Week 2 Discussion: Demand for Healthcare
YOU MUST USE THE REQUIRED READING NO OUTSIDE SOURCE.
Provide a response to
TWO of the questions below by Saturday, then provide a response to at least TWO of your peers by Tuesday:
· Include the two questions that you selected to discuss at the top of your initial posting.
· What exactly is the law of demand? Why does the demand curve generally slope downward?
· Explain the price elasticity of demand? Why is this important when looking at the demand for health care?
· What does it mean if a good has inelastic demand? Provide an example of an inelastic good?
· What factors lead to a shift in the demand curve for healthcare?
· What do we mean when we say goods are substitutes? Provide an example related to health care.
· What do we mean when we say goods are complements? Provide an example related to health care.
· What does diminishing marginal utility mean?
· Health care has both a consumption component and investment component? What is the investment component and can you provide an example?
· Economists agree that the healthcare market is characterized by “asymmetric information,” what does this mean exactly?
APA Requirements -Include Scholarly Evidence: Include at least TWO APA formatted references with correlating in-text citations.
Supplemental Readings and Resources for Week 2:
·
Economics Theory through Applications – Supplemental Reading: A Helpful Course Resource
·
PPT- HMGT 435 Week 2 Summary A Helpful Course Resource PPT
·
Institute for Healthcare Improvement (IHI) Website: Measure and Understand Supply and Demand Landing PageCHAPTER
153
10SUPPLY AND DEMAND ANALYSIS
Learning Objectives
After reading this chapter, students will be able to
• define demand and supply curves,
• interpret demand and supply curves,
• use demand and supply analysis to make simple forecasts, and
• identify factors that shift demand and supply curves.
Key Concepts
• A supply curve describes how much producers are willing to sell at
different prices.
• A demand curve describes how much consumers are willing to buy at
different prices.
• At the equilibrium price, producers want to sell the amount that
consumers want to buy.
• Markets generally move toward equilibrium outcomes.
• Expansion of insurance usually makes the equilibrium price and
quantity rise.
• Regulation and technology influence the supply of medical goods and
services.
• Demand and supply curves shift when a factor other than the product
price changes.
10.1 Introduction
Markets are in a constant state of flux. Prices rise and fall. Volumes rise and
fall. New products succeed at first and then fall by the wayside. Familiar
products falter and revive. Economics teaches us that, underneath the seem-
ingly random fluctuations of healthcare markets, systematic patterns can be
detected. Understanding these patterns requires an understanding of supply
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AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition
Account: s4264928.main.eds
Economics for Healthcare Managers154
and demand. Even though healthcare managers need to focus on the details
of day-to-day operations, they also need an appreciation of the overview that
supply and demand analysis can give them.
The basics of supply and demand illustrate the usefulness of econom-
ics. Even with little data, managers can forecast the effects of changes in
policy or demographics using a supply and demand analysis. For example, the
impact of added taxes on hospitals’ prices, the impact of increased insurance
coverage on the output mix of physicians, and the impact of higher electricity
prices on pharmacies’ prices can be analyzed. Supply and demand analysis is
a powerful tool that managers can use to make broad strategic decisions or
detailed pricing decisions.
10.1.1 Supply Curves
Exhibit 10.1 is a basic supply and demand diagram. The vertical axis shows
the price of the good or service. In this simple case, the price sellers receive is
the same price buyers pay. (InsCHAPTER
109
7THE DEMAND FOR HEALTHCARE PRODUCTS
Learning Objectives
After reading this chapter, students will be able to
• calculate sales and revenue using simple models,
• discuss the importance of demand in management decision making,
• articulate why consumer demand is an important topic in healthcare,
• apply demand theory to anticipate the effects of a policy change,
• use standard terminology to describe the demand for healthcare
products, and
• discuss the factors that influence demand.
Key Concepts
• The demand for healthcare products is complex.
• When a product’s price rises, the quantity demanded usually falls.
• The amount a consumer pays directly is called the out-of-pocket price
of that good or service.
• Because of insurance, the total price and the out-of-pocket price can
differ markedly.
• Multiple factors can shift demand: changes in consumer income,
insurance coverage, health status, prices of other goods and services,
and tastes.
• Demand forecasts are essential to management.
7.1 Introduction
Demand is one of the central ideas of economics. It underpins many of the
contributions of economics to public and private decision making. Analyses
of demand tell us that human wants are seldom absolute. More often they
demand
The amounts of a
product that will
be purchased at
different prices
when all other
factors are held
constant.
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AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition
Account: s4264928.main.eds
Economics for Healthcare Managers110
are conditioned by questions: “Is it really worth it?” “Is its value greater than
its cost?” These questions are central to understanding healthcare economics.
Demand forecasts are essential to management. Most managerial deci-
sions are based on revenue projections. Revenue projections in turn depend
on estimates of sales volume, given prices that managers set. A volume esti-
mate is an application of demand theory. Understanding the relationship
between price and quantity must be part of every manager’s tool kit. On
an even more fundamental level, demand forecasts help managers decide
whether to produce a certain product at all and how much to charge. For
example, if you conclude that the direct costs of providing therapeutic mas-
sage are $48 and that you will need to charge at least $75 to have an attrac-
tive profit margin, will you have enough customers toCHAPTER
125
8ELASTICITIES
Learning Objectives
After reading this chapter, students will be able to
• describe economic relationships with elasticities,
• use elasticity terms appropriately,
• apply elasticities to make simple forecasts, and
• calculate an elasticity.
Key Concepts
• Elasticities measure the association between the quantity demanded and
related factors.
• Elasticities are ratios of percentage changes, so they are scale free.
• Income, price, and cross-price elasticities are used most often.
• Income elasticities are usually positive but small.
• Price elasticities are usually negative.
• Cross-price elasticities may be positive or negative.
• Managers can use elasticities to forecast sales and revenues.
8.1 Introduction
Elasticities are valuable tools for managers. Armed only with basic marketing
data and reasonable elasticity estimates, managers can make sales, revenue,
and marginal revenue forecasts. In addition, elasticities are ideal for analyz-
ing “what if” questions. What will happen to revenues if we raise prices by
2 percent? What will happen to our sales if the price of a substitute drops by
3 percent?
Elasticities reduce confusion in descriptions. For example, suppose the
price of a 500-tablet bottle of generic ibuprofen rose from $7.50 to $8.00.
Someone seeking to downplay the size of this increase (or someone whose
focus was on the cost per tablet) would say that the price rose from 1.5 cents
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EBSCO Publishing : eBook Academic Collection (EBSCOhost) – printed on 1/12/2023 10:25 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition
Account: s4264928.main.eds
Economics for Healthcare Managers126
to 1.6 cents per tablet. Describing this change in percentage terms would
eliminate any confusion about price per bottle or price per tablet, but a
potential source of confusion remains.
To avoid confusion in calculating percentages, economists recommend
being explicit about the values used to calculate percentage changes. For
example, one might say that the price increase to $8.00 represents a 6.67
percent increase from the starting value of $7.50.
8.2 Elasticities
An elasticity measures the association between the quantity demanded and
related factors. For example, Chen, Okunade, and Lubiani (2014) used statis-
tical techniques to estimate that the income elasticity for adjusted inpatient
days was 0.04. The base for this estimate is average income, so an income 1
percent above the average CHAPTER
199
13ASYMMETRIC INFORMATION AND
INCENTIVES
Learning Objectives
After reading this chapter, students will be able to
• define asymmetric information and opportunism,
• describe two strategies for aligning incentives,
• explain why opportunism is a special management challenge in
healthcare, and
• discuss challenges in limiting opportunism.
Key Concepts
• Asymmetric information is information known to one party in a
transaction but not another.
• Asymmetric information allows the better informed party to act
opportunistically.
• Asymmetric information is a common problem for managers.
• Aligning incentives helps reduce the problems associated with
asymmetric information.
• Concerns about risk, complexity, measurement, strategic responses, and
team production limit the extent of incentive-based payments.
• Incentive-based contracts have become more common in healthcare.
13.1 Asymmetric Information
Asymmetric information confronts healthcare managers in most of their
professional roles. Vendors typically know more about the strengths and
weaknesses of their products than do purchasers. Employees typically know
more about their health problems than do human resource or health plan
managers. Subordinates typically know more about the effort they have put
asymmetric
information
Information known
to one party in a
transaction but not
another.
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AN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth Edition
Account: s4264928.main.eds
Economics for Healthcare Managers200
into their assignments than do their superiors. Providers typically know more
about treatment options than do their patients. In all these examples, one
party, commonly called an agent, has better information than another party,
commonly called a principal. Unless the principal is careful, the agent may
take advantage of this information asymmetry—in other words, engage in
opportunism.
Asymmetric information can result in two types of problems. One
is that mutually beneficial transactions may not take place if concern about
asymmetric information is too great. The other is that resources may be
wasted because of agents’ opportunism or principals’ costly precautions. For
example, an insurer cannot easily discern whether a treatment is really needed
(Arrow 1963). In response, an insurer may not cover services thought
likely to be abused, may require substantia
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