Economic Analysis of Outpatient Care Centers Vs. Hospitals

Debby Lopez, Katie Pham, Visish Srinivasan, Catiana Syllien, Marie Christine Uwamahoro

Drexel University

ECON 240 - 1

Dr. Edward A Tomczyk

12 November 2006

Economic Analysis of Outpatient Care Centers vs. Hospitals

A recent phenomenon in the health services is the burgeoning of outpatient healthcare centers. Particularly vigorous growth has been observed in centers that perform diagnostic tests and simple surgeries and procedures like colonoscopies. At the current state, outpatient care centers outnumber hospitals in Pennsylvania. Furthermore, these centers now perform one of every four surgical and diagnostic procedures in the state (Levy 2006). However, the trend applies nationwide, and other states could easily follow suit. Many critics have commented on the negative and positive aspects of this trend. What remains to be determined are the long term effects (on health and the economy) of this paradigm shift, in terms of the wellness of the community as well as economically. Proponents of the movement have pointed to the lower overhead for these clinics trickling down to lower costs for patients. However, critics skeptically question whether the real benefits are for the patients or simply as a mechanism to stuff physicians' wallets. When considered as firms in the marketplace, it is evident that these two groups, both servicing the health needs of the community, have vastly different balance sheets and income statements. This transfers over to a difference in operational functionality, profitability, and cost structure. Furthermore, the disparity of financial motivations that is visible in the varying profit margins is of concern to the community. All of these are important considerations to be made when considering the economic implications of this new phenomenon.

The most important aspect of this shift to analyze is the health aspect - how effective and safe are outpatient clinics in relation to inpatient clinics. In an article published in the New England Journal of Medicine, a consortium of physicians observed the effectiveness of various treatments and long term mortality rates of patients. It found that there was no significant change in the mortality rates and effectiveness of the treatments when observed in the long term; thus, outpatient clinics were a viable alternative (from the health perspective) to inpatient centers. Aside from severe cases, outpatient centers even provided better care in the psychiatric unit as well as some others.

The trend of outpatient care centers is not a recent one; it has been ongoing since the early 1990s. In the first five years of the decade, outpatient visits rose by 27%. This trend has only continued to grow, as health care groups strive to streamline in the face of rising costs. By applying techniques of quadratic regression on the data provided by the House Ways and Means Committee, one can see the level of growth is gaining momentum - the rate of the change is increasing quite rapidly. Thus, as we delve deeper into the first decade of the millennium, the trend continues as outpatient centers eclipse the inpatient centers.

As stated before, one of the major advantages of the outpatient clinic as opposed to a traditional inpatient hospital is the variance in costs, which often correlates with a variance in prices to patients. A study done at the Veterans Hospital in Palo Alto, CA evaluated the finances of their substance abuse and psychiatric centers in outpatient and inpatient settings. These are two of the areas that are often praised by those who tout the superiority of outpatient systems over hospitals, as they are high-cost to hospitals. As compared to other studies done in the field, it was found to be more accurate as the Department of Veterans Affairs ran the operation in conjunction with Stanford; this allowed for an in-depth view of the proceedings as well as a closer comparison since the two programs were run by the same group. The study found that total costs in substance abuse are 24.4% lower for the same volume of treated patients in an outpatient clinic versus an inpatient setting. As the program ran longer, the savings even increased, suggesting the superiority of the outpatient system in "a less intensive and more self-reliant" setting (Roberts 1999). The economics behind these findings involves an evaluation of fixed and variable costs, of which outpatient and inpatient clinics have different levels. The study found that while both clinics had both types of costs, the inpatient clinics had far more fixed costs. This correlated directly with a high average total cost per day, as fixed costs are considered to be the driving force in health care costs, not variable ones. Outpatient clinics generate more visits, allowing their relatively low fixed costs to be dispersed among many transactions. This allows for the outpatient clinics to operate in a streamlined manner as they avoid many of the expenses that sometimes leave hospitals groping in the dark for disposable income.

In addition to the reduced costs in the outpatient setting, revenue streams are also stronger. One of the main causes for prolonged hospitalization is the practice of prioritizing surgical procedures in resource-constrained hospitals. Often, an elective procedure is set for a later date because of an influx of new high priority cases from the ER. Many of these elective procedures are ripe for picking by outpatient clinics that can make the experience hassle-free for the patient. Furthermore, shorter hospitalizations reduce costs dramatically, not to mention the benefit of time for the patient. Inpatient systems also were found to order more irrelevant tests during pre-op, whereas this was generally avoided by outpatient clinics that got the job done efficiently and effectively. These were all found in a cost-benefit analysis performed by the VA Palo Alto Health Care System in conjunction with Stanford University, which also conducted other research in the realm of outpatient vs. inpatient healthcare economics.

There is already government regulation in place that is limiting the spread of such outpatient clinics. One of the most frequently observed practices involving outpatient clinics is the 'self referral' (Armstrong 2006). The Department for Human and Health Services (HHS) has been monitoring the actions of doctors at outpatient clinics to curb unnecessary procedures and tests, such as MRI and CT scans. Logically, physicians who have a financial interest in such tests will have a tendency to recommending them for their patients. This has caused trouble with Medicare and private market insurers, as their expenses for benefits disbursements