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Defying Traditional Economic Principles

By Dr. David Edward Marcinko; MBA CMP™

[Publisher-in-Chief]

It is well known that traditional medical marketplace supply and demand structures are not necessarily efficient or timely.  This is particularly true in healthcare delivery and is attributed to various “externalities” that seemingly deter competition. 

Defining Economic Externalities 

Formally, externalities are defined as the cost or benefits of market transactions that are not directly reflected in the price buyers (patients) or sellers (doctors) use to make their decisions. They represent defects or inefficiencies in the pricing system and can be either positive or negative. 

Medical Externalities 

Pertinent externalities for the physician, and healthcare practitioner, include but are not limited, to the following: 

1. Barriers to Entry: Physicians and other “learned healthcare professionals”, receive an extended formal education. This not only ensures competence and protects the public, but it also reduces competition. 

2. Competitive Advantage: Once school is over, a medical degree is an effective strategic advantage over a non-degreed practitioner.

3. Monopsony and Oligopsony: Occur when discounts are extracted from healthcare providers because of supply and demand size inequalities, and may run afoul of anti-trust laws.

4. Barriers to Exit: The increased cost of “doing business”, effectively precludes many physicians from terminating practice unit all fiscal investments are recouped. Observe that few doctors can practice “part time” and still afford their overhead. 

5. Mortal turpitude: Since physicians take the “Hippocratic Oath”, they are expected to place patient welfare above their own. This is not necessarily true with business entities that must adhere to legalities only.

6. Moral Hazards: All know that cigarettes, dietary indiscretions, drinking, drug use and promiscuous behavior are unhealthy. Yet, many pursue this life‑style that drive up healthcare costs for society as a whole. 

Other Externalities Exist 

Other externalities that drive up the cost of healthcare are well known but not easily changed.  

First, most Americans have group insurance through their employment. They do not “purchase” it on the open market, making them fairly indifferent to the costs or needs of individual health care purchases.  

Second, acquiring health insurance is not like buying a commodity, and it is difficult for a layman to know what purchases make sense and at what price? 

Third, most health insurance purchasing decisions are made by the doctor (i.e., refer to a specialist or have surgery), not the patient consumer, and hence has a vested interest in increasing service demand. This is changing with the consumer directed healthcare plan movement. 

Lastly, what well informed person would be a tough bargainer when their health is at stake? Who is going to negotiate with a neuro-surgeon? Nevertheless, some patients are doing just that with HD-HCPs! 

The Golden Age of Medical Reimbursement 

During the so called “Golden Age of Medicine“, 1965-1990, Medicare, Medicaid and all these factors worked to isolate American medicine from financial reality.

In the last decade, however, the private sector has demanded cost containment by negotiate prices for medical services. 

Conclusion

Can you comment on other externalities that seem to defy traditional healthcare supply and demand economics? 

More info: http://www.springerpub.com/prod.aspx?prod_id=23759 

Terms: www.HealthDictionarySeries.com 

Institutional: www.HealthCareFinancials.com

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA – Editor and Publisher-in-Chief – is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com

Filed under: Health Economics | Tagged: Health Economics | 5 Comments »