1. Chapter 7 The Demand for Healthcare Products Copyright 2015 Health Administration Press

2. After mastering this material, students will be able to  calculate sales and revenue;  explain why – demand matters in management decision making, and – consumer demand is important in healthcare;  and use standard models – to predict the effects of a policy change, and – to discuss the factors that influence demand. Copyright 2015 Health Administration Press2

3. Key Issues  Managers must understand demand. – It affects many decisions. – It helps you grasp market and policy shifts.  Several factors affect demand. – Price of the product – Price of related products – Demographics (e.g., age, income) Copyright 2015 Health Administration Press3

4. Why would understanding demand  matter for management?  matter for policy? Copyright 2015 Health Administration Press4

5. Demand drives  sales forecasts,  revenue forecasts,  pricing,  budgeting, and  investing. Copyright 2015 Health Administration Press5

6. EFFECTS OF PRICE Copyright 2015 Health Administration Press6

7. You have high-deductible insurance.  What is this?  Why would you choose such a plan? Copyright 2015 Health Administration Press7

8. You have high-deductible insurance.  Your physician recommends an X-ray.  Imaging West is two miles away. – Walk-in service is available for $250.  Imaging East is also two miles away. – Walk-in service is available for $100.  Which do you choose? Why? Copyright 2015 Health Administration Press8

9. About Your Choice  Why does having a high deductible matter?  Why does knowing the prices matter?  What principle does your choice illustrate? Copyright 2015 Health Administration Press9

10. Demand is one of the central ideas of economics.  It predicts that – higher prices will reduce sales, – lower prices will increase sales, and – other factors will also affect sales.  If you are going to predict Q4 sales – you need to know what price you will charge, and – the values of other factors. Copyright 2015 Health Administration Press10

11. At a higher price, sales will be lower. Copyright 2015 Health Administration Press11

12. How do sales increase at lower prices? More people buying? Higher sales per person? Copyright 2015 Health Administration Press12

13. OPPORTUNITY COSTS Copyright 2015 Health Administration Press13

14. Higher opportunity costs reduce sales. Copyright 2015 Health Administration Press14

15. Opportunity Cost Versus Price  Opportunity cost may not equal price – if consumers do not pay the whole bill, and – if other costs are important. 15Copyright 2015 Health Administration Press

16. Why wouldn’t a consumer pay the entire bill? Copyright 2015 Health Administration Press16

17. What might make opportunity costs higher than prices? Copyright 2015 Health Administration Press17

18. Opportunity cost of a $500 service.  $500 before deductible satisfied  $100 with 20 percent copayment  $0 after out-of-pocket limit + $40 in child-care costs? + $80 in lost wages? + $5 in transportation costs? Copyright 2015 Health Administration Press18

19. Out-of-pocket price: What a consumer directly pays  can be very different from – list price, and – what the provider actually receives.  Example – Doctor charges $1,000 – Insurance contract sets fee at $500 – Consumer pays 20 percent, or $100 Copyright 2015 Health Administration Press19

20. OTHER INFLUENCES ON DEMAND Copyright 2015 Health Administration Press20

21. What factors other than price affect buying decisions?  Income  Perceived health status  Perceived value of the product  Prices of related products  Preferences Copyright 2015 Health Administration Press21

22. Perceived health status strongly affects demand.  People seek care when they think they are ill. – Higher value – Greater use Copyright 2015 Health Administration Press22 Q P

23. Usually demand curves shift out with higher incomes.  More sales at every price  More willingness to pay at every quantity Copyright 2015 Health Administration Press23 Q P

24. Usually demand shifts out  when the price of a substitute rises. – What’s a substitute? – What’s a substitute for an office visit? – What’s a substitute for a hospital stay? Copyright 2015 Health Administration Press24 Q P

25. Usually demand shifts out  when the price of a complement falls. – What’s a complement? – What’s a complement for an office visit? – What’s a complement for a hospital stay? Copyright 2015 Health Administration Press25 Q P

26. Key Terms  Complement – Note spelling – Product used with your product – Example?  Substitute – Product used instead of your product – Example? Copyright 2015 Health Administration Press26

27. The impact of complements and substitutes  depends on budget share. – Small budget share = small impact – Large budget share = large impact Copyright 2015 Health Administration Press27

28. Why might demand shift like this? Copyright 2015 Health Administration Press28 Q P

29. Would a cut in a product’s price cause a shift like this? Copyright 2015 Health Administration Press29 Q P

30. COMPLEXITIES OF DEMAND Copyright 2015 Health Administration Press30

31. Complex Demand for Medical Products  Hard decisions for consumers  Poorly informed consumers  Well-informed providers  Complicated impact of insurance – Variable coverage – Variable cost sharing Copyright 2015 Health Administration Press31

32. Hard Decisions for Consumers  They have incomplete information. – How well does the product work? – How well does the alternative work?  Choices demand unfamiliar skills. – Using probabilities – Understanding clinical literature  Stakes may be high. Copyright 2015 Health Administration Press32

33. Patients may be rationally ignorant.  The condition is unexpected. – Little time to prepare – Many possible conditions  Information can be hard to get.  Many patients are first-time buyers.  Time may be short. Copyright 2015 Health Administration Press33

34. Agency: Providers may influence demand.  Providers have expertise.  Consumers turn to them for advice.  Producers can influence demand. – Patients do not know much. – Recommendations may reflect their incentives. – Response of consumers will reflect their beliefs about providers’ motives. Copyright 2015 Health Administration Press34

35. Two features make managed care necessary.  Moral hazard: Effects of insurance  Agency: Effects of provider advice Copyright 2015 Health Administration Press35

36. Managed care tries to change incentives.  Consumer – Low copayments for high-value products. – High copayments for low-value products.  Provider Copyright 2015 Health Administration Press36

37. Managed care tries to change incentives.  Consumer  Provider – Salary rather than fee-for-service – Case rates rather than fee-for-service – Utilization feedback – Quality bonuses Copyright 2015 Health Administration Press37

38. CONCLUSIONS Copyright 2015 Health Administration Press38

39. Conclusions  Understanding demand is important – for forecasts, and – for understanding policy and market shifts.  Economics focuses attention on – opportunity costs of care, – opportunity costs of related products, and – income and other demographics. Copyright 2015 Health Administration Press39

40. Conclusions  Demand for medical care is complex. – Hard choices – Insurance – Agency  Yet the “law of demand” usually holds: Higher prices reduce sales. Copyright 2015 Health Administration Press40