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Article Excerpt
Health care facilities include hospitals and nursing homes. Demand for beds and occupancy depends on income, prices and insurer restrictions. The supply of beds is limited by regulatory certificates of need. The implied equilibrium vacancy leads to a trade-off with rate increases. Rate increases establish an asset price for a hospital bed. If prices of health care rise faster than income and nonhealth prices, patients demand less bed availability and occupancy. Rising vacancy and rising prices occur, consistent with the empirical observations for U.S. health care facilities. For 1980-2001, the equilibrium vacancy rate for U.S. hospitals is between 27% and 36% depending on capacity adjustments, bed availability and price expectations. Equilibrium vacancy is near the actual rate after 2000, but that rate is 11 percentage points higher than in the early 1980s when the number of beds was nearly one-third higher. Usually rent regulation leads to excess demand. But in a general equilibrium model with income, relative prices, expectations, supply and capital markets, price regulation can coexist with excess supply.
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Medical care should be no different than hotels. On the back of my hotel room door in San Francisco was a sign that said the price of the room was $449. My actual bill was $130 instead of $449 because the government had negotiated special prices. With hotels I have the ability to ask what the rate is or go online, and they will actually search and tell me what various hotels are charging. None of that is available in health care. Michael Leavitt, U.S. Secretary of Health and Human Services.
The health care system has two types of real estate. Hospitals are short-stay, while nursing homes are long-stay facilities. Hospitals in the United States have every incentive to respond to price and revenue signals, as more than three-quarters are owned by nongovernment entities. (1)
While hospitals are motivated to generate profit or at least revenue, they act as price-takers. Prices by procedure are negotiated by insurers or preset by Medicare and Medicaid, the public carriers that pay half of all U.S. health care spending. (2) With prices predetermined and operators motivated for revenue, it appears that hospitals would suffer the classic conditions of a rent-controlled market. Excess demand occurs with waiting lines and times for elective procedures. While this is the situation in single-payer systems, it is not the case with health care facilities in the United States. Instead, there is the paradoxical observation of rising vacancy despite price and, effectively, rent regulation.
In the United States, community hospitals provide access to all-comers. (3) In 1980 the nation had 1.31 million beds in community hospitals according to Hospital Statistics of the American Hospital Association (AHA; 2005), with a vacancy rate of 23.3%. In 2001 the total had declined to 925,000 beds, but the vacancy rate had risen to 33.3%. Since 1995 the hospital bed vacancy rate has exceeded 30% even as capacity has been reduced.
The decline in capacity is even greater on a per capita basis because the population was rising as the bed count was falling. The number of beds per thousand people in the United States was 6.05 in 1980, but it had declined to 3.29 by 2001, a drop of 45%. That per capita bed count puts the United States in the bottom quartile in health care real estate facilities among developed countries (Anderson et al. 2005). Despite this relatively low availability, in 20 years vacancy increased from one in every four beds on an average night to one in three.
Hospitals have another vacancy-related issue related to peak-load demand. The system is aware of the weekend effect and the July phenomenon (Weissman 2005). (4) Vacancy falls below 10% in suburban areas during Monday-Thursday nights. Outside these peak hours and during the summer months the hospital vacancy rate can exceed 50%. This situation almost parallels the hotel industry in the business sector. Given the magnitudes involved for health care spending, any explanation for this paradox of falling availability, rising excess capacity and regulated prices has substantial cost implications.
This article develops a model of health care facilities. Patients, through their doctors and insurers, make choices on the number of beds available and occupancy. Beds have a rate tied to insurer reimbursement procedures. Occupancy has a separate price of waiting for a bed. If regulated hospital bed rates and waiting time prices rise faster than incomes and prices of nonhealth care items, patient utility declines. The patient must accept a lower level of both beds and occupancy. Bed counts fall while vacancy rises.
Vacancy is traded off against the rate of growth of hospital room rates. Depending on expectations and the structure, it takes a relatively large increase in vacancy to dampen rising rate increases. In the capital asset market for hospitals and their beds, the rising rates create incentives for new construction. However, that construction incentive is regulated by insurers and agencies. These agencies require certificates of need to justify new construction. If regulated initial bed supply exceeds the number that patients and their doctors who admitted them want to occupy, then the rising prices and rates force falling capacity and rising vacancy.
Without price expectations, supply and capital market regulation and substitution and income effects, rent control predicts excess demand and waiting lists. Restrictions on health care pricing lead to excess supply and rising vacancy, not excess demand. A core tenet of real estate markets becomes unclear in a general equilibrium. Price restrictions can coexist with either excess demand or excess supply, and in health care it is usually the latter.
Americans face regulated prices for health care, but there are no waiting lists at hospitals. In the U.S. multipayer insurance market, prices rise faster than incomes and restrictions remain on usage and supply. The more rigid are the demand restrictions on rates and networks and the supply restrictions on certificates of need, the larger the vacancy rate required to dampen a given rate increase. Conversely, in single-payer markets such as Europe and Canada where health care prices rise more slowly than income, patients occupy beds more intensively. There is no or minimal vacancy. Patients wait longer even though there are more beds per capita than in a multipayer market.
While the model is explicitly for hospitals, it incorporates features common to other health care facilities including senior housing, outpatient space and nursing homes. There are similarities with using prices to guide investment in public and quasi-public facilities and infrastructure. Fixed costs, including staff, dominate relative to variable costs. Demand fluctuates, but providers must meet peak-load capacity. Users pay a fraction of the total price, and they do not negotiate directly. Price and quality are negotiated by gatekeepers including insurers and employers rather than by patient users directly. Public insurers set rates for procedures. Private insurers negotiate with employers on premium payments and with providers for fees. In exchange, users accept a constrained feasible set of providers within quality or price limits. (5)
The application is to the hospital market in the United States for 1980-2001. The market satisfies a short-side rule on excess supply, leading to an estimation of demand and equilibrium. The estimated equilibrium vacancy rate for hospitals ranges between 27% and 36% depending on capacity adjustments, bed availability and price expectations. (6) The equilibrium vacancy rate is near the sample-period peak after 2000, nearly double the actual rate that existed 20 years earlier.
In one generation the hospital vacancy rate increased 11 percentage points. That increased vacancy translates into 106,000 more empty hospital beds on an average night. The average yearly cost of an empty bed has been estimated to be between $53,000 and $114,000 in 1995 dollars. (7) At the midpoint and with no price increases, the added cost of this additional vacancy...
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