Healthcare Industry/Medical Laboratories. As the Conditions Change Essay

Excerpt from Essay :

healthcare industry/medical laboratories. As the conditions change and new information becomes available, one can easily realize that this industry has many components that drive it.


As demand for laboratory services is rather inelastic, laboratories can establish prices as they deem appropriate. Reimbursement for services is limited, however, by contracts which the laboratory holds with various healthcare plans (Daron 2008). These healthcare plans, including Medicare and Medicaid, will negotiate reimbursement fees with the laboratory that are lower than the laboratory's usual and customary fees (Eddy 2007). The laboratory agrees to accept the reimbursement received from the health plan as payment in full. Laboratories are often forced into contracting with the large health plans in its area because referring clinicians will often not send specimens to the laboratory for processing unless the contracts exist (Daron 2006). Because the reimbursement from the health plans is often very low, the laboratory must find other ways to recoup its expenses and make a profit. Unfortunately, the net result of this situation is that patients with no insurance generally end up paying the highest costs for laboratory services. This scenario is one that plays out in all areas of healthcare (Anna 2005).

Price Elasticity of Demand

Price elasticity of demand is the percentage of change in quantity demanded divided by the percentage change in price. (Anna 2005)? An upper level manager in the laboratory industry would use this to see how sensitive the demand for a product can be affected by a price change. We will talk about the affects current price elasticity of demand has on the laboratory industry and where the price elasticity of demand may be going if the current trend stays the way it is (Eddy 2007).

According to Moffatt the formula for price elasticity of demand (PEoD) is "PEoD = (% Change in Quantity demanded) / (% Change in Price)" (Daron 2008). The continue increases in the cost of medical laboratories has made it very sensitive for consumer. An example from the laboratory industry is the Hemoccult Fecal Occult Blood Slide Test, which measures the amount of blood a patient may have in a stool. Normally this test is given to patients when there is a possibility of internal Gastrointestinal (GI) bleeding. Currently a case of 12 packs is worth $1,750.00. (Daron 2006) In this pack you have 1,200 test kits which would be use for 400 patients because each patient gets three test kits. In a large hospital it is a common practice that when someone comes in for GI bleeding to order this test. If the price of test kits increases it will make it more sensitive to be use because the cost of the product will be greater than the demand of the product which in turn will decrease the usage of the test kits and hurt the company that supplies the test kits to the medical laboratories (Anna 2005).

Impact of New Companies Entering the Market

Due to strict government regulations, shortage of qualified technical staff, and fierce competition from large nationwide laboratories, new laboratories do not frequently enter the laboratory marketplace (Eddy 2007). Most pathologists who are entering the marketplace would prefer to join an existing laboratory or become a staff pathologist at a hospital instead of undertaking the enormous task of starting a new laboratory. There are primarily three large laboratory systems in the United States that generate the greatest portion of laboratory revenues (Daron 2008). These three laboratories are very difficult to compete against due to the seemingly unlimited capital money they have to invest in existing and new technologies. New laboratories to the marketplace must overcome the obstacles that the large laboratories present, and that can be a daunting task. Profitability in the laboratory industry is generally dependent upon the laboratory having a high volume of testing, so laboratories entering the marketplace must establish trust with referring clinicians in order to garner their share of the marketplace (Daron 2006). Aggressive marketing campaigns must be initiated to garner enough accounts to stay in business.


Competition in the laboratory marketplace does increase when an existing laboratory chooses to specialize in a certain area, or when an existing laboratory diversifies with new technologies, methodologies, or improves its current service in a significant way (Anna 2005). Currently in the laboratory marketplace, competition of this type is seen in the form of clinicians who are hiring pathologists to be their employees and read their pathology specimens. These clinicians, largely gastrointestinal physicians, will send the specimens they obtain to an established laboratory for technical processing, (Daron 2008) and then they will have the slides sent back to their hired pathologist for final diagnosis. This practice has the effect of cutting the laboratory's revenues from the specimen in half, while providing the clinician with a means to realize a profit from the processing of the specimens that he or she obtains (Eddy 2007).

Supply and Demand Analysis

Supply and demand analysis is a very important tool to have in a business especially in the medical laboratory industry. Supply and demand analysis sets the price of a product. This also establishes your equilibrium. Supply and demand analyses describe, explain, and predict changes in the price and quantity of goods sold in a competitive market (Daron 2006). In the Laboratory industry you need to know how prices will affect the demand and supply of a service you may be providing and compare to other competitor in that you may be competed against. This analysis is use to determine the price elasticity of demand and of supply (Anna 2005).


In future years, theaffect of new organizations incoming the laboratory marketplace will likely not be significant. As laboratories operate in an oligopolic market structure, the barriers to entry in the laboratory marketplace are significant at present time, and will continue to be significant in the future as long as government regulations continue to exist (Eddy 2007). Government agencies are constantly watching the laboratory industry and establishing laws to regulate the activities of the laboratories. These barriers to entry will protect current laboratories from significant competition in future years (Daron 2008). Laboratories will be able to price its service at an affordable price. In the future the structure of the laboratories is going to change by the year 2020. The trend at the moment is to change the current structure from a system to a process by doing this increasing profit for laboratories throughout the country. Laboratory will reduce the costs that the individuals will have to pay (Daron 2006). Another aspect is new technologies will make the demand for it services elastic. This will give the laboratory industry the ability to price it services at a lower prices than it had ever done before (Anna 2005).


The technological advances made in the past ten years in the laboratory industry have been significant, and changes in the future will continue to have a tremendous impact on laboratory productivity. With the invention of technologies to automate processes which have long required manual labor, (Eddy 2007) laboratories can expect productivity increases and increased profits due to decreased labor costs. Specifically, by the year 2010, the majority of histology laboratories, which have historically been manual, are expected to be completely automated. New technologies are expected which will allow for the processing of a single specimen with no manual involvement whatsoever after the initial accessioning of the specimen. This type of increased productivity will allow laboratories to focus on new testing methodologies and technologies with the end-result being better healthcare for the consumer (Daron 2008).

Cost Structure

In the laboratory industry the future trend is to create a laboratory process. The laboratory will do this by having a process in place (Eddy 2007). In the process an individual working in the laboratory would not just do one test instead it would do one thing in a process of various tests. This will greatly reduce redundancy and increase efficiency in the laboratory setting (Anna 2005). Laboratories will also implement robots which would do parts of the process. There are 10 recommendations to change the current cost structure to make a more cost effective structure of the future for both the industry and its consumers (Daron 2006).


One of the recommendations in the National Academies Press is,"Medicare payments for outpatient clinical laboratory services should be based on a single, rational, national fee schedule" (Daron 2008). Implementation of this will help an individual who may travel or request service from another laboratory at a universal set price. This will give the consumer the ability to pick the medical laboratory it wants it test to be done by. Price Elasticity of Demand "The story of ageing and health expenditure is well-known. Ageing increases the number of older persons and decreases the number of workers, thereby increasing the elderly dependency ratio." Ageing will also increase health expenditure. However, the decline of the healthcare labor market participation will inevitably force the substantial reform of the healthcare sector (Daron…

Sources Used in Document:


Daron Acemoglu, David Cutler, Amy Finkelstein, and Joshua Linn. Did Medicare Induce Pharmaceutical Innovation? American Economic Review, 96(2):103{07, May 2006.

Daron Acemoglu and Amy Finkelstein. Input and Technology Choices in Regulated Industries: Evidence From the Health Care Sector. Journal of Political Economy, 116(5):837{880, October 2008.

Eddy M.M. Adang and George F. Borm. Is There an Association between Economic Performance and Public Satisfaction in Health Care? European Journal of Health Economics, 8(3):279{85, September 2007.

Anna Alberini and Aline Chiabai. Urban Environmental Health and Sensitive Populations: How Much are the Italians Willing to Pay to Reduce Their Risks? Working Paper 2005.105, Fondazione Eni Enrico Mattei, 2005.

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