Chapter 7: The Demand for Healthcare Products (PDF)

CHAPTER THE DEMAND FOR HEALTHCARE PRODUCTS 7 Learning Objectives...

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 demand for healthcare products is complex. When a product’s price rises, the quantity demanded usually falls. The amount a consumer pays directly 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 markedly. Multiple factors can shift demand: changes in consumer income, insurance coverage, health status, prices of other goods and services, Copyright © 2023. Health Administration Press. All rights reserved. and tastes. Demand forecasts are essential to management. 7.1 Introduction demand The amounts of a Demand is one of the central ideas of economics. It underpins many of the product that will contributions of economics to public and private decision-making. Analyses be purchased at different prices of demand tell us that human wants are seldom absolute. More often they when all other are conditioned by questions: Is it really worth it? Is its value greater than factors are held its cost? These questions are central to understanding healthcare economics. constant. 117 CH07.indd Lee, 117Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  118 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s 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 the prices that managers set. A volume estimate is an application of demand theory. Understanding the relationship between price and quantity must be part of every manager’s toolkit. On an even more fundamental level, demand forecasts help managers decide whether to produce a certain product at all and how much to charge. For example, if you conclude that the direct costs of providing therapeutic massage are $48 and that you will need to charge at least $75 to have 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 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 deter- market system mining which wants will be satisfied and which will not. Market systems use A system that prices to ration goods and services. A price system costs relatively little to uses prices to ration goods and operate, is usually self-correcting (e.g., prices fall when the quantity supplied services. exceeds the quantity demanded, which tends to restore balance), and allows quantity individuals with different wants to make different choices. These advantages demanded are important. The problem is that markets work by limiting the choices of The amount of a some consumers. As a result, even if the market process is fair, the market good or service outcome may seem unfair. Wealthy societies typically view exclusion of some that will be purchased at a consumers from valuable medical services, perhaps because of low income or specific price when perhaps because of previous catastrophic medical expenses, as unacceptable. all other factors The implications of demand are not limited to market-oriented sys- are held constant. tems. 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 for consumers. In addition, careful analyses of consumer use of services have Copyright © 2023. Health Administration Press. All rights reserved. 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 most pub- lic and private insurance plans. 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 CH07.indd Lee, 118Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 119 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 to pay for. The public may pay directly (through out-of- pocket payments) 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 consum- ers 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 pur- chase 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 often quite challenging. 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 the consumer is what matters). Forced to make hard choices, consumers Copyright © 2023. Health Administration Press. All rights reserved. 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. CH07.indd Lee, 119Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  120 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s Demand is complicated by itself. To keep things simple, we will first examine the demand for medical goods and services in cases in which insur- ance and professional advice 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. 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 head- ache who is considering buying a bottle of aspirin must compare its benefits, as they perceive them, to those of the other available choices. Those choices might include taking a nap, going for a walk, taking another nonprescription analgesic, or consulting a physician. Economic models of demand radically simplify descriptions of con- sumer 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 demand curve This simplification is valuable to firms and policymakers, who can- A graph that not change much besides prices and incomes. This focus can be misleading, describes how much consumers however, if it obscures the potential impact of public information campaigns are willing to buy (including advertising). at different prices. shift in demand 7.3.1 Changes in Price Copyright © 2023. Health Administration Press. All rights reserved. A shift that The fundamental prediction of demand theory is that the quantity demanded occurs when a factor other than will increase when the price of a good or service falls. The quantity demanded the price of the may increase because some consumers buy more of a product (as might be product (e.g., the case with analgesics) or because a larger proportion of the population consumer income) chooses to buy a product (as might be the case with dental prophylaxis). changes. A shift in demand changes Exhibit 7.1 illustrates this sort of relationship. On demand curve D1, a price the entire price- reduction from P1 to P2 increases the quantity demanded from Q1 to Q2. quantity schedule Exhibit 7.1 also illustrates a shift in demand. At each price, demand (creating a new curve D2 indicates a lower quantity demanded than demand curve D1. demand curve, not a movement along (Alternatively, at each volume, willingness to pay will be smaller with ­ an existing curve). D2.) This shift might be due to a drop in income, a drop in the price of a CH07.indd Lee, 120Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 121 EXHIBIT 7.1 Price A Shift in Demand D1 P1 D2 P2 Q1 Q2 Quantity substitute, an increase in the price of a complement, a change in demo- substitute graphics or consumer information, or other factors. A product used instead of another Demand curves can also be interpreted to mean that prices will have product. to be cut to increase sales. Consumers who are not willing to pay what the product now costs may enter the market at a lower price, or current con- complement sumers may use more of the product at a lower price. Demand curves are A product used in conjunction with important economic tools. Analysts use statistical techniques to estimate how another product. much the quantity demanded will change if the price of the product or other factors change. Copyright © 2023. Health Administration Press. All rights reserved. Substitution explains why demand curves generally slope downward— 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 nonprescrip- tion 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. CH07.indd Lee, 121Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  122 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s 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 gen- eral 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? Answering these questions requires empirical analysis. Fleshing out general notions about price sensitivity with estimates is one of the tasks of economic analysis. We also need an agreed- upon terminology to talk about how much the quantity demanded will change in response to a change in income, the price of the product, or the prices of other products. Economists describe these relationships in terms of elasticities, which we will talk more about in chapters 8 and 9. 7.3.2 Factors Other than Price Changes in factors other than the price of a product shift the entire demand curve. Changes in beliefs about the productivity of a good or service, pref- erences, the prices of related goods and services, and income can shift the demand curve. Consumers’ beliefs about the health effects of products are obviously central to discussions of demand. Few people want aspirin for its own sake. Copyright © 2023. Health Administration Press. All rights reserved. The demand for aspirin, as for most medical goods and services, depends on consumers’ expectations about its effects on their health. These expecta- tions have two dimensions. One dimension consists of consumers’ beliefs about their own health. If they believe they are healthy, they are unlikely to purchase goods and services to improve their health. The other dimension consists of their perception of how much a product will improve health. If I have a headache but do not believe that aspirin will relieve it, I will not be willing to buy aspirin. Health status and beliefs about the capacity of goods and services to improve health underpin demand. Demand is a useful construct only if consumer preferences are stable enough to allow us to predict responses to price and income changes and if price and income changes are important determinants of consumption CH07.indd Lee, 122Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 123 decisions. If on Tuesday, 14 percent of the population thinks that aspirin is something to avoid (whether it works or not), and on Friday, that percentage has risen to 24 percent, demand models will be of little use. We would need to track changes in attitude, not changes in price. Alternatively, if routine advertising campaigns could easily change consumers’ opinions about aspirin, tracking data on incomes and prices would be of little use. Preferences are usually stable enough for demand studies to be useful, so managers can rely on them in making pricing and marketing decisions. Changes in income and wealth usually result in shifts in demand. In principle, an increase in income or wealth could shift the demand curve either out (more consumption at every price) or in (less consumption at every price). Overall spending on healthcare clearly increases with income, but spending on some products falls with income. For example, as income and wealth increase, retirees reduce their use of informal home care (Rodrigues, Ilinca, and Schmidt 2018). For the most part, however, consumers with larger budgets buy more healthcare products. Changes in the prices of related goods also shift demand curves. Related goods are substitutes (products used instead of the product in question) and complements (products used in conjunction with the product in question). A substitute need not be a perfect substitute; in some cases it is simply an alter- native. For example, ibuprofen is a substitute for aspirin. A reduction in the price of a substitute usually shifts the demand curve in (reduced willingness to pay at every volume). If the price of ibuprofen fell, some consumers would be tempted to switch from aspirin to ibuprofen, and the demand for aspirin would shift in. Conversely, an increase in the price of a substitute usually shifts the demand curve out (increased willingness to pay at every volume). If the price of ibuprofen rose, some consumers would be tempted to switch from ibuprofen to aspirin, and the demand for aspirin would shift out. 7.4 Demand with Insurance Copyright © 2023. Health Administration Press. All rights reserved. Insurance changes demand by reducing the price of covered goods and services. For example, a consumer whose dental insurance plan covers 80 ­percent of the cost of a routine examination will need to pay only $10 instead of the full $50. The volume of routine examinations will usually increase as a result of an increase in insurance coverage, primarily because a higher proportion of the covered population will seek this form of preven- tive care. The response will not typically be large, however. Most consumers will not change their decisions to seek care because prices have changed. But managers should recognize that some consumers will respond to price changes caused by insurance. (We will develop tools for describing responses to price changes and review the evidence on this score in chapter 8.) CH07.indd Lee, 123Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  124 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s Exhibit 7.2 depicts standard responses to increases in insurance. An increase in insurance (a higher share of the population covered or a higher share of the bill covered) rotates the demand curve from D1 to D2. As a result, the quantity demanded may rise, the price may rise, or both may occur. To predict the outcome more precisely we will need the tools of supply analysis that we will develop in chapter 10. For provider organizations, an increase in insurance represents an opportunity to increase prices and margins. The rotation of D2 has made it steeper, meaning that demand has become less sensitive to price. As demand becomes less sensitive to price, profit-maximizing firms will seek higher cost sharing margins. (Higher margins mean that the cost of production will represent The general a smaller share of what consumers pay for a product.) Higher prices and term for direct increased quantity mean that the expansion of unmanaged insurance will payments result in substantial increases in spending. to providers by insurance Demand theory implies that having patients pay a larger share of the beneficiaries. bill (usually termed increased cost sharing) should reduce consumption (Deductibles, of care. Does it? A classic study by the RAND Corporation tells us that it copayments, and does (Manning et al. 1987). The RAND Health Insurance Experiment ran- coinsurance are forms of cost domly assigned consumers to different health plans and then tracked their sharing.) use of care (see exhibit 7.3). Its fee-for-service sites had coinsurance rates of EXHIBIT 7.2 The Impact of Price Insurance on Demand D2 Copyright © 2023. Health Administration Press. All rights reserved. D1 Quantity CH07.indd Lee, 124Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 125 EXHIBIT 7.3 Coinsurance Any Use Hospital Rate Spending of Care Admission Effect of Coinsurance 0% $750 87% 10% Rate 25% $617 79% 8% 50% $573 77% 7% 95% $540 68% 8% Source: Manning et al. (1987). 0 percent, 25 percent, 50 percent, and 95 percent. The health plans fully covered expenses above the out-of-pocket maximum, which varied from out-of-pocket 5 percent to 15 percent of income. Spending was substantially lower for maximum A cap on the consumers who shared in the cost of their care. Increasing the coinsurance amount that the rate (the share of the bill that consumers pay) from 0 percent to 25 percent consumer has to reduced total spending by nearly a fifth. This reduction had minimal effects pay out of pocket. on health. Costs were lower because consumers had fewer contacts with the healthcare system. The experiment went on for several years, and the suspi- cion that reducing use of care would increase spending later was not borne out. Based on the results of this study, virtually all insurance plans now incor- porate some form of cost sharing for care initiated by patients. Case 7.1 CVS Health CVS Health wants to transform the healthcare sector. The firm owns the insurer Aetna and CVS drugstores, many of which house MinuteClinics. The rationale for this arrangement is that MinuteClinics can serve some customers who Copyright © 2023. Health Administration Press. All rights reserved. might otherwise go to emergency rooms (thereby reducing costs for customers and for Aetna). In addition, CVS hopes to expand sales of other products to customers who seek care at a MinuteClinic (Tully 2021). MinuteClinic started in 2000, and as of 2021, it had more than 1,100 locations (CVS 2021). Its clinics are staffed by nurse practitio- ners and physician assistants, rather than physicians. The clinics are open seven days a week, and appointments are not needed. The nurse practitioners and physician assistants diagnose, treat, and write (continued) CH07.indd Lee, 125Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  126 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s Case 7.1 prescriptions for a variety of common illnesses. (continued) MinuteClinics show customers the prices of care (typically less than the prices in a physician’s office) and usually accept insurance. Most clinics are in CVS pharma- cies, although an increasing number are in other sites and some have connections with local health systems. Discussion Questions For what products is MinuteClinic a substitute? For what products is it a complement? How would continued expansion of MinuteClinics affect revenues of primary care practices? What attributes other than prices would make MinuteClinics attractive to patients? Is the supply of primary care physicians large enough to meet current levels of demand? Would you expect expansion of Minute Clinics to increase or decrease spending? Why? What are the implications of Aetna’s sale to CVS? A common criticism is that MinuteClinics locate in well-to-do areas. Is this a concern? 7.5 Demand with Advice from Providers Consumers are often rationally ignorant about the healthcare system and the decisions they need to make. They are ignorant because medical decisions are complex, because they are unfamiliar with their options, because they lack the Copyright © 2023. Health Administration Press. All rights reserved. skills and information they need to compare their options, and because they lack time to make a considered judgment. This ignorance is rational because consumers do not know what choices they will have to make, because the cost of acquiring skills and information is high, and because the benefits of acquiring these skills and information are unknown. Consumers routinely deal with situations in which they are ignorant. agent Few consumers really know whether their car needs a new constant velocity A person joint, whether their roof should be replaced or repaired, or whether they who provides should sell their stock in Cerner Corporation. Of course, consumers know services and they are ignorant. They often seek an agent, someone who is knowledgeable recommendations to clients (who are and can offer advice that advances the consumers’ interests. Most people with called principals). medical problems choose a physician to be their agent. CH07.indd Lee, 126Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 127 Using an agent reduces, but does not eliminate, the problems associ- ated with ignorance. Agents sometimes take advantage of principals (the principal ignorant consumers they represent). Taking advantage can range from out- The organization or individual and-out fraud (e.g., lying to sell a worthless insurance policy) to simple shirk- represented by an ing (e.g., failing to check the accuracy of ads for a property). If consumers agent. can identify poor agent performance, fairly simple remedies further reduce the problems associated with ignorance. In many cases an agent’s reputa- tion is of paramount importance, so agents have a strong incentive to please principals. In other cases, simply delaying payment until a project has been successfully completed substantially reduces agency problems. Problems arise when consumers have difficulty distinguishing bad out- comes from bad performance on the part of an agent. This problem is com- mon. Did your house take a long time to sell because the market weakened unexpectedly or because your agent recommended that you set the price too high? Was your baby born by cesarean section to preserve the baby’s health or to preserve your physician’s weekend plans? Most contracts with agents are designed to minimize these problems by aligning the interests of the principal and the agent. For example, real estate agents earn a share of a property’s sale price so that both the agent and the seller profit when the property is sold quickly at a high price. In similar fashion, earnings of mutual fund managers are commonly based on the total assets they manage, so managers and inves- tors profit when the value of the mutual fund increases. Agency models have several implications for our understanding of demand. First, what consumers demand may depend on incentives for pro- viders. Agency models suggest that changes in the amount paid to providers, the way providers are paid, or providers’ profits may change their recom- mendations for consumers. For example, consumers may respond to a lower price for generic drugs only because pharmacists have financial incentives to recommend them. Second, provider incentives will affect consumption of some goods and services more than others. Provider recommendations will not affect patients’ initial decisions to seek care. And where standards of care Copyright © 2023. Health Administration Press. All rights reserved. are clear and generally accepted, providers are less apt to change their recom- mendations when their incentives change. When a consensus about standards of care exists, providers who change their recommendations in response to financial incentives risk denial of payment, identification as a low-quality provider, or even malpractice suits. Third, patients with chronic illnesses are often quite knowledgeable about the therapies they prefer. When patients have firm preferences, agency is likely to have less effect on demand. In short, agency makes the demand for medical care more complex. Agency is one of the most important factors that makes managed care necessary. (That insurance plans must protect consumers from virtually all the costs of some very expensive procedures, so out-of-pocket costs need to CH07.indd Lee, 127Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  128 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s fall to near zero, is the other main factor.) If all the parties to a healthcare transaction had all the same information, expenditures could be limited sim- ply by changing consumer out-of-pocket payments. In many cases, though, provider incentives need to be aligned with consumer goals. (Of course, health plans also have an agency relationship with beneficiaries, and nothing guarantees that plans will be perfect agents.) Most of the features of managed care address the agency problem in one way or another. Bundled payments for services and capitation are designed to give physicians incentives to rec- ommend no more care than is really necessary. Primary care gatekeepers are supposed to monitor recommendations for specialty services (from which they derive no financial benefit). Case 7.2 Colonoscopy Colonoscopy screens for colorectal cancer, which is quite common and quite treatable in its early stages (CDC 2021). Colonoscopy involves inserting a long, flexible viewing tube into the colon. Because it requires a highly skilled team, colonoscopy is expensive. It also requires that patients prepare for the procedure, and many patients find this burdensome. The preparation involves at least a day of fasting followed by a powerful laxative. Not surprisingly, many patients have not had the recommended number of colon cancer screenings, even though the Affordable Care Act required coverage by most insurers. There are alternatives to colonoscopy, and some insurers are encouraging use of them (Span 2021). The best known is a fecal immu- nochemical test, which tests a stool sample for traces of blood. It is much less expensive and requires no preparation. Copyright © 2023. Health Administration Press. All rights reserved. Discussion Questions How did increased insurance coverage affect the demand for colonoscopies? How did the COVID-19 pandemic affect the demand for colonoscopies? What are some of the other substitutes for colonoscopies? How well do colonoscopy substitutes work? How would an improvement in a substitute affect the demand for colonoscopies? (continued) CH07.indd Lee, 128Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 129 Case 7.2 What are some complements for a (continued) colonoscopy? How would an improvement in a complement affect the demand for colonoscopies? Are gastroenterologists perfect agents in their colonoscopy recommendations? 7.6 Conclusion Demand is one of the central ideas of economics, and managers need to understand the basics of demand. In most cases, sales of a product falls when its price increases, and studies of healthcare products confirm this general- ization. An understanding of this relationship between price and quantity is part of effective management. Without it, managers cannot predict sales, revenues, or profits. To make accurate forecasts, managers also must be aware of the effects of factors they do not control. Demand for their products will be higher when the price of complements is lower or the price of substitutes is higher. In most cases, demand will be higher in areas with higher incomes. We will explore how to make forecasts in more detail in chapter 8. The demand for healthcare products is complex. Insurance and profes- sional advice have significant effects on demand. Insurance means that three prices exist: the out-of-pocket price the consumer pays, the price the insurer pays, and the price the provider receives. The quantity demanded will usually fall when out-of-pocket prices rise, but it may not change when the other prices do. Because professional advice is important in consumers’ healthcare decisions, the incentives professionals face can influence consumption of some products. How and how much professionals are paid can affect their Copyright © 2023. Health Administration Press. All rights reserved. recommendations, and recognition of this effect has helped spur the shift to managed care. To change patterns of consumption, managers may need to change incentives for patients and providers. Exercises 7.1 Is the idea of demand useful in healthcare, given the important role of agents? 7.2 Should medical services be free? Justify your answer. 7.3 Why might a consumer be “rationally ignorant” about the proper therapy for gallstones? CH07.indd Lee, 129Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  130 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s 7.4 Why do demand curves slope down (i.e., sales volume usually rises at lower prices)? 7.5 Why would consumers ever choose insurance plans with large deductibles? 7.6 During the last five years, average daily occupancy at Autumn Acres nursing home has slid from 125 to 95 even though Autumn Acres has cut its daily rate from $125 to $115. Do these data suggest that occupancy would have been higher if Autumn Acres had raised its rates? What changes in non-price demand factors might explain this change? (The supply, or the number of nursing home beds in the area, has not changed during this period.) 7.7 Your hospital is considering opening a satellite urgent care center about five miles from your main campus. You have been charged with gathering demographic information that might affect the demand for the center’s services. What data are likely to be relevant? 7.8 How would each of the following changes affect the demand curve for acupuncture? a. The price of an acupuncture session increases. b. Online sessions on stretching reduce back problems. c. Medicare reduces the copayment for acupuncture from $20 to $10. d. The surgeon general issues a warning that back surgery is ineffective. e. Medicare stops covering back surgery. 7.9 Your boss has asked you to describe how the demand for an over- the-counter sinus medication would change in the following situations. Assuming the price does not change, forecast whether the sales volume will go up, remain constant, or go down. a. The local population increases. Copyright © 2023. Health Administration Press. All rights reserved. b. A wet spring leads to a bumper crop of ragweed. c. Factory closings lead to a drop in the area’s average income. d. A competing product with a different formula is found to be unsafe. e. A research study showing that the medication causes severe dizziness is published. f. The price of another sinus medication drops. 7.10 A community has four residents. The table below shows the number of dental visits each resident will have. Calculate the total quantity demanded at each price. Then graph the relationship between price and total quantity, with total quantity on the horizontal axis. CH07.indd Lee, 130Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  C h a p ter 7 : The D em and for H ealthc are Produc ts 131 Abe’s Beth’s Cal’s Don’s Price Quantity Quantity Quantity Quantity $40 0 0 0 1 $30 0 1 0 1 $20 0 1 0 2 $10 1 2 1 2 $0 1 2 1 3 7.11 A clinic focuses on three services: counseling for teens and young adults, smoking cessation, and counseling for young parents. An analyst has developed a forecast of the number of visits each group will make at different prices. Calculate the total quantity demanded at each price. Then graph the relationship between price and total quantity, putting total quantity on the horizontal axis. Teen Smoking Parent Price Counseling Cessation Counseling $80 10 0 0 $60 15 1 0 $40 20 2 0 $20 40 4 6 $0 50 6 8 7.12 The price-quantity relationship has been estimated for the new prostate cancer blood test: Q = 4,000 – 20 × P. Use a spreadsheet Copyright © 2023. Health Administration Press. All rights reserved. to calculate the quantity demanded and total spending for prices ranging from $200 to $0, using $50 increments. Calculate the quantity and revenue for each price. Price Quantity Revenue $200 0 $0 $150 1,000 $150,000 $100 2,000 $200,000 $50 3,000 $150,000 $0 4,000 $0 CH07.indd Lee, 131Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:26 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-02-10 22:40:53.  132 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s 7.13 A physical therapy clinic faces a demand equation of Q = 200 – 1.5 × P, where Q is sessions per month and P is the price per session. a. The clinic currently charges $80. What is its sales volume and revenue at this price? b. If the clinic raised its price to $90, what would happen to volume and revenue? c. If the clinic lowered its price to $70, what would happen to volume and revenue? 7.14 Researchers have concluded that the demand for annual preventive clinic visits by children with asthma equals 1 + 0.00004 × Y – 0.04 × P. In this equation Y represents family income and P represents price. a. Calculate how many visits a child with a family income of $100,000 will make at prices of $200, $150, $100, $50, and $0. If you predict that visits will be less than zero, convert your answer to zero. b. Now repeat your calculations for a child with a family incom