Download The Market for Physicians` Services

The Market for
Physicians’Services
Chapter 5
Long-Run v. Short-Run Decisions
• Economists’ distinction between short- and long-run
• Short-run: price and output; MD hours of work; non-MD
input choices
• Long-run: decision to become MD; specialty choice; type
of practice?, location
• Assumption that decision makers are forward-looking.
How short-run feeds into long-run decisions
Concepts of Shortage and Surplus
• Shortage and surplus in common parlance
• Shortage and surplus in economics
• Why shortages and surpluses of MDs hard to predict:
future demand (payment policy, technological change,
other factors of production, etc.); sources of future
supply (domestic, out- and in-migration of MDs)
Fig. 5.1. The Economic Concept of Shortage
(Excess Demand) and Surplus (Excess Supply)
Choice of Medicine as a
Career
• Role of financial incentives
• Role of non-financial incentives (extrinsic v. intrinsic
motivation)
• Compensating wage differentials
• Concepts of present value and internal rate of return (on
investments in medical education)
Choice of Medicine as a Career, cont.
• For each individual m and each career alternative j,
there is a stream of anticipated future earnings (ymj)
and non-pecuniary attributes of the occupation (Aj).
• Non-pecuniary attributes: occupation’s prestige,
intellectual content, types of people one interacts
with, flexibility of work schedule, risk of injury, and
job-related stress.
• Values of ymj vary not only by j but also by m
• Individuals differ in utility that they attach to earnings
and non-Pecuniary attributes of job.
Choice of Medicine as a
Career, cont.
Let Um = Um(ymj, Aj)
(5.1)
• ymj & Aj substitutes.
• Higher level of anticipated earnings compensate
an individual for accepting work in an occupation
with a lower Aj.
• Since adding an additional unit of Aj differs among
individuals, people require different compensating
earnings differentials to make them equally well off
if they select an occupation with lower A.
Fig. 5.2. Determinants of Equilibrium Earnings in an
Occupation
Earnings ($)
Supply
Earnings ($)
MP↑→ Demand
curve shift outward
S
E2
E1
O
L1
L2 Number of
Employees
O
Market Equilibrium
Earnings ($)
S
E*
D
O
Demand
L*
Number of
employees
Fig. 5.3. The Equalizing Earnings
Differential between the Two
Occupations
Concept of Present Value
PVj = (Rj1-Cj1)/(1+i) + (Rj2-C2j)/(1+i)2 + (Rj3-Cj3)/(1+i)3 …
+ (Rjn-Cjn)/(1+i)n + Sjn
(5.2)
Where:
•PVj = present value of returns net of the cost of an investment in
training in occupation j
•i = market rate of interest
•Rjt = earnings in year t
•Cjt = cost associated with investment in training for occupation j in year
t
•n = number of periods (years) in which person expects to be active in
occupation j
•Sjn = value of the sale of the asset at year n, e.g., the sale of a
physician practice
Concept of Internal Rate
of Return
• The internal rate of return on an investment is the internal rate r which
makes the present value of the right hand side of eq. (5.2) zero.
0= (Rj1-Cj1)/(1+i) + (Rj2-Cj2)/(1+i)2 + (Rj3-Cj3)/(1+i)3 ...+ (Rjn-Cjn)/(1+i)n + Sjn
(5.3)
where
• n shows time horizon relevant for the project (n=number of periods).
• If r ≥ to marginal cost of funds, project is undertaken. If r < than
marginal cost of funds, the project is not undertaken. For careers, a
person can only accept 1 “project.” Choice of projects is mutually
exclusive.
Fig. 5.4. The Relationship between the Marginal
Cost of Funds and the Amount of
Investment in Human Capital
Marginal Cost ($)
Cost of Capital (COC)
COC'
C'
Scholarship or grants
for education
C
O
X
X+1
Amount of Investment
Choice of Mode of Practice (e.g.,
solo v. group practice)
• Scale v. scope economies. What are they and why do
they arise?
• Motives for joining group practice? Scale & scope
economies, referrals, patient coverage, reduced MD
earnings fluctuations
• How financial incentives facing individual MD differ:
salary; revenue sharing; expense sharing, etc.
Let OOP = out-of-pocket payment (by patient)
Net Marginal Revenue to MD (MR) and Marginal
Cost to Patient of Additional Unit (MC) of Service
MR to MD
+
0
-
MC to patient
+
MD paid FFS
and patient
pays OOP
MD salaried
and patient
pays OOP
MD capitated
and patient
pays OOP
MC to patient
0
MD paid FFS
and patient
pays 0 OOP
MD salaried
and patients
pays 0 OOP
MD capitated
and patient
pays 0 OOP
Physicians’ Short-Run Decisions
Argument that Standard Neoclassical Model
Does Not Apply to the Physician Services’
Market
• What does neoclassical model predict?
• Why do we care what the neoclassical model or any
alternative to this model predicts?
• Why do people question the neoclassical model? (1)
adequacy of predictions; (2) underlying assumptions:
perfect information; (3) higher-income persons
sometimes pay higher MD fees (price discrimination); (4)
lack of systematic relationship between fees and quality
of care; (5) fees often higher not lower in areas of high
MD density; (6) when government reduces fees it pays,
sometimes quantity of service rises
Reconciling Theory and Empirical
Evidence (“stylized facts”)
• Why individual physician’s demand curve may
be downward sloping: monopolistic competition
model
• Why fees may be higher not lower in areas with
higher physician density? (1) confounding; (2)
Pauly-Satterthwaite model; (3) quality-amenities
model
• Why administered price reductions may lead to
higher quantity of services? Backward-bending
supply of MD services
Alternative Models
• Target income hypothesis
• Supplier-induced demand (U(ym,l,E)) where
U=utility; ym=consumption of goods and services
made possible by earnings; l=leisure time;
E=ethics (violated when induce demand)
• Is being ethical a normal good?
• Does supplier-induced demand apply in lowincome country? Implications if it does or does
not?
Fig. 5.5. Equilibrium in Pure Monopoly
and Monopolistic Competition
Equilibrium in Pure Monopoly and
Monopolistic Competition, cont.
• Reason for the negative relationship between prices and
quantities provided
• Concept of a backward-bending labor supply curve
comes from microeconomic theory.
• Rewrite eq. (5.1) as follows
Ui = Ui(yi,Ai)
(5.4)
Hours of Work Decision
• Individual i’s utility is a function of income or goods
and leisure (li)
•
yi = (T- li)w + yo
(5.5)
• The person’s income depends on the number of
hours s/he works (T- li), where
• T = total amount of time available to allocate
between market work and leisure
• yoi = other income unrelated to work hours, such as
from investments or public subsidies.
• Individual’s decision problem is to find that level of li
which maximizes utility subject to the constraint
given by eq. (5.5).
Fig. 5.6. The Physician Work-Leisure
Decision
MD Price and Output
Decision with 2 Markets
• MD price setter in 1 market
• MD price price taker in 2nd market
• Necessary condition for price discrimination that price
elasticities of demand differ
• Also cannot have arbitrage between 2 markets
Fig. 5.7. The Physician as Price Setter and
Price Taker
Comparative Statics
• What comparative statics are
• Comparative statics in this context: evaluate exogenous
changes in demand in price setting market, price change
in price taking market, change in practice cost affecting
both markets
Fig.5.8. The Effect of an Increase in
Demand in the Non-Medicaid Market
Price
MC
p2
p1
D'p
MRp
O
x1
MR'p
x2
Dp
Quantity
Fig. 5.9. The Effect of Rising Marginal Costs
in the Medicaid and the NonMedicaid Market
Price
p2
MC'
MC
DM=MRM
MRp
O
x2
Dp
x'T
xT
Quantity