Within a firm and within a family, resources and decisions get made without prices and often without profits. The answer (as Coase understood and as Lauren notes in her comment) is that in these organizations, the savings in transaction costs overcomes the loss of feedback and information benefits from using prices...
So why doesn't a hospital work better? The answer I think, is that the level of specialization in medicine has emerged from a process that has very few incentives to make sure that the level of specialization is as productive as it should be. There are very few informational feedback loops.
I believe that it used to be worse. It used to be the case that doctors operated independently. Two doctors could issue orders on the same patient that were duplicative, or even contradictory. That has been fixed. Nowadays, at least where my father is, the doctor who is in charge of the unit is what in my business days we called the "owner" of the process.
So at any one time, one doctor "owns" all of the medical resources for the patients on his or her unit. That is an improvement.
The problem is that no one really "owns" the patient. If my father is in the cardiac unit, nobody really has responsibility for checking on the condition of, say, his skin. Or his emotional state.
I am getting ready to return to St. Louis (weather permitting). This afternoon, he is changing units again--it's been at least 6 or 7 units within three weeks. Given that, it's pretty amazing that there has been as much continuity of care as there has.
We have asked the physical therapists assigned to rehabilitate his hip about his likelihood of being able eventually to leave the hospital under his own power, and the response we get is that it is high. Unless they are being dishonest, I think that this argues against pulling him out of the hospital orbit altogether.
I may be wrong, but what seems to be missing in this process is what in business is called a project plan. A project plan lists tasks, dependencies, time frames, and accountabilities. For a patient who is on one unit his entire stay, the unit doctor's orders serve that function. But every time my father changes units, the plan gets torn up and they start all over.
For example, with each new unit his diet plan needs to be assembled from scratch. For breakfast, pretty much all he can eat is oatmeal. But for the first day or two on each unit, they just default to sending him bacon and eggs. Once, while I went down to the cafeteria to get him oatmeal, he for some reason tried to eat the bacon, and the nurse had to come in to stop him from choking. So it's not a minor issue.
The absence of a project plan means that some effort is wasted (every time he changes units he gets a new interview with a dietician), and some processes work poorly (the dietician interview always takes a day or two to work through the system). It also means that some things slip through the cracks. Long-term issues, such as skin care, are low priority when you know that the patient is going to be leaving your unit tomorrow.
Also, before my father can be mobile and out of the hospital, some things have to happen that are not on the radar screen for doctors' orders right now. I fear that he could reach a point where he can move tolerably well using a walker, but then he has to stay two or three days because of other issues that would have been prevented or resolved earlier in the context of a plan. Obviously, to the extent that I can anticipate those, I can help. But I wish that I could be confident in the process taking care of it.
Finally, a plan introduces an element of accountability. Are things going according to plan? Is the plan really leading to an outcome that the patient desires? Are there issues being overlooked?
Again, I think it all comes back to who pays the bill. In industries where the customer pays, sooner or later competition forces the business to put together a process that works for the customer. Given the way we use health "insurance," medical care is not subject to that same discipline.