We ended the previous segment with the discussion of the drop in

the number of hospital beds in the U.S. over the last couple of decades.

The drop is quite massive,

from about 1.2 Million hospital beds in the early 80s to less than 800,000 beds today.

We discussed the following equation,

and concluded that for the number of beds to fall one

of three things or a combination of the three should have happened.

The first is an increase in occupancy,

the second is a decrease in average length of stay and the

third is a decrease in the number of inpatient admissions.

Let's inspect each one of these scenarios.

Occupancy rates in hospitals were pretty stable

and if anything even fell slightly since the mid 70s.

So occupancy rates are not driving the decline in the number of hospital beds.

Next we have average length of stay.

The time that patients spend in the hospital has on average shortened.

But this decline is relatively modest. Why is that?

On the one hand, advances in medicine made procedures shorter, more accurate,

less invasive and far safer therefore allowing

for shorter recovery time and quicker discharge from the hospital.

But on the other hand,

patients in hospitals are older require

complex care and are more acutely ill. That leads to longer length of stay.

These two effects largely offset one another.

A third trend that has driven the length of stay down,

involves hospital payment models.

In the past, insurers reimburse hospitals retrospectively using fee for service,

paying hospitals for each procedure,

test, medication as well as days of stay.

Under the system an extra day in the hospital meant extra money.

So it provided an incentive to have patients stay in the hospital longer.

In the mid 80s insurers gradually started to reimburse hospital prospectively,

using the prospective payments system.

This is a method of reimbursement in which the insurer pays

an inpatient facility based on a pre-determined fixed amount.

The payment amount is derived based on a set of diagnosis-related groups.

That is the pre-determined amount for a patient diagnosed with a stroke

is different than the payment for a patient diagnosed with a urinary tract infection.

Under this system, the hospital is paid per patient and is incentivized to

free up beds quickly by shortening length of stay so they can admit more patients.

There is one more countervailing effect which

prevented a major decline in length of stay,

but we will get to it later in the segment.

So if it is not the occupancy rates and the average length of stay,

it must be the number of admissions.

Right? Yes, that is correct.

The massive drop in the number of beds

was mirrored by a decline in the number of admissions.

The main reason inpatient admissions fell had to

do with the shift away from inpatient care and towards outpatient care.

This transition was to a large extent facilitated by advances in technology.

For example; Previously patients receiving bariatric surgery,

would have had to stay in the hospital for a few days to recover from

a surgery that required cutting open their abdomen to shrink their stomach.

Now days, bariatric surgeons use laparoscopic techniques that are minimally

invasive and recovery times are so

short that patients can leave the hospital on the same day.

So as modern treatment methods are developed,

a shift in patient volume from inpatient to outpatient care will occur.

In the 80's the share of hospitals revenue from outpatient care was about 15%.

Today there are many hospitals who rely

primarily on their outpatient business for patient revenue.

Okay. Let's go back to average length of stay.

Here is a typical distribution of days in the hospital.

Hospitalization for gallbladder removal typically

last two or three days for, hip replacement,

the typical hospital stay is five to six days and for

a kidney transplant patients typically spend eight to 10 days in the hospital.

Now we can ask ourselves,

how would the shift from inpatient to outpatient care affect the average length of stay.

Why don't you pause the video and think about it.

When we think about the shift from inpatient to outpatient care,

we should first ask ourselves which procedures were candidates for such a shift.

Can we have outpatient organ transplantation,

triple heart bypass or total hip replacement.

No or at least not yet.

But procedures like gallbladder removal,

hernia repair or prostate surgery are commonly performed in

outpatient settings that do not require an overnight stay in the hospital.

So what is common about these procedures.

Well all of them require

relatively short hospital stays and when this shift to the outpatient setting,

they disproportionately affect the volume of short hospital stays.

When that happens, the average length of stay goes up

because there are fewer short stays and a smaller number of long stays.

It is like asking what would have happened to the average height

of a basketball team,iIf you remove the point guard,

who is typically short.

Well, that would increase the average height of the team.

So here is our forward effect.

The shift from inpatient to outpatient care increased the average length of stay.

So to recap, advances in medical technology and

reimbursement pressure in the form of

prospective payment system have pushed average length of stay down.

While the shift from inpatient to outpatient care and

the higher patient acutely and hospitals pushed average length of stay up.

Putting all these factors together we have seen

a modest decline in length of stay over the past couple of decades.

Introduction to Hospitals: Part 2

The Economics of Health Care Delivery

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