Moving Toward a More Perfectly Competitive Marketplace

Dr. David Edward Marcinko; MBA, CMP™

Publisher-in-Chief

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

Filed under: Health Economics | Tagged: Health Economics | 1 Comment »

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 »

Understanding Basic Health Economic Concepts

[By Dr. David Edward Marcinko; MBA CMP™]

Healthcare price ceilings and floors benefit certain groups but impair the distribution of medical goods and services by the price system in free competitive markets. 

And, government intervention interferes in the functioning of competitive markets and is likely to result in “resource allocation” problems. 

Health Economics Definitions

“Price ceilings” are maximum legally charges and always result in shortages when set below market equilibrium prices. How long is the wait at a local charitable hospital vs. a local for-profit medical center? Price ceilings often result in an underground black market economy that exceeds legal limits.  

Non-price rationing (i.e., free medical care) on the other hand, distributes available services to patients on a basis other than ability to pay. The most common non-price rationing device is, “first-come, first-served”. 

“Price floors” establish minimum prices, which often result in surpluses when they exceed equilibrium price levels. The minimum wage is a good example of a price floor.

Assessment 

Remember, Keynesian macro-economic philosophy.  In evaluating managed care price controls, the gains to beneficiaries of price ceilings and floors must be weighed against the resulting allocation problems.

Alternative methods that will make the gainers just as well off without impairing the rationing function of medical prices, can be considered as ways to increase efficiency in the medical economy. 

Conclusion

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Filed under: Health Economics | Tagged: Health Economics | 4 Comments »

A Conceptual Review of Four Traditional Healthcare Models

By Dr. David E. Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™

In any discussion of theoretical competitive medical practice models – as a surrogate for more pragmatic real world competition – assumptions are made that include normal demand quantities, many fully informed patients, and the fact that physicians cannot directly influence demand for care (debatable). 

These assumptions, although fluid, also negate that patient buyers are large enough have any influence over price. 

Competitive Structures 

A result of the above assumptions, four structures or models of competition emerge.

1. In a “pure monopoly”, there is only one provider with a unique service. The doctor is a “price maker” and charges whatever he wishes. 
2. In an “oligopoly”, there are a few physicians who provide similar services. For example, when it becomes clear to local competitors – Dr. Smith and Dr. Jones – that neither can win a price war, oligopolists return prices to prior, but still inflated levels. 
3. In “monopolistic competition“, there are many providers with differentiated services. For example, should Dr. Jones decide to have evening hours, she may charge a premium for her fees if Dr. Jones doe not follow suit. 
4. Finally – when “pure competition” occurs – there are many physicians, providing similar and substitutable services. Marketing and advertising does not affect fees, and prices are determined by supply and demand. The doctors become “price takers” by accepting fees arrived at by practicing competitively. 

Conclusion 

And so, what kind of competitive medical provider or physician executive are you; and is you competitive model based on locale, supply-demand, provider specialty or some other factors? Or, do these philosophical economic models offer any real world applications, at all?

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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Filed under: Health Economics | Tagged: Health Economics | 1 Comment »