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Curriculum Center Browse Bibliography Build EPacket Pricing Structure Distribution Process Management Control in Nonprofit Organizations
Note on Strategic Decision Making in Healthcare Organizations
Young, David W.
Functional Area(s):
   General Management
   Healthcare Management
Difficulty Level: Intermediate
Pages: 17
Teaching Note: Not Available. 
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First Page and the Assignment Questions:
   During the next several decades, healthcare organizations in much of the industrialized world will be confronting a variety of environmental and competitive demands. As a result, they will need to think carefully about their strategies and how they wish to position themselves for success.
    The environmental demands are multidimensional. In part, as Exhibit 1 indicates, the recent entrance of “baby boomers” into the 60-65 year age group suggests that, without some significant changes in healthcare delivery patterns, there will be an exponentially increasing demand for inpatient care, with concomitant cost increases. Moreover, as the data from a large United States employer indicate (Exhibit 2), unless there are some radical changes in lifestyles or public health programs, many of the health problems that are likely to emerge (primarily cancer and heart disease) are not ones that lend themselves easily to a shift to outpatient care. Finally, as Medicare data from the U.S. suggest (Exhibit 3), a small fraction of the elderly will likely require a disproportionately large percentage of healthcare resources (note that 20 percent of the beneficiaries account for 86 percent of the spending).
    The patterns in these exhibits are not unique to the U.S. Indeed, the health systems of many other industrialized countries, especially those in Europe, face exaggerated demands. For example, as Exhibit 4 shows, the percentage of the population over 60 years of age is higher in many European countries than in the U.S.


    These environmental demands take place in the context of a marketplace that is unlike any other we know, and certainly not well described in any economics textbook. As Exhibit 5 shows, there are multiple actors in almost all health systems: Person A (a patient) who receives services from Person B (a hospital or clinic) that are ordered by Person C (a physician), both of whom have their fees paid (or costs reimbursed) by Person D (a health plan or other insurer), which has its premiums paid by Person E (an employer in the U.S. or a government agency elsewhere), sometimes with cost sharing by Person A.
    In each of the “submarkets” in Exhibit 5 there is a price. In all but the submarket between insurers and providers, the price is relatively simple. In this latter submarket, however, the pricing structure can be quite complex. Some managed care plans pay hospitals on a per diem basis, for example, while others pay by DRG. Some government payers, such as those in Canada, pay a fixed amount per fiscal year. In some instances physicians have their fees “bundled” with the payment to a hospital, and in others their fees are paid separately. In many instances the fees of all physicians (primary care and specialists) are discounted on the basis of “usual, reasonable, and customary.” There are many other variations that serve to further complicate this submarket.
    To the extent that there is price elasticity of demand in a submarket, the seller’s price will have an impact on the relevant purchaser’s buying behavior, resulting in decisions that can have repercussions on other aspects of the healthcare system. This phenomenon was seen in the U.S. some years ago, when the introduction of a $1 copayment for California’s MediCal (indigent) patients led to a substantial reduction in their use of primary care services. Unfortunately, some of these same patients were hospitalized several months later with conditions that could have been avoided had they been treated with timely primary care. The result was an increase in total MediCal expenditures.