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