For profit hospitals are assumed to maximize profits, while non-profit hospitals

Question

For profit hospitals are assumed to maximize profits, while non-profit hospitals may maximize quantity instead. Discuss the difference between these two approaches. Explain how prospective payment changes the incentive to hospitals as compared to retrospective reimbursement. What predictions would you make as a result of the adoption of reimbursement based on DRGs? Why are non-profit hospitals often expected to pay a greater role in providing care for the uninsured? Suppose that the Medicare rate of hospital reimbursement is reduced. Explain why the costs may not be shifted to other patients in the short run.

Explanation / Answer

a)

Maximizing profit is either increasing the profit margin (Sales-Cost) or increasing the quantity(number of patients) with lower profit margin. Profit is maximized when the Marginal revenue from patients equals the Marginal cost the hospital incurs on a patient. Thus serving the quantity to an extent where MC=MC

For Non Profit hospitals, their aim is to maximize the quantity rather than the profit. Thus they serve as many patients as possible. The non Profit hospitals are not meant to make profit. Thus the Non profit organisation may maximize quantity without bothering about Marginal cost, Marginal revenue or Profit Margin

b)

Prospective payment encourages the hospital to be more efficient and provide better facility to justify the reimbursement change, rather than the retrospective where hospital has no motive to change the current facility

DRG payment method is a fixed charge that hospital charges based on the two factors- the charge for the facility and the charge for the resources consumption for the patients rather than the length of time the patients stays in the hospital. Thus payment by DRG encourages efficiency and transparency. Thus it improves the fairness among hospitals by charging similarly across hospitals for similar care. Thus the prediction as a result of the adoption of reimbursement based on DRG would be that hospital would be more organised and be efficient in terms of the process.

c)

Non Profit hospitals are not meant to make profit but rather than to provide services to more customer. The uninsured patients are the patients who can’t afford to pay their medical bills and going to profit hospitals will charge them higher fees for service and medicines. Thus the non profit hospitals are the only hospitals who will charge them little lesser and thus pay a greater role in providing care for the uninsured

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