HCM 320 SNHU Vaccination Plans for Pediatrics Patients Paper

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37Anuyn

Economics

Southern New Hampshire University

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Submit your analysis as a short paper that you may use to develop speaker’s notes for your final presentation. Prompt: Describe for your audience the nature of your chosen public health issue, including the economic considerations involved. Specifically, the following critical elements must be addressed: I. Analysis of the Health Issue: A. Outline the underlying economic principles and indicators at play using specific examples. To what extent do those principles and indicators apply in understanding your chosen public health issue? B. Demonstrate the economic impacts of your public health issue. Provide specific examples of each impact. C. Analyze the larger context within which your chosen public health issue exists. To what extent is the issue a product of larger socioeconomic factors? D. Examine the major healthcare organizations impacted by the public health issue. How are they currently acting and reacting to the issue? Rubric Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document with double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format. Critical Elements Proficient (100%) Needs Improvement (75%) Not Evident (0%)

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HCM 320 Milestone Two Guidelines and Rubric Overview: For Milestone Two, you will describe for your audience the nature of your chosen public health issue, so that they will be able to understand and appreciate your presentation. Building upon your Milestone One worksheet submission, your analysis will include the economic principles and impacts of the principles involved with your public health issue, related socioeconomic factors, and the healthcare organizations impacted. Use the feedback you received on Milestone One to assist you in developing your introduction. Submit your analysis as a short paper that you may use to develop speaker’s notes for your final presentation. Prompt: Describe for your audience the nature of your chosen public health issue, including the economic considerations involved. Specifically, the following critical elements must be addressed: I. Analysis of the Health Issue: A. Outline the underlying economic principles and indicators at play using specific examples. To what extent do those principles and indicators apply in understanding your chosen public health issue? B. Demonstrate the economic impacts of your public health issue. Provide specific examples of each impact. C. Analyze the larger context within which your chosen public health issue exists. To what extent is the issue a product of larger socioeconomic factors? D. Examine the major healthcare organizations impacted by the public health issue. How are they currently acting and reacting to the issue? Rubric Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document with double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format. Critical Elements Analysis of the Health Issue: Economic Principles and Indicators Proficient (100%) Outlines the underlying economic principles and indicators at play, using specific examples Analysis of the Health Issue: Economic Impacts Demonstrates the economic impacts of the public health issue and provides specific examples of each impact Needs Improvement (75%) Outlines the underlying economic principles and indicators at play, but there are inaccuracies or the outline lacks specific examples Demonstrates the economic impacts of the public health issue, but there are inaccuracies or the demonstration fails to provide specific examples of each impact Not Evident (0%) Does not outline the underlying economic principles and indicators at play Value 23 Does not demonstrate the economic impacts of the public health issue 23 Analysis of the Health Issue: Socioeconomic Factors Analysis of the Health Issue: Healthcare Organizations Articulation of Response Analyzes the larger context within which the public health issue exists by qualifying the extent to which the issue is a product of larger socioeconomic factors Examines the major healthcare organizations impacted by the public health issue, including their actions and reactions to the issue Submission has no major errors related to citations, grammar, spelling, syntax, or organization Analyzes the larger context within which the public health issue exists, but fails to fully or accurately qualify the extent to which the issue is a product of larger socioeconomic factors Examines the major healthcare organizations impacted by the issue, but fails to fully or accurately explain their actions and reactions to the issue Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Does not analyze the larger context within which the public health issue exists 23 Does not examine the major healthcare organizations impacted by the issue 23 Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 8 Total 100% Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. CHAPTER SUPPLY AND DEMAND ANALYSIS 10 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. • A demand curve describes how much consumers are willing to pay at different levels of output. • 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. • Insurance and professional advice influence the demand for medical goods and services. • 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. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 155 Account: shapiro.main.eds 155 7/15/14 8:51 AM Ec o n o m ic s f o r H e a l th c a re M a n a g e r s 10.1 Introduction Healthcare 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 seemingly random fluctuations of healthcare markets, systematic patterns can be detected. Understanding these systematic patterns requires an understanding of supply 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 economics. 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. (Insurance and taxes complicate matters because the price the buyer pays is different from the price the seller receives.) The horizontal axis shows the quantity customers bought and producers sold. EXHIBIT 10.1 Equilibrium $350 $300 S $250 Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 156 $200 $150 $100 D $50 $0 0 20 40 60 80 100 120 Quantity EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 156 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis The supply curve (labeled S) describes how much producers are willing to sell at different prices. From another perspective, it describes what the price must be to induce producers to sell different quantities. The supply curve in Exhibit 10.1 slopes up, as do most supply curves. This upward slope means that, when the price is higher, producers are willing to sell more of a good or service or more producers are willing to sell a good or service. When the price is higher, producers are more willing to add workers, equipment, and other resources to sell more. In addition, higher prices allow firms to enter a market they could not enter at lower prices. When prices are low, only the most efficient firms can profitably participate in a market. When prices are higher, firms with higher costs can also earn acceptable profits. 157 Supply curve A graphic depiction of how much producers are willing to sell at different prices 10.1.2 Demand Curves The demand curve (labeled D) describes how much consumers are willing to buy at different prices. From another perspective, it describes how much the marginal consumer (the one who would not make a purchase at a higher price) is willing to pay at different levels of output. The demand curve in Exhibit 10.1 slopes down, meaning that, for producers to sell more of a product, its price must be cut. Such a sales increase might be the result of an increase in the share of the population that buys a good or service, an increase in consumption per purchaser, or some mix of the two. Demand curve A graphic depiction of how much consumers are willing to buy at different prices 10.1.3 Equilibrium The demand and supply curves intersect at the equilibrium price and quantity. At the equilibrium price, the amount producers want to sell equals the amount consumers want to buy. In Exhibit 10.1, consumers want to buy 60 units and producers want to sell 60 units when the price is $100. Markets tend to move toward equilibrium points. If the price is above the equilibrium price, producers will not meet their sales forecasts. Sometimes producers cut prices to sell more. Sometimes producers cut production. Either strategy tends to equate supply and demand. Alternatively, if the price is below the equilibrium price, consumers will quickly buy up the available stock. To meet this shortage, producers may raise prices or produce more. Either strategy tends to equate supply and demand. Markets will not always be in equilibrium, especially if conditions change quickly, but the incentive to move toward equilibrium is strong. Producers typically can change prices faster than they can increase or decrease production. A high price today does not mean a high price tomorrow. Prices are likely to fall as additional capacity becomes available. Likewise, a low price today does not mean a low price tomorrow. Prices are likely to rise as capacity decreases. We will explore this concept in more detail in our examination of the effects of managed care on the incomes of primary care physicians. Equilibrium price Price at which the quantity demanded equals the quantity supplied (There is no shortage or surplus.) Shortage Situation in which the quantity demanded at the prevailing price exceeds the quantity supplied (The best indication of a shortage is that prices are rising.) EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 157 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 158 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s 10.1.4 Professional Advice and Imperfect Competition Healthcare markets are complex. The influence of professional advice on consumer choices is a complication of particular concern. The assumption that changes in supply will not affect consumers’ choices (i.e., demand) can be misleading. If changes in factors that ought not to affect consumers’ choices (such as providers’ financial arrangements with insurers) influence providers’ recommendations, a supply and demand analysis that does not take this effect into account could be equally misleading. Even more important, few healthcare markets fit the model of a competitive market (i.e., a market with many competitors who perceive they have little influence on the market price). We must condition any analysis on the judgment that healthcare markets are competitive enough that conventional supply curves are useful guides. In markets that are not competitive enough, producers’ responses to changes in market conditions are likely to be more complex than supply curves suggest. This text focuses on applications of demand and supply analysis in which neither providers’ influence on demand nor imperfect competition is likely to be a problem. 10.2 Demand and Supply Shifts A movement along a demand curve is called a change in the quantity demanded. In other words, a movement along a demand curve traces the link between the price consumers are willing to pay and the quantity they demand. Demand and supply analysis is most useful to healthcare managers in understanding how the equilibrium price and quantity will change in response to shifts in demand or supply. With limited information, a working manager can sketch the impact of a change in policy on the markets of most concern. What factors might cause the demand curve to shift to the right (greater demand at every price or higher prices for every quantity)? We need detailed empirical work to verify the responses of demand to market conditions, but the list of standard responses is short. Typically, a shift to the right results from an increase in income, an increase in the price of a substitute (a good or service used instead of the product in question), a decrease in the price of a complement (a good or service used along with the product in question), or a change in tastes. Economists often use mathematical notation to describe demand. Q = D(P,Y ) is an example of this notation. It says that the quantity demanded varies with prices (represented by P) and income (represented by Y ), which means that quantity, the relevant prices, and income are systematically related. A demand curve traces this relationship when income and all prices other than the price of the product itself do not change. What factors might cause the supply curve to shift to the right (greater supply at every price or lower prices at every quantity)? Typically, a shift to the right results from a reduction in the price of an input, an improvement EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 158 Account: shapiro.main.eds 7/15/14 8:51 AM 159 in technology, or an easing of regulations. In mathematical notation, we can describe supply as Q = S(P,W). Here, W represents the prices of inputs (the factors such as labor, land, equipment, buildings, and supplies that a business uses to produce its product). Unless technology or regulations are the focus of an analysis, we do not make their role explicit. Case 10.1 Worrying About Demand Shifts “You know, this business is changing,” said Terry, the business manager. “It used to be that an administrator like me had to worry only about running a good nursing home and keeping an eye on the other nursing homes in town, but these days we have more competitors than I can shake a stick at. Some of the folks at Sunshine Assisted Living would have been residents in our nursing home a few years ago. Not today, though. We admit their residents only when they are getting close to needing total care. Without changing offices, I feel like I switched from running a nursing home to running a hospice. The thing that has me spooked, though, is this new home health agency. It has billboards out on the interstate with a picture of a senior citizen and a slogan that says, ‘Stay healthy. Stay active. Stay home.’ I’m worried that it will siphon off a significant part of our residents. It’s just supply and demand.” With that Terry jumped up, went over to the whiteboard, and drew a simple graph (Exhibit 10.2). “Here’s where we are today. We have a EXHIBIT 10.2 Terry’s Supply and Demand Graph Demand Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis Supply Quantity (continued) EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 159 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 160 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Case 10.1 census of about 150, and we’re doing fine. But when those home health folks are done with us, we’ll be lucky to have a census of 100. I’m worried.” “Whoa, partner,” interrupted Tracey, who handled marketing. “I like the graph, but I don’t think a home health agency is going to have that sort of impact on us. A 2007 study out of Brown University by Gruneir and colleagues did not find the impact you are describing. I just don’t think many of our residents are candidates for home health services. By the time we see them, they need more care than most home health agencies can offer.” (continued) Discussion questions: • Exhibit 10.2 shows the current situation. What did Terry think the graph would look like after the home health care agency entered the market? What did Tracey think the new graph would look like? • Over the next few years, what demographic changes seem likely to shift the demand for nursing home care? • What changes in the local market might cause the sort of shift in demand that Terry is concerned about? 10.2.1 A Shift in Demand Demand shift A shift that occurs when a factor other than the price of the product itself (e.g., consumer incomes) changes Supply shift Shift that occurs when a factor (e.g., an input price) other than the price of the product changes We begin our demand and supply analyses by looking at a classical problem in health economics: What will happen to the equilibrium price and quantity of a product used by consumers if insurance expands? Insurance expands when the insurance plan agrees to pay a larger share of the bill or the proportion of the population with insurance increases. This sort of change in insurance causes a demand shift (or shift in demand). As shown in Exhibit 10.3, the entire demand curve rotates. As a result of this insurance expansion, the equilibrium price rises from P1 to P2 and the equilibrium quantity rises from Q 1 to Q 2. For example, as coverage for pharmaceuticals has become a part of more Americans’ insurance, the prices and sales of prescription pharmaceuticals have risen. 10.2.2 A Shift in Supply Exhibit 10.4 depicts a supply shift (or shift in supply). The supply curve has contracted from S1 to S2. This shift means that at every price, producers want to supply a smaller volume. Alternatively, it means that to produce each volume, producers require a higher price. A change in regulations might result in a shift like the one from S1 to S2. For example, suppose that state EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 160 Account: shapiro.main.eds 7/15/14 8:51 AM Price P2 161 EXHIBIT 10.3 An Expansion of Insurance D2 S D1 P1 Q2 Q1 Quantity regulations mandated improved care planning and record keeping for nursing homes. Some nursing homes might close down, but the majority would raise prices for private-pay patients to cover the increased cost of care. The net effect would be an increase in the equilibrium price from P1 to P2 and a reduction in the equilibrium quantity from Q1 to Q2. A manager should be able to forecast this effect with no information other than the realization that the demand for nursing home care is relatively inelastic (meaning that the slope of the demand curve is steep) and that the regulation would shift the supply curve inward. EXHIBIT 10.4 A Supply Shift S2 D Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis S1 P2 P1 Q2 Q1 Quantity EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 161 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 162 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s The Supply of Physicians’ Services Empirical analyses of supply usually find that an increase in earnings results in higher volume (i.e., supply curves usually slope up). Rizzo and Blumenthal (1994) found that young, male, self-employed physicians fit this pattern. A 1 percent increase in hourly earnings increased annual practice hours by 0.23 percent. One reason that the response was so muted is that an increase in hourly earnings also increases total income, and having a higher income usually leads to a reduction in hours. Confirming this supposition, these authors found that a 1 percent increase in income from all sources reduced annual hours by 0.26 percent. Many young physicians have spouses with high earning potential, which also tends to reduce hours. A 1 percent increase in a physician’s spouse’s income reduced annual hours by 0.02 percent. In other words, the study found that change in either nonpractice income or in a spouse’s earnings shifts the supply curve. So, both practice and nonpractice earnings affected annual hours of work. As is usually the case in labor supply analyses, both effects were relatively small. The implication for managers is that financial incentives may have modest effects on the decisions of higher-income workers. Managers may need to emphasize the intrinsic rewards of work (or pay a lot to change behavior). Responses to changing market conditions depend on how much time passes. A change in technology, such as the development of a new surgical technique, initially will have little effect on supply. Over time, however, as more surgeons become familiar with the technique, its impact on supply will grow. Short-term supply and demand curves generally look different from long-term supply and demand curves. The more time consumers and producers have to respond, the more their behavior changes. 10.3 Shortage and Surplus A shortage exists when the quantity demanded at the prevailing price exceeds the quantity supplied. In markets that are free to adjust, the price should rise so that equilibrium is restored. At a higher price, less will be demanded, leaving a greater supply. In some markets, though, prices cannot adjust, often because a public or private insurer sets prices too low and consumers demand more than producers are willing to supply. Exhibit 10.5 depicts a shortage situation. The EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 162 Account: shapiro.main.eds 7/15/14 8:51 AM 163 EXHIBIT 10.5 A Shortage D S Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis P* P2 Q S Q* QD Quantity equilibrium price is P* and the equilibrium quantity is Q*, but the insurer has set a price of P2, so consumers demand Q D and producers supply Q S. Because the price cannot adjust, a shortage equal to Q D − Q S exists. A surplus exists when the quantity supplied at the prevailing price exceeds the quantity demanded. In markets that are free to adjust, the price should fall so that equilibrium is restored. In some markets, prices are free to fall but do so slowly. For example, in the 1990s, many hospitals had unfilled hospital beds because the combination of managed care and new technology reduced the demand for inpatient care. Over time, insurance companies used this excess capacity to secure much lower rates (even though Medicare and Medicaid rates remained unchanged), and enough hospitals closed or downsized to eliminate the excess capacity. Case 10.2 Surplus Situation in which the quantity supplied at the prevailing price exceeds the quantity demanded (The best indication of a surplus is that prices are falling.) How Large Will the Shortage of Primary Care Physicians Be? The Affordable Care Act (ACA) has increased the share of the population with health insurance. Most of the newly insured were reasonably healthy and viewed health insurance as too expensive, given its likely benefits. As a result, the ACA will primarily affect the demand for primary care services, and many anticipate a shortage of primary care physicians (Robeznieks 2013). (continued) EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 163 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 164 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Case 10.2 Some other observers suggest that this concern is overblown (Auerbach et al. 2013). The production of primary care is changing in ways that shift its supply. One change is the rapid expansion of patient-centered medical homes, which emphasize a greater role for technology, physician assistants, and nurse practitioners. Another change is the growth of nurse-managed clinics (of which MinuteClinic, discussed in Case 7.1, is an example). Both of these innovations reduce the number of physicians needed to provide primary care for a population. (continued) Discussion questions: • Set up a model of the demand and supply for primary care physicians. (It should have salary on the vertical axis and number of primary care physicians on the horizontal axis.) Assuming that the production of primary care does not change (i.e., the supply curve does not shift), how do you expect the market equilibrium to change? • How have the incomes of primary care physicians changed in the last few years? Are these changes consistent with your prediction? (You can get income data from Medscape Physician Compensation Reports.) • Are the changes in the incomes of primary care physicians consistent with the prediction of a shortage? That is, have they risen rapidly? • If retail clinics and patient-centered medical homes continue to expand, how will they affect the market equilibrium? Which curve would shift as a result—demand or supply? 10.4 Analyses of Multiple Markets Demand and supply models can also be helpful in forecasting the effects of shifts in one market on the equilibrium in another. Such forecasts can be made only if the markets are related—that is, the products need to be complements or substitutes. Spetz and colleagues (2006) provided an example of this effect. They showed that the demand for licensed practical nurses (LPNs) increased as the wages of registered nurses (RNs) rose (as a result of the shortage of RNs) (see Exhibit 10.6). Increases in the wages of RNs shifted the demand curve for LPNs from D1 to D2. As a result, employment of LPNs rose from Q 1 to Q 2 and wages rose from W1 to W2. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 164 Account: shapiro.main.eds 7/15/14 8:51 AM S2 D2 Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis 165 EXHIBIT 10.6 Higher RN Wages Shift Demand for LPNs D1 W2 W1 Q1 Q2 Quantity Source: Data from Spetz et al. (2006). 10.5 Conclusion Supply and demand analysis can help managers anticipate the effects of changes in policy, technology, or prices. Supply and demand analysis is a valuable tool that managers can use to quickly anticipate the effects of shifts in demand or supply curves. Short-term shifts in demand are likely to result from one of two factors: changes in insurance or shifts in the prices or characteristics of substitutes or complements. Short-term shifts in supply are likely to result from one of three factors: changes in regulations, shifts in the prices or characteristics of inputs, or changes in technology. Most demand curves slope down, which means that consumers will buy more if prices are lower. It also means that consumers who are willing to purchase a product only at a low price do not place a high value on it. In contrast, most supply curves slope up, which means that higher prices will motivate producers to sell additional output (or motivate more producers to sell the same output). Exercises 10.1 Physicians’ offices supply some urgent care services (i.e., services patients seek for prompt attention but not for preservation of life or limb). a. Name three other providers of urgent care services. b. What sort of shift in supply or demand would result in a market equilibrium with higher prices and sales volume? EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 165 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 166 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s c. What might cause such a shift? d. What sort of shift in supply or demand would result in a market equilibrium with higher prices but lower sales volume? e. What might cause such a shift? 10.2 Suppose the market equilibrium price for immunizations is $40 and the volume is 25,000. a. Identify three providers of immunization services. b. What sort of shift in supply or demand would reduce both prices and sales volume? c. What might cause such a shift? d. What sort of shift in supply or demand would result in a market equilibrium with a price above $40 and a volume below 25,000? e. What might cause such a shift? 10.3 The table contains data on the number of doses of an antihistamine sold per month in a small town. Price Demand Supply $10 185 208 $9 187 205 $8 188 202 $7 190 199 $6 191 196 $5 193 193 $4 194 190 $3 196 187 $2 197 184 $1 199 181 a. To sell 196 doses to customers, what will the price need to be? b. For stores to be willing to sell 196 doses, what will the price need to be? c. How many doses will customers want to buy if the price is $2? d. How many doses will suppliers want to sell if the price is $2? e. Is there excess supply or excess demand at $2? f. What is the equilibrium price? How can you tell? EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 166 Account: shapiro.main.eds 7/15/14 8:51 AM 167 10.4 The table contains demand and supply data for eyeglasses in a local market. Price Demand Supply $300 7,400 8,320 $290 7,480 8,200 $280 7,520 8,080 $270 7,600 7,960 $260 7,640 7,840 $250 7,720 7,720 $240 7,760 7,600 $230 7,840 7,480 $220 7,880 7,360 a. At $280, how many pairs will consumers want to buy? b. How many pairs will consumers want to buy if the price is $290? c. How many pairs will stores want to sell at $290? d. Is $290 the equilibrium price? e. Is there excess supply or excess demand at $290? f. What is the equilibrium price? How can you tell? 10.5 The exhibit shows a basic demand and supply graph for home care services. Identify the equilibrium price and quantity. Label them P* and Q*. Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis Supply Demand Quantity EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 167 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 168 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s a. Retirements drive up the wages of home care workers. How would the graph change? How would P* and Q* change? b. Improved technology lets home care workers monitor use of medications without going to clients’ homes. How would the graph change? How would P* and Q* change? c. The number of people needing home care services increases. How would the graph change? How would P* and Q* change? d. A change in Medicare rules expands coverage for home care services. How would the graph change? How would P* and Q* change? 10.6 The demand function is Q = 600 − P, with P being the price paid by consumers. Put a list of prices ranging from $400 to $0 in a column labeled P. (Use intervals of $50.) a. Consumers have insurance with 40 percent coinsurance. For each price, calculate the amount that consumers pay. (Put this figure in a column labeled PNet.) b. Calculate the quantity demanded when there is insurance. (Put this figure in a column labeled DI.) c. Plot the demand curve, putting P (not PNet) on the vertical axis. d. The quantity supplied equals 2 × P. Put these values in a column labeled S. e. What is the equilibrium price? f. How much do consumers spend? g. How much does the insurer spend? 10.7 The demand function is Q = 1,000 − (0.5 × P ). P is the price paid by consumers. Calculate the quantity demanded when there is no insurance. (Put these values in column DU of the table.) P DU PNet DI S 560 $176 912 952 $1,000 $960 $920 $880 $840 $800 $760 $720 $680 $640 $600 $560 EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 168 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 10 : Sup p ly and D em and A naly sis 10.8 10.9 10.10 10.11 169 a. The state mandates coverage with 20 percent coinsurance, meaning that the demand function becomes 1,000 − (0.5 × 0.2 × P). b. For each price, calculate the amount consumers pay. (Put this figure in column PNet.) c. Calculate the quantity demanded when there is insurance. (Put this figure in column DI.) d. Plot the two demand curves, putting P (not PNet) on the vertical axis. e. How do DU and DI differ? Which is more elastic? The supply function for the product in Exercise 10.7 is 160 + (0.9 × P). P is the price received by the seller. At the equilibrium price, the quantity demanded will equal the quantity supplied. f. What was the equilibrium price before coverage? After? g. After coverage begins, how much will the product cost insurers? How much will the product cost patients? How much did patients pay for the product before coverage started? Consumers who can buy health insurance through an employer get a tax subsidy. Use demand and supply analysis to assess how this subsidy affects consumers who cannot buy insurance through an employer. Why are price controls unlikely to make consumers better off if a market is reasonably competitive? Make the business case why healthcare providers should advocate for expansion of insurance coverage for the poor. References Auerbach, D. I., P. G. Chen, M. W. Friedberg, R. Reid, C. Lau, P. I. Buerhaus, and A. Mehrotra. 2013. “Nurse-Managed Health Centers and Patient-Centered Medical Homes Could Mitigate Expected Primary Care Physician Shortage.” Health Affairs 32 (11): 1933–41. Gruneir, A., K. L. Lapane, S. C. Miller, and V. Mor. 2007. “Long-Term Care Market Competition and Nursing Home Dementia Special Care Units.” Medical Care 45 (8): 739–45. Rizzo, J. A., and D. Blumenthal. 1994. “Physician Labor Supply: Do Income Effects Matter?” Journal of Health Economics 13 (4): 433–53. Robeznieks, A. 2013. “What Doctor Shortage? Some Experts Say Changes in Delivery Will Erase Need for More Physicians.” Modern Healthcare 43 (45): 14–15. Spetz, J., W. T. Dyer, S. Chapman, and J. A. Seago. 2006. “Hospital Demand for Licensed Practical Nurses.” Western Journal of Nursing Research 28 (6): 726–39. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 169 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 170 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. CHAPTER FORECASTING 9 Learning Objectives After reading this chapter, students will be able to • • • • articulate the importance of a good sales forecast, describe the attributes of a good sales forecast, apply demand theory to forecasts, and use simple forecasting tools appropriately. Key Concepts • • • • • Making and interpreting forecasts are important jobs for managers. Forecasts are planning tools, not rigid goals. Sales and revenue forecasts are applications of demand theory. Changes in demand conditions usually change forecasts. Good forecasts should be easy to understand, easy to modify, accurate, transparent, and precise. • Forecasts combine history and judgment. • Percentage adjustment, moving averages, and seasonalized regression analysis are common forecasting methods. • Assessing external factors is vital to forecasting. 9.1 Introduction Making and interpreting forecasts are important jobs for managers. Sales forecasts are especially important because many decisions hinge on what the organization expects to sell. Pricing decisions, staffing decisions, product launch decisions, and other crucial decisions are based on the organization’s revenue and sales forecasts. Inaccurate or misunderstood forecasts can hurt businesses. The organization can hire too many workers or too few. It can set prices too high or EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 139 Account: shapiro.main.eds 139 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 140 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s too low. It can add too much equipment or too little. At best, these sorts of forecasting problems will cut into profits; at worst, they may drive an organization out of business. The consequences of bad or misapplied forecasts are particularly serious in healthcare. For example, underestimating the level of demand in the short term may result in stock shortages at a pharmacy or too few nurses on duty at a hospital. In both cases, the healthcare organization will suffer financially and, more important, put patients at risk. It will suffer because the costs of meeting unexpected demand are high and because the long-term consequences of failing to meet patients’ needs are significant. The best outcome in this case will be unhappy patients; the worst outcome will be that physicians stop referring patients to the organization. Overestimating sales can also have serious long-term effects. A hospital may add too many beds because its census forecast was too high. This surplus will depress profits for some time because the facility will have hired staff and added equipment to meet its overestimated forecast, and the costs of hiring and paying new employees and buying new equipment will substantially exceed actual sales profits. In extreme cases, bad forecasts may drive a firm out of business. A facility that borrows heavily in anticipation of higher sales that do not materialize may be unable to repay those debts. Bankruptcy may be the only option. Sales and revenue forecasts are applications of demand theory. The factors that change sales and revenues also change demand. The most important influences on demand are the price of the product, rivals’ prices for the product, prices for complements and substitutes, and demographics. Recognizing these influences can simplify forecasting considerably because it focuses our attention on tracking what has changed. 9.2 What Is a Sales Forecast? A sales forecast is a projection of the number of units (e.g., bed days, visits, doses) an organization expects to sell. The forecast must specify the time frame, marketing plan, and expected market conditions for which it is valid. A forecast is a planning tool, not a rigid goal. Conditions may change. If they do, the organization’s plan needs to be reassessed. Good management usually involves responding effectively to changes in the environment, not forging ahead as though nothing has shifted. In addition, fixed sales goals create incentives to behave opportunistically (that is, for employees to try to meet their goals instead of the organization’s goals). For example, sales staff may harm the organization by making overblown claims of a product’s effectiveness to meet their sales goals, even though their actions will harm the EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 140 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting 141 company in the long run. Alternatively, sales managers may bid on unprofitable managed care contracts just to meet goals. Whenever possible, a sales forecast should estimate the number of units expected to be sold, not revenues. The number of units to be sold determines staffing, materials, working capital, and other needs. In addition, costs often vary unevenly with volume. A small reduction in sales volume may save an entire shift’s worth of wages (thereby avoiding considerable cost), or an increase in sales may incur an insignificant cost increase if it requires no additional staff or equipment. Case 9.1 Building a New Urgent Care Center “It’s a slam dunk,” said Kim, the marketing analyst. “The volumes we’ve forecasted ensure that the new urgent care center will be profitable within six months.” “Great,” replied Angel, vice president of strategic management, “but I think it would be useful to walk through those numbers to put everyone at ease.” “OK, here’s how we forecasted visits,” said Kim. “There are 40,000 people living in our primary market area. National rates suggest that a population of this size will make 6,000 urgent care visits each year. Right now, our emergency department sees 2,500 urgent—but not emergent—visits each year. We believe that 1,500 of them will come to the urgent care center. Our seat-of-the-pants estimate is that Providence, the other hospital serving our primary market area, sees 2,000 urgent care patients per year in its emergency department. We expect to get half of those visits. We also expect that the added convenience of the urgent care center will bring in an additional 500 visits each year. So, 3,000 visits per year, each yielding revenue of $125, give us $375,000 in total revenue. We have fixed costs of $200,000. Our best estimate is that each visit has variable costs of $20, so we’re talking profits of $115,000, for a margin on sales of 30 percent.” “That’s nice and clear,” said Angel, “but I’d like to take a closer look. About half of the patients Providence sees would have to drive past Providence to get to our urgent care center. Do we have any indication that those folks will do that? My second concern is that our emergency department is open 24/7. The urgent care center will be open 82 hours per week. Can we really hope to capture 60 percent of the emergency department’s urgent care patients?” (continued) EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 141 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 142 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Case 9.1 Discussion questions: • What happens to profits if the urgent care center has only 2,000 visits? • To what extent does Kim’s forecast rely on judgment rather than data? Would additional information help resolve Angel’s concerns? What sort of data would you suggest gathering? • Does building the urgent care center seem risky? Could you do anything to reduce the amount of risk? • Would there be any advantages to planning for a small patient volume and letting your customers surprise you? Suppose you plan for 2,000 visits but volume turns out to be 3,000. What happens? Would underestimating the volume be better or worse than planning for 3,000 and getting only 2,000? (continued) The dollar volume of sales can vary in response to factors that do not affect the resources needed to produce, market, or service sales. Discounts and price increases are examples of such factors. Revenues can vary even though neither volume nor costs change. Finally, managers can easily forecast revenue given a volume forecast. In general, managers should build their revenue estimates on sales volume estimates. Good forecasts have five attributes. They should be 1. 2. 3. 4. 5. easy to understand, easy to modify, accurate (i.e., they contain the most probable actual values), transparent about how variable they are, and precise (i.e., they give the analyst as little wiggle room as possible). These attributes often conflict. Managers may need to underplay how imprecise simple forecasts are because their audience is not prepared to consider variation. As Aven (2013) points out, many decision makers are more comfortable working with a single, very precise estimate, even though it may be inaccurate. Precision and accuracy always conflict because a more precise forecast (80 to 85 visits per day) will always be less accurate than a less precise forecast (70 to 95 visits per day). Offering decision makers several precise scenarios is usually a good compromise. For example, busy decision makers generally can use a forecast such as “Our baseline forecast is 82 visits per day for the next three months; our low forecast is 75 visits per day, and our high forecast is 89 visits per day.” EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 142 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting 143 9.3 Forecasting All forecasts combine history and judgment. History is the only real source of data. For example, sales can be forecasted only on the basis of data on past sales of a product, past sales of similar products, past sales by rivals, or past sales in other markets. History is an imperfect guide to the future, but it is an essential starting point. Judgment is also essential. It provides a basis for deciding what data to use, how to use the data, and what statistical techniques, if any, to use. In many cases (such as introductions of new products or new competitive situations), managers who have insufficient data have to base their forecasts mainly on judgment. As mentioned in Section 9.2, a forecast must specify the time frame, marketing plan, and expected market conditions for which it is valid. Changes in any of these factors will change the forecast. A forecast applies to a given period. Extrapolating to a longer or shorter period is risky; conditions may change. The time frame varies according to the forecast’s use. For example, a staffing plan may need a forecast for only the next few weeks. Additional staff can be hired over a longer time horizon. In contrast, budget plans usually need a forecast for the coming year. Organizations usually set their budgets a year in advance on the basis of projected sales. Strategic plans usually need a forecast for the next several years. Longer forecasts are generally less detailed and less reliable, but managers know to take these factors into account when they develop and use them. Forecasts should be as short term as possible. A forecast for next month’s sales will usually be more accurate than forecasts for the distant future, which are likely to be less accurate because important facts will have changed. Your competitors today are likely to be your competitors in a month. Your competitors in two years are likely to be different from your competitors today, so a forecast based on current market conditions will be poor. Marketing plan changes will influence the forecast. A clinic that increases its advertising expects visits to increase. A forecast that does not consider this increase will usually be inaccurate. Increasing discounts to pharmacy benefits managers should result in increased sales for a pharmaceutical firm. Again, a forecast that does not account for additional discounts will usually be deficient. Any major changes in an organization’s marketing efforts should change forecasts. If they do not, the organization should reassess the usefulness of its marketing initiatives. Changes in market conditions also influence forecasts. For example, a major plant closing would probably reduce a local plastic surgeon’s volume. Plant employees who had intended to undergo plastic surgery may opt to delay this elective procedure, and prospective patients who work for similar EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 143 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 144 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Percentage adjustment Percentage adjustment of the past n periods of historic demand (The adjustment is essentially a best guess of what is expected to happen in the next year.) Moving average The unweighted mean of the previous n data points Seasonalized regression analysis A least squares regression that includes variables that identify subperiods (e.g., weeks) that historically have had above- or below-trend sales plants may defer discretionary spending in fear that they too may lose their jobs. Alternatively, a hospital closure will probably cause a competing hospital to forecast more inpatient days. Historical data have limited value in projecting such an effect if a similar closure has not occurred in the past. Approval of a new drug by the Food and Drug Administration should cause a pharmaceutical firm to forecast a decrease in sales for its competing product. This sort of change in market conditions is familiar, and the firm’s marketing staff will probably draw on experience to predict the loss. Analysts routinely use three forecasting methods: percentage adjustment, moving averages, and seasonalized regression analysis. If the data are adequate and the market has not changed too much, seasonalized regression analysis is the preferred method. However, whether the data are adequate and whether the market has changed too much are judgment calls. Percentage adjustment increases or decreases the last period’s sales volume by a percentage the analyst deems sensible. For example, if a hospital had an average daily census of 100 the previous quarter, and an analyst expects the census to fall an average of 1 percent per quarter, a reasonable forecast would be a census of 99. Because of its simplicity, managers often use percentage adjustment; however, this simplicity is also a shortcoming. In principle, a manager can use any percentage adjustment that he or she wants to. Without some requirement that percentage adjustments be well justified, this approach may not yield accurate forecasts. For example, a manager might justify a request for a new position based on a forecast that average daily census will increase by 5 percent, even though the average daily census had been falling for the last 14 quarters. In addition, percentage adjustment does not allow for seasonal effects. (Seasonal effects are systematic tendencies for particular days, weeks, months, or quarters to have above- or below-average volume.) Demand theory can be used to add rigor to percentage adjustment. For example, if the price of a product has changed, an estimate of the percentage change in sales can be calculated by multiplying the percentage change in price by the price elasticity of demand. So, if an organization has chosen to raise prices by 3 percent and faces a price elasticity of demand of −4, sales will drop by 12 percent. Similar calculations can be used if the price of a substitute, the price of a complement, or consumer income has changed. The moving-average method uses the average of data from recent periods to forecast sales. This method works well for short-term forecasts, although it tends to hide emerging trends and seasonal effects. Exhibit 9.1 shows census data and a one-year moving average for a sample hospital. Exhibit 9.1 also illustrates the calculation of a seasonalized regression format. Excel was used to estimate a regression model with a trend (a variable that increases in value as time passes) and three quarter indicators. The variable Q 1 has a value of one if the data are from the first quarter; otherwise, its value is zero. Q 2 equals one if the data are from the second quarter, and Q 3 equals one if the data are from the third quarter. For technical reasons, EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 144 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting Quarter Census Moving Average First Second Third Trend 1 99 1 0 0 1 2 109 0 1 0 2 3 101 0 0 1 3 4 107 0 0 0 4 5 104 104.0 1 0 0 5 6 116 105.3 0 1 0 6 7 100 107.0 0 0 1 7 8 106 106.8 0 0 0 8 9 103 106.5 1 0 0 9 10 107 106.3 0 1 0 10 11 90 104.0 0 0 1 11 12 105 101.5 0 0 0 12 13 102 101.3 1 0 0 13 14 94 101.0 0 1 0 14 15 98 97.8 0 0 1 15 16 104 99.8 0 0 0 16 17 99 99.5 1 0 0 17 18 105 98.8 0 1 0 18 19 94 101.5 0 0 1 19 20 102 100.5 0 0 0 20 21 100 100.0 1 0 0 21 22 145 EXHIBIT 9.1 Census Data for a Sample Hospital 100.3 Seasonalized Regression Model Coefficient t-statistic 108.811 40.90 R2 = 0.55 −3.968 −1.53 F(4,20) = 4.98 0.732 0.27 p = 0.01 Third quarter −8.534 −3.16 Trend −0.334 −2.16 Intercept First quarter Second quarter EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 145 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 146 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Mean absolute deviation The average absolute difference between a forecast and the actual value (It is absolute because it converts both 9 and −9 to 9. The Excel function ABS( ) performs this conversion.) EXHIBIT 9.2 An Overview of the Forecasting Process the average response in the fourth quarter is represented by the constant. A negative regression coefficient for trend indicates that the census is in a downward trend. The results also show that the typical third-quarter census is smaller than average because the coefficient for Q 3 is large, negative, and statistically significant. The forecast based on seasonalized regression analysis is calculated as follows: 108.811 + (−0.334 × 22) + 0.732. Here, 108.811 is the estimate of the constant, −0.334 is the estimate of the trend coefficient, 22 is the quarter to which the forecast applies, and 0.732 is the estimate of the Q 2 coefficient. Therefore, the seasonalized forecast is 102.2, slightly higher than the forecast based on the moving average. Overall the seasonalized forecast is a little more accurate than the one-year moving average. The mean absolute deviation for the regression is 2.3 for periods 5 through 21, and the mean absolute deviation for the moving average is 4.0. Exhibit 9.2 shows an overview of the forecasting process. The main message of this exhibit is that a forecast is one part of the overall product Assess internal and external factors. Develop an initial forecast. Develop an initial marketing strategy and then modify the forecast and marketing strategy until they are consistent. Monitor sales, internal factors, external factors, and the marketing strategy. Modify the forecast and marketing strategies as needed. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 146 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting 147 management process. In addition, the forecast will change as managers’ assessments of relevant internal factors (e.g., cost and quality), external factors (e.g., the competitive environment and reimbursement levels), and the marketing plan change. Simple Forecasting Techniques A naïve forecast uses the value for the last period as the forecast for the next period—in other words, a 0 percent adjustment forecast. Exhibit 9.3 shows an example of a naïve forecast. A moving-average forecast uses the average of the last n values, where n is the number of preceding values used in the forecast. For example, the first entry in the Two-Period Moving Average column in Exhibit 9.3 equals (189 + 217) ÷ 2, or 203. Month Sales Naïve Forecast Two-Period MovingAverage Forecast February 189 March 217 189 April 211 217 203 May 239 211 214 June 234 239 225 July 243 234 236.5 EXHIBIT 9.3 Naïve and Moving-Average Forecasting Techniques To compare forecasting techniques, analysts sometimes use the mean absolute deviation, which is the average of the forecast’s absolute deviations from the actual value. (When using the absolute deviation, it doesn’t matter if a value is higher or lower than the actual value; all the deviations are positive numbers.) For April through July, the naïve forecast above has a mean absolute deviation of 12.0, and the two-period moving-average forecast has a mean absolute deviation of 12.1. From this perspective, the naïve forecast performs a little better. These (and other) mechanistic forecasting methods do not allow managers to explore how changes in the environment are likely to affect sales. How would changes in insurance coverage change sales? Naïve forecasts and moving-average forecasts are little help in such situations. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 147 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 148 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s 9.4 What Matters? Assessment of external factors (i.e., factors beyond the organization’s control) is vital to forecasting. General economic conditions are a prime example. Expected inflation and interest rates are good indicators of the state of the economy. Local market conditions, such as business rents and local wages, also play an important role. Government actions also can have a major impact on healthcare firms. For example, changes in Medicare rates affect most healthcare firms. Alternatively, regulations can have a significant effect on costs. Expansion of Medicaid eligibility can have major effects on some hospitals and minor effects on others. These sorts of changes will also affect most of your competitors, but forecasters would be ill advised to ignore changes in government policy. The plans of key competitors must also be considered. Closure of a competing clinic or hospital can increase volume significantly and quickly. Introduction of a generic drug can have a dramatic effect on a pharmaceutical manufacturer. Changes in competitors’ pricing policies can have a major impact on sales. Technological change is always an important issue. If a rival gains a technological advantage, your sales can drop sharply. For example, if a rival introduces minimally invasive coronary artery bypass graft surgery, admissions to your cardiac unit will probably drop significantly until you adopt similar technology. In other cases, your own advances may affect sales of substitute products. For example, introduction of highly reliable MRI may sharply reduce the demand for conventional colonoscopy. Keep in mind, however, that if you don’t introduce technologies that add value for your customers, someone else will. A decision not to introduce an attractive product because it will cannibalize sales is usually a mistake. Finally, although markets usually change slowly, differences in general market characteristics (e.g., median income and percentage with insurance coverage) may be important in forecasting sales of a new product. Developing a Five-Year Forecast Beech (2001) shows how to develop a five-year forecast for a hospital’s strategic financial plan. He begins the analysis by defining the hospital’s service area and then estimating how the population of the service area will change during the next five years in terms of gender and (continued) EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 148 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting 149 (continued) age. Next, Beech uses several data sources to forecast admission rates and length of stay for the services used by these population groups. (The hospital characterizes these services as medical and surgical, obstetrics and gynecology, pediatric, and psychiatric.) He then uses the hospital’s own data and his estimates of overall admission rates and length of stay to calculate the hospital’s market share for medical and surgical services, obstetric and gynecological services, pediatric services, and psychiatric services. On the basis of these market share estimates, Beech develops four demand forecasts. His baseline forecast predicts that the hospital’s market share and overall utilization will not change. His decreased utilization forecast predicts that overall days of care will drop by 10 percent but that the hospital will maintain its market share. His decreased market share forecast predicts that the hospital’s market share will fall by 2 percent, and his increased market share forecast predicts that the hospital’s market share will rise by 2 percent. (The decreased market share and increased market share forecasts predict that utilization rates will not change.) History suggests that Beech’s decreased utilization forecast is most likely to occur. To the relief of the hospital’s management, the area’s population growth will offset most of the drop in days of care per thousand residents, so overall days of care will drop by less than 1 percent. However, this scenario implies that pediatric days will drop by more than 7 percent, so the hospital will need to look carefully at costs in this service line. Assessment of internal factors (i.e., factors within an organization’s control) is also vital to forecasting. For example, existing production may limit sales, or may have limited sales in the past. If so, changes in capacity or productivity need to be considered. Changes in the availability of resources and personnel can also have a powerful effect on sales. For many healthcare organizations, the entry or exit of a key physician can dramatically shape volume. In addition, changes in the size, support, composition, and organization of the sales staff can affect sales dramatically. For instance, a small drug firm may experience a large increase in sales if one of its products is marketed by a larger firm’s sales staff. Failures or improvements in key systems can also have dramatic effects on sales. Breakdowns in a clinic’s phone or scheduling system may drive away potential customers. Fixing the phone system, in contrast, might be the most effective marketing campaign the clinic ever launched. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 149 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 150 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Case 9.2 Forecasting the Demand for Transfusions “Our blood inventories are shrinking,” said Drew, the director of transfusion services, “and I’m worried that we might not be able to supply our customers if there’s a surge in demand. We need to do something. And it needs to be smart, because the shelf life of blood is only six weeks. Simply collecting more may not solve our problem.” At this point, Kim, the marketing analyst, chimed in, “We need to do more than just predict our annual volume. We need a monthly forecast. That way we can target our drives so that we collect enough blood shortly before we expect to use it. Less blood will expire, and we will only need to address unexpected spikes in use.” “The good news,” said Taylor, the assistant director of transfusion services, “is that we have monthly data for the last six years. We should be able to use them. I know that in 2004 Dr. Pereira tested a number of time-series models and suggested several that work reasonably well. I think he found some clear seasonal effects.” Discussion questions: • What sort of model would you recommend to predict the demand for blood? What would you do with your predictions? • Why would the presence of seasonal effects be important? • Taylor suggested using a statistical model to forecast demand. What judgment does a statistical model require? • What sorts of changes in the environment would you need to account for in your forecasting model? 9.5 Conclusion Making and interpreting forecasts are important tasks for healthcare managers. Not only are most crucial decisions based on sales forecasts, but also the consequences of overestimating or underestimating demand can be catastrophic. Overestimating demand can put the financial future of an organization at risk, whereas underestimating demand can compromise the care of patients and harm the organization’s reputation. Analysts should apply demand theory to their sales forecasts to better recognize changes. Demand theory limits what analysts need to consider: the price of the product, the price of substitutes, and the price of complements. The key idea of demand theory is that the out-of-pocket price drives most EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 150 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting 151 consumer demand. The amount the consumer has to pay depends largely on the terms of his or her insurance contract. Is the product covered? What is the required copayment? Changes in the answers to these two questions can shift sales sharply. The same concerns affect the prices of substitutes. The most important substitutes are similar products offered by rivals, but other products that meet some of the same needs should also be considered. Demographic factors are important. Population size, income per capita, the age distribution of the population, the ethnic makeup of the population, and the insurance coverage of the population are some examples. Although vital, demographic factors tend to be stable in the short term. Demographics are much more important in long-range forecasts. “Forecasting is hard, especially when it involves the future.” This old saying reveals a core truth about forecasting: You often will be wrong. Knowing that, a shrewd manager will make decisions that can be modified as conditions change. The shrewd manager will also know which data are likely to be the most problematic or most variable and will monitor those data carefully. Management decisions require sales forecasts. Off-the-cuff forecasts often fail to consider key factors and can lead to risky decisions. Imperfect forecasts can be used to make decisions as long as you recognize that your predictions will sometimes be wrong and you structure your decisions accordingly. Exercises 9.1 The table lists visits for the four clinics operated by your system. You anticipate that volumes will increase by 4 percent next year. Forecast the number of visits for each clinic, and explain what assumptions underlie your forecasts. For example, are you sure that all of the clinics can serve additional clients? Period Clinic 1 Clinic 2 Clinic 3 Clinic 4 Total This year 16,640 41,600 24,960 33,280 116,480 Next year ? ? ? ? 121,139 9.2 Your data for the clinics in Exercise 9.1 suggest that Clinic 2 is operating at capacity and is highly efficient. Its output is unlikely to increase. Furthermore, Clinic 4 has unused capacity but is unlikely to attract additional patients. How would these facts change your answer to Exercise 9.1? Continue to assume that overall volume will rise to 121,139. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 151 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 152 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s 9.3 You estimate that the price elasticity of demand for clinic visits is −0.25. You anticipate that a major insurer will increase the copayment from $20 to $25. This insurer covers 40,000 of your patients, and those patients average 2.5 visits per year. What is your forecast of the change in the number of visits? 9.4 A major employer has just added health insurance coverage for its employees. Consequently, 5,000 of your patients will pay a $30 copayment rather than the list price of $100 per visit. These patients average 2.2 visits per year. You believe the price elasticity of demand is between −0.15 and −0.35. What is your forecast of the change in the number of visits? 9.5 The table shows data on asthma-related visits. Is there evidence that these visits vary by quarter? Can you detect a trend? A powerful test would be to run a multiple regression in Excel. If the function is already loaded, you will find it in Data > Data Analysis > Regression. If not, get help in adding the Analysis Tool Pak. To test for quarterly differences, create a variable called Q1 that equals 1 if the data are for the first quarter and 0 otherwise, a variable called Q2 that equals 1 if the data are for the second quarter and 0 otherwise, and a variable called Q4 that equals 1 if the data are for the fourth quarter and 0 otherwise. (Because you will accept the default, which is to have a constant term in your regression equation, do not include an indicator variable for quarter 3.) Also create a variable called Trend that increases by 1 each quarter. Year Q1 Q2 2001 Q3 Q4 1,513 1,060 2002 1,431 1,123 994 679 2003 1,485 886 1,256 975 2004 1,256 1,156 1,163 1,062 2005 1,200 1,072 1,563 531 2006 1,022 1,169 9.6 Your marketing department estimates that Medicare urology visits equal 5 − (1.0 × C) + (−6.5 × TO) + (5 × TR) + (0.01 × Y ). Here, C denotes the Medicare copayment (now $20), TO is waiting time in your clinic (now 30 minutes), TR is waiting time in your competitor’s clinic (now 40 minutes), and Y is per capita income (now $40,000). EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 152 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C hap ter 9 : Forec asting 153 a. How many visits do you anticipate? b. Medicare’s allowed fee is $120. What revenue do you anticipate? c. What might change your forecast of visits and revenue? 9.7 Because of fluctuations in insurance coverage, the average price paid out of pocket (P) by patients of an urgent care center varied, as the table shows. The number of visits per month (Q ) also varied, and an analyst believes the two are related. The analyst also thinks the data show a trend. Run a regression of Q on P and Period to test these hypotheses. Then use the estimated parameters a, b, and c and the values of Month and P to predict Q (number of visits). The prediction equation is Q = a + (b × Month) + (c × P). Month 1 2 3 P $21 $18 Q 193 197 256 4 5 $15 $24 $18 179 231 6 7 $21 $18 8 9 10 11 $15 $20 $19 $24 214 247 273 223 225 198 12 $20 211 9.8 Use the data in Exercise 9.7 to answer these questions: a. Calculate the naïve estimator, which is Q t = Q t − 1. b. Calculate the two-period moving-average forecast. c. Calculate the mean absolute deviation for the regression forecast, the naïve forecast, and the two-period moving-average forecast. d. Which forecast seems to perform the best? Why? 9.9 Sales data are displayed in the table. Month Sales Month Sales February 224 January 260 March 217 February 284 April 211 March 280 May 239 April 271 June 234 May 302 July 243 June 286 August 238 July 297 September 243 August 301 October 251 September 309 November 259 October 314 December 270 EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 153 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 154 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s a. Calculate the naïve estimator, which is Salest = Salest − 1. b. Calculate the two-period and three-period moving averages. c. Calculate the mean absolute deviation for each of the forecasting methods. 9.10 A pharmaceutical company produces a sinus medicine. Monthly sales (in thousands of doses) for the past three years are shown in the table. Jan Feb Mar Apr May June July 586 2,260 2,232 Aug Sept 8,018 9,384 6,788 8,020 1,848 410 9,136 7,420 3,350 1,998 1,972 3,572 4,506 10,474 13,358 9,628 7,826 3,528 2,126 2,070 3,762 4,754 Oct Nov 6,916 5,698 8,232 Dec 6,940 8,218 10,248 11,010 14,040 8,646 8,634 10,782 a. Develop a regression model that allows for trend and seasonal components. Obtain the Excel output for this model. b. Calculate a two-period moving-average forecast. c. Compare the mean absolute deviations for these approaches. d. Use one of these models to forecast sales for each month of year 3. References Aven, T. 2013. “On How to Deal with Deep Uncertainties in a Risk Assessment and Management Context.” Risk Analysis 33 (12): 2082–91. Beech, A. J. 2001. “Market-Based Demand Forecasting Promotes Informed Strategic Financial Planning.” Healthcare Financial Management 55 (11): 46–56. Pereira, A. 2004. “Performance of Time-Series Methods in Forecasting the Demand for Red Blood Cell Transfusion.” Transfusion 44 (5): 739–46. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 154 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. CHAPTER THE DEMAND FOR HEALTHCARE PRODUCTS 7 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 quantity demanded is the amount of a good or service purchased at a specific price when all other factors are held constant. • When a product’s price rises, the quantity demanded usually falls. • Demand (a demand curve) describes the amounts of a good or service that will be purchased at different prices when all other factors are held constant. • An increase or decrease in demand reflects a shift in the entire list of amounts purchased at different prices. An increase or a decrease in demand results when another factor that influences consumer decisions changes. • Other factors that influence demand for healthcare products include consumer income, insurance coverage, perceptions of health status, perceptions of the productivity of goods and services, prices of other goods and services, and tastes. • The amount of money a consumer pays for a good or service 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 quite a bit. EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 109 Account: shapiro.main.eds 109 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 110 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s • A complement is a good or service that is used in conjunction with another good or service. Demand for a good falls if the price of a complement increases. • A substitute is a good or service used instead of another good or service. Demand for a good rises if a substitute increases in price. 7.1 Introduction Demand The amounts of a good or service that will be purchased at different prices when all other factors are held constant 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 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 decisions are based on revenue projections. Revenue projections in turn depend on estimates of sales volume, given prices that managers set. A volume estimate is an application of demand theory. An understanding of 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. Suppose you conclude that the direct costs of providing therapeutic massage are $48 and that you will need to charge at least $75 to cover other costs and offer an attractive profit margin. Will you have enough customers to make this service a sensible addition to your product line? Demand analyses are designed to answer such questions. 7.1.1 Rationing Market system A system that uses prices to ration goods and services Quantity demanded The amount of a good or service that will be purchased at a specific price when all other factors are held constant On an abstract level, we need to ration goods and services (including medical goods and services) somehow. Human wants are infinite, or nearly so. Our capacity to satisfy those wants is finite. We must develop a system for determining which wants will be satisfied and which will not. Market systems use prices to ration goods and services. A price system costs relatively little to operate, is usually self-correcting (e.g., prices fall when the quantity supplied exceeds the quantity demanded, which tends to restore balance), and allows individuals with different wants to make different choices. These advantages are important. The problem is that markets work by limiting the choices of some consumers. As a result, even if the market process is fair, the market outcome may seem unfair. Wealthy societies typically view exclusion of some consumers from valuable medical services, perhaps because of low income or perhaps because of previous catastrophic medical expenses, as unacceptable. The implications of demand are not limited to market-oriented systems. Demand theory predicts that if care is not rationed by price, it will be rationed by other means, such as waiting times, which are often inconvenient EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 110 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p ter 7 : The D em and for H ealthc are Produc ts 111 for consumers. In addition, careful analyses of consumer use of services have convinced most analysts that medical goods and services should not be free. If care were truly costless for consumers, they would use it until it offered them no additional value. Today this understanding is reflected in the public and private insurance plans of most nations. Value-Based Insurance Consumers buy more when prices drop. Insurance plans have long used this principle to keep spending down. Unfortunately, consumers are as likely to reduce use of highly effective products as they are to reduce use of fairly ineffective products. This result is even more apt to be true if the benefits of a service are subtle or accrue over time. For example, taking a drug called a statin can lower your cholesterol and may reduce plaque in arteries, which can lower the risk of heart attack. However, you do not feel any better if you take a statin, and you do not feel any worse if you stop. Adherence, which involves getting people to fill their prescriptions for statins and take their medicine, is not easy. From an insurance perspective, however, improving adherence can reduce the odds of a very expensive heart attack. Value-based insurance sharply reduces the prices that consumers pay for effective treatments, hoping to improve adherence. At Pitney Bowes, statin adherence for a group of high-risk employees had steadily declined to about 71 percent. To try to increase adherence, Pitney Bowes reduced copayments from more than $24 per month to less than $1 (Choudhry et al. 2010). It worked. This study and others suggest that insurers can use copayments to steer consumers to high-value services. It seems fairly clear that doing so can improve health outcomes. It is less clear whether value-based insurance can reduce spending. Care cannot really be free. Someone must pay, somehow. Modern healthcare requires the services of highly skilled professionals, complex and elaborate equipment, and specialized supplies. Even the resources for which there is no charge represent a cost to someone. 7.1.2 Indirect Payments and Insurance Because the burden of healthcare costs falls primarily on an unfortunate few, health insurance is common. Insurance creates another use for demand analyses. To design sensible insurance plans, we need to understand the public’s valuation of services. Insurance plans seek to identify benefits the public is willing EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 111 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 112 Ec o n o m ic s f o r H e a l th c a re M a n a g e r s Out-of-pocket price The amount of money a consumer pays for a good or service to pay for. The public may pay directly (through the out-of-pocket price) or indirectly. Indirect payments can take the form of health insurance premiums, taxes, wage reductions, or higher prices for other products. Understanding the public’s valuation is especially important in the healthcare sector because indirect payments are so common. When consumers pay directly, valuation is not very important (except for making revenue forecasts). Right or wrong, a consumer who refuses to buy a $7.50 bottle of aspirin from an airport vendor because it is “too expensive” is making a clear statement about value. In contrast, a Medicare patient who thinks coronary artery bypass graft surgery is a good buy at a cost of $1,000 is not providing us with useful information. The surgery costs more than $30,000, but the patient and taxpayers pay most of the bill indirectly. Because consumers purchase so much medical care indirectly, with the assistance of public or private insurance, assessing whether the values of goods and services are as large as their costs is often difficult. 7.2 Why Demand for Healthcare Is Complex The demand for medical care is more complex than the demand for many other goods for four reasons. 1. The price of care often depends on insurance coverage. Insurance has powerful effects on demand and makes analysis more complex. 2. Healthcare decisions are typically quite perplexing. Consumers would prefer to be healthy and use no medical services. Medical services have value largely because of their impact on health. The links between medical care and health outcomes are often difficult to ascertain at the population level (where the average impact of care is what matters) and stunningly complex at the individual level (where what happens to oneself is what matters). Forced to make hard choices, consumers may make bad choices. 3. This complexity contributes to consumers’ poor information about costs and benefits of care. Such “rational ignorance” is natural. Because most consumers will not have to make most healthcare choices, it makes no sense for them to be prepared to do so. 4. The net effect of complexity and consumer ignorance is that producers have significant influence on demand. Consumers naturally turn to healthcare professionals for advice. Unfortunately, because they are human, professionals’ choices are likely to reflect their values and incentives as well as those of their patients. Demand is complicated by itself. To keep things simple, we will first examine the demand for medical goods and services in cases where insurance EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 112 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p ter 7 : The D em and for H ealthc are Produc ts 113 and the guidance of healthcare professionals play no role. The demand for over-the-counter pharmaceuticals, such as aspirin, is an example. We will then add insurance to the mix but keep professional advice out. The demand for dental prophylaxis will be the example in this case. Finally, we will add the role of professional advice. 7.3 Demand Without Insurance and Healthcare Professionals In principle, a consumer’s decision to buy a particular good or service reflects a maddening array of considerations. For example, a consumer with a headache who is considering buying a bottle of aspirin must compare its benefits, as he or she perceives them, to those of the other available choices. Those choices might include taking a nap, going for a walk, taking another nonprescription analgesic, and consulting a physician. Economic models of demand radically simplify descriptions of consumer choices by stressing three key relationships that affect the amounts purchased: 1. The impact of changes in the price of a product 2. The impact of changes in the prices of related products 3. The impact of changes in consumer incomes This simplification is valuable to firms and policymakers, who cannot change much besides prices and incomes. This focus can be misleading, however, if it obscures the potential impact of public information campaigns (including advertising). 7.3.1 Changes in Price The fundamental prediction of demand theory is that the quantity demanded will decrease when the price of a good or service rises. The quantity demanded may decrease because some consumers buy smaller amounts of a product (as might be the case with analgesics) or because a smaller proportion of the population chooses to buy a product (as might be the case with dental prophylaxis). Exhibit 7.1 illustrates this sort of relationship. On demand curve D1 a price reduction from P1 to P2 increases the quantity demanded from Q1 to Q2. Exhibit 7.1 also illustrates a demand shift (or shift in demand). At each price, demand curve D2 indicates a lower quantity demanded than demand curve D1. (Alternatively, at each volume, willingness to pay will be smaller with D2.) This shift might be due to a drop in income, a drop in the price of a substitute, an increase in the price of a complement, a change in demographics or consumer information, or other factors. Demand curve A graphic depiction of how much consumers are willing to buy at different prices Demand shift A shift that occurs when a factor other than the price of the product itself (e.g., consumer incomes) changes Substitute A product used instead of another product Complement A product used in conjunction with another product EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 113 Account: shapiro.main.eds 7/15/14 8:51 AM Ec o n o m ic s f o r H e a l th c a re M a n a g e r s EXHIBIT 7.1 Linear Demand Price D1 P1 P2 D2 Q2 Q1 Quantity Demand curves can also be interpreted to mean that prices will have to be cut to increase the sales volume. Consumers who are not willing to pay what the product now costs may enter the market at a lower price, or current consumers may use more of the product at a lower price. Demand curves are important economic tools. Analysts use statistical techniques to estimate how much the quantity demanded will change if the price of the product, income, or other factors change. Like Exhibit 7.1, Exhibit 7.2 illustrates a shift in demand. In Exhibit 7.2, however, the demand curves are not straight lines. EXHIBIT 7.2 Nonlinear Demand D1 Price Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 114 D2 P1 Q1 Q2 Quantity EBSCO : eBook Collection (EBSCOhost) - printed on 3/26/2019 1:34 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1663949 ; Lee, Robert H..; Economics for Healthcare Managers 00_Lee (2266).indb 114 Account: shapiro.main.eds 7/15/14 8:51 AM Copyright @ 2015. Health Admininstration Press. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p ter 7 : The D em and for H ealthc are Produc ts 115 Substitution explains why demand curves generally slope down, that is, why consumption of a product usually falls if its price rises. Substitutes exist for most goods and services. When the price of a product is higher than that of its substitute, more people choose the substitute. Substitutes for aspirin include taking a nap, going for a walk, taking another nonprescription analgesic, and consulting a physician. If close substitutes are available, changes in a product’s price could lead to large changes in consumption. If none of the alternatives are close substitutes, changes in a product’s price will lead to smaller changes in consumption. Taking another nonprescription analgesic is a close substitute for taking aspirin, so we would anticipate that consumers would be sensitive to changes in the price of aspirin. Substitution is not the only result of a change in price. When the price of a good or service falls, the consumer has more money to spend on all goods and services. Most of the time this income effect reinforces the substitution effect, so we can predict with confidence that a price reduction will cause consumers to buy more of that good. In a few cases, things get murkier. A rise in the wage rate, for example, increases the income you would forgo by reducing your work week. At first blush, you might expect that a higher wage rate would reduce your demand for time off. At the same time, though, a higher wage rate increases your income, which may mean more money for travel and leisure activities, increasing the amount of time you want off. In these cases empirical work is necessary to predict the impact of a change in prices. Two points about price sensitivity need to be made here. First, a general perception that use of most goods and services will fall if prices rise is a useful notion to keep tucked away. Second, managers need more precise guidance. How much will sales increase if I reduce prices by 10 percent? Will my total revenue rise or fall as a result? To answer these questions takes empirical analysis. Fleshing out general ...
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Running head: VACCINATION PLANS FOR PEDIATRICS PATIENTS

Vaccination Plans for Pediatrics patients
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Institution Affiliations

VACCINATION PLANS FOR PEDIATRICS PATIENTS

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Vaccination plan for pediatric patients
Vaccination prevents diseases in children and adults, which leads to substantial savings in
the cost of health, resulting in improved public health and their economic status. The use of
Vaccines helps to produce immunity against communicable illness. Any Vaccination plan has a
direct impact on health and broadly on economic growth because the money that would have
been used in treating a disease will be channeled to other uses. Healthy people are also
productive.
Economic principles and indicators at play, and the extent of their application in
understanding the vaccination plan for pediatric patients
Vaccination has contributed profoundly to the reduction of the infectious diseases
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