HMGT 3320 Exam 2
WHY THE HEALTHCARE MARKET DOES NOT SEEM TO FOLLOW THE COMPETITIVE MODEL
"Excessive" physician profits - arguable, but if excessive, new entrants would be drawn to the market which would S and Price -Yet, we've not seen this happening in practice Fee differences among patients for same treatment Quality of care differences Restricting competitive behavior - consumers can't effectively "shop" Consumer ignorance - reliance on physician as agent -Supplier-induced demand - physician as the "bad" agent
Simple Monopoly
A single firm has sufficient market power to have complete control over the quantity produced and the price in the market
Market Power (MP)
Ability of one buyer/seller in a market to influence the terms/conditions of a transaction
_______ organizations do not pay taxes on the profits generated through operations
Tax-exempt
endogenous (internal) factors
the variables that can be controlled for in a model, dependent variable
Exogenous (external) factors
the variables that cannot be controlled for in a model, independent variable
health insurance
to reduce financial risk of a health-related event
Total cost (TC)
total fixed costs + total variable costs
Profits are defined as
total revenue (TR) minus total costs (TC)
Production involves alternative combinations of inputs that yield varying levels of outputs
true
Production involves the creation or addition of
utility
Revenue Assumptions
•Earned revenues from patient-related sources •Other sources of revenues that are nonpatient-related •Producer is a "price-taker" in the market
Assumptions about the objectives of the organization
•Main objective is to maximize profits •Profits = total revenues - total costs
Cost Assumptions
•Producer has both fixed and variable costs •Costs are both monetary costs and opportunity costs •Variable costs are employed in the least costly manner
Conditions for Market Power
1. Limited availability of viable substitutes for the good or service 2. Ease with which buyers/sellers can weigh available alternatives
Two major methods for setting fee to be paid to physician
1. Relative value scale (RVS) with conversion rate applied (Medicare & other payers) 2. Usual, customary, and reasonable rate
Healthcare provider, acting as an agent, typically faces at least two principals:
1. The patients being served 2. The insurers (payers)
Determinants of Market Structure
1.Economies of scale 2.Pricing policies 3.Input prices and taxes 4.Regulation
Average Cost (AC)
Average value of resource inputs for one unit of production, which is: Total Cost divided by Total Output
1932
Blue Cross and Blue Shield first offered group health plans
Shift in supply can be caused by "causal factors" like:
Change in the price of inputs: use of PA to reduce cost Change in technology or other factors that impact capital stock: can make output more or less expensive to produce Changes in government policies: easing/tightening licensing rules Changes in availability of substitutes or complements: increase in radiologists leads to increase in imaging film/technology Changes in goals and expectations: investing in high-profit services Entry into the market by new suppliers: high cost of building a hospital
_______ drives administrators' behaviors - for-profit & non-profit
Compensation
RETROSPECTIVE COST BASIS
Cost Basis: Pays a hospital for the allowable expenses already incurred in the provision of services Charge Basis: Pays a hospital for the charges it had already billed in the provision of services
Sunk cost
Costs that have already been committed and cannot be recovered in the present Example: The salary a physician could have made as a hospital employee vs. a private practitioner
Individual demand
Each consumer has a normal demand curve (it slopes downward and to the right) for the good or service and the supplier (physician) cannot directly influence consumer demand for the good or service
Individual supply
Each supplier (doc) has an upward-sloping marginal cost (MC) curve (supply curve) and individual suppliers are competing to sell their good or service to consumers
PROSPECTIVE FEE-FOR-SERVICE SYSTEM
Fee to be paid for a service is set before services are provided Provider is "at risk" for any excess of cost over the prospective fee Provider has incentive to provide additional services as long as the fee exceeds the hospital's marginal cost of production: MR > MC Total Cost = Cost per service X Services per Day X Days of Stay per Admission X Number of Admissions
1968
Firestone Tire and Rubber Company began to self-fund health benefits, removing them from regulation of the health insurance industry
Direct Costs
Fixed & Variable costs of the operation E.g., services and supplies paid for in full to produce output
Output depends on
Fixed Costs + Variable Costs
PER CASE PAYMENT TO PHYSICIANS
Fixed amount paid for each type of case treated, not for each individual service related to the case
Shift in demand for healthcare can be caused by "causal factors" like:
Higher consumer incomes Shift in tastes and preferences: healthy lifestyle image Changes in prices of other goods and services: decrease in insurance cost Changes in expectations: FDA approval or denial of a drug Changes in health status: increase in a certain illness in the population
SHIFTS IN DEMAND
If consumers are willing to buy more at each price, producers will increase profits by producing more output
Multi-Market Analysis
Impact of substitutes and complements in markets Example: Inpatient & Outpatient services (substitutes) Requires analysis of BOTH the primary market (e.g., Inpatient) AND the substitute (or complement) market (e.g., Outpatient)
HMO Cost Control Methods
Lowering the use of healthcare services by existing patients Encouraging enrollment of members who are at low risk (young) Dis-enrolling high-risk patients
1965
Medicare and Medicaid provided health insurance access to... Elderly population - Medicare Vulnerable population - Medicaid
Inputs typically consist of limited quantities of:
Mental and physical labor Capital equipment Raw materials Intermediate goods and services Knowledge Entrepreneurial abilities
The AGENT (e.g., doctor) acts on behalf of the
PRINCIPAL (e.g., patient)
Types of compensatory benefits received by administrators
Pecuniary (monetary), especially the salary & bonus received Amenities (non-monetary), including high-grade office furniture, a relaxed work atmosphere, expense paid "business" trips to exotic places, and so on
SALARIED PAYMENT
Physician is hired by a provider organization and is paid a salary Amount of salary payment is not tied to physician productivity (e.g., number of enrollees or volume of services rendered)
________ involves an explicit agreement or implicit "understanding" among competitors in a market to limit price competition
Price collusion
Three methods of healthcare price-quality competition:
Price competition alone—monetary incentives/ disincentives •Lower price Quality competition alone—nonmonetary incentives/disincentives •More office locations to cut patient travel time •More time with each patient •More providers in an HMO's physician network Joint price and quality competition—combination of monetary and nonmonetary incentives/disincentives
Disequilibrium
Price does not adjust to allow supply and demand to equalize Could be temporary as it takes time for equalization to occur Could be permanent, like government policy, that prevents equalization
Fixed inputs
Production inputs that cannot be changed in the short run Cannot be varied or changed in the current production period...volume does not matter! E.g., office rent, test equipment, physician's time, utilities
Variable inputs
Production inputs that the firm can adjust in the short run to meet changes in demand for their output. Often this is labor and/or raw materials E.g., Supplies, hourly wages
"PER CAPITA" PAYMENT - CAPITATION
Provider is paid a fixed amount of money for each individual enrolled in member panel, regardless of actual use of services Usually a fixed amount per member, per month ("PMPM") Example, "all Medicaid enrollees in a defined city geography"
Economies of Scale
Reflect an increase in efficiency of production as the number of goods or services produced increases and fixed costs are shared among more units
Accountable Care Organizations (ACOs): ACA Value-based Pricing
Reorganization of care around a team of providers, technology, and knowledge-focused on patients
Health Maintenance Organizations (HMOs)
Responsible simultaneously for health insurance and healthcare services Assume all the financial risk for providing the care needed by members Employ (or contract with) physicians to act as gatekeepers to control utilization
HOSPITAL PAYMENT METHODS
Retrospective cost basis Prospective fee-for-service system Per diem fees Per case or per admission payment Per case payment with adjustment for outliers Diagnosis Related Groups (DRGs) Capitation Global budget
Economic profit
Return above the normal profit and typically viewed as excessive and not sustainable
SIMULTANEOUS SHIFTS IN DEMAND AND SUPPLY
Separate factors may cause changes in both D & S Net effect on price depends on how much each curve shifts The same factor that causes demand to shift independently may also cause supply to shift When demand increases and supply decreases, price will increase, but quantity will increase, decrease, or remain the same depending on the extent of the shifts
Indirect Costs
Services and supplies used in production operations that are obtained at less than full cost E.g., someone or some organization has incurred an opportunity cost
Utilization
The actual quantity exchanged in the market Utilization is not equal to amount demanded when disequilibrium exists and more (or less) is demanded than is supplied Utilization is not equal to quantity offered when disequilibrium exists and more (or less) is supplied than consumers are willing to buy
competitive bidding
The purchaser (e.g., a government agency) requests bids from competing providers and selects the "best" bid Example, state Medicaid capitated provider contracts Example, state Medicaid claims administrator contracts
Normal profit
The return that owners could normally get on their assets and is associated with the risk taken
Opportunity costs
The value that the producer gives up by not committing the resources used to the next highest valued use; alternatively viewed as the market value of the resources Examples: physician's time, unused office space
Market demand
There are many consumers in the market and they are competing for the good or service and so do not have any individual influence over the price of the good or service supplied
Market supply
There are many suppliers, and each individual supplier is unable to influence price; each supplier takes the price and supplies the quantity at which MR = MC of production
USUAL, CUSTOMARY, AND REASONABLE PHYSICIAN PAYMENT SYSTEM (UCR)
Usual - the usual or typical fee charged by the billing physician Customary - the typical fee amounts charged by all physicians in the community for same services Reasonable - Allowances made for extenuating circumstances
Marginal Cost (MC)
Value of additional resources that must be committed to the production process to produce one addition unit of output TC After Currently Produced Unit minus TC After Prior Produced Unit
Some examples of exogenous factors and how they can impact the supply curve
What if production costs increase? -Profit declines as cost increases What if technology reduces production costs? -Profit increases What if income taxes increase? -Profit declines What if the number substitute products increases? - Profit declines due to competition
Shifts in Supply
Willingness of producers to offer more at each price allows the consumers to increase consumption
A shift outward and to the right in the supply curve reflects
a greater quantity offered for sale at each price
Monopsony
a market structure in which there is only a single buyer of a good, service, or resource
MEDICARE SEVERITY - DIAGNOSIS RELATED GROUPS (MS-DRGs)
a patient classification system that forms the foundation for a payment system Medicare prospective payment system to set a payment for each procedure classifies patients according to common elements
Under RVS, each category of service is assigned
a relative value (an index number) in accordance with some stated criterion
An inward and to the left shift of the supply curve reflects
a smaller quantity offered for sale at each price
Typically, fee paid is set or agreed in ______ to the service being delivered
advance (prospectively)
Use of technology
could shift the production curve upward or downward depending on the type of tech
Supplier induced demand
doctors create excess demand for their services Requires violation of the independence between supply and demand decisions in the market...and the agent/principal relationship Major requirement is asymmetry of information in the medical market regarding need for and impact of healthcare services Also requires willingness of providers to influence consumers to demand more services...willing to act counter to ethics
Demand curve of a monopolist is _______ since even the monopolist faces tradeoffs between price and quantity
downward (negative) sloping
Price is the _________ (internal) factor impacting the quantity offered in the market Change in price will cause movement along a given supply curve, reflecting a change in quantity supplied
endogenous
Healthcare has many competitors and potential competitors because
excess profits exist and barriers to entry are not particularly high
Under a __________ a single rate is paid to all long-term care facilities regardless of patient characteristics, quality levels, and so on
flat per diem rate
The market supply curve will shift outward and to the right if
given the number of producers, any factors cause the individual supply curves to shift outward or if the number of suppliers increases
Exogenous factors that cause the marginal cost to decrease will result
in a downward right shift in the supply curve (an increase in supply)
Exogenous factors that cause the marginal cost to increase will result
in an upward left shift in the supply curve/schedule of the firm (a decrease in supply) The quantity supplied at any price will be reduced
UCR is viewed as _______ since increasing fees charged in one year will impact the customary rate of fees charged the following year
inflationary
A downward shift in the production relationship (curve) means that
less output can be produced: Marginal Product is lower at any level of output Example: use of more human & tech resources to improve quality of the output
A profit-maximizing firm will continue to expand production as long as
marginal revenue (MR) exceeds marginal cost (MC)
Profit-maximizing monopolist will set price and quantity such that
marginal revenue (MR) is equal to marginal cost (MC)
A _______ brings buyers (demanders) and sellers (suppliers) together, and not necessarily at a physical location
market
The amount of capital used in production
more capital-intensive operations will shift the production curve downward
A change in case mix
more complex cases require more inputs which shifts the production curve downward
An upward shift in the production relationship (curve) means that at each level of input
more output can be produced At any level of output, less additional input is required to produce one extra unit of output; the Marginal Product is greater at any level of output Example: use of technology that is cheaper than humans and more efficient
U.S. has a ______ system where each payer sets its payment rules
multi-payer
Shortage
occurs when quantity demanded exceeds quantity supplied
Surplus
occurs when there is an excess of quantity supplied over quantity demanded
Markets with a few large firms that dominate and have a high degree of interdependence are called
oligopolistic
A change in any of the exogenous factors will cause a shift, either
outward to the right or inward to the left, of the entire supply curve
Quantity supplied by a physician is driven by the
payment rate and the marginal cost for the specific service
When market concentration increases and providers are fewer in number, the probability of ______ increases
price collusion
A ________ expresses how output will vary when inputs are changed in quantity
production function
§If price falls below variable costs
production will cease as no value is added to the firm
Stark Law
prohibits referring patients to an entity in which the physician or a family member has a financial relationship
Monopolist has unilateral ability ("Market Power") to
set price at any level
1929 The first prepaid group plan
teachers in Dallas contracted with Baylor Hospital for room, board, and medical services in exchange for a monthly fee ("capitation")
1973
the Health Maintenance Organization Act was passed, requiring most employers to offer federally qualified HMOs as an options for employees
price discrimination
the business practice of selling the same good at different prices to different customers