Market for Hospital Services

OutlineHospital Industry Structure

Hospital Conduct

Industry Performance

Hospital Industry StructureIs the hospital market competitive?Competitiveness depends on:

number of hospitals barriers to entry demand/ number of buyers types of services/technology asymmetric information (patients & hospitals)

U.S. Institutional SettingHospital classification

Community hospitals Physician-owned specialty hospitals Teaching hospitals Private for profit, private not-for-profit, public

not-for-profit

Community Hospital Characteristics1970-2007

Measure 1970 1980 1990 2000 2007 No. of hospitals 5,859 5,904 5,420 4,915 4,897 Beds (thousands) 848.2 992.0 929.4 823.6 800.9 Beds per 1,000 population 4.17 4.38 3.73 2.93 2.65 Admissions (thousands) 29,252 36,143 31,181 33,089 35,346 Admissions per 1,000 population

144.0 159.6 125.4 117.6 117.2

Resident U.S. Population 203.2 226.5 248.7 281.4 301.6 Average length of stay (days)

7.7 7.6 7.2 5.8 5.5

Percent occupancy 78.0 75.4 66.8 63.9 66.6 Outpatient visits (millions)

133.5 202.3 301.3 521.4 603.3

Outpatient visits per admission

4.6 5.6 9.7 15.8 17.1

Outpatient surgeries as a percent of total

- 16.3 50.5 62.7 62.7

Cost per day ($) 74 245 687 1,149 1,696 Cost per stay ($) 605 1,851 4,947 6,649 9,337 Source: Health, United States, 2009: With Chartbook on Trends in the Health of Americans, Tables 104, 117, 118 and 136.

Community Hospitals by Ownership Type

Year

Number of hospitals

For Profit

Not-for-Profit

Government

No. % No. % No. %

1975 5,875 775 13.2 3,339 56.8 1,761 30.0 1980 5,830 730 12.5 3,322 57.0 1,778 30.5 1990 5,384 749 13.9 3,191 59.3 1,444 26.8 2000 4,915 749 15.2 3,003 61.1 1,163 23.7 2007 4,897 873 17.8 2,913 59.5 1,111 22.7

Year

Number of beds (thousands)

For Profit

Not-for-Profit

Government

No. % No. % No. %

1975 941.8 73.5 7.8 658.2 69.9 210.2 22.3 1980 988.4 87.0 8.8 692.5 70.0 208.9 21.2 1990 927.4 101.4 11.0 656.8 70.8 169.2 18.2 2000 823.6 109.9 13.3 583.0 70.8 130.7 15.9 2007 800.9 115.7 14.4 553.7 69.1 131.4 16.4

Source: Health, United States, 2009: With Chartbook on the Health of Americans, Table 115, 200.

Size Distribution of Community Hospitals Percentage of Hospitals

in Each Bed Size Category Bed Size Category

1970 1980 1990 2000 2007

0-24 6.8% 4.4% 4.2% 5.9% 7.3% 25-49 22.6 17.7 17.4 18.5 21.9 50-99 25.4 5.1 23.5 21.5 19.8 100-199 21.8 23.5 24.3 25.1 22.1 200-299 10.1 12.3 13.7 13.3 12.5 300-399 6.1 7.1 7.6 6.9 7.0 400-499 3.2 4.6 4.1 3.7 3.9 500 and over 4.0 5.4 5.3 5.0 5.3 Source: Health, United States, 2009: With Chartbook on the Health of Americans, Table 115.

# of hospitals declined 17% # of beds declined 15% Median size: 150 beds

Short-term stays (< 7 days) Outpatient visits up dramatically

Nonprofit 60% For-profit 18% State & Local 22%

Hospital Industry Structure

Area HospitalsMarietta Memorial

Selby Camden-Clark

St. Joseph’s

Type NFP NFP NFP NFP

Beds 199 25 375 325

Physicians 90+ na 150+ 160+

Staff 1200+ 250+ 1300+ na

Barriers to Entry Certificate of Need (CON) laws

Required in certain states to open a hospital (designed to limit excess capacity)

Economies of scale LRAC of community hospital reach minimum around

175-200 beds Multi-hospital system

Learning By Doing Over time, higher cumulative output, more

experience leads to lower costs, higher quality.

Mergers

Horizontal: merger of firms in same market Exploit EOS Reduce administrative costs Improve customer access to information

Vertical: mergers of firms in upstream and/or downstream markets Advantages

Solves the agency problemLowers transactions costsEnsures supply of input

DisadvantagesMonopoly power

Insurers & hospitals (Allina)Insurers & physicians (Kaiser)Physicians & hospitals (PHO)

Hospital Conduct Large # of sellers and low entry barriers promote

competition: Higher output and quality Lower price

However, the hospital market has important differences: Hospitals don’t necessarily maximize profits

Role of Non-Profit Hospitals Government is a major payer

Prices not set competitively Consumer less likely to shop around

Insurance and asymmetric info

Empirical Evidence Studies prior to 1990 support the idea of a

“Medical Arms Race” Regions with more competition have:

More excess bed capacityLarger # of duplicate specialized services

After 1990, increased competition led to: Lower costs and improved quality

Models of Hospital BehaviorProfit MaximizationUtility maximizing modelsPhysician-control models

Hospital Income FlowsSources of Funds Uses of Funds

Patients self pay 3% Labor 53%

Private Insurance 36% Professional fees 5%

Philanthropy 5% Supplies, other 34%

Medicare 29% Depreciation and interest 8%

Medicaid 20%

Other government 7%

100% 100%

Pricing Practices in Medicine

Hospital Expenses by Ownership Type

Expenses per Inpatient Day Year For Profit Not-for-Profit Government

1980 $ 257 $ 246 $ 239 1990 752 692 634 2000 1,057 1,182 1,064 2007 1,536 1,776 1,472

Expenses per Inpatient Stay

Year For Profit Not-for-Profit Government

1980 $1,676 $1,902 $1,750 1990 4,727 5,001 4,838 2000 5,642 6,717 7,106 2007 7,823 9,593 9,523 Source: Health, United States, 2009: With Chartbook on the Health of Americans, Table 136.

Hospital Price Inflation in the US

Annual Percent Change Year CPI

Inflation Hospital Services

1990 4.7 9.9 2000 2.5 4.2 2001 2.8 6.6 2002 1.6 8.7 2003 2.3 7.3 2004 2.7 5.9 2005 3.4 5.3 2006 3.2 6.5

Source: Health, United States, 2007: With

Chartbook on the Health of Americans, Table 120.

Pricing Practices in MedicinePrice discriminationCost shifting

From Medicare patients to private patients

Charges and discounts for diagnostic bilateral mammogram

Hospital (Location) Official charge

Medicaid Medicare HMOs, Health plans

Policy on Uninsured

UCLA Medical Center (Los Angeles)

$460 $127 $90 Up to $242 Gives discounts based on individual's ability to pay, says CFO Sergio Melgar

Oregon Health & Science University (Portland)

$240 $65 $59 Average $128

Works with uninsured patients to help them find financial aid; offers sliding scales, payment plans

Jamaica Hospital (Queens, N.Y.)

$351 $50 $96 $40 to $78 Has sliding fee scales for uninsured, says CEO David Rosen

Johns Hopkins Hospital & Health System (Baltimore)

$261 $156 $173 $186 State regulation of charges reduces disparity between bills to insured and uninsured

Grinnell Regional Medical Center (Grinnell, Iowa)

$285 $73 $79 $119 to $190

Works with uninsured to set a payment schedule

Source: Lucette Lagnado, “A Young Woman, An Appendectomy, And a $19,000 Debt,” Wall Street Journal, March 17, 2003, A1.

Problem Set #6

Pricing Practices in MedicinePrice discriminationCost shifting

From Medicare patients to private patients

Market for Pharmaceuticals

Pharmaceutical Industry Pharmaceuticals account for 12% of healthcare spending Drug companies spend 14% of revenues on R&D Industry Structure

Basic research--supported by NIH labs and grants to universities

Applied research--development of marketable drugs 284 new drug approvals from 1990-99:

265 from industry 9 from government 10 from academia

Drug Purpose Maker Global Sales ($billions)

Annual Growth

Lipitor (2011) Lowers cholesterol Pfizer $13.7 -0.9%

Plavix (2011) Blood-thinner Bristol-Myers Squibb and Sanofi-Aventis

$ 8.6 16.9%

Nexium (2015) Treats ulcers AstraZeneca $ 7.8 7.8%

Advair (2010) Treats asthma GlaxoSmithKline $ 7.7 7.0%

Enbrel (2012) Treats arthritis Amgen/Wyeth $ 5.7 5.6%

Seroquel (2011) Anti-psychotic AstraZeneca $ 5.4 14.9%

Zyprexa (2011) Anti-psychotic Eli Lilly $ 5.0 -1.8%

Remicade (2018)Treats arthritis & Crohn’s Disease

Centocor $ 4.9 14.0%

Singulair (2012) Treats asthma Merck $ 4.7 3.1%

Lovenox (2007)Treats deep vein thrombosis

Sanofi-Aventis $ 3.8 8.9%

The World's Top-Selling Drugs, 2008

http://pharmexec.findpharma.com/pharmexec/Special+Reports/2009-PharmExec-Top-50/ArticleStandard/Article/detail/597526

Top 10 Global Pharmaceutical Companies

R&D Process in Pharmaceuticals

Kefauver-Harris Amendment (1962) Thalidomide scare (1957-61) Established safety and efficacy standard Drug advertising must disclose side effects

R&D Process $55 billion spent by US pharma in 2006 DiMasi et al. (2003): average out-of-pocket cost for a new

approved drug is $403m (and fully capitalized cost is $802m)

R&D Process

Country of Origin Number of New Drugs Percentage

United States 764.0 60.4

Switzerland 89.0 7.0

United Kingdom 81.5 6.4

West Germany 73.0 5.8

France 39.5 3.1

Japan 26.5 2.1

Belgium 23.0 1.8

Sweden 18.5 1.5

Denmark 17.5 1.4

Holland 15.0 1.2

Italy 13.4 1.0

Mexico 10.0 0.8

Canada 5.0 0.4

Other countries 24.0 1.9

Source not ascertained 75.0 6.0

Total 1,265 100.0

Source: Weidenbaum (1993)

New Drugs Introduced into the US Market 1940-1990

Drug Is Beneficial Drug Is Harmful

FDA Allows the Drug Correct Decision

Type 1 Error:Allowing a harmful drug.

FDA Does Not Allow the Drug

Type 2 Error:Disallowing a beneficial drug.

Correct Decision

Is the FDA too Risk Averse?Two Types of Error in FDA Approval Decision

Victims are identifiable and traceable, and might appear on Oprah.Error is self-correcting

Victims are not identifiable and scarcely even acknowledged in theabstract.Error is not self-correcting

Regulating Drug Prices The economics of drug pricing

High fixed costs; low marginal costs Problem Set #12

Price controls in the U.S. and abroad Danzon (1996): role of generics

Impact of price controls on new drug development?

R&D vs. Promotion Spending

Source: R&D Spending: Pharmaceutical Research and Manufacturers of America,PhRMA Annual Membership Survey, 2004. Promotional Data: IMS Health,Integrated Promotional Services™ and CMR, 6/2004

Benefits of Pharmaceuticals

0.0

0.5

1.0

1.5

2.0

1988 1990 1992 1994 1996 1998 2000

Num

ber

of Y

ears

Added

to L

ongev

ity

.

New Medicines Account for 40% of Increase in Life Expectancy

Increase in Longevity due to NCE launches

Total Increase in Longevity

Source: F.R. Lichtenberg, “The Impact of New Drug Launches on Longevity: Evidence from Longitudinal, Disease-Level Data from 52 Countries, 1982-2001,” NBER: June 2003.

85%

35%

55%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

BeforeProgram

After Program BeforeProgram

After Program

ER Visits Hospitalizations

Perc

ent of P

atients

.

New Drugs Reduce Visits to Hospital and ER: Asthma Management Program Improves

Outcomes for Children with Asthma

Source: P.J. Munzenberger and R.Z. Vinuya, “Impact of an Asthma Program on the Quality of Life of Children in an Urban Setting,” Pharmacotherapy, 22 (2002).

Cost of Drug Therapy vs Surgery

DiseaseCost of Surgery

Cost of Drug Therapy

Drug Therapy as Percent of

Surgery

Ulcers $28,900 $900 3.1%

Heart Disease $43,370 $300 0.7%

Gallstones $12,000 $1,000 8.3%Source: Weidenbaum (1993)

Confounding Factors

Lifestyle Age Legal issues Technology

HC Expenditures = P * Q

• Pricing• Intensity of use

Lifestyle Effects

AIDS STDs Teenage pregnancies

Alcohol abuse Cigarette smoking Drug Use Obesity

Liberal perspective: due to failure in economic system in providing sufficient income earning

opportunities

Conservative perspective:due to breakdown of traditional

family values with government as a contributor

AIDS Cases in the U.S.Year Males, 13 years

and older Females, 13 years

and older Children < 13

Years Old Total

1985 7,484 519 128 8,131 1990 36,180 4,544 725 41,449 1995 56,650 12,978 745 70,373 2000 30,387 10,763 117 41,267 2005 26,525 9,548 54 36,127 2007 26,355 9,579 28 35,962 All Years 810,676 198,544 9,209 1,018,428

Source: Health, United States, 2009: With Chartbook on Trends in the Health of Americans, Tab le 48.

Cases have stabilized at 36,000 annual cases

AIDS by Exposure CategoryNumber, by year of report

Source

1990 1995 2000 2007 Total To Date

Percent Distribution

Total To Date Total Cases

40,740 69,774 40,230 35,962 1,018,428 100.0

Homosexual/bisexual males

23,658 30,944 13,648 16,749 487,695 47.9

IV drug users

9,270 18,802 8,099 6,010 255,859 25.1

Homosexual/bisexual males and IV drug user

2,943 4,185 1,587 1,664 71,242 7.0

High-risk heterosexual contact

2,253 8,479 6,565 11,111 176,157 17.3

Hemophilia/Blood tranfusion

1,117 1,032 395 401 18,266 1.8

Source: Health, United States, 2002: With Chartbook on Trends in the Health of Americans, 2002, Table 55. And HIV Surveillance Report, 2007, Vol. 19.

AIDS in AmericaExtent of AIDS

Worldwide: 36-40m living with HIV; 22m deaths United States: 1m cases; 400,000+ deaths

Medical care issues Hellinger (1992): lifetime costs of $70,000 Cocktail

Protease inhibitors: $7400/yrAZT: $3500/yr3TC: $2800/yr

$12,000 - $16,000 pppy

$16,000 x 750,000 = $12 billion

Drug AbuseExtent of Drug UseCost to societyIntervention strategies

Use of selected substances in the past month, by age, 2007

Age Any Illicit Drug

Marijuana Alcohol Cigarettes

12-13 yrs 3.3 0.9 3.5 1.8

14-15 yrs 8.9 5.7 14.7 8.4

16-17 yrs 16.0 13.1 29.0 18.9

18-25 yrs 19.7 16.4 61.2 36.2

26-34 yrs 10.9 7.9 62.6 33.4

35 + 4.6 3.0 52.2 22.0

12 and over 8.0 5.8 51.1 24.2

Source: Health United States, 2009: With Chartbook on Trends in the Health of Americans, 2009, Table 63.

Use of selected substances among US high school seniors

Year Alcohol Cigarettes Marijuana Cocaine Inhalants MMDA

1980 72.0 30.5 33.7 5.2 1.4 --

1990 57.1 29.4 14.0 1.9 2.7 --

1995 51.3 33.5 21.2 1.8 3.2 --

2000 50.0 31.4 21.6 2.1 2.2 3.6

2003 47.5 24.4 21.2 2.1 1.5 1.3

2004 48.0 25.0 19.9 2.3 1.5 1.2

2005 47.0 23.2 19.8 2.3 2.0 1.0

2006 45.3 21.6 18.3 2.5 1.5 1.3

2007 44.4 21.6 18.8 2.0 1.2 1.6

Source: Health United States, 2009: With Chartbook on Trends in the Health of Americans, 2009, Table 64.

Prevalence of Tobacco Use25 Years and Older

Percent smokers

Year Male Female 1974 42.9 32.0 1979 37.3 29.5 1985 32.8 27.5 1990 28.2 22.9 1995 26.4 22.9 2000 24.7 20.5 2005 22.7 18.0 2006 22.9 17.9 2007 21.4 17.2

Source: Health United States, 2009: With Chartbook on Trends in the Health of Americans, 2009 Table 61.

Economic Costs of Drug Abuse in the US, 2000(millions of dollars)

Cost Categories Estimated Cost

Health Care

Community-based Drug-abuse Treatment $5,594

Federally Provided Drug-Abuse Treatment $506

Support for Drug Abuse-Related Health Services

$2,084

Medical Consequences of Drug Abuse $6,715

Total Health Care $14,899

Productivity Losses

Premature Death $18,256

Drug Abuse-Related Illness $25,435

Institutionalization/Hospitalization $1,915

Productivity Loss of Victims of Crime $2,217

Incarceration $35,601

Crime Careers $27,066

Total Productivity Losses $110,491

Other Costs

Cost of Goods and Services Lost to Crime $35,056

Social Welfare Administration $218

Total Other Costs $35,274

Total Economics Costs $160,664

Source: US National Drug Control Policy, 2001

Is Addiction Rational? When does a habit become an addiction? Becker and Murphy (1988)

Past consumption increases current consumption People make forward-looking consumption plans Policy Implication: if cigarette taxes are credibly

announced to double in one year, then current consumption will decrease

Gruber and Koszegi (2001) Forward looking behavior is not consistent over time Policy should take into consideration not only

externalities of behavior, but “internalities”

Smokers die on average 6.1 years prematurely. At $100,000/year, cost per pack smoked is $30.45

Obesity

BMI > 30

Obesity

BMI > 30 30% of Americans Health Problems

Diabetes Hypertension Cardiovascular disease Colon cancer Postmenopausal breast cancer

Finkelstein, Fiebelkorn, and Wang (2003) Direct costs of obesity ~ $90 billion 9% of total medical expenditures

Aging of the Population

Elderly in the U.S. Percent of total civilian population

Year Over 65 65-74 75-84 Over 85 1950 8.1 5.5 2.2 0.4 1960 9.2 6.1 2.6 0.5 1970 9.9 6.1 3.0 0.7 1980 11.3 6.9 3.4 1.0 1990 12.5 7.3 4.0 1.2 1995 12.8 7.2 4.2 1.4 2000 12.4 6.5 4.4 1.5 2005 12.4 6.3 4.4 1.7 2010 13.3 7.0 4.4 2.0 2020 16.4 9.5 4.8 2.1 2030 20.1 10.9 6.7 2.5 2040 20.7 9.1 7.9 3.7 2050 20.4 8.8 6.8 4.8 Source: Economic Report of the President, 1994, Table B-32, p. 305 and Health, United States, 2007 Table 1.

Personal Health Care Expenditures by Age and Type of Service (2004)

Age Group Personal Health Care

Hospital Care

Physicians’ Services

Nursing Home

Services

Other

Less than 19 $ 2,650 $ 1,000 $ 753 $ 18 $ 879

19-64 4,511 1,636 1,256 127 1,492

65 + over 14,797 5,403 3,024 2,526 3,844

65-74 10,778 4,191 2,716 809 3,062

75-84 16,389 6,178 3,463 2,623 4,125

85 + over 25,691 7,916 3,037 8,706 6,032

All ages 5,276 1,928 1,339 115.0 1,894

Source: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/2004-age-tables.pdf

Per capita dollars

Utilization of Medical Care Resources, 2005

Age Group

Out-Patient Visits per

100 Population

Days of Hospital

Care per 100 Population

Inpatient Procedures

per 100 Population

(Males)*

Inpatient Procedures

per 100 Population (Females)*

Physician

Office Visits Per 100

Population Less than 18 33 19.2 4.0 3.7 253 18-44 26 33.1 5.0 19.0 224 45-64 32 59.2 16.2 15.2 391 65-74 41 139.9 37.6 33.0 647 Over 75 38 259.4 56.5 45.6 768 All persons 33 55.4 12.5 16.7 329 Source: Health, United States, 2003 and 2007. * 2001 data.

Americans' Current Health Care Expenditures Are Concentrated in

the Final Part of the Life Span

Source: Joanne Lynn, David M. Adamson, Rand Health White Paper WP-137 (2003). Available at http://www.medicaring.org/whitepaper/

Legal System and Malpractice

Medical Malpractice Tort Costs(Billions of 2008 $)

Source: 2009 Update on U.S. Tort Costs, Towers Perrin, 2009.

$0

$5

$10

$15

$20

$25

$30

$35

1975 1980 1985 1990 1995 2000 2005

Bil

lio

ns

.

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

Sh

are

of

GD

P

.

Share of GDP

Tort Costs

Tort Law in the United StatesFour elements of a tort case

Presence of a physician-patient relationship An adverse outcome Negligence by the provider Direct causality between the negligence and

adverse outcomePurpose of tort law

Compensation Deterrence Retribution

Claims Frequency by Specialty

Date

All Physicians

General/ Family

Practice

Internal Medicine

Surgery Obstetrics/ Gynecology

1985 10.2 5.7 6.2 16.8 25.8 1986 9.2 7.6 5.5 15.8 13.0 1987 6.7 5.7 4.5 12.7 8.0 1988 6.4 6.2 4.3 10.2 15.1 1989 7.4 6.6 5.9 11.2 13.5 1990 7.7 5.9 6.2 11.5 11.9 1991 8.2 5.7 5.5 14.0 11.6 1992 9.1 6.9 7.3 15.5 15.6 1993 9.8 7.1 7.9 18.9 22.5 1994 9.5 6.7 5.7 16.9 19.2 1995 9.0 6.2 5.7 14.9 20.9 1996 9.0 6.7 5.3 14.9 13.1

Source: Martin L. Gonzalez, ed., Socioeconomic Characteristics of Medical Practice, Chicago: American Medical Association, various years.

Malpractice Premiums by Specialtyas a percentage of professional expenses

Year All

Physicians

General/ Family

Practice

Internal Medicine

Surgery

Obstetrics/ Gynecology

1985 10.2 7.0 6.4 12.2 17.8 1986 10.8 6.1 6.4 14.3 19.6 1987 12.1 7.3 7.1 14.9 20.4 1988 11.3 7.7 6.6 14.1 18.6 1989 10.4 7.0 5.9 12.7 18.7 1990 9.7 5.8 6.6 11.3 16.1 1991 8.7 5.5 5.0 10.4 14.8 1992 7.6 5.2 4.9 8.6 14.3 1993 7.9 4.9 4.9 9.2 14.2 1994 8.2 5.4 4.6 8.9 19.0 1995 7.4 5.0 4.7 8.8 14.4 1996 6.5 4.0 4.6 7.1 13.2

Source: Martin L. Gonzalez, ed., Socioeconomic Characteristics of Medical Practice, Chicago: American Medical Association, various years.

International Comparison of Malpractice Awards (2001)

United States

Australia Canada United Kingdom

Claims per 100 physicians 7.67 4.72 1.90 6.00

Claims per 100,000 population 18 12 4 12

Average claim awarded (PPP US $) $265,103 $97,014 $249,750 $411,171

Source: Anderson, Hussey, Frogner, and Walters (2005)

Causes of Increased Litigation

Increased supply of lawyers Increased litigiousness in US Increased medical cost and physicians’ salaries Breakdown of physician-patient relationship Pro-plaintiff trend in common law doctrine Size of damage awards Increased technology in medicine

Silicone Implant Litigation Silicone implants first introduced

in 1962 by Dow Corning FDA relabeled implants as class III

medical device in 1988 FDA moratorium in 1992 National class action lawsuit with

thousands of plaintiffs $4.25 billion settlement with 40%

going to attorneys Dow Corning bankruptcy

FDA removed moratorium in 2006

Medical Technology Technological change

Cost-increasing technological change Cost-decreasing technological change

MRI Machines, 2007

40.1

25.9

19.3

18.6

16.0

15.3

14.4

13.2

11.0

10.5

10.2

9.3

8.8

8.2

8.2

6.7

5.7

5.6

5.1

4.4

2.7

1.5

0 10 20 30 40

Japan

United States

Iceland

Italy

Korea

Finland

Switzerland

Greece

OECD

Luxembourg

Denmark

Spain

New Zealand

United Kingdom

Germany

Canada

France

Turkey

Australia

Czech Republic

Poland

Mexico

MRI (per million population)

CT Scanners, 2007

92.6

56.0

37.1

34.3

32.1

30.3

27.3

25.8

22.8

18.7

17.4

16.4

16.3

14.6

14.3

12.7

12.3

10.3

9.7

8.1

7.6

4.0

0 10 20 30 40 50 60 70 80 90 100

Japan (2002)

Australia

Korea

United States

Iceland

Italy

Luxembourg

Greece

OECD

Sw itzerland

Denmark

Finland

Germany

Spain

Ireland

Canada

New Zealand

France

Poland

Turkey

United Kingdom

Mexico

CT Scanners (per million population)

MRI Exams per 1000 population2007

0.010.020.030.040.050.060.070.080.090.0

100.0

United S

tate

s

Icela

nd

Luxe

mbo

urg

Belgium

OECDSpa

in

Canada

United K

ingdom

Hungar

y

Czech

Rep

ublic

Franc

e

Austra

lia

CT Exams per 1000 population

0.0

50.0

100.0

150.0

200.0

250.0

United S

tate

s

Luxe

mbo

urg

Belgium

Icela

nd

OECD

Canada

Austra

lia

Czech

Rep

ublic

Spain

United K

ingdom

Hungar

y

Franc

e

High-cost Medicine

Heart disease Angioplasty: 1 million @ $10,000 each

CABGS: 500,000 @ $50,000+ each

Heart transplantation: 2,212 @ $787,000 each

Infertility treatment IUI (intrauterine insemination): $1000-$2000 per cycle

IVF (in vitro fertilization): $10,000-$12,000 per cycle

GIFT (gamete intrafallopian transfer): $15,000-$20,000 per cycle

Organ Transplantation

History National Organ Transplant Act (1984)

What Can be Transplanted?

Organs Cornea (1905) Kidney (1954) Pancreas (1966) Heart (1967) Liver (1967) Lungs (1987) Intestines (1987) Penis (2006)

Tissue Skin Bone marrow Bone Blood vessels Hand (1998) Face (2005)

National Organ Transplant Act (1984)

Banned sale of organs in US 5 year prison $50,000 fine

Created Organ Procurement and Transplantation Network (OPTN) Regional system of organ distribution Hospitals required to notify OPTN of possible donors Hospitals required to notify potential donors of their options

United Network for Organ Sharing Operates OPTN Allocation Criteria

Medical History Blood type Location Time on Waiting List

Number of U.S. Transplants

Year Kidney Pancreas Kidney/ Liver Heart Lung Heart/ IntestinePancreas Lung

1990 9,417 69 458 2,690 2,107 203 52 51995 11,084 109 919 3,934 2,363 872 69 462000 13,619 439 915 4,997 2,199 959 48 822005 16,483 542 903 6,444 2,125 1,406 35 1782008 16,520 436 837 6,319 2,163 1,478 27 1852009 16,829 379 854 6,320 2,212 1,661 29 178

Total to date

284,156 6,530 16,710 100,784 47,487 19,775 1,021 1,884

Candidates on Waiting List

89,537 1,496 2,284 16,574 3,166 1,881 72 241

2008 Average Billed Price

$259,000 $275,200 $439,000 $523,400 $787,000 $450,400 $1,123,000 $1,121,800

Patient survival rate 1-year (%)

95.6 95 94.4 86.7 88.0 83.2 55.6 82.2

3-year 90.3 90.2 90.4 78.3 79.3 62.2 44.3 57.0

Market for Organs

Supply and demand for organs Property rights

U.S. policy—required requestRest of Europe—presumed consent

Deceased and Living Kidney Donors1990- 2009

1990 1995 2000 2005 20100

1000

2000

3000

4000

5000

6000

7000

8000

Deceased Living

Market for Body Organs

Kidneys

Price

D1

S1

P1

Shortage

Gov’t prohibits trade in organs At P = 0: Qd > Qs shortage results

Non-Price Rationing Black Market Bribes Discrimination Wait / Search

Gov’t prohibits trade in organs At P = 0: Qd > Qs shortage results

Non-Price Rationing Black Market Bribes Discrimination Wait / Search

16 90(1000s)

Wait List Death Rates1995-2009

1994 1996 1998 2000 2002 2004 2006 2008 20100

5

10

15

20

25

30

35

40

Kidney Liver Heart Lung

Percentage

Organ Rationing SchemesAllocation

Methods Benefits Costs

Waiting time Equitable Inappropriate matching;

organ wastage; no consideration of urgency

Priority to sickest first Equitable

Higher retransplantation and death rates; less benefit overall

Priority to sickest last

Higher overall survival; less

retransplantation Sickest patients die

Best Biological Match

Higher overall survival; less

retransplantation

Fewer transplants for certain groups, including highly sensitized patients and some minorities

Source: Charles T. Carlstrom and Christy D. Rollow, The Cato Journal (Vol. 17, #2) Fall 1997

Market for Body Organs

Kidneys

Price

D1

S1

P2

Q2

P1

Shortage

Gov’t prohibits trade in organs At P = 0: Qd > Qs shortage results

Non-Price Rationing Black Market Bribes Discrimination Wait / Search

Free Market: P2, Q2

Gov’t prohibits trade in organs At P = 0: Qd > Qs shortage results

Non-Price Rationing Black Market Bribes Discrimination Wait / Search

Free Market: P2, Q2

S2

16 90(1000s)

Iranian Model Legalized the sale of kidneys Officially approved patients’

organization oversees all transactions

Donors get $2000 - $4000 Waiting list has been eliminated

Source: The Economist, November 16, 2006, available at http://www.economist.com/world/international/displaystory.cfm?story_id=8173393

Cost of Transplant Surgery, 2008

Organ

Number

Transplanted

Estimated

Cost1 (millions)

Estimated Average Cost

per transplant

Number on

Waiting List

Estimated Cost if Donor Organs were

Available2

Total Estimated

Cost (millions)

Kidney 16,520 $ 4,278.7 $ 259,000 89,537 $ 23,190 $ 27,469 Heart 2,163 1,703.8 787,700 3,166 2,494 4,197 Liver 6,319 3,307.4 523,400 16,574 8,675 11,982 Heart/Lung 27 30.3 1,123,800 72 81 111 Pancreas 436 120.1 275,500 1,496 412 532 Lung 1,478 665.7 450,400 1,881 847 1,513 Total 26,943 $10,106.0 - 112,726 $35,699 $45,805 1. Number transplanted times average cost of the transplant procedure. 2. Number on waiting list times average cost of the transplant procedure.