Fluent Essays

You just started working as a Health Service Manager within one of the following health care industries.  First choose an industry below to discuss the questions that follow: Ambulatory Surgery center Pharmacy Physician’s Office Cosmetic Surgery Center Laser Eye Center Dental Office Your boss has asked you to write a report detailing how the demand for your product(s) is impacted by various economic factors.  In writing your memo, be sure to include your name and in the subject line identify the health care entity you chose above. In order for your boss to easily review your memo, please include section headers to correspond to the questions below. Answer the following questions relying primarily on the course readings and other resource material presented in this class (do not cite any other outside sources). Describe a product or service your company provides to your patients Evaluate the demand curve for your product and relationship between the price of your service/product and the quantity demanded. In this evaluation, be sure to identify: whether demand is sensitive (e.g. elastic) or less sensitive (e.g. inelastic) to changes in the price and evaluate why this relationship might occur. include a discussion of how the existence of health insurance would impact the elasticity of demand. Define “substitute” goods and identify potential substitutes for your product/service. Evaluate how does the existence of a substitute impact the demand for your product/service. Define “complement” goods and identify potential complements for your product/service. Evaluate how does the existence of complement goods impact the demand for your product/service. Identify and discuss the economic factors that might lead to a shift in the demand curve for your product/service? UMUC HMGT 435 Week 4: The Supply Side: Importance of Costs 1 1 Understand difference between accounting vs. economic costs Understand characteristics of cost in short-run vs. long-run and impact on: Average vs. marginal Input specialization Diminishing returns Understand what costs matter for a firm’s pricing decision Breakeven vs. shut-down prices Understand what factors constitute a “perfectly competitive” market Key Learning Objectives Week 4 ‹#› Economic costs include the “opportunity” cost of inputs used in the production process Economic Cost = Explicit cost + Implicit Cost Accounting Cost = Explicit cost Explicit cost : actual monetary payments for inputs Implicit cost: opportunity cost of inputs that do not require a monetary payment Applies to Profit Equation as Well Economic Profit = Total Revenue minus Costs (Explicit + Implicit) Accounting Profit = TR minus C (Explicit only) Accounting vs. Economic Costs and Profits ‹#› From Week 1 introduced the concept of factors of production also called input into the production process Labor- Doctors, nurses, administrative staff, etc. Physical capital – Hospitals, doctor’s offices, medical technology, etc. Natural Resources and Raw Materials – land for the capital to be built, energy sources (oil and gas), raw materials for pharmaceuticals Entrepreneurship – scientists who develop cures for cancer, drug companies who develop new drugs. Production Function: Relationship between Inputs (e.g. labor, capital) to and Outputs (e.g. patient care) from the production process Factors of Production in Healthcare ‹#› Production Function and Time Short-run: period of time in which firms are able to vary one of the inputs to production Long-run: period of time in which firms can vary all inputs to production All inputs are variable in long-run, you can hire and fire labor, you can build more physicians offices and hospitals Thus, the production function is largely a short-run decision Within the Short-Run timeframe, firms do face different stages of production based on how much output (and marginal product) they can get from a given input (e.g. labor). The Production Function and Time ‹#› Increasing returns (Marginal Product (MP) > Average Product (AP) Each additional worker contributes more to their output. Example: New physician office with a number of exam rooms and one physician and one admin staff. Adding another physician and admin staff can allow the office to see more patients in a day. Diminishing returns (MP = AP) As firm increases workers, output increases but at a diminishing rate. Example: Too many physicians for same amount of office space means that they will start bumping into each other and rate of growth in patient care will decline Negative (or decreasing) returns (MP < AP) As firms add workers, output declines Example: waiting room and exam rooms at full capacity, so cannot see any more partients even if add physicians, only solution is a long-run option to expand office space. The Stages of Production ‹#› Total Costs = Fixed Costs + Variable Costs Fixed costs do not vary with quantity produced Variable costs vary with quantity produced In the long-run, all costs are variable Distinguish between Average and Marginal Costs Average Costs = Total Costs/Quantity Marginal Costs = Change in Total Costs resulting from a one-unit increase in output Principle of Diminishing Returns As more variable inputs are added, in the SR, MC must eventually be increasing Example: Crowded hospital waiting room Short-Run Costs ‹#› Characteristics of a perfectly competitive market: Many sellers (large number of firms) and buyers Homogeneous product (identical and no branding) No barriers to entry Firms in Perfectly Competitive Market must determine: What price to charge? How much to produce? Supply Curve of A Perfectly Competitive Firm ‹#› PC firm is a “price taker” accepts market price (no influence over market price) P=MR for the firm Demand curve is horizontal at the market P (perfectly elastic) A price above market price, demand would drop to zero and everyone would go to competitors What Price Does Perfectly Competitive (PC) Firm Charge? ‹#› Total Revenue = Price (times) Quantity Economic Profit = Total Revenue (minus) total economic cost Marginal revenue: Increase in revenue from selling one more unit P = MR in Perf. Comp. market Using Marginal Principal choose Q where MR = MC How Much Does a PC Firm Produce? ‹#› Total Cost = FC + VC A firm must cover it’s variable cost (also thought of as operating cost) to be viable It still must cover it’s fixed cost. Shutdown P = AVC = MC Point where firm indifferent between operating or not Any point where P > AVC the firm can still operate A firms would shutdown if P<AVC Firm’s Shut Down Decision ‹#› Fixed or Sunk Cost A cost a firm has already committed to and cannot be recovered If firm produces nothing it will have a loss equal to fixed costs The decision to operate or not ignores any fixed costs Only the relationship between revenue and variable costs is important for SR decision to shut-down or not Fixed Costs and Decision to Shut-down ‹#› Change in Inputs (e.g. labor and capital) Number of producers/suppliers Change in Technology (which impacts productivity) Government Regulation/Taxes/ Subsidies Future expectations Factors Leading to A Shift in Supply Curve ‹#› Shifts in Demand or Supply in Perfectly Competitive Market How does the market react to events that influence the demand for or supply of medical services in perfectly competitive market Recall that changes in factors other than output price will cause the demand or supply curve to shift An increase in consumer income will cause the demand curve for physician visits to shift to the right An increase in the wage of nurses will cause the supply curve for hospital stays to shift to the left ‹#› 14 Effect on Equilibrium These shifts in the demand or supply curves will lead to a change in equilibrium price and quantity Predicting such changes is referred to as comparative static analysis ‹#› 15 Comparative Static Analysis Case Study: In the mid-1980s, the AIDs epidemic led to an increase in the demand for latex gloves among health care workers The epidemic led to a shift to the right in the demand curve for latex gloves Excess demand for gloves developed, leading to a temporary shortage of gloves ‹#› 16 Comparative Analysis (Long run) Market output of latex gloves (Q) Dollars per pair S D0 Q0 P0 D1 E F Excess demand ‹#› 17 Comparative Analysis (Long run) The shortage of gloves led buyers to bid the price of gloves upwards As the price bid for gloves rose, suppliers increased their quantity supplied of gloves This process continued until a new short-run equilibrium was reached From 1986 to 1990, annual sales of latex gloves increased by ~58\% ‹#› 18 Comparative Analysis (Long run) Market output of latex gloves (Q) Dollars per pair S D0 Q0 P0 D1 P1 Q1 ‹#› 19 Entry of Firms in Long-Run Other medical suppliers made plans to build new manufacturing plants to make gloves, in the hopes of making profits In 1988, 116 permits were pending in Malaysia for building latex glove factories Entry of the new plants into the market increased the supply of latex gloves in the long run The supply curve for gloves shifted out ‹#› 20 Comparative Analysis (Long run) Market output of latex gloves (Q) Dollars per pair S0 D0 Q0 P0 D1 P1 Q1 Q2 S1 ‹#› 21 Effect on Long-Run Price in Perfectly Competitive Markets As the supply curve for gloves shifts out, the price of gloves begins to fall Note that the quantity of gloves sold on the market also increases As the price of gloves fall, profits also fall The process continues, until the price of gloves falls back to P0, where profits for all glove makers are again equal to 0 ‹#› 22 UMUC HMGT 435 Week 3: The Demand for Health Insurance 1 1 Understand how health insurance markets work and the role of risk and risk mitigation Understand potential market failures in health insurance markets Understand the impact of health insurance on the demand for health care Understand how deductibles and copays improve price sensitivity Key Learning Objectives Week 3 ‹#› Uncertainty exists when any number of events may occur and we do not know which one will arise. Risk exists when the probability of each even can be estimated Expected value(EV) = probability of event occurring * expenditure of health care treatment Understanding Risk and Uncertainty ‹#› Fair and unfair gamble A “fair” gamble is when EV profit = 0 An unfair gamble where EV of profit <0 A favorable gamble is where EV of profit > 0 Risk Averse Individual will refuse a “fair” gamble The more risk-averse an individual is the more favorable the gamble must be Risk-Neutral is indifferent between accepting and not accepting a fair gamble Risk Loving individual will accept a fair gamble and may even accept non-fair gamble Attitudes Toward Risk ‹#› Health care is consumed under the condition of uncertainty with respect to: The timing of health care expenditures Costs of health care spending This uncertainty poses a “risk” of incurring large unplanned health expenditures due to ill health Health expenditures for catastrophic care (heart surgery, etc) are quite high Some individuals are more “risk averse” than others Risk and Uncertainty in Health Care ‹#› Health insurance is: Used to mitigate risk Represents a contract between an insurance provider and an individual Pay an agreed upon price for health insurance (called a premium) In exchange for payment for all or portion of health care costs Role of Health Insurance ‹#› Group (employer-sponsored) market Employers purchase policy from insurers and offer to employees Covers almost 70\% of working adults Employers pay large share of premiums, as a result, participation rate very high so risk is spread across large group Individual market Individuals purchase policies directly from insurers Risky individuals or those needing care more likely to purchase policies Participation rate low Markets for Health Insurance: Demand Side ‹#› How risk averse an individual is The probability of the event (illness) occurring The magnitude of the loss (cost of getting necessary care) The price of insurance The income of the individual Factors Impacting the Demand for Health Insurance ‹#› Price willing to pay for health insurance = “fair” premium = Expected value + risk premium based on their level of risk aversion where expected value = (probability of falling ill * cost of care) Simplified Example: Probability of catastrophic illness = 10\% Cost of catastrophic illness = $100,000 Probability of no catastrophic illness= 90\% Risk Premium = $0 for risk neutral individual (would be positive for risk averse individual) Fair Premium = (.10*100,000) + (.90 x 0) + 0 = 10,000 +0 + 0 = $10,000 What Price are Consumers Willing to Pay for Health Insurance ‹#› Premiums set by health insurers based on expected risks and costs Attempt to pool risk across a large number of insured individuals Total premium = “fair” premium + administrative costs + profit margin Two key risks health insurers face: Adverse selection Moral Hazard Suppliers of Health Insurance: Insurance Companies ‹#› Individuals most in need of care (e.g. the sickest and those with chronic conditions) are the most likely to want health insurance Individuals less likely to need insurance (e.g. the young and healthy) are less likely to voluntarily purchase coverage Adverse selection arises because of “asymmetry of information” between the individual purchasers and insurance provider Individuals with high risk don’t tell insurer they are high risk To address “asymmetry of information issues” insurers charge community rates for insurance: Community rate attractive for high-risk individuals but still too high for low-risk indiviudals Adverse Selection ‹#› If can’t control adverse selection, premiums tend to be higher than they otherwise would have been (for both healthy and less healthy) populations The SMALLER the covered population the higher the impact of adverse selection on premiums The LARGER the covered population the lower the impact of adverse selection on premiums Impact of Adverse Selection ‹#› Group health (employer-sponsored) plans: Generous employer premium subsidies (cover about 71\% of premiums) lead to higher participation rates Higher participation rates lead to larger risk-pool Individual insurers: Medical underwriting (using age, health status, existence of pre-existing conditions) Exclude coverage for pre-existing conditions (**recently banned under Affordable Care Aact) How Insurers Control Adverse Selection ‹#› Also a type of information asymmetry Occurs when the insured has a tendency or incentive to behave inappropriately (engage in more risky behavior) Examples: Not wearing seat belts Smoking in bed Moral Hazard ‹#› Copays and deductibles help discourage risky behavior as it imposes some cost of care if get in accident for not wearing a seatbelt Lower premiums for smokers and individuals who participate in wellness programs How Insurance Companies Reduce Impact of Moral Hazard ‹#› Existence of health insurance reduces sensitivity to price of care (demand becomes inelastic) Read NBER Article “Consumer Demand for Health Insurance” by Thomas C. Buchmueller. Healthy consumers choose less rich lower premium plans Unhealthy consumers willing to pay higher premium for richer plan but increased adverse selection Out-of-pocket (copays and deductibles) help increase “price sensitivity” Health Insurance Reduces the Elasticity of Demand for Health Care ‹#›