Market Forces in Market Forces in Health CareHealth Care

Eric D. Kupferberg, PhDEric D. Kupferberg, PhD

23 September 201023 September 2010

Two Possible FramesTwo Possible Frames

What force or role does the market play in What force or role does the market play in shaping health care in America?shaping health care in America?

What are the forces operating in the What are the forces operating in the health care market?health care market?

Defining Market ForcesDefining Market Forces

Typically supply and demandTypically supply and demand

Defined in relation to each otherDefined in relation to each other

Price as a mediatorPrice as a mediator

Defining Market ForcesDefining Market ForcesDemand, Supply, and PriceDemand, Supply, and Price

Ideal Markets & Perfect Ideal Markets & Perfect CompetitionCompetition

Assumes large number of small sellers so that Assumes large number of small sellers so that no one seller can greatly determine the priceno one seller can greatly determine the price

Assumes that both buyers and sellers are well-Assumes that both buyers and sellers are well-informed and aware of any changes in priceinformed and aware of any changes in price

Assumes that the goods that are bought and Assumes that the goods that are bought and sold are nearly homogenous so that buyers sold are nearly homogenous so that buyers make decisions primarily on pricemake decisions primarily on price

No “Ideal” in Health Care No “Ideal” in Health Care MarketsMarkets

Limited number of insurersLimited number of insurers Many small cities and rural areas have Many small cities and rural areas have

few hospitalsfew hospitals Limited suppliers of medical devices, Limited suppliers of medical devices,

technologies, and pharmaceutical pricestechnologies, and pharmaceutical prices Consumers rarely Consumers rarely seesee the entire cost; the entire cost;

only pay 10-20$ per visitonly pay 10-20$ per visit

No “Ideal” in Health Care No “Ideal” in Health Care MarketsMarkets

Governments purchase large portion Governments purchase large portion and control costsand control costs

Limited health literacyLimited health literacy Patients rarely comparison shopPatients rarely comparison shop Health care is not a homogeneous goodHealth care is not a homogeneous good

WhoWho is Demanding? is Demanding?Who’s the Consumer?Who’s the Consumer?

Patients and potential patientsPatients and potential patients

EmployersEmployers

Physicians & specialistsPhysicians & specialists

Hospitals, clinics, ACS facilitiesHospitals, clinics, ACS facilities

Medicare and medicaid branchesMedicare and medicaid branches

Veterans administrationVeterans administration

Isolated Consumers are RareIsolated Consumers are Rare

Even the most common transaction in health care Even the most common transaction in health care involves at least two consumers and two involves at least two consumers and two supplierssuppliers

Example: standard office visit is the product of a Example: standard office visit is the product of a patient purchasing services, a physician patient purchasing services, a physician purchasing facilities and equipment, an employer purchasing facilities and equipment, an employer purchasing a health plan, etc.purchasing a health plan, etc.

Consumer demands often mediated by a 3Consumer demands often mediated by a 3rdrd party party ((e.g.e.g., patient needs negotiated by physician), patient needs negotiated by physician)

No Monolithic Heath Care No Monolithic Heath Care MarketMarket

All markets are localAll markets are local

Heterogeneous mix of consumers and suppliersHeterogeneous mix of consumers and suppliers

Market niches matter more than position in Market niches matter more than position in general health care marketplacegeneral health care marketplace

Consumers are non-uniform with regards to race, Consumers are non-uniform with regards to race, ethnicity, gender, geography, education and ethnicity, gender, geography, education and economic statuseconomic status

Fluctuating DemandFluctuating DemandThe Role of GovernmentsThe Role of Governments

Expansion of Medicare benefits increases demandExpansion of Medicare benefits increases demand

Broadening of eligibility requirements increases Broadening of eligibility requirements increases demanddemand

Patient “Bill of Rights” legislation increases demandPatient “Bill of Rights” legislation increases demand

State cuts in Medicaid reduces demand for most State cuts in Medicaid reduces demand for most health care products & serviceshealth care products & services

Medicaid cuts increase demand for emergency Medicaid cuts increase demand for emergency health carehealth care

Fluctuating DemandFluctuating DemandThe Role of GovernmentsThe Role of Governments

Fluctuating Demand Fluctuating Demand and Increased Costand Increased Cost

Fluctuating DemandFluctuating DemandThe Influence of CostsThe Influence of Costs

Higher health care and out of pocket Higher health care and out of pocket costs decreases demandcosts decreases demand

Increasing numbers of uninsured Increasing numbers of uninsured decreases demand; numbers of decreases demand; numbers of uninsured will top 50 million by 2006uninsured will top 50 million by 2006

Economic growth increases demand; Economic growth increases demand; increased economic disparities worsens increased economic disparities worsens overall health status in the populationoverall health status in the population

Health care is a Health care is a normal goodnormal good, but its , but its price elasticity is smaller than other price elasticity is smaller than other goods (goods (e.g.e.g., food, gasoline, automobiles, , food, gasoline, automobiles, housing)housing)

Fluctuating Fluctuating DemandDemandThreats to HealthThreats to Health

Recent and emerging diseases Recent and emerging diseases can dramatically increase can dramatically increase demand: AIDS, antibiotic demand: AIDS, antibiotic resistant TB, new flu variants, resistant TB, new flu variants, bioterrorism, SARS, obesity, etc.bioterrorism, SARS, obesity, etc.

BUTBUT, the greater force is the , the greater force is the aging populationaging population

We Are Living LongerWe Are Living Longer

Aging PopulationAging PopulationDemographic RealitiesDemographic Realities

Baby boomers will turn 65 in 2010Baby boomers will turn 65 in 2010

Percentage of people over age 65 will increase Percentage of people over age 65 will increase from 12.8% in 1995 to 18.5% in 2025from 12.8% in 1995 to 18.5% in 2025

Older population has many more conditions Older population has many more conditions requiring health carerequiring health care

Older population maintains a greater Older population maintains a greater tastetaste for for health care products and services and devotes health care products and services and devotes greater attention to planning for the futuregreater attention to planning for the future

Co-varies with regional, ethnic, and economic Co-varies with regional, ethnic, and economic factors (factors (e.g.e.g., middle-class rural farmers in the , middle-class rural farmers in the mid-west tend to reply on hospitals and mid-west tend to reply on hospitals and physicians, while middle-class professional physicians, while middle-class professional elderly rely on nursing homes)elderly rely on nursing homes)

Percentage of Older Adults GrowingPercentage of Older Adults Growing

Aging PopulationAging PopulationChronic ConditionsChronic Conditions

Chronic conditions are Chronic conditions are thethe major cause of illness, major cause of illness, disability, and death in the U.S. Chronic disability, and death in the U.S. Chronic conditions cost $774 billion in 2000 (75% of all conditions cost $774 billion in 2000 (75% of all health care spending), and will rise to $1.07 health care spending), and will rise to $1.07 trillion in 2020 (80% of all health care costs)trillion in 2020 (80% of all health care costs)

Chronic conditions greatly contributed to the Chronic conditions greatly contributed to the doubling of expenditures on prescription drugs doubling of expenditures on prescription drugs from 1999 to 2004from 1999 to 2004

Chronic conditions require additional time to Chronic conditions require additional time to diagnose and coordinate among several diagnose and coordinate among several providersproviders

Adoption of care management processes (CMPs) Adoption of care management processes (CMPs) has been slow and has yielded mixed resultshas been slow and has yielded mixed results

Chronic Conditions Rise With Aging Chronic Conditions Rise With Aging PopulationPopulation

Chronic Conditions Rise With Aging Chronic Conditions Rise With Aging PopulationPopulation

Senior Have More Chronic Senior Have More Chronic ConditionsConditions

Technological InnovationsTechnological InnovationsMultiplier and Magnifying Multiplier and Magnifying RepercussionsRepercussions

Many medical technologies do not simply Many medical technologies do not simply replace older technologies; they are replace older technologies; they are additiveadditive

New medical technologies increase demand New medical technologies increase demand for related or downstream technologiesfor related or downstream technologies

Technological imperatives: “because it’s Technological imperatives: “because it’s there” or “because we can” (there” or “because we can” (e.g.e.g., imaging , imaging services and some psychopharmaceuticals)services and some psychopharmaceuticals)

Health care exceptionalism: typically new Health care exceptionalism: typically new technologies reduce the cost of a good; not technologies reduce the cost of a good; not true for health caretrue for health care

Technological InnovationsTechnological InnovationsMedical DevicesMedical Devices

Minimally invasive surgical Minimally invasive surgical techniquestechniques

Novel sepsis treatmentsNovel sepsis treatments Implantable devicesImplantable devices Diabetes management toolsDiabetes management tools At-home diagnostic health kitsAt-home diagnostic health kits Pharmaceutically coated stents Pharmaceutically coated stents Tissue engineeringTissue engineering Transdermal patchesTransdermal patches Tissue engineeringTissue engineering XenotransplantationXenotransplantationSource: Gene O’Dell, “2003 AHA Environmental Assessment,” Source: Gene O’Dell, “2003 AHA Environmental Assessment,” TrusteeTrustee 56 (Oct. 2003): 24. 56 (Oct. 2003): 24.

Technological InnovationsTechnological InnovationsDiagnostic TechnologiesDiagnostic Technologies

New MRI, CAT, PET, and New MRI, CAT, PET, and ultrasound machines ultrasound machines create their own marketcreate their own market

Advances in diagnostic Advances in diagnostic technologies increases technologies increases demand for surgical demand for surgical servicesservices

Many prenatal screening Many prenatal screening tests on the horizontests on the horizon

Hospital Tech Adoptions: PriceHospital Tech Adoptions: Price

Technologies evaluated by profitabilityTechnologies evaluated by profitability Technologies acquired when expected Technologies acquired when expected

revenue stream exceeds expected cost revenue stream exceeds expected cost over the useful life of a productover the useful life of a product

Hospital manager must consider “loss Hospital manager must consider “loss leaders” which loose money but benefit leaders” which loose money but benefit the entire hospital by bringing visibility the entire hospital by bringing visibility to other parts of the hospitalto other parts of the hospital

Technology Competition ModelTechnology Competition Model

• Sales maximization theory; hospitals want to be the largest

• Conspicuous consumption theory; want to show that the hospital is the most technologically advanced

• Hospitals acquire technology that maximizes physician income

Utility MaximizationUtility Maximization

Hospital manager invests in Hospital manager invests in technology to enhance the quality or technology to enhance the quality or quantity of services providedquantity of services provided

Technology competes against other Technology competes against other services, for example nurses, for a services, for example nurses, for a share of the hospitals budget; share of the hospitals budget; technology is evaluated in this technology is evaluated in this contextcontext

Technological Technological InnovationsInnovationsA New Wave of PharmaceuticalsA New Wave of Pharmaceuticals

Promise of genomics and Promise of genomics and bioinformatics to replace bioinformatics to replace chemotherapy for treatment chemotherapy for treatment of some cancers, to reduce of some cancers, to reduce heart diseases, and combat heart diseases, and combat autoimmune disordersautoimmune disorders

New microarrays and New microarrays and genomic technologies seek to genomic technologies seek to target specific populationstarget specific populations

Source: G. Steven Burrill, “From Pipe Dream to Pipeline Dream: Personalised Medicine Takes Off,” EBR (Spring 2003).

Technological InnovationsTechnological InnovationsIncreasing Demand for Increasing Demand for PharmaceuticalsPharmaceuticals

Source: Congressional Budget Office, “Testimony on Projections of Medicare and Prescription Drug Spending,” (7 March 2002).

Fluctuating DemandFluctuating DemandAccess to InformationAccess to Information

Web-based sources abound (e.g., WebMD)Web-based sources abound (e.g., WebMD)

Health features in newspapers and magazinesHealth features in newspapers and magazines

Television and radio reportsTelevision and radio reports

Advocacy groups distribute informationAdvocacy groups distribute information

At-home diagnostic tests increase demandAt-home diagnostic tests increase demand

For physicians: professional meetings, For physicians: professional meetings,

journals, and industry periodicalsjournals, and industry periodicals

Percent of Consumers Percent of Consumers Searching For Healthcare Searching For Healthcare InformationInformation

Consumers’ Sources of Consumers’ Sources of Healthcare InformationHealthcare Information

All Education Levels Seek Online InformationAll Education Levels Seek Online Information

While While PepsiPepsi spent spent $125 million$125 million advertising its soda in advertising its soda in

2000, the manufacturer of 2000, the manufacturer of VioxxVioxx spent spent $160 million$160 million. .

(2003, BCBSA).(2003, BCBSA).

Source: Blue Cross “Key Factors Driving Health Care Costs” 2003

Direct to Consumer Advertising

Nielson Reports- June 16, 2008 / FDA.gov 02

Advertising SpendingAdvertising Spending

2008 2008 RankRank

Top 10 Product Top 10 Product CategoriesCategories

Q1 2008 ($ Q1 2008 ($ mil)mil)

Q1 2007 ($ Q1 2007 ($ mil)mil)

% % changchang

ee

11AutomotiveAutomotive $2,695.80 $2,695.80 $2,940.60 $2,940.60 --

8.32%8.32%

22 PharmaceuticalPharmaceutical $1,311.70 $1,311.70 $1,310.00 $1,310.00 0.13%0.13%

Firms Brand Medical ConditionsFirms Brand Medical Conditions

DTC Part of Larger CampaignsDTC Part of Larger Campaigns

The Pharma Giants Spend MostThe Pharma Giants Spend Most

Advertising SpendingAdvertising Spending

DTC Advertising WorksDTC Advertising Works

Fluctuating DemandFluctuating DemandConsumer ExpectationsConsumer Expectations

Patients demand greater control and more Patients demand greater control and more choiceschoices

Short waiting periods, direct access to Short waiting periods, direct access to specialists, access specialists, access viavia email email

Medical considering “Report Card” listing Medical considering “Report Card” listing measures of patient satisfaction and quality measures of patient satisfaction and quality outcomes for specific conditionsoutcomes for specific conditions

Access to state of the art medical Access to state of the art medical technologiestechnologies

Fluctuating DemandFluctuating DemandConsumer Expectations & Cultural NormsConsumer Expectations & Cultural Norms

Standards of beauty influence demand for Standards of beauty influence demand for body augmentations and cosmetic body augmentations and cosmetic surgeriessurgeries

Cultural bias against melancholy and Cultural bias against melancholy and shyness increases demand for psychiatric shyness increases demand for psychiatric services and medicationsservices and medications

Growing cultural acceptance of psychiatric Growing cultural acceptance of psychiatric services and medicines increase demandservices and medicines increase demand

Fluctuating DemandFluctuating DemandCase Example: ObesityCase Example: Obesity

Formerly Public Health efforts targeted Formerly Public Health efforts targeted smoking. New focus highlights obesity as smoking. New focus highlights obesity as a leading cause of preventable illnessa leading cause of preventable illness

More than 50% of adult Americans are More than 50% of adult Americans are overweight, and obesity has increased by overweight, and obesity has increased by 60% from 1991 to 200360% from 1991 to 2003

Defining ObesityDefining Obesity

Living in the Land of the Lean ?Living in the Land of the Lean ?

Living in the Land of the Lean ?Living in the Land of the Lean ?

Blue States = LeanBlue States = LeanRed States = Red States = Obese Obese

U.S. Population is Very, Very U.S. Population is Very, Very LazyLazy

Huge Marketing Potential

Obesity Increase HC UtilizationObesity Increase HC Utilization

Obesity is Cost-DriverObesity is Cost-Driver

Who is a Supplier?Who is a Supplier?

Physicians, nurses, PAs, NAs, medical Physicians, nurses, PAs, NAs, medical technicians, front office stafftechnicians, front office staff

Hospitals, ACS, out-patient clinics, VA Hospitals, ACS, out-patient clinics, VA institutions, psychiatric facilities, etc.institutions, psychiatric facilities, etc.

Medical colleges, nursing programs, medical Medical colleges, nursing programs, medical technician schoolstechnician schools

Pharmaceutical firmsPharmaceutical firms Producers of medical instruments and Producers of medical instruments and

technologiestechnologies

Vacancy Rates for Selected Hospital Personnel, December 2006

Source: 2007 AHA Survey of Hospital LeadersNote: 116,000 vacancies is a national estimate created by extrapolating the vacancy rate to all 5,000 community hospitals in 2005. ST: Speech Therapist, OT: Occupational Therapist, PT: Physical Therapist.

116,000 RN Vacancies*

Fluctuating SupplyFluctuating SupplyShortage of NursesShortage of Nurses

Nationwide shortage of nurses will increase Nationwide shortage of nurses will increase

from its current 6% level to 29% by 2020from its current 6% level to 29% by 2020

Demand for nurses will increase by 40% from Demand for nurses will increase by 40% from

2000 to 2020, compared to the 6% expected 2000 to 2020, compared to the 6% expected

growth in numbers of nursesgrowth in numbers of nurses

Increasing demand due to aging population Increasing demand due to aging population

and improved health educationand improved health education

Nursing shortage increases pressures on Nursing shortage increases pressures on

physicians and increases health care costsphysicians and increases health care costs

IT Technologists

Housekeeping/ Maintenance

Nursing Assistants

LPNs

Billing/Coders

Laboratory Technicians

Imaging Technicians

Pharmacists

Registered Nurses

Percent of Hospitals Reporting Recruitment More Difficult in 2006 vs. 2005

Source: 2007 AHA Survey of Hospital Leaders.

Therapists (Speech,Occupational and Physical)

Fluctuating SupplyFluctuating SupplyShortage of PhysiciansShortage of Physicians

Acute in primary care, where decreasing Acute in primary care, where decreasing salaries have lead and medical school cultures salaries have lead and medical school cultures have led to lower recruitmentshave led to lower recruitments

Shortage in some specialties (Shortage in some specialties (e.g.e.g., thoracic , thoracic surgery reporting near crises)surgery reporting near crises)

Shortages augmented by aging population Shortages augmented by aging population which requires procedures not dominant in which requires procedures not dominant in current populationcurrent population

Physician Workforce Physician Workforce StudyStudy

12 physician specialties in Massachusetts 12 physician specialties in Massachusetts are operating under severe labor market are operating under severe labor market conditionsconditions

The primary care specialties of internal The primary care specialties of internal medicine and family medicine are now medicine and family medicine are now considered to be in critically short supplyconsidered to be in critically short supply

The number of physician specialties found The number of physician specialties found to be in short supply has doubled to a total to be in short supply has doubled to a total of 12 in just three yearsof 12 in just three years

Physician recruitment and retention remain Physician recruitment and retention remain serious problems in Massachusetts, serious problems in Massachusetts, especially for community hospitalsespecially for community hospitals

Current Pool of Physicians is Current Pool of Physicians is Inadequate to Fill Vacant Inadequate to Fill Vacant PositionsPositions

Mean Recruitment Time of Mean Recruitment Time of Selected Physician Selected Physician SpecialtiesSpecialties