Chapters 1 and 2 of this dissertation explore the ever growing outpatient surgical market and how hospitals respond to specialized competitors, Ambulatory Surgical Centers (ASCs). ASCs are providers of surgical procedures that occur in an outpatient medical

setting. Relative to hospitals, ASCs exhibit a lower cost structure, have lower prices to

insurers and patients, and provide a higher quality of care. ASCs have grown in popularity

among patients since the late 1980s and among insurers in more recent years. Hospital

proponents have expressed concern that ASCs may have negative effects on the availability

of hospital services, since ASCs may cherry-pick the most profitable patients who might

otherwise have obtained care in hospitals, leaving hospitals with a pool of more costly or

less well-insured patients, which could threaten the economic viability of hospitals. Limited research has indicated that hospitals do exhibit a loss of outpatient surgical volume over time in the presence of ASCs. Other studies have noted that ASCs do indeed service

more profitable and healthy patients, with indications that these differentials may stem from

physician-ownership of ASCs.

While standard theory would dictate that hospitals would exit the market in the faceof superior competitors, hospitals have continued to operate in the outpatient market, and

in some cases have exhibited expanding outpatient revenue over time. There are a few

factors that likely contribute to hospitals’ continued ability to compete with ASCs, and

examples include successful lobbying efforts to establish legislative restrictions on ASCs

and receiving higher revenue from insurers (reimbursement rates) relative to ASCs. These

interventions, however, may not last, as exemplified by recent legislation that proposes

to enforce site neutral payments, which would pay hospitals at substantially lower rates.

Hospital responses to ASCs that are in line with more typical quantity- or price-based

competitive strategies have not been examined. The exact mechanisms for competition

under these avenues depend on a hospital’s maximizing objectives. For-profit hospitals are

assumed to be profit-maximizers. Not-for-profit hospitals, however, have no shortage of

theoretical models, with mixed empirical evidence to support them.

This dissertation expands on studies concerning hospital-ASC competition by separating the aggregate outpatient market into surgical procedure classifications, within established market geographies for patients. Specifically, I examine three specialty outpatient

markets in which ASCs have exhibited substantial growth nationally and in the state of

Florida, from 2000 through 2009, in addition to examining a combined market of all other

outpatient surgical procedures. In this outpatient market dissection, I empirically examine

how hospital patient volume, the number of physicians, and patient insurer mix vary by

ASC presence in a given market. I extend a model of not-for-profit hospitals as revenue

maximizers that accounts for physicians as the main driver of service volume and motivates

potential not-for-profit service expansion in response to competition.

Using Florida state data, my estimates suggest differential hospital ownership status effects on hospital patient volume, hospital physicians, and highest revenue patients (those

privately insured) in select markets. Specifically, estimates indicate that for-profit hospitals have lost a sizable amount of their privately/commercially insured patients in markets

where they face ASC competition, while not-for-profit hospitals did not. My estimates

further indicate that not-for-profit hospitals are more likely to exhibit output expansion,

primarily among privately insured patients. Taken together, my results further the literature

on differential objectives of hospital ownership by examining emerging hospital markets

and indicating that in Florida, where the split between for-profit and not-for-profit private

hospitals is even, ASCs will focus on for-profit hospital populations first, and not-for-profit

hospitals can maximize output in a manner that prioritizes revenue.

Chapter 3 of this dissertation focuses on the direct and indirect costs to society of a

popular surgical treatment for end-stage knee osteoarthritis - the total knee arthroplasty

(TKA). This chapter motivated my historical examination in Chapter 2, as this popular and

expensive procedure has potential to transition to an outpatient setting, given advances in

anesthesia and its low complication rate. Indeed, while TKA has been isolated to hospital settings to date, recent legislation from Medicare in 2018 notes a potential for a shift

of this high revenue procedure from a hospital setting to an ASC setting, which would

likely decrease the direct medical costs noted below and increase the societal value of this

procedure.

This chapter, published in 2013, notes the importance of societal perspective in valuing

surgical procedures, and in doing so, considers hospital medical costs of providing a procedure that is growing in popularity. Using a Markov model, my coauthors and I estimated

the value of TKA by comparing direct and indirect costs between surgical and nonsurgical treatment scenarios. Direct costs considered all surgical and non-surgical medical costs for osteoarthritis of the knee, including hospital costs (insurer reimbursements). Indirect costs

included lost wages due to an inability to work, lower earnings, or receipt of disability payments. Our model further incorporated quality-of-life measures to estimate costs over patients’ lifetimes and quality-adjusted life years. Assumptions and cost estimates came from

Medicare claims data (with all-payer adjustments), survey data, clinical expert opinion, and

peer-reviewed literature. Compared with nonsurgical treatment, we found that total knee

arthroplasty increased lifetime direct costs by a mean of $20,635 (net present value in 2009

U.S. dollars). These costs were offset by societal savings of $39,565 from reduced indirect

costs, resulting in a lifetime societal net benefit from total knee arthroplasty of $18,930 per

patient. Eighty-five percent of these savings originated from increased employment and

earnings, with the remaining 15% from fewer missed workdays and lower disability payments. A large portion of direct medical costs were driven by the hospital-based setting of the surgical procedure. The estimated lifetime societal savings from the more than 600,000

total knee arthroplasties performed in the U.S. in 2009 were estimated to be approximately

$12 billion. These societal savings primarily accrued to patients and employers.