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Why Supply and Demand Doesn’t Work in Medicine
By Dr. David Edward Marcinko; MBA
[Publisher-in-Chief]
Much has been written here, and elsewhere, about free market competition in healthcare; especially in light of the current national political debates. Yet, these markets are not free.
Like Evolution – Healthcare Competition is Only a Theory
Perfectly competitive healthcare markets are not free; they exist only in economic theory as a useful comparative artifice. In reality, industries and markets have varying constraints on competition. The healthcare industry has often been characterized as unique with its many significant barriers to free market competition, such as market controls on price and quality.
According to colleague Robert James Cimasi, of Health Capital Consultants LLC, in St. Louis MO; there are three main reasons for these barriers in healthcare:
Competitive Healthcare Barriers
- The nature of healthcare creates an unpredictable, urgent, and “infinite” level of demand.
- The ubiquitous involvement of insurance companies, private and governmental, as intermediary organizations in the purchase of healthcare interferes with consumer motivations and consequently their choice of providers and services.
- The difficulties in measuring healthcare quality and beneficial outcomes (both of quantifying and qualifying them) and the lack of information on the relative costs of healthcare providers and services also inhibit consumer selection, further removing incentives to providers to increase quality and lower costs.
Barriers to Healthcare Competition
Included among the many other barriers to competition in healthcare delivery are the following:
- Patients don’t purchase services directly from providers;
- Patients don’t compare prices between providers;
- The government is the largest purchaser of healthcare;
- Private purchasers often lack market power;
- Patients, purchasers and providers lack information;
- Occupational licensing;
- Many providers have monopoly or near-monopoly power (yet antitrust laws prevent some potentially beneficial integration);
- Providers are rewarded for increasing costs;
- Capital investments are overly subsidized (It should be noted that Stigler argues that an industry will not use its power to collect money from the government unless the list of beneficiaries can be limited, due to the fact the amount of subsidies will be divided among a growing number of rivals.*
- Certificate of Need (CON), regulation, and licensing laws are an entry barrier to competing and substitute providers and services; and
- Exit barriers protect low-quality providers.
Assessment
Of course, the supply side is also flagrantly encouraged by excessive medical testing, procedural interventions and surgery; mostly excused by malpractice phobia as a well as the personal financial interests of involved stakeholders.
References
Stigler, George J. “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science. Vol. 2, No. 1 (Spring 1971): 5.
Conclusion
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Filed under: Health Economics, Managed Care, Op-Editorials | Tagged: david marcinko, Health Capital Consultants LLC, healthcare competition, healthcare economics, Robert Cimasi |
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Dr. Marcinko,
Excellent post. Some time ago, I recall that Michael Porter (et al.) wrote in the Harvard Business Review that:
“In industry after industry, the underlying dynamic is the same: competition compels companies to deliver increasing value to customers.
The fundamental driver of this continuous quality improvement and cost reduction is innovation. Without incentives to sustain innovation in health care, short-term cost savings will soon be overwhelmed by the desire to widen access, the growing health needs of an aging population, and the unwillingness of Americans to settle for anything less than the best treatments available. Inevitably, the failure to promote innovation will lead to lower quality or more rationing of care — two equally undesirable results.”
I fear that with the current healthcare reform situation, such innovation may be lost.
And, I look forward to your future contributions and insights.
Thank you.
Mark
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Mark
Many years ago while a young medical student at Temple University, in Philadelphia, I was fortunate to attend a lecture by Mike.
Of course, that was well before he became famous as the “father of corporate competitive business theory”.
Dave Marcinko
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Dr. Marcinko,
Don’t get us wrong–we don’t think that the current antitrust exemption is good law or policy. But, cracking down on insurer market power without doing the same against providers may well have the opposite of its intended effect.
Taming health care costs will be hard. Attacking insurers is, by comparison, very easy, as well as popular. But, in this case, what is popular will not be particularly effective. These two examples illustrate this point.
“Popular but Ineffective: Repealing Insurers Antitrust Exemption”
Essay by Austin Frakt; PhD
http://theincidentaleconomist.com/popular-but-ineffective-repealing-insurers-antitrust-exemption/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheIncidentalEconomist+%28The+Incidental+Economist+%28Posts%29%29
“Anti-Trust and Health Reform”
Essay by Austin Frakt, PhD and Ian Crosby, JD
http://theincidentaleconomist.com/antitrust-and-health-reform/
Jane and Tom
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New Medical Schools Open, but Physician Shortage Concerns Persist
Not a single allopathic medical school opened its doors during the 1980s and 1990s. But since 2007, more than a dozen allopathic schools have started the Liaison Committee on Medical Education accreditation process. Another 10 are under discussion, and five osteopathic medical colleges have opened.
The surge in new medical schools is taking place as the Assn. of American Medical Colleges predicts a shortage of at least 125,000 physicians by 2025. Hopes among educators and physician leaders are high that the new schools can help underserved areas and spur local economic growth.
But some experts on work-force issues say new schools are not enough. They say that without more federal funding for residency slots or changes in the doctor payment system, the schools are unlikely to avert an overall work-force shortage or address the undersupply of primary care physicians and general surgeons.
Source: Kevin B. O’Reilly, AMNews [3/29/10]
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The New England Journal of Medicine [NEJM] recently said that 50% of physicians will leave medicine because of ObamaCares within the next five years.
This may then force Congress to boost payments to physicians to keep them in Medicine and to get them to accept more Medicaid and Medicare beneficiaries.
Dr. PJ Miller
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Dr. Marcinko
When assessing the effects of healthcare market concentration on competition, antitrust authorities look not just at how many competitors there are in a market, but also how they compete.
In one standard model, called Cournot competition, producers set levels of output, and prices adjust in relation to supply. In another model, called Bertrand Competition, producers set prices, and produce quantities sufficient to meet demand at the prices they set.
In pure Cournot competition, prices vary substantially based on the number of competitors in the market. In a Cournot duopoly (a market with two competitors setting output), the producers will extract between them half of a monopoly profit.
But, pure Bertrand competition pushes prices down toward marginal costs no matter how many competitors there are in healthcare on any other space.
Source: http://theincidentaleconomist.com/sympathy-for-the-insurance-companies/
Adam
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Several potential benefits are associated with the integration of companies in the same or related industries. These synergistic benefits depend upon the type of companies and their integration strategies, as well as whether the anticipated transaction is a manifestation of horizontal consolidation or vertical integration.
Horizontal consolidation is “the acquisition and consolidation of like organizations or business ventures under a single corporate management, in order to produce synergy, reduce redundancies and duplication of efforts or products, and achieve economies of scale while increasing market share.”
Vertical integration involves the joining of organizations that are fundamentally different in their product and/or services offerings, i.e., “the aggregation of dissimilar but related business units, companies, or organizations under a single ownership or management in order to provide a full range of related products and services.”
As healthcare is essentially a local business, horizontal integration within the local market has been limited by antitrust laws. Therefore, in order to control greater market share, a hospital’s strategy has required vertical integration. Healthcare providers and organizations have placed much emphasis on the benefits of vertical system integration in the last 10 or more years, whereby a single healthcare organization owns all of the elements needed to provide a continuum of care for all the needs of a given patient population. Much of this effect has stemmed from the desire to be able provide a “continuum of care,” i.e., to be able to single source contract for the healthcare needs of a patient population and to profit from implementing preventative healthcare and utilization management measures.
The relative economic benefits of this type of vertical integration versus horizontal integration strategies remain the subject of great debate in academia and among the strategic managers of other industries. One lesson that may be drawn from other industries is that neither of these forms of integration is universally applicable or beneficial to every organization and market.
There are also great costs to integration, which must be outweighed by the benefits. Each specific benefit should be identified and researched when examining the probable effects of integration, consolidation, mergers or divestitures as a competitive strategy.
Source: Robert James Cimasi; MHA, CMP
http://www.HealthcareFinancials.com
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Doctor Market Power
Excellent post Dr. Marcinko. And, for more on physician market power, or the lack thereof, please visit this essay by Austin Frakt PhD.
http://theincidentaleconomist.com/wordpress/physician-market-power/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheIncidentalEconomist+%28The+Incidental+Economist+%28Posts%29%29
Charles
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HOSPITALS
DEM
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