Demand and Supply Response

1. Jody

Elasticity is a crucial economic concept that has a significant impact on strategic decision-making in healthcare. In healthcare, elasticity refers to the responsiveness of the quantity demanded or supplied of healthcare services to price, income, or other factors. Understanding elasticity is essential for healthcare organizations, policymakers, and stakeholders as it informs a wide range of strategic choices in this sector. First and foremost, the concept of elasticity is pivotal in pricing strategies within the healthcare industry. Various factors, including the availability of substitutes, income levels, and insurance coverage, often influence the elasticity of demand for healthcare services (Ridderstaat et al., 2019). When demand for a specific healthcare service is relatively elastic, a slight price change can result in a proportionally more significant change in the quantity demanded. Healthcare organizations must consider the price elasticity of their services when setting prices. For example, elective procedures with more elastic demand might require competitive pricing strategies. At the same time, inelastic services that are essential for life, like emergency care, may allow for more flexibility in pricing. Understanding elasticity informs decisions regarding allocating resources and investments in healthcare (Danzon, 2018). For example, suppose a particular healthcare service has inelastic demand. In that case, it may make strategic sense for a hospital to allocate more resources and infrastructure to meet this demand, as consumers are less sensitive to price changes. Conversely, services with more elastic demand may require a more cost-effective and efficient approach to resource allocation. By aligning resource allocation with demand elasticity, healthcare organizations can optimize their operations and investments.

Elasticity also plays a significant role in healthcare policy decisions, particularly in the context of public healthcare systems. Policymakers must consider the price elasticity of healthcare services when implementing policies such as co-pays, deductibles, or subsidies. Elastic demand for necessary healthcare services, like prescription drugs or medical treatments, may necessitate policies that protect vulnerable populations from price fluctuations (Prager, 2020). Conversely, understanding the inelastic demand for elective or cosmetic procedures can inform taxation policies or budget allocations that generate revenue for other healthcare priorities. Elasticity tells choices related to the development and adoption of healthcare technologies and innovations. Healthcare organizations must consider the potential impact of new technologies on the demand and supply of healthcare services. For instance, introducing a groundbreaking medical device may lead to changes in demand for related services, affecting resource allocation and pricing strategies. By conducting elasticity analysis, healthcare organizations can make informed decisions about investing in emerging technologies and predicting their effects on the healthcare landscape. The concept of elasticity is a critical factor in shaping strategic choices within the healthcare industry (Lomas et al., 2018). Understanding the responsiveness of demand and supply for healthcare services to various factors like price, income, and technology is essential for healthcare organizations, policymakers, and stakeholders. By utilizing elasticity analysis, these entities can make informed decisions regarding pricing strategies, resource allocation, policy implementation, and technology adoption, ultimately leading to more effective and efficient healthcare management and delivery.

The concept of elasticity in healthcare, which examines how demand and supply respond to various factors, aligns with biblical principles of stewardship and responsibility. As stewards of resources, healthcare organizations and policymakers are called to make strategic decisions that ensure equitable access to healthcare, especially for the vulnerable. This relates to the biblical concept of justice, as highlighted in Micah 6:8, which says, “He has told you, O man, what is good; and what does the Lord require of you but to do justice, and to love kindness, and to walk humbly with your God.” (ESV, 2016, Micah 6:8). Understanding elasticity can guide healthcare leaders in making just decisions about resource allocation and pricing, with a focus on serving the greater good and addressing the needs of those who are most sensitive to changes in healthcare availability and cost.

References

Danzon, P. M. (2018). Differential pricing of pharmaceuticals: theory, evidence and emerging issues. PharmacoEconomics, 36(12), 1395-1405.

English Standard Version Bible, (2016). The MacArthur Study Bible. Crossway.

Lomas, J., Claxton, K., Martin, S., & Soares, M. (2018). Resolving the “cost-effective but unaffordable” paradox: estimating the health opportunity costs of nonmarginal budget impacts. Value in Health, 21(3), 266-275.

Prager, E. (2020). Healthcare demand under simple prices: evidence from tiered hospital networks. American Economic Journal: Applied Economics, 12(4), 196-223.

Ridderstaat, J., Singh, D., & DeMicco, F. (2019). The impact of major tourist markets on health tourism spending in the United States. Journal of Destination Marketing & Management, 11, 270-280.

2. Racheal

Elasticity is a tool that is valuable to decision-makers and managers and is a tool that can be utilized to help analyze what-if questions (Lee, 2019). Elasticities are especially helpful to managers in forecasting sales and revenues (Lee, 2019). Price elasticity, which is an association between quantity demanded and price (Lee, 2019) would be a major factor influencing strategic choices. Managers and decision-makers need to keep in mind that changes in price will affect revenue either directly or indirectly because that price change will change the quantity demanded (Lee, 2019). If an organization is looking at a cost change and to expand at the same time, price elasticity would be valuable to helping management understand if this is feasible with cost changes or will revenue and demand be negatively impacted.

Price elasticity in healthcare affects more than healthcare systems and organizations, it can impact pharmaceuticals and insurance plans. Evidence has shown that because of the price inelasticity of prescription medications and medical treatments influences the rising prices of not only healthcare but overall drug prices (Mendoza, 2020). What happens when the cost of treatment and prescriptions gets too high or if someone doesn’t have insurance coverage? If prices for pharmaceuticals are increased and the uninsured individuals are not considered, we can often see them purchasing their medications illegally, so they are more affordable (Mendoza, 2020). When looking at price elasticity we must also look at how price-sensitive our consumers are (Mendoza, 2020).

A good example of this would be the Medicare donut hole. Over a ten-year time frame, it was shown that the coverage gap closing or partially closing led to roughly a fifty percent discount for brand-name medications which results in roughly a 2.5% increase in utilization of prescription coverage (Mendoza, 2020). Prior to this, we could see that patients were less willing to get medications during their donut hole period until prices changed. Studies have also shown that those who are not insured or who drop off insurance because of their age decrease their usage of prescription drugs and often forego medical treatment, but increase their usage of risky drugs (Mendoza, 2020). If prices and price sensitivity are not considered when using elasticities to make decisions, we are letting people fall through the cracks or causing other issues, because today people will seek medications or care through the cheapest means possible.

Am I saying this is the outcome every time, absolutely not, but this is a worst-case scenario if we do not look at all the effects of price on demand and what those prices mean to the consumers. Studies are not in agreement on the effect of income on the utilization of healthcare services. Research has shown that healthcare organization expenses are impacted by income declines or increases (Barati & Fariditavana, 2020). The study goes on to explain that patients are more likely to utilize more services when their income is good or increasing, but if they have a change or decline in income, they are less likely to utilize services (Barati & Fariditavana, 2020). While all organizations want to increase their revenue, we must always utilize things like price elasticity to make informed decisions. How will the organization be impacted if prices are raised for services but the demand decreases? Is our organization something that patients need regardless of if prices increase? Do we offer a service that is not elective, or do we offer something that patients may feel they can do without if prices increase too much? These are all questions that elasticity and understanding the different forms of elasticity can help answer when an organization is making decisions or forecasting potential changes.

The Bible teaches us, “For the wrongdoer will be paid back for the wrong he has done, and there is no partiality” (ESV, 2001, Colossians 3:25). Making changes in an organization to increase revenue or the money you may receive is not only wrong but can harm those you should be helping. Those who make decisions just to be me profitable than others are doing it for the wrong reasons and God will see this. We need to make decisions that are not only good for the organization but for those we treat and care for as well. The patient should be our number one concern and how our decisions affect them. If raising prices means decreasing revenue and patients not receiving the care, they need then it shouldn’t be done. When making choices for an organization or helping make choices we need to ensure they are being done for the right reasons.

References:

Barati, M., & Fariditavana, H. (2020). Asymmetric effect of income on the us healthcare expenditure: Evidence from the nonlinear autoregressive distributed lag (ardl) approach. Empirical Economics, 58(4), 1979–2008. https://doi.org/10.1007/s00181-018-1604-7Links to an external site.

English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/

Lee, R. H. (2019). Economics for healthcare managers (4th ed.). Health Administration Press.

Mendoza, R. L. (2020). Effects of innovation and insurance coverage on price elasticity of demand for prescription drugs: Some empirical lessons in pharmacoeconomics. Journal of Medical Economics, 23(9), 915–922. https://doi.org/10.1080/13696998.2020.1772797

Each thread must demonstrate course-related knowledge. Include at least 2 peer reviewed citations and course text book (3 sources) and biblical integration

Course textbook: Lee, R. H. (2023). Economics for healthcare managers. Health Administration Press.