Healthcare Economics Term Paper

Excerpt from Term Paper :

managed care organizations use to reduce unnecessary utilizations? Which ones do you think are more effective?

After food, shelter and clothing, health services are a major human need. With the rapid evolution of the human civilization, and the increasing health awareness among the masses, the demands for health care services are increases. On the parallel end, the health sector today operates on corporate lines and many health care service providers operate their organizations as a for profit organization. These organizations have similar objectives as any other corporate firm, which includes, maximizing profits, increasing market share, eliminating competition or maintaining competitive edge and covering costs. Most of these for profit health care service providers stand out from nonprofits health care service providers due to the fact that they offer services that are otherwise not offered by the nonprofits service providers. Most of these health services are expensive at cost therefore prices charged from patients are considerably high. Since customers, who in case of health care service providers are their patients, pay a significant sum of money, they look for value for money and quality. Failure to satisfy customers might result in losing customers to competing health care service providers.

In free market economic systems, where production activities are dominated by the private sector, it is inevitable to curtail the temptation of the profit motives of private health care services provider. Although in many cases, private health care service does provide efficient and quality services, the prices they charge are out of the purchasing power of most consumers. This is mainly because the cost and capital incentive nature of health cares organizations, which forces the producers to charge higher prices in order to cover their costs and generate profits. Ironically, unlike most other goods and services, health care is need where consumers have little choice. Since contribution to the society is considered to be an important contributor to the success of any nature of organizations, managed care organizations emerged. The primary focus of managed care organizations is to control the organizations costs, using various techniques, and bring in greater cost efficiency and cost control, such that the burden of prices can be reduced on the patients and the costs could be covered easily.

Certain mechanisms that managed care organizations use to reduce unnecessary utilization in order to bring in more cost efficiency involve the active market forces of demand and supply. Since health care sector is a competitive industry. One method used is a demand inducement method. This method involves physician generating higher consumer demand based on the fact that the patients are dependent on the physicians due to their unique information, knowledge and expertise in the field. This forces the patients to demand physician services. While the demand inducement method is not directly focused on cost management, it does arguably focus on greater revenue generation. Higher revenues and diverse services provided by a single physician will eventually result in cost efficiency due to increasing returns to scale. Having said that, the contention of many health care economists is the fact that while the mechanism is aimed at lowering costs and generating revenues through volume-based operations, physicians are in a capacity to exploit the edge they have over patients due to the unique service they provide. This questions the social welfare aspect of the health care service provided by managed care organizations.

Another approach to reduce utilization by employing demand side mechanism is the theory that physicians and their families tend to use fewer health care services as compared to people with non-medical backgrounds. This is because physicians, who are already exposed to and are in possession of medical knowledge, maintain their life styles on the lines of self-care theories and use preventive measures, which results in little need for using health care services for them. Thus resources conserved from being employed over physicians can be utilized towards the general public.

Supply side mechanisms to reduce utilization involve physicians to avoid prescribing unnecessary extra health care services to a patient. Many physicians, if capacity to provide more than one kind of service, are in a capacity to prescribe other services to the patients, regardless of its medical requirement, with the sole purpose of generating higher income. While it will in arguably generate higher income for the physician, the operational costs of the organization as a whole will go up. Therefore, in order to reduce utilization of resources, it is advisable that physicians avoid prescribing unnecessary services to the patients.

Another methodology given for unnecessary utilization is a Pay for Performance payment system. This system, in many ways is similar to the performance-based payment system used in many other organizations. Under this system, physicians are paid on the basis of the quality and efficiency of the services they provide rather than the volume of services they provide. This is a much more viable system due to its dual effects. The need to provide a quality service under this system will automatically induce greater demand with more consumers using health care services and thus greater revenues for both the physician and the organization. Likewise, the need to provide efficient services will result in greater cost controls thus bringing down average costs.

2. The text discusses three types of imperfectly competitive markets. Describe each one.

One key characteristic that differentiates Capitalist systems from the socialist ones is the existence of competition in the market. This level of competition may however be either perfect or imperfect. A perfectly competitive market is one where there are numerous buyers and sellers producing and demanding similar goods and services, with both the buyers and sellers having the complete knowledge about the goods and services on offer. In contrast to that in imperfectly competitive markets, there are fewer buyers and sellers producing a certain product, and more uniqueness and product differentiation exists. Moreover, the buyers generally do not have a complete and in depth knowledge of the goods and services on offer and of the market dynamics.

Since health care services involve each physician and each health care organization offering a certain degree of unique service, with patients having little knowledge and expertise about the service and the health care markets, the health care service sector is categorized as an imperfectly competitive sector. The three major types of imperfect competition that exist in health care markets are Oligopoly, Monopoly and Monopolistic Competition.

Monopoly, as the name suggests, refers to a market setting where a single producer offers a certain unique service with no competition in place. For example in a certain geographical region, if there is only one physician and organization offering services for heart transplant, that physician and/or organization will be enjoying a monopoly in the said region. Since monopoly allows the producer an immense power to influence the market being the only service provider, it can be an issue of concern in health care industry as health care service providers may exploit their patients and charge higher prices by exploiting lack of substitute service available.

In an Oligopoly, there are a few producers that produce a certain good or service. Due to low number of service providers, each producer remains in position to influence the decision of the other producer. While Oligopoly is a better situation than monopoly as consumers still have a choice available, however, Oligopoly still has a potential to generate cartelization by the producers that would result a situation similar to a monopoly and thus consumers will remain at the suffering end.

Monopolistic Competition is a more hybrid situation with characteristics that do not completely fit either the perfectly competitive market or the monopoly. Under such a situation, there is a number of producers producing a similar good or service which makes it similar to a perfectly competitive market. However, each of the good or service on offer is highly differentiated, which results in lesser degree of substitution thus making the service unique in its own way and creating monopoly like situation.

3. Discuss the reasons, outlined in the book, why we should encourage or discourage the growth of for-profits in the health care provider market.

As the term suggests, a for-profit organization would be operating with the aim of profit maximization in contrast to non-profit organizations. This means that for profit organizations would be focusing on lower costs, lower capital investments and higher profits. Based on these characteristics, health care economist discourages the dominance of for-profit organizations in the health care sector. This is because such service providers tend to under produce the service and over charge the service in order to inflate their levels of profits.

Contrary to that, non-profit organizations work with a greater sense of social welfare and provide greater quality service. The management is done in a way that lowers administrative costs. Moreover, non-profit organizations promote strong trust-based relationships with the patients and have a strong sense of commitment at the communal level. An added advantage that non-profit organizations enjoy over for profit ones is the financial incentive…

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