Reference Pricing and Colonoscopy Demand: A Market Analysis
This paper examines how reference pricing shapes patient and provider behavior in the market for colonoscopies. Beginning with the clinical rationale for colonoscopies as a cancer screening tool, the paper analyzes how a $500 reference price would steer patients toward lower-cost providers while preserving access for higher-income consumers. It then contrasts this with a $25 reference price scenario, exploring how drastically reduced coverage affects price sensitivity and the likelihood that patients substitute fecal tests for colonoscopies. Drawing on principles of price elasticity of demand and rational consumer behavior, the paper concludes that the size of the price-sensitive market segment varies by regional income levels, with meaningful public health implications for early cancer detection.
- Colonoscopy as a Cancer Screening Tool: Clinical rationale and demand drivers for colonoscopies
- Effects of a $500 Reference Price: How a $500 price steers patients to low-cost providers
- Market Equilibrium and Provider Response: Provider emergence and market adjustment to reference pricing
- Effects of a $25 Reference Price: How near-zero coverage raises price sensitivity and substitution
- Price Elasticity and Regional Variation: Regional income differences shape demand elasticity outcomes
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What makes this paper effective
- Grounds the economic analysis in clinical context, establishing why colonoscopies have inelastic demand before applying price theory.
- Uses a clear comparative structure — contrasting a $500 versus a $25 reference price — that makes the argument easy to follow and evaluate.
- Connects macroeconomic concepts like market equilibrium and price elasticity to individual patient decision-making, demonstrating applied reasoning.
Key academic technique demonstrated
The paper demonstrates scenario-based economic reasoning: it sets up two distinct reference price conditions and systematically traces their effects through consumer behavior, provider incentives, and market outcomes. This technique is effective in applied economics writing because it isolates variables and shows causal chains rather than simply describing a phenomenon.
Structure breakdown
The paper opens by establishing the clinical and economic rationale for colonoscopy demand, then analyzes the $500 reference price scenario in two stages — immediate consumer response and longer-term market equilibrium. It pivots to the $25 scenario, using the established framework to show how reduced coverage amplifies price sensitivity and substitution behavior. The paper closes by scaling the argument to regional income variation, linking micro-level consumer choice to macro-level market outcomes.
Colonoscopy as a Cancer Screening Tool
In order to understand the implications of reference pricing, the drivers of demand for colonoscopies must first be understood. Colonoscopies are used to detect cancers and precancerous polyps and are a recommended technique for this purpose, as the physician can examine the colon visually. Other techniques are not as effective. Polyps and even early-stage colon cancer are often asymptomatic, but early detection produces the best outcomes for patients. For this reason — and because of the ability to detect and remove precancerous polyps — the colonoscopy is the most effective early detection technique available (ACA, 2015). Other techniques exist, but they are not perfect substitutes. The fecal test is not as effective as a colonoscopy and is therefore not a true substitute. That said, patients do not always make decisions based on medical data, and economic analysis assumes that patients behave rationally.
Effects of a $500 Reference Price
With a $500 reference price, patients would be oriented toward seeking out the lowest-cost provider. While the lowest quartile of providers charge less than $536 — the $36 difference being essentially irrelevant in the economic analysis — these providers are not necessarily distributed uniformly across the country. Low-cost colonoscopies are likely available in areas where factor costs such as labor are lower, or where payers demand inexpensive medical services. Assuming a perfectly even distribution of low-cost colonoscopy providers, however, patients would generally seek out these providers where possible in order to eliminate out-of-pocket costs.
The average price is much higher, and some consumers may choose to pay the added cost. Indeed, a rational consumer would accept that added cost given that colon cancer treatment is far more expensive than a colonoscopy. Most patients at risk are older and therefore more likely to be at a stage in their careers where they can afford a few extra hundred dollars for an average-priced procedure. On the whole, a $500 reference price would orient the market — both consumers and providers — toward colonoscopies priced closer to that figure.
Market Equilibrium and Provider Response
While the reference price should help skew the market toward lower prices, providers priced substantially above $1,000 are likely catering to a segment that can reasonably afford higher-cost care and will view the expense as a sound investment in future health. Only in the middle of the market — patients old enough to need a colonoscopy but without surplus income — would the reference price drive individuals to a low-cost provider. Where such patients are common, providers will emerge to offer low-cost colonoscopies. As the market moves toward equilibrium, supply will emerge to fill demand wherever that demand exists.
References
ACA (2015). Colorectal cancer prevention and early detection. American Cancer Society. Retrieved September 17, 2015, from http://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-used
Investopedia (2015). Price elasticity of demand. Investopedia. Retrieved September 17, 2015, from http://www.investopedia.com/terms/p/priceelasticity.asp
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