The Supply of Medical Care

            A scenario is presented whereby the state legislature, under pressure from the Federal Government is implored to develop a new healthcare complex that will serve as a long-term health care facility for veterans. A proposal is advanced for the state to construct the new complex. Initially the agreement stipulates that the Federal Government will contribute $5 million toward the project. The state government is to contribute the remaining $3 million of the construction cost for the complex. The Department of Veterans Affairs officials on their part assure the state legislature that they will meet the full operational costs for the veteran’s home on completion of the project, thus granting the state government impetus to proceed with the proposal. The construction and renovation of the agreed site is eventually completed as the new 110-bed Northwest Veterans’ Home.

A few months into operation of the facility, budgetary constraints regarding operational costs become apparent. The Department of Veterans Affairs officials cannot meet the budgetary requirements for the veterans’ home operational costs and therefore resort to the state government to facilitate financing of the same; much to the frustration of the state legislature. The Department of Veterans Affairs officials are inexorably forced to adopt a cost cutting regime to justify continued operation of the facility. This is the situation since an audit of the facility’s operation commissioned by the Joint Budget Committee reveals inflation of costs by the leaseholder Regional Hospital (Gray & Steffy, 1983). The costs are so inflated that the report, in its conclusion states that the state would save $25 million, disregarding inflation, if they opted to abandon the facility and construct their own in another location.

The administrators of the Northwest Veterans’ Home thus are in need of several austere cost cutting measures. The first and most significant measure that they should adopt involves a renegotiation of their contract with Regional Hospital, the leaseholder of the new facility. For instance, the fee agreed to with the leaseholder for the daily foodservice operation is $15.05 per patient, per day. This needs renegotiation considering that the median cost for the service nationwide is $6.43 per patient, per day. Among the items that can be renegotiated include a liability insurance package that the facility has purchased. Renegotiations with the organizations facilitating provision of healthcare personnel is also in order with the aim of ameliorating the inflated costs often associated with doctor’s fee among other costs. The facility is operating under state auspices and therefore should also enjoy the sovereign immunity against lawsuits conferred on states (Butler, 1995)

Apart from these aforementioned structural adjustments, the administrators of the Northwest Veterans’ Home can also adopt various other cost cutting measures. A competitive outsourcing policy should be adopted by most if not all departments of the facility. The outsourcing of non essential medical equipment and auxiliary services for the complex such as maintenance and laundry can be a first step. Integrating Health Management organizations (HMO’s) into the healthcare service provision for the veterans will also cut costs, for example through the substitution of expensive ambulatory care with inexpensive hospital visits. The adoption of flexible spending accounts (FSA’s) is also an effective cost cutting measure. FSA’s for instance, allow some of the funds remaining in accounts at years end to be carried forward into the new financial year. Cost sharing between stakeholders in the industry and the merger of some essential services with other hospitals in the immediate vicinity of the new facility would also go some way in reducing the operational costs at Northwest Veterans’ Home (Ellis, 1992)


Butler, J. R. G. (1995). Hospital cost analysis. New York, Springer.

Ellis, R. P. (1992). Hospital cost function estimation when firms may not try to minimize total costs. Industry Studies Program, Dept. of Economics, Boston University.

Gray, S. P., Steffy, W. (1983). Hospital cost containment through productivity management.  Van Nostrand Reinhold.


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