MHA5030 WEEK 3 DISCUSSION AND PROJECT

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MHA5030 WEEK 3 LECTURE NOTES

The Importance of Supply in Healthcare

In a traditional economic model, demand is important for supply as supply tends to create a supporting role and reacts only to changes in demand. Demand changes may come from price, but unless demand is changed, supply does not change. In order for policymakers to make a change in the consumption of an item in the free market, their main tool is price. They can control the price or tax the good to suppress the amount of the good that is desired. As an alternative, they can add a subsidy, for instance, in agriculture, to encourage greater supply. In healthcare, it is possible for policymakers to add copayments or deductibles against insured individuals in order to decrease consumption.

Suppliers, also in healthcare, have additional tools to use to control consumption in the form of capitation, diagnosis-related groups, or evidence-based practice guidelines. These tools commonly used in managed care can be very effective in controlling excessive use of health services.

In your study and this unit, you will examine assumptions of the free market, which are supply and demand are independently determined, firms do not have any market power, and there are no increasing returns of scale or economies. It is incumbent upon you to examine how these assumptions of the free market hold true in healthcare.

If a physician acts as an agent for a patient, then the physician must know what is best for the patient as well as what the patient would choose as best for himself or herself. Granting that a physician generally knows more about what’s good for a patient, due to variation in education and physicians, the chosen treatment may or may not be best for the patient. In addition, if the patient has as much information as the physician, the patient might choose differently.

In addition, you will examine factors such as induced demand, which may come from a pharmaceutical company that wants the physician to prescribe a certain drug. It is difficult to determine when there is induced demand, which supply reacts to, but there is evidence that it does occur.

Additional Materials

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

· How Competitive Is the Supply of Healthcare?

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

· Unnecessary Care: Is Profit-Driven Healthcare to Blame? 

From the Internet, read the following article:

· Mitchell, J. (2010). Effect of physician ownership of specialty hospitals and ambulatory surgery centers on frequency of use of outpatient orthopedic surgery. Archives of Surgery, 145(8): 732–738. Retrieved from http://jamanetwork.com/journals/jamasurgery/article-abstract/406180

The Profit Motive

In the free market, the profit motive generally leads to production of goods and services in an efficient way. Consumers want high-quality products and services at low prices, and sellers compete in the marketplace to provide them. Prices are determined in the marketplace by what the market will bear. This is true if we have several assumptions from which the consumer can make informed choices. The seller is not a monopoly, and there are no significant externalities present that the government might control. So looking at the profit motive, you will look at two assumptions: firms maximize profits, and this profit maximization results in efficient production, leading to the highest consumer welfare.

As mentioned earlier, nonprofit organizations do not necessarily follow these assumptions, and nonprofit organizations make up a large part of the healthcare marketplace. So it is important that we look at the differences in behavior of the two ownership types in order to understand how healthcare reacts to the profit motive.

Another complication that we encounter while looking at the healthcare marketplace in regard to the profit motive is the fact that nonprofit ownership is strong in a hospital ownership; less dominant in other areas such as hospice care, health insurance, nursing home care, and dialysis; has very little influence in ambulatory surgical care specialty hospitals and physician services, which are mostly for profit; and in the case of companies that supply products for healthcare, such as pharmaceuticals, there are generally no nonprofit influences.

From a policy perspective, because nonprofit organizations generally perform better in terms of quality and community service, for areas such as surgical centers in the pharmaceutical industry, it might make sense for the government to add further regulations to optimize these industries in terms of price.

Additional Materials

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

· The Profit Motive in Healthcare

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

· Competition in Health Care: Its Evolution over the Past Decade opens in new window

From the Internet, read the following article:

· Mitchell, J. (2010). Effect of physician ownership of specialty hospitals and ambulatory surgery centers on frequency of use of outpatient orthopedic surgery. Archives of Surgery, 145(8): 732–738. Retrieved from http://jamanetwork.com/journals/jamasurgery/article-abstract/406180

The Healthcare Workforce

It may seem obvious that without physicians and nurses, there would be no healthcare, and this makes the segment of the workforce absolutely critical to understand.

Complications of meeting the supply requirements of these two human resources certainly include, in both cases, long educational requirements and high financial costs to achieve the necessary levels of expertise required. The current and future requirements for the healthcare workforce become an important issue for economists and managers in healthcare administration.

One issue concerns the inelasticity of demand, where the demand for labor is less than the change in wages and working conditions for nurses or physicians. With government reimbursement from Medicare and Medicaid controlling reimbursement, it is difficult for organizations to find additional funds to help increase supply. Even with insurance coverage, organizations cannot change prices until the next contract period, so demand remains inelastic.

In many areas of the country, hospitals have a monopoly and can control wages and prices, making supply inelastic.

The population of this country is growing at a fairly rapid rate, so the need for healthcare services continues to expand, maybe at an even higher rate when the immigrant population comes from an area with poor healthcare and requires abnormally high levels of service to make the population healthy. With this and other factors in mind, there is a serious question of whether we have an adequate supply of trained medical personnel to support the population. There is a substantial debate in this country over whether we have adequate personnel now or for the future. Clearly, healthcare is complex, and with technology, it becomes more complex; thus, forecasting the future needs of the country in healthcare is very difficult. In 1960, physicians made house calls and worked very long hours, whereas today, physicians and nurses work a fairly regular work week. Changes such as the working hours have occurred over time, but this has complicated the ability to forecast workforce requirements greatly.

In looking at the labor market in healthcare versus the assumptions of a perfectly competitive market, it seems clear that there are challenges to be overcome through policy. Policies that intervene can be developed, but there is risk, and tampering with this market and can create unintended consequences. The ability to forecast accurately will be vital to this effort.

Additional Materials

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

· The Healthcare Workforce

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

· Could U.S. Hospitals Go the Way of U.S. Airlines? 

· Changes in Hospital Competitive Strategy: A New Medical Arms Race? 

· The Nursing Workforce in an Era of Health Care Reform