Medical Practice Profit Maximization

Posted on February 16, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Moving Toward a More Perfectly Competitive Marketplace

Dr. David Edward Marcinko; MBA, CMP™

Publisher-in-Chiefbiz-book1

Some believe it is now time to consider how medical marketplace externalities can be applied to achieve a profit maximizing medical practice.  Realize that the imperfect fee-for-service marketplace is moving to become more perfectly competitive in the managed care environment. 

Medical Economic Scenarios 

For example, consider the following health economic scenarios.  

1. A glut of good physicians causes them to become “price takers”, selling a homogenous(commoditized) service. An appendectomy is an appendectomy; or is it? 

Financially, many doctors are “taking what they’re given (by MCOs), 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.  Perhaps providers need to “differentiate” themselves from the competition?  Ponder the MD vs. DO controversy, since one of the fastest growing areas of specialization is osteopathic family medicine.

Or, consider the potential economic impact of any willing provider laws? 

2. Physicians have an increasing smaller share of the medical marketplace because of extended care providers. Does this help or hinder them?

Price information is freely available to all MCO’s because of computerization; and increasingly to consumers and HD-HCPs. 

3. Doctors have been defeated in their ability to influence the marketplace by selling a quality, but nevertheless standardized, service. Consider the economic effects of practice guidelines in this light? 

4. As medical care becomes efficient, each doctor becomes a perfect substitute for the other. This may either be an accolade, or a curse since patient demand becomes perfectly elastic at the HMO’s capitated set price.  

This being the case, there is no incentive to lower fees in an attempt to attract more patients, since doctors would not be able treat any more patients than they would otherwise. The price decrease just lowers income, but has no effect number of patients treated.  It simply decreases profits. 

5. Since marginal revenue is the fee obtained from seeing one extra patient, marginal revenue becomes equal to HMO price, and marginal profit is zero when marginal revenue just equals marginal cost.

Will the MD still want to wait another hour just to see that last late HMO or Medicaid patient? 

6. A profit maximizing office will operate at a short-term loss as long as its minimum average cost is less than its minimum possible average variable cost.  But, just how long is “short term”, anyway? 

7. Efficiency prevails when medical services are made available just up to the point that marginal benefits equal marginal costs. When efficiency is achieved, it is not possible to make more money without decreasing another doctor’s income in a risk pool situation.  Voila – managed competition, anyone?

It is estimated that more than a quarter of all physicians may leave practice by the year 2015. 

Assessment 

Regardless of the technical nature of the above health economic arguments, practical attention must be directed toward the possibility of governmental (national healthcare) intervention or marketplace (HMO) intercession, relative to two other concepts – not discussed here – that directly affect medical practices; price ceilings and price floors.  

Conclusion 

Recall all the fee schedule surveys popular several years ago?  How does this knowledge impact medical care today?  

Can you comment on any other economic scenarios that might encourage medical practice profit maximization? 

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

Institutional: www.HealthcareFinancials.com 

Terms: www.HealthDictionarySeries.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

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