Deck 9: Management and Regulations of Hospital Costs

Question 1

Economies of scale result when a hospital realizes increases in the average cost per patient day as more patients are treated.

Answer 1

False

Question 2

Managers use capital budgets to anticipate and adjust cash flow needed for short run plant and equipment needs.

Answer 2

False

Question 3

Pro Forma financial statements use the information contained in management's operating and capital budgets as well as management's projections of the revenue and expense conditions for the future to estimate the hospital's financial condition over time.

Answer 3

True

Question 4

Diseconomies of scale are generally realized when hospitals reach the size of more than 500 beds. If an organization of this size still stays in business, it must be maintaining efficiency for a limited range of more-specialized services, while most likely not being able to provide less-specialized services efficiently.

Question 5

If a certain hospital's list charges for two different surgical procedures are exactly the same, it must be the case that either those two procedures take the same amount of a surgeon's time to perform, or one procedure takes less time but is performed by a surgeon who is paid more per hour.

Question 6

Since the hospital is a multiproduct firm, realizing economies of scale should be recognized at the product level.

Question 7

The conflict between an economist's measurement of cost and an accountant's measurement of cost is that the economist will put a value on the full opportunity cost of an action, while the accountant usually does not count a cost unless money actually changes hands.

Question 8

Hospital costs per patient day over the past fifteen years have increased by a factor of greater than 4.

Question 9

Comparing hospital cost per day over time is difficult because changes in the quality and type of service offered are so large.

Question 10

The Balanced Budget Act of 1971 imposed price controls on hospital charges.

Question 11

It is generally more expensive for hospital managers to make adjustments in the existing outlay of costs when they have more time to do so, i.e. in the long run, rather than in the short-run.

Question 12

When comparing accounting vs. economic costs, the major disadvantage of using accounting costs is that they will always predict lower costs per surgery on those days when the number of surgeries is higher than expected. In reality this is not true, however, as every deviation from the planned level of operation raises costs, such as payment of overtime, extra expenses when hiring temps, cost of rush ordering of exhausted supplies, etc.

Question 13

Many hospitals break out the payment for a radiologist's service into two components: the radiologist's time interpreting x-rays and the hospital's charge for producing the x-rays. After doing so, they decide to contract out the service of producing the x-rays. This is most likely because

A) economies of scale exist in x-ray production.
B) diseconomies of scale exist in x-ray production.
C) cost shifting is possible.
D) radiologists historically have been able to price discriminate.
E) the hospital is more efficient at producing x-rays.

Question 14

A specialty hospital opens up with 50 beds to perform only abdominal surgeries. Observed economies of scale for most hospitals are documented at 100 beds. Will this specialty hospital be able to realize economies of scale in the production of abdominal surgeries?

A) Yes. The surgery may have relatively low capital costs, so spreading over 50 beds would be sufficient to realize economies of scale because specialization of surgeons' skills is more important factor in realizing economies of scale than number of beds.
B) Yes. The key to economies of scale may be spreading high fixed costs over a small number of beds.
C) Yes, specialty hospitals do not necessarily have to produce high number of surgeries to achieve economies of scale in their particular line of specialization.
D) No, economies of scale cannot be realized at such a low bed count.
E) There is not enough information to determine the answer with certainty.

Question 15

Accounting costs are usually lower than economic costs because

A) accountants include depreciation when calculating hospital costs.
B) accountants exclude depreciation when calculating hospital costs.
C) accountants calculate tax credits and value them in calculating hospital costs.
D) economists include the opportunity cost of resources when calculating hospital costs.
E) accountants and economists calculate depreciation differently.

Question 16

Long term planning in building a flexible plant rather than a dedicated plant is more important when

A) demand is expected to remain constant.
B) demand is expected to increase a lot.
C) demand is difficult to forecast.
D) legislation is expected to change the hospital reimbursement system.
E) physician shortages are expected.

Question 17

The cost per patient day at Hospital A is much higher than the cost per patient day at Hospital B. Which one of the options below does not offer a valid possible explanation behind that fact?

A) Hospital A has sicker patients than Hospital B.
B) Hospital A is an academic medical center and Hospital B is not.
C) Hospital A has several long term union labor contracts while Hospital B does not.
D) Hospital B is more efficient than Hospital A.
E) Hospital A is a small rural facility with limited equipment and staff, while Hospital B is a large urban facility with sophisticated equipment and famous doctors.

Question 18

Long run cost functions

A) are comprised of the highest portions of short run cost functions.
B) always lie above short run cost functions.
C) can lie above or below short run costs functions.
D) are decision tools for capital budgeting.
E) often lie on top of short run cost functions.

Question 19

Which of the following tools has not yet been used to constrain growth in hospital costs?

A) price controls.
B) diseconomies of scale.
C) certificate of need legislation.
D) administered prices, as in DRGs.
E) budgetary review.

Question 20

Improvements in quality of medical procedures often mean that cost per unit of output decreases, quality of life is improved; however, total costs to society increase. This seeming paradox

A) cannot be explained adequately by economists at this time. More empirical study is needed.
B) is due to economies of scale.
C) is the result of diseconomies of scale.
D) is explained by the fact that more people will demand the treatment if it increases life expectancy or quality of life.
E) is due to the law of diminishing marginal returns.

Question 21

In 1977, a medication to fight heart disease cost $1,000 and had a mortality rate of 80% after 1 year. Surgery cost $25,000 and had a mortality rate of 60% after 1 year. In 2012, a medication to fight heart disease cost $150 and has a mortality rate of 30%. Surgery costs $10,000 and has a mortality rate of 10%. One should expect expenditures on heart disease treatments to escalate because

A) more individuals will choose surgery in 2012 than they would have in 1970.
B) people tradeoff reduced life expectancy for lower costs.
C) managed care insurers tradeoff reduced life expectancy for lower costs.
D) physicians tradeoff reduced life expectancy for lower costs.
E) Medicare will most likely pay for the medication only.

Question 22

Considering all the confusion about hospital charges, costs and prices, what is the most common way for private insurers to develop a set of reimbursement rates they will use with every particular hospital?

A) Every insurer conducts their own feasibility study for each hospital and creates their own chargemaster for that hospital from scratch.
B) Most private insurers rely on published Medicare reimbursement rates as a basis, and set their reimbursement rates to hospitals as a certain percentage of Medicare rates (e.g. 110%).
C) Most private insurers rely on published Medicaid reimbursement rates as a basis, and set their reimbursement rates to hospitals as a certain percentage of Medicaid rates (e.g. 90%).
D) Most insurers rely on each hospital's chargemaster as a basis, and typically negotiate a certain percentage discount (e.g. 30% off all the listed charges).
E) There is no "most common", or dominant, way how private insurers set their payments to hospitals. A variety of methods exists, and all of them are about equally popular.

Question 23

Which of the following hospital inputs can be considered fixed for at least a 3-month period?

A) Number of nurses the hospital employs.
B) Number of physician assistants the hospital employs.
C) Number of temporary agency nurses.
D) Total number of beds.
E) Number of hospital wings.

Question 24

Economists might point to the existence of so many blood collection services in strip malls and not in hospitals as evidence of economies of scale in blood collection services. Please explain why this might or might not be true.

Question 25

Explain why the prospective payment system enacted by the institution of DRG payments was intended to reduce cost escalation in hospitals. What system did it replace?

Question 26

In what areas did hospitals seek to increase revenues after the institution of administered pricing of DRGs? Did this increase economic efficiency?

Question 27

Please discuss who wins and who loses ever since the Certificate of Need (CON) legislation has been enacted to restrict the addition of any new hospital beds, such as beds for cardiac care.

Question 28

In 1977, a medication to fight heart disease cost $1,000 and had a mortality rate of 80% after 1 year. Surgery cost $25,000 and had a mortality rate of 60% after 1 year. In 2012, a medication to fight heart disease cost $150 and has a mortality rate of 30%. Surgery costs $10,000 and has a mortality rate of 10%. As a result of technological improvements, in this particular case medical costs can be expected to escalate. Is this response to technological advances typical for most products in the economy, or unique to healthcare only? Discuss why or why not, using the market for cell phones for comparison.

Question 29

As shown in Table 9.3, average hospital cost per patient day is the lowest for hospitals with 50 to 99 beds is continuously increasing as hospital size increases beyond that point, and is the highest for hospitals with 500 beds or more. Explain how is this possible in a highly competitive hospital environment? How can such large hospitals (500 beds or more) still stay in business? Discuss.