WEEK 1 MHA5030 CURRENT ECONOMICS IN HEALTHCARE-- DISCUSSION AND PROJECT INSTRUCTIONS

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MHA5030 CURRENT ECONOMICS IN HEALTHCARE Week 1 LECTURE

Economics of Healthcare

Economic theory holds the view that a free market is superior to a government-regulated system that mandates prices through controls on supply. The Affordable Care Act of 2010 is a mixture of controls and bows to the free market in some ways. It can be argued that the government’s role in healthcare should be to ensure a fair marketplace and ensure access to the market for all. The government does much more than this, as it is also involved in the finance of many other healthcare activities. Over the past few decades, the government has been viewed by some as an inefficient means to provide widespread healthcare in the country.

With markets and the political will of the country moving toward a more traditional, competitive marketplace, it is critical to take a look at how this works in the healthcare marketplace. Central to this discussion is whether the assumptions of the free-market theory are being met.

Additional Materials

From your course textbook, The Economics of Health Reconsidered, read the following chapter:

· Why Should the Economics of Healthcare Be Reconsidered?

From the South University Online Library, read the following articles:

· Can Efficiency in Health Care Be Left to the Market? 

· Uncertainty and the Welfare Economics of Medical Care 

· Why Is a Systemic View of Health Financing Necessary? 

The Traditional Competitive Model

The traditional model of competition relies on two basic principles: The first is that an individual is free to buy or sell as he or she wishes in the marketplace; the second is that when a person stops buying or selling, it is because he or she is satisfied with the market as it exists. This situation is called equilibrium.

Microeconomics focuses mainly on supply and demand and how they affect the price of an item in the marketplace. For example, take nurses in a hospital. If a hospital has 600 beds and there is a 6:1 ratio of patients to nurses, then it takes 100 nurses to care for the patients in the hospital. Since the hospital is operating 24–7, it takes 300 nurses, but to cover vacations and holidays and sick time, it will take at least 500 nurses to fully staff the hospital when it is full. If the average nurse makes $20 an hour and there are a little over 500 nurses available for work in this town, then supply and demand are in equilibrium and we have a price. If there’s a nursing school in this town and 50 nurses graduate next month, what do you suppose happens to the equilibrium? How about if a new hospital opens up nearby that needs several hundred nurses? In the traditional model of competition, these types of issues happen constantly in the marketplace, and exposure to this type of analysis is essential for managers in healthcare.

The second consideration concerns the incremental value of each additional item acquired. For example, if you are in a candy store, the first piece of candy you buy is the one you really want. The fifth piece that you buy will not have the same value as the first had. This is called diminishing marginal utility. A simple supply and demand chart will show us each of these concepts. Notice how the supply-demand curve tapers as the volumes increase in either direction.

A third consideration concerns elasticities of demand. If prices are determined by the demand for a particular item, it is good to consider that there may be substitutes for that item that satisfy purchasers at a lower price. When reviewing the price of an item, it is good to consider whether substitutes are available, whether this is a high-priced item that would encourage a purchaser to seek a lower-priced similar item, and what the time frame is for purchasing this item, which could be a simple drink at a ballgame or a major surgery in the near future.

Additional Materials

From your course textbook, The Economics of Health Reconsidered, read the following chapter:

· The Traditional Competitive Model

From the South University Online Library, read the following article:

· Acquisition of MRI Equipment by Doctors Drives Up Imaging Use and Spending 

From the Internet, read the following articles:

· Neumann, P. J. (2004). Why don’t Americans use cost-effectiveness analysis? American Journal of Managed Care, 10, 308–312. Retrieved from http://www.ajmc.com/journals/issue/2004/2004-05-vol10-n5/May04-1788p308-312

· Rand Corporation. (n.d.). The Health Insurance Experiment: A classic RAND study speaks to the current health care reform debate. Retrieved from http://www.rand.org/content/dam/rand/pubs/research_briefs/2006/RAND_RB9174.pdf

Assumptions of the Competitive Market

An Introduction to the Assumptions of the Competitive Market

To address the assumptions of a free-market system in a meaningful way, it is important to review why they are important. In a few words, market failure is the downside to not meeting the assumptions. Market failure is a situation in which the market has reduced allocative efficiency. That means the market uses scarce resources to make the products and provide the services that society demands and desires. When these scarce resources are not used in optimal ways to improve the health of the population, we have market failure.

Market failure will be the subject of much of this course through a look at the assumptions of a free market that create a market that avoids failure. Note that market failure is also a feature of a government-run system, but that is the reason for the current drive to move to a market-driven system, and another story.

Additional Materials

From your course textbook, The Economics of Health Reconsidered, read the following chapter:

· Assumptions Underlying the Competitive Model and Implications for Markets and Government

From the South University Online Library, read the following article:

· Some Simple Economics of Mandated Benefits 

From the Internet, read the following article:

· Posner, R. A. (n.d.). Theories of economic regulation. The Bell Journal of Economics and Management Science, 5(2). Retrieved from pascal.iseg.utl.pt/~carlosfr/ses/Posner.pdf