Chapter 4: The Reconstitution of the Hospital

As with many institutions, the history of the hospital can be explained through the view of social science disciplines. As Starr notes at the end of Chapter 4, however, the hospital is an anomaly from almost all of these perspectives. While the early hospital did not maximize profit, which goes against the economic theory that states that firms will always seek to balance marginal revenue with marginal cost, I would argue that hospitals today seek to maximize profit for a number of reasons.

First, competition has increased again. In the last few years, we have witnessed the proliferation of private clinics, often in strip malls or free-standing buildings. While these clinics first handled only minor illnesses, like the common cold or flu, many are now able to deal with more acute issues like broken bones. These clinics have set fee schedules, due upon service. For people without health insurance, however, they may be less expensive than a trip to the Emergency Room.

Second, hospitals have become “big business.” Because the demand for hospital care is relatively inelastic, it can be assumed that consumers are essentially price takers, particularly when critically ill. For some items, patients pay a user fee. Durable medical goods are an example of this. A patient will lay on a hospital bed and have his blood pressure and pulse monitored. When he leaves, the bed can be used again. Because this is an exhaustible good, the fee for use is prorated. For laboratory procedures, economies of scale apply. While a laboratory technician can run one urinalysis at a time, she can also run 8, decreasing the cost per urinalysis. Each patient, however, will pay a cost that reflects the marginal cost of ONE urinalysis. Thus, internal efficiency can increase profit without the knowledge of the patient.

Finally, many insurance plans reimburse by diagnosis. That is, all people who are diagnosed with a disease are estimated to “cost” the same amount, regardless of actual treatment received. It is in the best interest of the hospital, then, to try to come in under the reimbursed cost.

None of these elements of profit maximizing are inherently bad, but the risk of poor patient care does exist. As hospitals struggle with other industries to stay in the black even with rising costs, a loss is inevitable. The question is, however, does this loss represent a loss to consumers (patients) or to hospitals. Both choices have consequences we will continue to affront through the next century.