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Analyze the validity of this statement: “According to the RAND HIE Study results, demand for emergency room care does not depend on its price.”

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Related questions

Analyze two aspects of the demand for healthcare elasticity. First, consider a copayment of $20 for routine office visits to a general practitioner. What would economists expect to happen to the demand for visits if the copay is raised to $65? Which type of elasticity is thus demonstrated? Next, how would you characterize emergency-room services when thinking about substitutes and necessities vs. luxuries? What does your answer tell about emergency-room elasticity of demand?

Case Study: Mental Health Parity

Presenting to the board, Chris spoke with passion. Our insurance plan should provide the same coverage for mental health services as for other medical services. It's the right thing to do, and it's good business. If our employees or their dependents have untreated mental health problems, the employees become less productive and waste money getting treated for other stuff. Thank you, Chris,€ said Kerry, the company's CEO. This is an important question for us, and the Benefits Committee will carefully consider it. After Chris left the room, Kerry turned to Jordan, the director of human resources, and said, Jordan, what's your take on this? There are actually two questions here, said Jordan. First, how elastic is the demand for ambulatory mental health services? How much will the use of mental health services increase if coverage improves? Second, how effective is mental health care? This second question is the more important one because good mental health care can have such powerful effects. Now, a number of studies have concluded that the use of mental health services is more price-sensitive than the use of other ambulatory care. Analyses of ambulatory mental health services have found elasticities ranging from 0.44 to 1.00. These results could be statistical flukes. Consumers who expect to use mental health services may choose insurance plans that offer generous coverage for those services. However, the RAND Corporation researchers Keeler, Manning, and Wells in 1988 used data from the RAND Health Insurance Experiment, which randomly assigned respondents to insurance plans, to resolve this issue. The RAND analysis generally confirmed that the demand for mental health services is more price-sensitive than the demand for general ambulatory medical services. Demand for each is inelastic, but the elasticity for mental health services is 0.8 and the elasticity for other outpatient services is 0.3. Most consumers will not use any mental health services, but plans that offer generous mental health benefits will cost more. We can't ignore this. I'm confused,€ said Addison, an internist on the board. In 2012 McConnell and colleagues published a study showing that Oregon's law requiring mental health parity in commercial insurance plans had little effect on spending. How could that be? Real-life appears to be contradicting the RAND study. I'm sure the plans for federal employees used managed care techniques to control spending,€ Jordan jumped in. And mental health spending isn't the issue. The issues are what happens to other healthcare spending and what happens to our workers. I'm pretty sure there's good evidence showing that effective mental health treatment can reduce other costs and improve productivity.

Discussion questions:

Why does it matter whether demand for mental health services is more elastic than demand for other services?

The price elasticity of demand for ambulatory mental health services appears to be about 0.8, and the price elasticity for general ambulatory medical services appears to be about 0.3. How much would spending increase for each type of care if copayments were cut from $40 to $25?

What managed care techniques do insurers use to control spending?

Is there evidence that better treatment of mental health problems reduces other spending?

Is there evidence that better treatment of mental health problems improves productivity?

What is your recommendation to the Benefits Committee?

St. Joseph Health Center in St. Charles, Missouri, is on a quest to improve quality. Although good quality is important in any organization, it is especially vital (and urgent) in a medical setting. St. Joseph is one of 20 hospitals in four states that are operated by SSM Health Care Corp., which is sponsored by the Franciscan Sisters of Mary. In any given year, SSM hospitals admit about 150,000 patients and treat more than 1 million people on an outpatient basis. And SSM was the first health-care organization to win the Malcolm Baldrige National Quality Award, which recognizes the outstanding quality performance of US businesses and nonprofits.

Managers at the 364-bed St. Joseph facility have pursued continual improvment for more than 15 years. Early on, Dr. Filippo Ferrigni, head of the intensive-care unit, found that staff members used slightly different methods for measuring the blood pressure of different patients. He quickly standardized measurements for blood pressure, temperature, and other vital signs. Later, he read research showing that high blood-sugar levels are linked to higher infections risks. Knowing that patients sometimes become infected while in the hospital, he suggested the goal of lowering the blood-sugar levels of intensive-care patients.

Because his colleagues were concerned about possible adverse reactions to such treatment, Dr. Ferrigni initially sought very radual improvements. The results were quite impressive: over-all mortality among intensive-care patients dropped by 40%. To make this new process work, the nurses had to check each patient's blood-sugar level 12 times per day instead of 4 times per day; however, the results convinced them that the extra effor and additional tests were worthwhile. Building on the intensive-care unit's success, hospital management then set a quality goal of lowering the blood-sugar levels of all patients - a decision that cut the facility's overall mortality rate by 28% within three years. Treating a serious infection can cost $35,000 per patient, so reducing incidences of infection not only saved patients' lives, it saved the hospital many thousands of dollars.

The 30/30 program, another of St. Joseph's quality-improvement initiatives, requires emerfency room staff to evaluate seriously ill patients within 30 seconds and complete the patient admission process for in-hospital treament in 30 minutes or less. When the 30/30 program began, the facility was chieving its emergency-room objectives only 65% of the time. After two years, it was meeting its objectives 94% of the time. Management had to hire more staff members to achieve this improvement, which raised the cost of providing emergency-room care by $200,000 annually. The higher cost was more than offset by increases in admissions as St. Joseph gained a higher share of the local market for emergency medical treatment.

Quality improvements have led to financial improvements for St. Joseph and its parent company, SSM. Although SSM had no profits in 1999, it was reporting a net profit of $17 million by 2002, the year it was honored with the Baldrige Award. Winning was wonderful, but as Bill Thompson, SSM's senior vice president for strategic planning, says, "It's not thw award, it's the process that shows how to improve quality." In the course of applying for the award and having its results reviewed by examiners, SSM's management refined the processes for analyzing patient-care operations, setting quality-improvement standards, and assessing performance from internal and external perspectives.

St. Joseph's executives, like the top managers of all SSM institutions, are responsible for fomulating the hospital's strategy for serving the community and making decisons about which medical specialties will be offered. As in other SSM hospitals, senior managers evaluate results in terms of the number of procedures completed, market share, patient and staff satisfaction, revenue, and other measures. Patients benefit, staff members benefit, and the community benefits from SSM's focus on performance: "If the activity's not getting the results we want, then we change the activity. It's the result that's improtant."

Questions
1. Would you recommend that St. Joseph's top managers put more emphasis on efficiency or on effectiveness? Explain.
2. How have St. joseph's quality-improvement initiatives affected capacity strategy and product strategy?
3. Do you think that St. Joseph's executives should use management by exception for controlling emergency-room activites? Explain.

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