Understanding Modern Healthcare Market Competition

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Updating Competitive Strategy Theory in Healthcare

By Robert James Cimasi; MHA ASA FRICs MCBA AVA CM&AA
By Todd A. Zigrang; MBA MHA ASA FACHE
By Anne P. Sharamitaro; Esq.

www.HealthCapital.com

Michael Porter[i] is considered by many to be one of the world’s leading authorities on competitive strategy and international competitiveness.  In 1980, he published Competitive Strategy: Techniques for Analyzing Industries and Competitors,[ii] in which he argues that all businesses must respond to five competitive forces.

(1) The Threat of New Market Entrants

This force may be defined as the risk of a similar company entering the marketplace and winning business.  There are many barriers to entry of new market entrants in healthcare including: the high cost of equipment, licensure, requirement for physicians and other highly trained technicians, development of physician referral networks and provider contracts, and other significant regulatory requirements.

Certificate of Need (CON) laws, which require governmental approval for new healthcare facilities, equipment, and services have been in place since they were federally mandated in 1974.  State CON laws create a regulatory barrier to entry.  New medical provider entrants commonly face substantial political opposition by established interests, which is manifested in the CON review process.

(2) The Bargaining Power of Suppliers

A supplier can be defined as any business relationship upon which a business relies to deliver a product, service, or outcome.  Healthcare equipment is a highly technical product produced by a limited number of manufacturers. This reduces the range of choices for providers and can increase costs.

(3) Threats from Substitute Products or Services

Substitute products or services are those that are sufficiently equivalent in function or utility to offer consumers an alternate choice of product or service.  An illustration of this in healthcare would be diagnostic imaging as a substitute for surgery, which is often a more costly and risky option for patients. The threat of less invasive or less expensive diagnostic tests other than diagnostic imaging is relatively small for the near term future.

(4) The Bargaining Power of Buyers

This force is the degree of negotiating leverage of an industry’s buyers or customers.  The buyers of healthcare services are ultimately the patients. However, the competitive force of buyers is manifested through healthcare insurers including the U.S. and state governments through the Medicare, Medicaid, TRICARE, and other programs; managed care payors (e.g., Blue Cross/Blue Shield affiliates); workers’ compensation insurers; and, others.  In addition to the government, many of these healthcare insurers are large, national companies, often publicly traded, commanding significant bargaining power over healthcare provider reimbursement.

(5) Rivalry Amongst Existing Firms

This is ongoing competition between existing firms without consideration of the other competitive forces which define industries. Healthcare providers face pressure from other existing providers to obtain favorable provider contracts; maintain the latest technology; increase efficiencies; and, lower prices.

References:

[i]  A professor of Business Administration at the Harvard Business School, Michael Porter serves as an advisor to heads of state, governors, mayors, and CEOs throughout the world.  The recipient of the Wells Prize in Economics, the Adam Smith Award, three McKinsey Awards, and honorary doctorates from the Stockholm School of Economics and six other universities, Porter is the author of fourteen books, among them Competitive Advantage, The Competitive Advantage of Nations, and Cases in Competitive Strategy.

[ii]  Porter, M.E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press, 1980.

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2 Responses

  1. Physician market power

    According to Austin Frakt PhD, there’s vastly more economics literature on the effects of hospital market power than physician market power. So, this working paper by Abe Dunn and Adam Hale Shapiro (ungated pdf) is a welcome contribution.

    http://www.bea.gov/papers/pdf/Physician_Market_Power_and_Medical_Care.pdf

    Frakt further says that physician concentration is positively and significantly correlated with service price levels.

    Specifically, a 10 percent increase in the FTHHI [fixed-travel-time Herfindahl-Hirshman Index] will cause about a 1 percent increase in physician fees. Linking this finding to historical survey data discussed in Rebitzer and Vortruba [2011] implies that physician consolidation has caused about an 8 percent increase in fees over the last two decades (1988 to 2008). He also find that health-plan concentration is inversely correlated with service price fees. That is, insurance carriers in more concentrated health insurance markets pay lower fees to physicians.

    He also finds a price elasticity of supply in the range of 0.27 to 0.34 for orthopedists and 0.57 to 1.26 for cardiologists. While in most markets an upward sloping supply curve would be unsurprising, in the health service market, this means that physicians treat patients according to service price levels.

    In other words, a physician with a higher price-cost margin will perform more services. On the demand side, he finds a service price elasticity of demand in the range of -0.32 to -0.43 for orthopedics and -0.05 to -0.28 for cardiology patients. This finding supports prior research which suggest that patients are price sensitive, but relatively inelastic (Manning et al. [1987] and Keeler and Rolph [1988]).

    Ann Miller RN MHA via Austin Frakt PhD
    http://theincidentaleconomist.com/wordpress/physician-market-power-2/

  2. Market power makes healthcare “least consumer-friendly” industry

    Concentrated economic power, combined with fee-for-service incentives, has made healthcare “the least consumer-friendly” U.S. industry and enabled arbitrary and capricious price gouging, according to the man behind Time magazine’s “Bitter Pill” feature.

    http://www.healthcarefinancenews.com/news/market-power-makes-healthcare-least-consumer-friendly-industry?topic=,29,19,21

    Abe

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