Economics 2159A/B Lecture Notes - Lecture 9: Demand Curve, Moral Hazard
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Question 1 to 9. Choose TRUE or FALSE. WILL RATE 5 stars for a correct answer
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1. |
1. Flow of Funds Direct spending by the government on health care in 2012 was almost $ 4,500. |
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2. |
Flow of Funds Payments to hospitals and physicians account for about half of all health care spending in 2012. |
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3. |
Flow of Funds Over the past 100 years, out-of-pocket expenditures for health care services by individuals have decreased from over 75% to less than 5%. |
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4. |
Flow of Funds Third-party payers account for 60% of all health care expenditures in 2012 |
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5. |
Flow of Funds The dollar amount of health care expenditures paid by charitable organizations and individuals has remained roughly constant over the past 100 years if one adjusts for inflation |
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6. Flow of Funds Ranking everyone by the amount spent on medical care, 30 percent of the total (all expenditures for all people) is accounted for by the top 1 percent of patients. The top half of the population accounts for 90 percent of total spending. This is mostly due to cost-shifting. |
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7. Flow of Funds Not only is the share of GDP to health care higher in 2012 than in 1929, but the wages of health care workers have also risen concerning wages of other types of workers. The Flow of Funds idea emphasizes that total dollars spent by individuals, the government, and other third-party payers for health care must equal total income earned by health care providers, administrators, and other health care workers. |
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8. Equity and Distribution Socioeconomic differences in mortality found in the U.S. are most likely attributable to a lack of universal health insurance coverage. |
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9. Shifting Overhead When a drug company advertises it will provide a prescription drug at no charge to certain individuals who cannot afford a doctor prescribed drug, costs are most likely being shifted away from individuals who are paying high prices to those who are paying nothing.
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The CEO of St. Sebastian Health System, a moderate-sized hospital system in a mid-sized, Midwest city has hired you to help turn things around. The CFO is projecting a $3.7 million operating loss this year, which will be more than offset by non-operating income. However, the board has made it clear that the situation must improve. If the system cannot produce a positive operating margin in 2017, someone else is going to be the CEO. The CEO and CFO have asked you to recommend strategic approaches to sell their services in the community that will help turn the financial ship around.
Your Health System
St. Sebastian is a community-based health system. The senior management team has an average tenure of 17 years. The exception is the Chief Medical Officer (CMO). She has been in her position for two years and is the fourth CMO in that role in the past ten years. The CEO and COO have each been in their current roles for ten years. The system is comprised of the following:
Two large, acute care hospitals
Two long term care facilities
Two skilled nursing facilities
One long-term acute-care hospital (LTAC)
Four geographically distributed outpatient centers
Four Urgent Care Centers
Two free-standing ambulatory surgery centers (ASCs)
A 400 member employed physician group that includes 180 Primary Care Providers (PCPs). All 28
PCP practices are certified Level III Patient-Centered Medical Homes by NCQA.
The remainder of the 1,000 members medical staff is generally comprised of large, independent groups who have varying degrees of loyalty to the system. The Radiology and Emergency groups, for example, do 100% of their work at St. Sebastian and have no ownership of any outside facilities. The Gastroenterology Group, on the other hand, does work at the hospital but also owns its own, freestanding endoscopy center. The orthopedic group does 75% of their work at St. Sebastian but maintains privileges at other facilities. They do not own their own ASC.
In the current year, St. Sebastian is projecting 220,000 patient visits (combined IP and OP) with an average cost per visit of $1,727. They have an average charge per visit of $4,545.
Over the past ten years, St. Sebastian has been active in pursuing many different strategic projects including:
They have established clinical institutes in cardiovascular, orthopedic, oncology, maternity, and neurologic care. Each of these has been built through a co-management agreement between the system and the internal or external physician group who would be most logical. Each institute is led by a dyad of an administrator and medical director.
Five years ago, they consolidated maternity programs to one facility, a move that justified investing in a Level III Neonatal Intensive Care Unit (NICU)
They have established a research division in the hopes of working with national pharmaceutical companies and/or tertiary care hospitals in the Midwest.
They have established a Physician Hospital Organization (PHO) and intend to become an Accountable Care Organization (ACO) that can participate in the Medicare Shared Savings
Program (MSSP) and/or enter into global risk contracts with third-party payers. The PHO is currently evaluating whether or not they should purchase an insurance license so that they could offer commercial, Medicare Advantage, and Managed Medicaid insurance products.
5. They have established a Business Health division to service the corporate health needs of the employers in the region. This would include things like EAP programs, on-site wellness, drug screening, on-site clinics, etc. This division also recently built two large, full-service fitness centers.
The competition The community is currently served by three other major health providers:
Mercy is the competitor acute care system in town and has two hospitals and various outpatient centers. They have not been active in physician employment they employ a group of 60 PCPs, but no specialists. Similarly, they have not been engaged in branching out with different strategic initiatives, preferring instead to focus on cost-efficient care. They do not have clinical institutes, research divisions, a PHO, or a Business Health division. They have 230,000 visits per year, with an average cost of $1,435 per visit and an average charge of $4,348.
General Pediatric is a pediatric teaching hospital. Five years ago, they signed an affiliation agreement with Johns Hopkins to gain access to clinical and research capabilities that would have been beyond their reach, given their size. The employee essentially all of the pediatric subspecialists and have a PHO, which includes 75% of the region's primary care pediatricians. They will have 200,000 visits this year, with an average cost of $2,100 per visit and an average charge of $5,000 per visit.
General University is an adult teaching hospital affiliated with the local university's medical school. They staff the region's free-care clinics and historically, have been the region's hospital for indigent/uninsured patients. They are the region's Level I trauma center and are well regarded for intensive services like trauma, stroke, and cancer care. However, their location and reputation for taking indigent patients mean that they are not preferred for normal medical care by commercially insured or Medicare patients. Besides the community health centers, they own an inpatient rehab hospital, but no other facilities. They have explored affiliations with national leaders in academic medicine, but so far have not signed any such agreements. They see 180,000 visits per year with an average cost of $1,833 and an average charge of $5,556 per visit.
There are no other hospitals currently operating, though there are 23 skilled nursing facilities (SNFs) and 3 inpatient rehab facilities throughout the region. They are independent actors and for the most part, are struggling to stay profitable. Several single-specialty physician groups operate ambulatory surgery centers and one chain of independent diagnostic treatment facilities (IDTFs). Three years ago, there was a significant change in the state government, and that resulted in the long-time Certificate of Need (CON) program is all but scrapped (Skilled Nursing Facilities are still heavily regulated). Several for-profit hospital companies have recently done some analysis around entering your market, but have not done so yet.
The community is a Midwest city and surrounding suburbs in the midst of a transition from a manufacturing employment base, which unfortunately accelerated with the 2008 economic downturn. The hospitals have seen this over the past several years in a tightening of benefits offered by local employers. Benefits continue to be offered, but increasingly are likely to have a significant deductible associated with them. Unemployment has been above the national average and is projected
to remain that way. This means that the average wage in the region is actually below where it was in 2008 when the last recession hit. The number of Medicare-age residents is projected to rise over the next 10-20 years while working-age patients are projected to stay flat or fall slightly. Similarly, birth rates are expected to fall slightly over the coming decade.
The community is 60 miles south, 45 miles east, and 50 miles north of other, similarly-sized cities. Until 20 years ago, that made this city effectively an island unto itself. Increasingly, however, the suburbs of each of these communities have become very close to each other. As that has happened, providers in each community have followed and established practice sites and free-standing outpatient centers.
The community has a normal looking mix of Commercial, Medicare, and Medicaid patients. Because the state's governor was fiercely against the Affordable Care Act, the Medicaid expansion that happened in other states hasn't happened here. Thus, the community also has a sizable population without insurance today. As you'd expect, different hospitals see a different mix of these patients. The local health council was able to provide you with the most recent years payer mix by hospital below:
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Patient visits |
Commercial |
Medicare |
Medicaid |
Uninsured/Self-pay |
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Mercy |
80,500 |
105,800 |
23,000 |
20,700 |
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St. Sebastian |
99,000 |
101,200 |
11,000 |
8,800 |
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Gen. Pediatric |
70,000 |
4,000 |
110,000 |
16,000 |
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Gen. University |
63,000 |
45,000 |
45,000 |
27,000 |
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Community Total |
312,500 |
256,000 |
189,000 |
72,500 |
Reimbursement the CFO was able to supply you with their best estimate for what various payers are reimbursing for services. In general, the commercial plans are paying 50% of charges, regardless of location, except at General Pediatric. There, the monopoly on pediatric services has allowed them to negotiate rates of 80% of charge, but only for the commercial plans. Medicare currently pays 30% of charges at all hospitals, and Medicaid pays 25% of charges everywhere. Uninsured patients are generally paying 2% of charges.
refer back to St. Sebastian and the facts laid out in the background reading and Case #1and consider:
What products are in this industry vs. part of another distinct group?
What is the geographic scope of competition?
Identify the participants and segment them. Who are,
The buyers and buyer groups?
Suppliers and supplier groups?
The competitors?
The substitutes?
The potential entrants?
Which of these forces is strong/weak and why?
If possible, analyze the industry structure.
Why is the level of profitability what it is?
Which are the controlling forces for profitability?
What are the recent and likely future changes in each force, both positive and negative?
| (Please Summerize the work down below, thank you) | |
| Political | Economic |
| Growing political influences on healthcare advances | Cost of living increases |
| Global government influence on healthcare cost | Cost of insurance prices |
| Government control of Medicaid, Medicare funding | Rise of forecasted interest rates |
| Social/Cultural | Technical or Technology |
| Increase average age of population | Demand on new medical treatments |
| Patient expectations increase | Customize treatments |
| Demographics are in constant change | More advance service facilities |
| Environmental | Legal |
| Growing need for green business | Constant change of government drug Regulations |
| Environmental agenda and community awareness | Consumer laws |
| Health and safety regulations | |
| Porters 5 forces of business model | |
| Competitive Rivalry | |
| Growth opportunity for healthcare companies are expected to growing the next few years | |
| Increase in new revolutionary drugs both in and outside of the US | |
| Threat if New Entrants | |
| Strict government regulations | |
| Difficult to keep up due to constant change | |
| Huge startup cost | |
| Substitute Products | |
| Threat of other substituting product and service at lower cost | |
| Bargaining Power of Customers | |
| Generic drugs offered at large discount to consumer | |
| Larger less customized healthcare facility with lower housing costs | |
| Several facilities offering similar services. | |
| Bargaining power of supplier | |
| Medical suppliers have a large pricing power | |
| Bargaining power of physicians and nurses is huge because of large hospital benefits | |
Swot Analysis
Strengths
Highly trained and capable employees
Market experience
Strong leadership
High level of organizational efficiency
Excellent facilities
Strong commitment to bettering the community
Weaknesses
Increased cost of healthcare could lower our clientele
Limited staff resources
Limited cash flow to hire and train new employees
Lack of resources
Opportunities
| Fast growing technology opens new doors for using state of the art equipment to better serve the patients. Nursing and residential care is one of the fastest growing industries Aging population Threats Uncertainty in political and economic climate causes hesitation for receiving new patients. Funding constraints Highly competitive market Product or Service Analysis Our services will be used by patients who cannot afford experimental treatments and patients who have been abandoned by the system because hospitals can no longer provide medical assistance. At our facility, we will be able to work with the families and provide them with different payments options, such as low monthly payment plans. Our main goal is to be able to treat the patient at a very affordable cost; however, if any patient does not possess the means to pay for treatment, he or she would not be turned away; our facility will tap into government and private funding to cover treatment cost. The beauty of this service is that there isnât a charge of any kind to take part in our program because it is completely funded by government grants. Individuals that would take part would more than likely not have the means to pay a monthly deductible. Due to the nature of the business listed as a non-profit agency, there is no way to make a profit of any kind, as it would jeopardize the business in its entirety. Some of the market factors that create a demand for our services include the need of medical care after having maximized all resources, the number of low income families, and the number of patients facing health issues needed extended medical care. Opportunities that may derive from this business is the opportunity to expand and open multiple facilities, while extending a helping hand to many more in need. The risk, however, is the unstable funds deriving from grants. This can pose a huge treat to the business, as grants often times come and go and cannot be counted on as a constant income. After studying the healthcare system and current policies in place, data shows many individuals facing severe health issues usually go untreated and uncared for due to the outrageous cost of medical care. It is devastating to see how often people, especially the elderly, are sent home and forgotten for the mere reason that hospitals and doctors are not willing to care for patients without financial means. In fact, in 2009 Harvard news reported 45,000 annual deaths due to lack of health coverage in the U.S. alone, which is significantly higher than the 18,000 reported by USA Today in 2002. Financial Analysis Clermont will be a nonprofit organization, dedicated to help the most needed. To open the facility fully operational we must take in consideration some fixed expenses like the land acquisition, permits, interest, brokers, administration fees, professionals (facility setup), staff, reports (environmental, occupational, fire, FDA), electricity, water, phone, water & sewer , connections, taxes, insurance, management, security, advertising, accountants, food, lawn mowers, bank fees, etc. The facility will need have a total value of approximately three million dollars, but if we break the price of the land acquisition in to a thirty (30) year mortgage we can star up the business with an investment of approximately $ 233,944.61 USD to cover the first month of operation including all the startup permits and connections. After the first month the fixed expenses will be $184,444.00 USD with the exception of the months were taxes are due; taxes are around $ 43,000.00 USD paid quarterly will increase the tax month (depending on the facility fiscal year) for $ 10,750.00 USD approximately. We will fund all the costs with private and public funding, fundraiser, events, raffles, and most important with the help of the community. As we mentioned before, Clermont is a nonprofit organization and we will do everything in our power to give the relief to the families in need. No one will be rejected because they do not have the money or the insurance cannot help. No money will be required from patient and every single dollar received will be spent in the patients, and in improving our facility and our service every day. We believe our financial even breaking point will be a year after we begin operations, and be profitable soon after. There are many patients in need, and with the government and public grants each person will receive the treatment they need, and we will become the hope of many. |