Market Forces in Health Care Eric D. Kupferberg, PhD 23 September 2010

Two Possible Frames What force or role does the market play in shaping health care in America? What force or role does the market play in shaping health care in America? What are the forces operating in the health care market? What are the forces operating in the health care market?

Defining Market Forces Typically supply and demand Typically supply and demand Defined in relation to each other Defined in relation to each other Price as a mediator Price as a mediator

Defining Market Forces Demand, Supply, and Price

Ideal Markets & Perfect Competition Assumes large number of small sellers so that no one seller can greatly determine the price Assumes large number of small sellers so that no one seller can greatly determine the price Assumes that both buyers and sellers are well- informed and aware of any changes in price Assumes that both buyers and sellers are well- informed and aware of any changes in price Assumes that the goods that are bought and sold are nearly homogenous so that buyers make decisions primarily on price Assumes that the goods that are bought and sold are nearly homogenous so that buyers make decisions primarily on price

No “Ideal” in Health Care Markets Limited number of insurers Limited number of insurers Many small cities and rural areas have few hospitals Many small cities and rural areas have few hospitals Limited suppliers of medical devices, technologies, and pharmaceutical prices Limited suppliers of medical devices, technologies, and pharmaceutical prices Consumers rarely see the entire cost; only pay 10-20$ per visit Consumers rarely see the entire cost; only pay 10-20$ per visit

No “Ideal” in Health Care Markets Governments purchase large portion and control costs Governments purchase large portion and control costs Limited health literacy Limited health literacy Patients rarely comparison shop Patients rarely comparison shop Health care is not a homogeneous good Health care is not a homogeneous good

Who is Demanding? Who’s the Consumer? Patients and potential patients Patients and potential patients Employers Employers Physicians & specialists Physicians & specialists Hospitals, clinics, ACS facilities Hospitals, clinics, ACS facilities Medicare and medicaid branches Medicare and medicaid branches Veterans administration Veterans administration

Isolated Consumers are Rare Even the most common transaction in health care involves at least two consumers and two suppliers Even the most common transaction in health care involves at least two consumers and two suppliers Example: standard office visit is the product of a patient purchasing services, a physician purchasing facilities and equipment, an employer purchasing a health plan, etc. Example: standard office visit is the product of a patient purchasing services, a physician purchasing facilities and equipment, an employer purchasing a health plan, etc. Consumer demands often mediated by a 3 rd party (e.g., patient needs negotiated by physician) Consumer demands often mediated by a 3 rd party (e.g., patient needs negotiated by physician)

No Monolithic Heath Care Market All markets are local All markets are local Heterogeneous mix of consumers and suppliers Heterogeneous mix of consumers and suppliers Market niches matter more than position in general health care marketplace Market niches matter more than position in general health care marketplace Consumers are non-uniform with regards to race, ethnicity, gender, geography, education and economic status Consumers are non-uniform with regards to race, ethnicity, gender, geography, education and economic status

Fluctuating Demand The Role of Governments Expansion of Medicare benefits increases demand Expansion of Medicare benefits increases demand Broadening of eligibility requirements increases demand Broadening of eligibility requirements increases demand Patient “Bill of Rights” legislation increases demand Patient “Bill of Rights” legislation increases demand State cuts in Medicaid reduces demand for most health care products & services State cuts in Medicaid reduces demand for most health care products & services Medicaid cuts increase demand for emergency health care Medicaid cuts increase demand for emergency health care

Fluctuating Demand The Role of Governments

Fluctuating Demand and Increased Cost

Fluctuating Demand The Influence of Costs Higher health care and out of pocket costs decreases demand Higher health care and out of pocket costs decreases demand Increasing numbers of uninsured decreases demand; numbers of uninsured will top 50 million by 2006 Increasing numbers of uninsured decreases demand; numbers of uninsured will top 50 million by 2006 Economic growth increases demand; increased economic disparities worsens overall health status in the population Economic growth increases demand; increased economic disparities worsens overall health status in the population Health care is a normal good, but its price elasticity is smaller than other goods (e.g., food, gasoline, automobiles, housing) Health care is a normal good, but its price elasticity is smaller than other goods (e.g., food, gasoline, automobiles, housing)

Fluctuating Demand Threats to Health Recent and emerging diseases can dramatically increase demand: AIDS, antibiotic resistant TB, new flu variants, bioterrorism, SARS, obesity, etc. Recent and emerging diseases can dramatically increase demand: AIDS, antibiotic resistant TB, new flu variants, bioterrorism, SARS, obesity, etc. BUT, the greater force is the aging population BUT, the greater force is the aging population