Supply and Demand in Medical Care

The Imperfect Competitive Medical Marketplace

By Dr. David Edward Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™biz-book1 

The issue is not how to fill or reuse empty beds. In this changing environment, hospitals and health systems must focus on streamlining and simplifying operational processes, facilitating case management, promoting the least costly setting for care delivery, and optimizing resource sharing among departments. When hospitals have addressed these issues, then solutions to the “bed problem” will be obvious.

-Cynthia Hayward, 1996

How and why the current healthcare imbroglio happened is very complex, but here is a brief synopsis of current supply-demand inequalities.

A Definition of Medical Care 

Medical care is defined as the finite examination and treatment of patients, for monetary compensation. Among other reasons, changes in patient demand may occur as a result of the absence or presence of health insurance plans or the encouragement of additional treatments by profit maximizing providers. 

Health Economics 101 

Changes in supply occur as a result of physician shortages or surpluses and a host of other factors. Until recently, a glut of physicians has caused them to become “price takers,” selling a homogenous service.

How else could aggregate HMO fee schedules drop to some percentage below prevailing Medicare or Medicaid rates in some instances? Or, how else could otherwise qualified physicians be de-selected from managed healthcare plans because of large (successful equates with expensive) practices? 

The Supply-Demand Curve 

A graphical representation of this economic relationship produces the classic downward sloping demand curve and the upward sloping supply curve. At some point in time however, the treatment plan is completed, the patient is satisfied, and additional services are not needed. This is known as market equilibrium.  

When an industry becomes more competitive – either by too much supply or too little demand – market equilibrium fees tend to become elastic while patient volume becomes very sensitive to even small changes in price. This may be where we have arrived, right now relative to medical price elasticity. 

Medical Price Elasticity 

In a managed care environment, every covered service has a low price ceiling and every “non-covered” service has its own price elasticity.   

Traditionally, medical services were inelastic to price changes and considered a growth industry since a fee increase would also increase revenues.  Now, the marketplace has become resistant to pricing pressure by physician oversupply and managed care.  

Generally, a pricing coefficient greater than one is considered elastic, while a coefficient less than one is inelastic.

Interestingly, exact unity prevails when elasticity of supply is exactly equal to one.  

In the golden days of medicine, the price elasticity of medical care was greater than 1, now it is about .35 and diminishing 

Meaning to Doctors 

Financially, all this means that many doctors are “taking what they’re given (by HMOs, CMS, etc), because they’re working for a living”.   

Younger doctors under 40 are especially inclined to work for less since they have had little exposure to fee-for-service compensation. Older doctors are retiring. Middle-Agers are frustrated. 

Additionally, physicians have an increasingly smaller share of the medical marketplace because of so-called medical care extenders, such as PAs and nurse practitioner’s.

Some health plans have even done away with many true allied healthcare professionals, such as RN’s or CRNAs, in favor of trained, not educated, and less costly technicians.  

Conclusion

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Despite the financial impact of managed care on doctors, patients may also be hurt physically as the economic cost of medical re-intervention is often much more than the cost of the proposed initial professional care.  

For example, a study by Deloitte & Touche a few years ago, reported employee satisfaction was decreasing about 10 percent per year, as healthcare coverage represented a fiscal and economic time bomb on corporate books. 

How would you comment on the above in light of the IOM on medical errors and mistakes, findings a few years back?

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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10 Responses

  1. Speaking of Supply-Demand

    I understand that the South Carolina Supreme Court is now considering a case which could result in discounts of 50 percent off of hospital bills for patients through 2004.

    The dispute arose from a state law requiring hospitals to offer the best rates possible if bills were paid within seven days. The court will decide whether uninsured and underinsured patients should get those discounts back.

    Of course, lawyers for the patients want to get the case certified as a class action. Unfortunately, the dispute is moot for many patients since the state law was changed in 2006.

    However, the American Hospital Association [AHA] recommends they write off bills for uninsured patients with annual incomes 300 percent of the poverty rate, and offer a sliding scale to all other patients.

    Any other thoughts on such economic imperfections?

    -Jamie

  2. AMGA Physician Supply Study

    According to a report by the American Medical Group Association (AMGA) and Cejka Search, the economic imbalance in supply and demand for physicians will intensify as the U.S. population continues to grow faster than the physician workforce. Moreover, added pressure will come with the increasing number of physicians practicing medicine on a part-time basis.

    In the recently released survey, responding groups reported an increase in the percentage of physicians practicing part-time from 13 percent in 2005 to 19 percent in 2007, while males increased from 5 percent to 7 percent, and females increased from 8 percent to 12 percent.

    The age group with the greatest number of physicians practicing part-time is between 35 and 39; the gender split among part-time physicians in that age group is 15 percent male and 85 percent female.

    Of the physicians practicing part-time, 83 percent practice more than half of a workweek and 45 percent practice at least three-quarters of a workweek. Eighty-six percent of respondents reported that they hired hospitalists or engaged with a hospitalist organization in the past year, while the likelihood of the group doing so increased with the size of the group and if it was owned by a hospital or an integrated delivery system.

    -Susan

  3. Jamie and Sue,

    More money, or medical procedures, do not equate to better health care. There is a “law of diminishing returns”. Americans do not seem to understand this economic principle.

    Gizelle

  4. On Competitive Analysis

    Dr. Marcinko, unfortunately many believe that the impact of newer more theoretical competitive models of medical practice like consumer-directed health care, medical homes, micro-practices and the deployment of health information technology, may actually add to healthcare costs over the next five to 10 years (Congressional Budget Office).

    So do I, as these are all just another layer of costly middle management.

    Chris

  5. More on Lowering Healthcare Costs [Supply and Demand]

    Most discussions around healthcare these days focus on covering all Americans, and on lowering healthcare costs. And, President Obama has recently focused on the second issue, noting that ballooning healthcare costs could cripple the federal government’s finances and kill economic growth. But, how can healthcare costs be reined in?

    In the partially private US healthcare system, prices are still somewhat subject to the law of supply and demand. Healthcare prices (and therefore costs) can thus be lowered by either reducing demand or increasing supply.

    So, here’s a quick list of ideas:

    http://truecostblog.com/2009/04/09/lowering-healthcare-costs/

    Hope R. Hetico RN, MHA
    [Managing Editor]

  6. More on Supply Side Healthcare Economics

    Did you know that John E. Wennberg MD, who spent his entire career at Dartmouth studying American medicine, suggested that that 60% of Medicare is spent on supply sensitive care (physician visits, consultations, imaging exams, and hospital and ICU admissions) and 25% on preference sensitive care (PSA tests, mammography, and elective surgery)?

    Food for thought?

    Dr. David Edward Marcinko MBA
    [Publisher-in-Chief]
    http://www.BusinessofMedicalPractice.com

  7. Shortage of supply of physician-surgeon manpower

    While reports in the 1980s predicted a surplus of general surgeons, there is a potential shortage predicted to occur by 2012. An aging population, changing lifestyle demands, technological changes, and increased sub-specialization are responsible in part for the predicted shortage.

    A statement in the August 2007 Bulletin of the American College of Surgeons addressed patient access issues related to surgical care. Since 1985, the general surgeon-to-population ratio has steadily declined, while sub-specialists are having difficulty meeting patient demand. Additionally, many surgeons have specialized so much that they do not feel qualified to provide emergency services, and some surgeons only provide outpatient care.

    Dr. David Edward Marcinko MBA
    http://www.BusinessofMedicalPractice.com
    [Editor-in-Chief]

  8. On The Domenici-Rivlin Protect Medicare Act [Competitive Bidding for Medicare]

    Here’s a very brief PDF summary of the Domenici-Rivlin Medicare proposal to the supercommittee.

    http://www.bipartisanpolicy.org/sites/default/files/Domenici-Rivlin%20Protect%20Medicare%20Act%20.pdf

    Note: The proposal is based on competitive bidding among Medicare-participating private plans and FFS Medicare (the public option).

    Craig

  9. Patient Centered Health Care

    Any shift to patient-driven healthcare would replace, or at least reduce, the conflicts of interest in medicine with heightened practitioner incentives to improve pricing, delivery and quality from the patient’s perspective.

    And, improving any one enhances the practitioner’s competitive position in a fee-for-service, and market environment, driven by patient transparency, information, choice and decisions.

    Related: http://thehealthcareblog.com/blog/2011/11/02/is-incentive-driven-healthcare-the-holy-grail-of-engagement/

    Dr. David Edward Marcinko MBA, CMP™
    http://www.BusinessofMedicalPractice.com
    [Publisher-in-Chief]

  10. Can medical providers jack up prices even as demand for services drop?

    Much of healthcare inflation in recent years may be attributed to prices charged by hospitals and like providers, reported Kaiser Health News.

    http://www.fiercehealthfinance.com/story/healthcare-costs-rise-even-as-demand-for-services-drops/2012-05-22?utm_medium=nl&utm_source=internal

    What do you think?

    Hope Hetico RN MHA
    http://www.BusinessofMedicalPractice.com

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