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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? 

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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

***

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

Commentary on Rising Healthcare Costs – OR – How Did We Get Here?

By Dr. David Edward Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™

“New financing and risk management schemes, restructured delivery systems, advanced therapeutics, sophisticated information technology and profound demographic shifts are among the forces that will lead to very different healthcare systems in the first part of the 21st century.”

-Clem Bezold 

Introduction

Traditional organizations in the “good old days” – except for the military – provided indemnity (fee-for-service) insurance which gave patients great freedom and MDs great incentives to supply care. But, insurers had little control over the care that was rendered and its associated costs. Healthcare costs skyrocketed to more than a trillion dollars, or 15 percent of GNP by 2002, crippling U.S. productivity.  

The increase has continued unabated, since then. 

Present Day Medicare 

Now, consider that Medicare which says it has enough to “pay” medical benefits for our seniors, in reality cannot pay a thing. This created a rising burden on the young, who subsidized treatment for the old and middle-aged. Workers under 65 pay most taxes and even among workers there are generational subsidies. 

In 1999, workers aged 45-64 years-old – with employer-paid insurance – had health costs twice those of workers aged 18-44; since the young have wages reduced because of elder insurance costs. Additionally, Medicare C+ programs have fared even worse, as evidenced by the wave of plan dropouts, corruption, quality concerns, and continued issues about burdensome requirements and inadequate payment rates. 

Medicare Since Inception 

Also, realize that since 1963 – in the Medicare system alone – the following has happened:

· Workers contributing to the system decreased from 6:1 to 2:1 since 1963.

· Enrollees increased from 22 million to more than 55 million currently.

· The elderly population increased from 10 percent to 17 percent of the U.S. population.

· The average life span increased from 71 to 79 years.

· The Medicare Trust Fund is not really a trust fund at all; but actually an accounting fiction since technically the fund holds interest earning U.S. government bonds, representing an accounting surplus of payroll taxes collected minus benefits paid. The bonds are essentially IOUs the government has written to itself). 

Furthermore, the rising cost of healthcare attributed to wide treatment variability patterns, and mistakes reported by the Institute of Medicine [IOM], could be ascribed more to style than to patient differences.  

Medical Treatment Variability 

In the classic example, studies by John (Jack) Wennberg, MD, in the early 1970’s at Dartmouth Medical School, shocked the health care community when he discovered that differences in hysterectomy, tonsillectomy and prostatectomy rates in one county were 30-50 percent higher than rates in adjacent counties. 

By the early 1980’s Wennberg’s studies concluded that new physician incentive were needed if doctors were to provide appropriate care at acceptable costs.

Nevertheless, iatrogenic (doctor-induced) factors contributing to healthcare cost escalation continued into the 1990’s, despite rising physician incomes.  And, a few years ago it was estimated that:

· 53 percent of all surgeries may be unnecessary.

· 36 percent of all medical office visits may not be needed.

· 35 percent of all hospital admissions may be iatrogenic.

· Iatrogenic medication errors abound. 

Other causes of spiraling costs included: voracious consumer appetite, lifestyle drugs with direct to patient advertising, inflation, cost shifting, and the relative insulation of consumers to the true cost of medical care. 

The “Malpractice Phobia” 

Moreover, malpractice phobia, misinformed patients, hungry trial lawyers and class action lawsuits have all contributed to escalating healthcare costs.  

For example, the Jury Verdict Research estimated median award statistics for the Year 2000, as:

· $689,000 for medication errors;

· $563,000 for misdiagnosis cases;

· $277,000 for surgical negligence;

· $280,000 for non-surgical treatment cases;

· $284,000 for cases involving doctor/patient relations;

· $630,000 median award for all medical malpractice cases. 

All have grown since then.

Conclusion 

Not coincidentally, corporate America looked for methods to contain costs and provide pro-active, rather than retroactive-active medical care. In the past, managed care, not national healthcare, was the private result.  

But, a national healthcare system may still be in the future. 

What are your thoughts on the above regarding the upcoming political election season?

More related info: www.HealthDictionarySeries.com

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

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

2007: Largest Medical School Class Ever

Staff Writers

The 2007 entering class to U.S. medical schools is the largest in the nation’s history, according to the Association of American Medical Colleges.

The number of first-year enrollees totaled almost 17,800 students, a 2.3 percent increase over 2006, while more than 42,300 individuals applied to enter medical school in 2007, an increase of 8.2 percent over 2006. 

Nearly 32,000 were first-time applicants, while the number of black male applicants and Hispanic male applicants both increased by 9.2 percent.

And, the number of black males who ultimately were accepted and enrolled in medical school increased by 5.3 percent, a rate nearly double that of the first-year entrant increase overall. 

So, how will this doctor-pipeline affect – if at all – the current healthcare supply-demand equation?

Filed under: Health Economics | Tagged: Health Economics | Leave a comment »

What are Domestic and Medical Economic Indicators?

www.CertifiedMedicalPlanner.com

By Staff Writers

There are 12 leading, 6 lagging and 4 co-incidental indicators for the United States economy. And, there are 3 macro-economic medical indicators for physicians and the healthcare industrial complex. Their purpose is to help evaluate which period of the business cycle is in play. 

Leading Economic Indicators:  

1. Average workweek for manufacturing production workers

2. Layoff rate in manufacturing

3. New orders for consumer goods

4. Vendor performance and slow/on-time deliveries

5. New business formation

6. New building permits for private housing *

7. Contracts and orders for plants and equipment

8. Net changes in inventories

9. Change in sensitive prices

10. Change in total liquid assets

11. Stock prices

12. Money supply 

Co-incidental Economic Indicators: 

1. Employees on non-agricultural payrolls

2. Personal income

3. Industrial production

4. Manufacturing and trade sales 

Lagging Economic Indicators:

1. Average duration of unemployment

2. Manufacturing and trade inventories

3. Labor costs per unit of output

4.  Average bank prime interest rates

5. Commercial and industrial loans outstanding

6. Ration of consumer installment dent to personal income [* Often considered the leading, leading economic indicator]. 

Specific Medical Economic Indicators for Physicians 

1. Medical Labor Production is a measure of medical professional output per hour, or per each unit (patient) of labor. Managed care has decreased labor production cost in medicine.
2. Unit Medical Labor Costs represent the cost of physician labor (treatment), per unit (CPT code) of output.
3. Capacity of Medical Utilization is a percentage of the maximum rate at which a medical office, clinical hospital or surgical center can operate under normal conditions. At the rate nears 100 percent, efficiency declines due to mechanical breakdowns, burnout of doctors and employees, and less experienced medical care extenders and para-professionals, etc.

Like domestic economic indicators, these evaluate the macro-economic healthcare business cycle which may be entering the depressed state. And so, what do you think; doctor colleagues and laymen, alike?

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Filed under: Health Economics | Tagged: Health Economics | Leave a comment »