You just started working as a Health Service Manager within one of the following health care industries.? First choose an industry below to discuss t

  

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You just started working as a Health Service Manager within one of the following health care industries.  First choose an industry below to discuss the questions that follow:

Ambulatory Surgery center
Pharmacy
Physician’s Office
Cosmetic Surgery Center
Laser Eye Center
Dental Office

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Your boss has asked you to write a report detailing how the demand for your product(s) is impacted by various economic factors.  In writing your memo, be sure to include your name and in the subject line identify the health care entity you chose above. In order for your boss to easily review your memo, please include section headers to correspond to the questions below.
Answer the following questions relying primarily on the course readings and other resource material presented in this class (do not cite any other outside sources).

Describe a product or service your company provides to your patients
Evaluate the demand curve for your product and relationship between the price of your service/product and the quantity demanded.

In this evaluation, be sure to identify:

the shape of the demand curve
whether demand is sensitive (e.g. elastic) or less sensitive (e.g. inelastic) to changes in the price and
evaluate why this relationship might occur.
include a discussion of how the existence of health insurance would impact the elasticity of demand.

Define “substitute” goods and identify potential substitutes for your product/service. Evaluate how does the existence of a substitute impact the demand for your product/service.
Define “complement” goods and identify potential complements for your product/service. Evaluate how does the existence of complement goods impact the demand for your product/service.
Identify and discuss the economic factors that might lead to a shift in the demand curve for your product/service?

HMGT435Week2SummaryAHelpfulCourseResourcePPT11.pptx

ebscohost.pdf

ebscohost1.pdf

UMUC HMGT 435

Week 2: The Demand for Health Care
1

1

Shows relationship between the price of a good and the quantity demanded (holding all else constant)
Demand is defined for a “specific time period.”
Higher price leads to lower quantity demanded and vice versa (downward sloping)
What is the Individual Demand Curve?

‹#›

For “normal goods” demand curve is downward sloping because the quantity demanded falls as prices rise (holding all other conditions constant)
Note movements along the demand curve represent changes in quantity demanded due to changes in price while shifts in the demand curve represent changes in demand.
The demand curve is the Marginal Benefit curve that shows how much each “additional unit” of a service is worth.
Later you will learn that the supply curve represents the marginal cost of a good.
The “slope” (e.g. steepness) of the demand curve is determined by the sensitivity of consumers to the price of the good (often called price elasticity)

Why is Demand Curve Downward Sloping?

‹#›

Factors that Lead to An Increase in Demand (shift D curve right)
Increase in Consumer income
Price of related goods ( increase P substitutes or decrease P of complements)
Changes in consumers tastes and advertising
Consumer Expectations about future prices (e.g. expect prices to increase in future)

What Leads to A Shift in Demand Curve

‹#›

Consumer choice theory explains why consumers behave or react in certain ways to changes in various factors to “maximize their utility”
Utility is illustrated using “indifference curves” showing a consumer’s preferences across different good.
An “indifference curve” shows what combination of two good that yield equal satisfaction.
Slope (steepness) of indifference good shows the “marginal rate of substitution.” This is the amount of one good that must be sacrificed to get the other good.
Diminishing Marginal Utility: At some point, if you keep consuming a good, your utility diminishes (e.g. eating too much candy)
Consumption is constrained by both the price of the good and their income.
What Determines the Demand Curve

‹#›

Elasticity measures how sensitive quantity demanded is when prices change.
Mathematic Formula:
Price elasticity of demand= % change in quantity/% change in price
Graphically:
The slope (steepness) of the demand curve indicates elasticity of demand
The steeper the slope the more inelastic demand is
The flatter the slope the more elastic demand is
What Does Price Elasticity Mean?

‹#›

“Price Elastic”
Quantity demanded will change by more than change in price. This indicates that consumers are “very sensitive” to price changes.
“Price Inelastic”
Quantity demanded will change by less than the change in price
*** Many health care goods are price inelastic and not sensitive to price changes****
“Unit Elastic”
Quantity demanded changes by the same percentage as price changes

What Does Price Elasticity Mean?

‹#›

High P elasticity (>1) means that consumer are more “sensitive” to changes in price

A small change in price leads to a larger change in quantity

Can you think of healthcare goods that are price elastic?

When Demand is Price Elastic

‹#›

Low P elasticity (P is inelastic) and < 1 means consumers are “not sensitive” to changes in price Inelastic: % change in Q < % change in P Can you think of healthcare goods and services that are price inelastic? When Demand is Price Inelastic ‹#› Perfectly Inelastic: Quantity demanded does not change when price changes (e.g. lifesaving drugs) Perfectly Elastic: At a certain price quantity demanded is infinite, if a firm increased price by 1% all of its demand would evaporate (e.g. good with large number of substitute) Elasticity in the Extreme ‹#› A “substitute” is a good used in lieu of another good that functions similarly or provides the same service. The availability of a “substitute” for a good impacts the price sensitivity or elasticity Demand for a product will be “relatively elastic” (more sensitive to price) if there are a large number of substitutes for the product “Antacids” Example: There are many different substitutes for antacids. Demand for “Tums” may decrease if price of Tums increase and price of Prilosec decreases. Impact of Substitute Goods on Sensitivity of Demand to Prices ‹#› A “complement” is a good used in conjunction with another good. Example: Gauge and Tape used to cover a wound. If you use gauge you also need tape to hold the gauge to the wound. An increase in the price of the complementary good, reduces the demand for the good you are focusing on. What are Complementary Goods ‹#› Share of Consumer’s Budget The larger the share of a good is of a consumer’s budget (like food), the more sensitive (elastic) the consumer will be to changes in price Luxury Goods vs. Necessity The more discretionary a good is (like a diamond necklace), the more sensitive (demand is more elastic) a consumer is to prices The more a good is a necessity (e.g. insulin for a diabetic patient), the less sensitive (demand is more inelastic) a consumer is to prices Other Determinants of Price Sensitivity (Elasticity) ‹#› Total Revenue = P times Q Thus, elasticity or sensitivity of demand to price impacts impact on total revenue TR will decline by a smaller amount when prices rise and demand is inelastic (see next slide) Price Elasticity and Total Revenue ‹#› How Elasticity Impact Total Revenue ‹#› Demand is only one component of analysis As price changes, producers (suppliers) are willing to produce more or less Need to overlay supply curve on demand curve to identify equilibrium price We will discuss more about supply and its characteristics in Week 4 and Week 5 Need to See Supply Curve for Equilibrium Price ‹#› Investment Component as well as Consumption Component Demand for health care tends to be more inelastic (reasons discussed below) Information is not readily available about quality of care and care plan (e.g asymmetric information) Unique Characteristics of Demand for Health Care ‹#› Health care has both two characteristics: 1) Consumption good, makes consumer feel better 2) Investment commodity component– a state of health will determine the time available to the consumer to work and for leisure Example Of Investment Component: A decrease in the number of sick days will increase the time available for work and leisure The Return to Investment on health is the monetary value of the decrease in sick days Implications for Demand – Include a “time” component that impacts demand for health care Health Care as An Investment ‹#› Investment in health care is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goods. Optimal Level of Investment in Health is: Marginal benefit = Marginal cost Because as we age, health depreciates so it becomes more costly to attain the same level of health capital or health stock as one ages Age also decreases the marginal benefit of health Optimal health investment will therefore decrease as we age Health Care As An Investment (Cont.) Source: Michael Grossman (1972), “On the Concept of Health Capital and the Demand for Health” Journal of Political Economy, 80(2): p 223-255 ‹#› Existence of health insurance reduces the exposure of insured individuals to the price of health care Reduces the elasticity of demand for health care services Out-of-pocket costs play a larger role in influencing patients Big push for “high-deductible” health plans intended to increase the price sensitivity of individuals when consuming health care services For the uninsured, the “need” for care reduces sensitivity to prices The Elasticity of the Demand for Health Care ‹#› Doctors are better informed about health care and the health care needs of their patients A “principle-agent” relationship develops in which the doctor (the agent) makes available their specialist knowledge to the principle (the patient) Problem is end up with “supplier induced demand” Doctors act as imperfect agents (failing to maximize the patients’ utility) in order to maximize their own utility. Hard to measure this. Example: Doctor owns the lab, he has incentive to order blood tests to increase the profit of the lab. A number of laws exist to prevent these relationships. Asymmetric Information in Health Care Source: Kenneth Arrow (December 1963), “Uncertainty and the Welfare Economics of Medical Care,” American Economic Review, 53 (5) p.941-973 ‹#› , CHAPTER 37 3AN OVERVIEW OF THE HEALTHCARE FINANCING SYSTEM Learning Objectives After reading this chapter, students will be able to • explain why health insurance is common, • use standard health insurance terminology, • identify major trends in health insurance, • describe the major problems faced by the current insurance system, and • find current information about health insurance. Key Concepts • Insurance pools the risks of high costs. • Moral hazard and adverse selection complicate risk pooling. • About 91 percent of the US population has medical insurance. • Consumers pay for most medical care indirectly, through taxes and insurance premiums. • Most consumers obtain coverage through an employer- or government- sponsored plan. • Managed care has largely replaced traditional insurance. • Managed care plans differ widely. 3.1 Introduction 3.1.1 Paying for Medical Care Consumers pay for most medical care indirectly, through insurance. In 2016 insurance paid for 78 percent of healthcare spending (Centers for Medicare & Medicaid Services [CMS] 2017). Healthcare managers must therefore understand the structure of private and public insurance programs because much of their organizations’ revenues are shaped by insurance. Lee.indd 37 1/2/19 3:15 PM Co py ri gh t © 2 01 9. H ea lt h Ad mi ni st ra ti on P re ss . Al l ri gh ts r es er ve d. M ay n ot b e re pr od uc ed i n an y fo rm w it ho ut p er mi ss io n fr om t he p ub li sh er , ex ce pt f ai r us es p er mi tt ed u nd er U. S. o r ap pl ic ab le c op yr ig ht l aw . EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/1/2022 6:15 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition Account: s4264928 E c o n o m i c s f o r H e a l t h c a r e M a n a g e r s38
Managers must also be aware that consumers ultimately pay for healthcare products, a key fact obscured by the complex structure of the US healthcare financing system. When healthcare spending invokes higher premiums or taxes, consumers are forced to spend less on other goods and services. Some consumers may drop coverage, some employers may reduce benefits, and some plans may reduce payments. This reaction need not occur if a consensus has emerged in support of increased spending, but even then, managers should be wary of the profound effects that changes to insurance plans can cause for their firms. Finally, managers must consider more than insurance payments. Even though the bulk of healthcare firms’ revenue comes from insurers, consumers pay directly for some products. Consumers directly spent more than $352 billion on healthcare products in 2016 (CMS 2017). No firm should ignore this huge market.
3.1.2 Direct Spending Despite its large amount, direct consumer spending accounts for only a frac- tion of total healthcare spending. Exhibit 3.1 depicts a healthcare market in which consumers directly pay the full cost of some services and part of the costs of other services. Consumers’ direct payments are often called out-of- pocket payments. For example, a consumer’s payment for the full cost of a pharmaceutical product, her 20 percent coinsurance payment to her dentist, and her $25 copayment to her son’s pediatrician are all considered out-of- pocket payments. Insurance beneficiaries make out-of-pocket payments for
out-of-pocket payment Money a consumer directly pays for a good or service.
coinsurance A form of cost sharing in which a patient pays a share of the bill, not a set fee.
copayment A fee the patient must pay in addition to the amount paid by insurance.
Consumers Providers
Third parties
Premiums and taxes
Out-of-pocket payments
EXHIBIT 3.1 The Flow
of Funds in Healthcare
Markets
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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/1/2022 6:15 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition Account: s4264928

C h a p t e r 3 : A n O v e r v i e w o f t h e H e a l t h c a r e F i n a n c i n g S y s t e m 39
services that are not covered, for services in excess of their policy’s coverage limits, and for deductibles (amounts consumers are required to spend before their plan pays anything). Another name for out-of-pocket payments is cost sharing. Economics teaches us that a well-designed insurance plan usually incorporates some cost sharing. We will explore this concept in detail in the discussion of demand in chapter 7.
Insurance payments continue to be the largest source of revenue for most healthcare providers. In 2016, they represented 88 percent of pay- ments to hospitals, 81 percent of payments to physicians, and 66 percent of payments to nursing homes (CMS 2017). Because insurance affects most healthcare purchases, its structure has a profound influence on the healthcare system and healthcare organizations.
The extent of insurance distinguishes the healthcare market from most other markets. Insurance has three important effects on patients:
• It protects them against high healthcare expenses, which is the main goal.
• It encourages them to use more healthcare services, which is a side effect.
• It limits their autonomy in healthcare decision making, which is not a goal.
Nonetheless, the advantages of insurance continue to exceed its disad- vantages. As discussed in chapter 2, the share of direct payments for health- care has steadily fallen during the past 15 years.
3.1.3 Sources of Insurance Nearly 300 million Americans had some health insurance coverage in 2016 (US Census Bureau 2017). Only 1 percent of those older than 65 lacked cov- erage, only 5 percent of those younger than 18 lacked coverage, and 12 per- cent of those aged 18 to 64 lacked coverage. Although 27 percent of those older than age 65 had employment-based insurance, 93 percent had Medi- care coverage (meaning that many had duplicate coverage). Employment- based insurance was the most common form of coverage for those younger than 65. Fifty-six percent of children had employment-based insurance, and 39 percent had Medicaid. Sixty-three percent of those aged 18 to 64 had employment-based insurance, and only 15 percent had Medicaid. In section 3.2 we will explore why employment-based insurance is so prevalent.
3.1.4 The Uninsured For many years the share of the population without medical insurance rose steadily, even as insurance payments rose as a share of total spending. Since
deductible The amount a consumer must pay before insurance covers any healthcare costs.
cost sharing The general term for direct payments to providers by insurance beneficiaries. (Deductibles, copayments, and coinsurance are forms of cost sharing.)
Medicare An insurance program for the elderly and disabled, run by the Centers for Medicare & Medicaid Services.
Medicaid A collection of state-run insurance programs that meet standards set by the Centers for Medicare & Medicaid Services and serve those with incomes low enough to qualify for their state’s program. Medicaid enrollment has increased by more than 20 percent as a result of state expansions under the Affordable Care Act.
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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/1/2022 6:15 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition Account: s4264928

E c o n o m i c s f o r H e a l t h c a r e M a n a g e r s40
the enactment of the Affordable Care Act (ACA), the percentage of the population without health insurance has fallen sharply. The share of those younger than age 65 without insurance was 18.2 percent in 2010. By 2016 it was 10.1 percent (US Census Bureau 2017).
Uninsured consumers enter healthcare markets with three significant disadvantages. First, they must finance their needs from their own resources or the resources of family, friends, and well-wishers. If these funds are not adequate, they must do without care or rely on charity care. The uninsured do not have access to the vast resources of modern insurance companies when large healthcare bills arrive. Second, unlike most insured customers, uninsured customers may be expected to pay list prices for services. Most insured consumers are covered by plans that have secured discounts from providers. None of the major government insurance plans and few private insurance plans pay list prices for care. Although uninsured patients could negotiate discounts, this practice is not routine. Third, the uninsured tend to have low incomes. In 2016, 11.9 percent of those with annual household incomes below $25,000 did not have health insurance, compared with only 5.5 percent of those with annual household incomes above $75,000 (US Census Bureau 2017).
The combination of low income and no insurance often creates access problems. For example, in 2016, 23 percent of uninsured adults reported going without care when they had a medical problem (Kaiser Family Foun- dation 2017a). This rate was more than six times that of well-insured adults. Delaying or forgoing care can lead to worse health outcomes.
3.2 What Is Insurance, and Why Is It So Prevalent?
3.2.1 What Insurance Does Insurance pools the risks of healthcare costs, which have a skewed distri- bution. Most consumers have modest healthcare costs, but a few incur crushing sums. For example, in 2014, 1 percent of the noninstitutionalized population spent 23 percent of the total, averaging more than $107,000 (Berk and Fang 2017). Insurance addresses this problem. Suppose that one person in a hundred has the misfortune to run up $100,000 in healthcare bills and no one else spends anything. Consumers cannot predict whether they will be lucky or unlucky, so they may buy insurance. If a private firm offers insurance for an annual premium of $1,040, many consumers would gladly buy insurance to eliminate a 1 percent chance of a $100,000 bill. (The insurer gets $4,000 per 100 people to cover its selling costs, claims processing costs, and profits.)
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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/1/2022 6:15 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition Account: s4264928

C h a p t e r 3 : A n O v e r v i e w o f t h e H e a l t h c a r e F i n a n c i n g S y s t e m 41
3.2.2 Adverse Selection and Moral Hazard Alas, the world is more complex than the preceding scenario, and such a sim- ple plan probably would not work. To begin with, insurance tends to change the purchasing decisions of consumers. Insured consumers are more likely to use services, and providers no longer feel compelled to limit their diagnosis and treatment recommendations to amounts that individual consumers can afford. The increase in spending that occurs as a result of insurance cover- age is known as moral hazard. Moral hazard can be substantially reduced if consumers face cost-sharing requirements, and most contemporary plans have this provision.
Another, less tractable problem remains. Some consumers, notably older people with chronic illnesses, are much more likely than average to face large bills. Such consumers would be especially eager to buy insurance. On the other hand, some consumers, notably younger people with healthy ancestors and no chronic illnesses, are much less likely than average to face large bills. Such consumers would not be especially eager to buy insurance. This situation illustrates adverse selection: People with high risk are apt to be eager to buy insurance, but people with low risk may not be. Wary of this phenomenon, insurance firms have tried to assess the risks that individual consumers pose and base their premiums on those risks, a process known as underwriting. Of course underwriting drives up costs, making coverage more expensive, which further reduces the share of consumers who are will- ing to pay for insurance. In the worst case, no private firm would be willing to offer insurance to the general public.
In the United States, three mechanisms reduce the effects of adverse selection: employment-sponsored medical insurance, government-sponsored medical insurance, and health insurance subsidies. In 2016, 91 percent of the population had health insurance. About 37 percent had government- sponsored medical insurance, and 56 percent had employer-sponsored insur- ance (US Census Bureau 2017). Ninety-four percent of Americans aged 65 years or older have coverage through Medicare or Medicaid. Ninety percent of those younger than 65 years have coverage, with 63 percent having employer-sponsored coverage and 27 percent having government-sponsored coverage (14% of these younger Americans bought insurance themselves, but for some this purchase was in addition to other insurance).
Why is the link between employment and medical insurance so strong? First, insurers are able to offer lower prices on employment-based insurance because they reduce their sales costs and adverse selection risks by selling to groups. Selling a policy to a group of 1,000 people costs only a little more than selling a policy to an individual; thus the sales cost is much lower. And because few people take jobs or stay in them just because of the medical insurance benefits, adverse selection rarely occurs (i.e., most of the
moral hazard The incentive to use additional care that having insurance creates.
adverse selection A situation that occurs when buyers have better information than sellers. For example, high- risk consumers are willing to pay more for insurance than low-risk consumers are. (Organizations that have difficulty distinguishing high-risk from low- risk consumers are unlikely to be profitable.)
underwriting The process of assessing the risks associated with an insurance policy and setting the premium accordingly.
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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/1/2022 6:15 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition Account: s4264928

E c o n o m i c s f o r H e a l t h c a r e M a n a g e r s42
employees get the insurance, regardless of whether they think they’ll need it soon). Second, insurance can benefit employers. If coverage improves the health of employees or their dependents, workers will be more productive, thereby improving profits for the company. Companies also benefit because workers with employment-based medical insurance are less likely to quit. The costs of hiring and training employees are high, so firms do not want to lose employees unnecessarily. Third, employers’ contributions to insurance premi- ums are excluded from their employees’ Social Security taxes, Medicare taxes, federal income taxes, and most state and local income taxes. Earning $5,000 in cash instead of a $5,000 medical insurance benefit could easily increase an employee’s tax bill by $2,500.
This system is clearly advantageous for insurers, employers, and employees. From the perspective of society as a whole, however, its desir- ability is less clear. The subsidies built into the tax code tend to force tax rates higher, may encourage the use of insurance for costs such as eyeglasses and routine dental checkups, and give employees an unrealistic sense of how much insurance costs.
3.2.3 Medicare as an Example of Complexity The health insurance system in the United States is so complex that only a few specialists understand it. Exhibit 3.2 illustrates the complexity of health- care financing by examining the flow of funds in traditional Medicare. Many
Understanding Health Risks and Insurance
Adverse selection is one reason for governments to intervene in health insurance markets. A persistent fear is that people with low risks will not buy insurance, pushing up premiums for people with higher risks. Once premiums go up, additional people with low risks will drop out. This sequence is called a death spiral because it will ultimately result in no one buying insurance. To prevent this outcome, governments subsidize insurance or mandate that it be bought.
Little evidence suggests that people understand health risks or insurance well. Yet to make a good choice, consumers must compare many different products with varying attributes and forecast what their risks will be (Ericson and Starc 2016). Not surprisingly, many find insurance choices difficult. A recent survey of Americans who might seek insurance through the ACA marketplace found that many struggled to understand basic concepts, such as a premium, a provider network, or covered services (Long et al. 2014).
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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/1/2022 6:15 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition Account: s4264928

C h a p t e r 3 : A n O v e r v i e w o f t h e H e a l t h c a r e F i n a n c i n g S y s t e m 43
Medicare beneficiaries pay for supplemental policies that cover deductibles, coinsurance, and other expenses that Medicare does not cover. Like many insurers, Medicare requires a deductible. In 2017, the Medicare Part A deductible was $1,316 per year, and the Medicare Part B deductible was $183. The most common coinsurance payments spring from the 20 percent of allowed fees Medicare beneficiaries must pay for most Part B services. For simplicity, exhibit 3.2 focuses on supplemental policies that reimburse ben- eficiaries rather than pay providers directly. Beneficiaries with these sorts of policies (and many without supplemental coverage) must make required out- of-pocket payments directly to providers. Beneficiaries must also pay the Part B premiums that fund 25 percent of this Medicare component. Like other taxpayers, beneficiaries must also pay income taxes, which cover the other 75 percent of Part B costs.
Medicare Part A Coverage for inpatient hospital, skilled nursing, hospice, and home health services.
Medicare Part B Coverage for outpatient services and medical equipment.
Medicare beneficiaries
Premiums
Part B premiums and income taxes
Providers
Government
Employees
Wages
Employers
Payroll and income taxes
Medicare payments
Supplemental insurers
Out-of-pocket payments
EXHIBIT 3.2 The Flow of Funds in Medicare
Lee

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