Describe each of the following models of hospital behavior, profit maximization model, the utility maximizing model, physician control models, the Harris model, and constituency models.
A. Profit maximization models: Profit maximizers produce at the point where marginal revenue equals marginal cost
The model predicts hospitals will reinvest profits by choosing those investments that yield the highest return.
In Feldstein's description of the profit maximizing model the hospital can practice price discrimination. The hospital will price discriminate according to the price elasticity for each class of patient and for each type of service.
B. Utility maximization models: managers have objectives other than maximization of profits, hospitals may maximize: 1. Quantity of services, 2. Quality of services, 3. Prestige, 4. Environment for executives
C. Physician control models: physicians act as contractors who retain the residual revenue after other inputs are paid. In these models physicians have an incentive to favor over-investment in hospital equipment, since this investment increases their productivity. it means more purchasing power is available for physician’s services.
- D. The Harris Model: hospital as two separate firms, a medical staff, which is the demand division, and the administration, which is the supply division. cost containment strategies should recognize the role of
- physicians as demanders of service, rather than being directly solely at the suppliers of hospital services.
- E. hospitals as trying to serve multiple constituencies. Instead of trying to maximize profit, the managers must balance the interests of patients, physicians, government
- agencies, employers, professional trade organizations and others.