Hospitals: The Market for Health Care Facilities

By Benjamin, John D.; Chinloy, Peter et al. | Real Estate Economics, Spring 2007 | Go to article overview

Hospitals: The Market for Health Care Facilities

Benjamin, John D., Chinloy, Peter, Megbolugbe, Isaac F., Real Estate Economics

Health care facilities include hospitals and nursing homes. Demand for beds and occupancy depends on income, prices and insurer restrictions. The supply of beds is limited by regulatory certificates of need. The implied equilibrium vacancy leads to a trade-off with rate increases. Rate increases establish an asset price for a hospital bed. If prices of health care rise faster than income and nonhealth prices, patients demand less bed availability and occupancy. Rising vacancy and rising prices occur, consistent with the empirical observations for U.S. health care facilities. For 1980-2001, the equilibrium vacancy rate for U.S. hospitals is between 27% and 36% depending on capacity adjustments, bed availability and price expectations. Equilibrium vacancy is near the actual rate after 2000, but that rate is 11 percentage points higher than in the early 1980s when the number of beds was nearly one-third higher. Usually rent regulation leads to excess demand. But in a general equilibrium model with income, relative prices, expectations, supply and capital markets, price regulation can coexist with excess supply.


  Medical care should be no different than hotels. On the back of my
  hotel room door in San Francisco was a sign that said the price of the
  room was $449. My actual bill was $130 instead of $449 because the
  government had negotiated special prices. With hotels I have the
  ability to ask what the rate is or go online, and they will actually
  search and tell me what various hotels are charging. None of that is
  available in health care.
  Michael Leavitt, U.S. Secretary of Health and Human Services.

The health care system has two types of real estate. Hospitals are short-stay, while nursing homes are long-stay facilities. Hospitals in the United States have every incentive to respond to price and revenue signals, as more than three-quarters are owned by nongovernment entities. (1)

While hospitals are motivated to generate profit or at least revenue, they act as price-takers. Prices by procedure are negotiated by insurers or preset by Medicare and Medicaid, the public carriers that pay half of all U.S. health care spending. (2) With prices predetermined and operators motivated for revenue, it appears that hospitals would suffer the classic conditions of a rent-controlled market. Excess demand occurs with waiting lines and times for elective procedures. While this is the situation in single-payer systems, it is not the case with health care facilities in the United States. Instead, there is the paradoxical observation of rising vacancy despite price and, effectively, rent regulation.

In the United States, community hospitals provide access to all-comers. (3) In 1980 the nation had 1.31 million beds in community hospitals according to Hospital Statistics of the American Hospital Association (AHA; 2005), with a vacancy rate of 23.3%. In 2001 the total had declined to 925,000 beds, but the vacancy rate had risen to 33.3%. Since 1995 the hospital bed vacancy rate has exceeded 30% even as capacity has been reduced.

The decline in capacity is even greater on a per capita basis because the population was rising as the bed count was falling. The number of beds per thousand people in the United States was 6.05 in 1980, but it had declined to 3.29 by 2001, a drop of 45%. That per capita bed count puts the United States in the bottom quartile in health care real estate facilities among developed countries (Anderson et al. 2005). Despite this relatively low availability, in 20 years vacancy increased from one in every four beds on an average night to one in three.

Hospitals have another vacancy-related issue related to peak-load demand. The system is aware of the weekend effect and the July phenomenon (Weissman 2005). (4) Vacancy falls below 10% in suburban areas during Monday-Thursday nights. Outside these peak hours and during the summer months the hospital vacancy rate can exceed 50%. …

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