A research paper about the US hospital national network and the supply-demand issues

In the United States, just like in other countries, public health continues to evolve to ensure that families, communities, as well as individuals, access quality, and affordable healthcare services. Global healthcare systems are undergoing a transformation to reduce costs, while upholding quality care, and, in the US, the healthcare system is under intense pressure to change especially from the supply-driven model of healthcare delivery to a system that focuses on patients’ needs. This transformation goes against the already established healthcare system that is focused on volume and the profitability of the services offered. According to Cuttler and  Morton (2013), the transformation in the US healthcare system is a big step towards the development of a value-based healthcare system in the US, but this is only possible when all the stakeholders including physicians, healthcare insurance companies, and healthcare organizations. Recent years have seen the US healthcare markets consolidate to form mergers between health insurers and hospitals. In as much as this has been part of the entire transformation, it is certain that it has shaped the US healthcare system in great ways as regards the market structure of the US hospital network, and the overall delivery of healthcare services.

 

The market structure of the US hospital system

 

Competitive interactions among healthcare providers bring forth incentives that are instrumental in shaping the behavior of healthcare providers, hence affecting the price, quantity, and quality of healthcare services. The statement mentioned above is particularly the case in the US because of the revelation that approximately 56% of the total health care expenditures are financed privately (Gaynor & Town, 2011). As a result, the prices, quantities, and the quality of the services provided by the healthcare system are strictly under the influence of buyers and sellers. In such a situation, even though the government might opt to set prices administratively for publicly financed care, the strategic interactions that exist between providers are sure to tamper with the quantity, quality, and accessibility of the healthcare services. The US hospital network consists of registered hospitals including community hospitals, federal government hospitals, nonfederal psychiatrist hospitals, nonfederal long-term care hospitals, and hospital units of institutions. The community hospitals are either rural or urban community hospitals some of whom are nongovernment not-for-profit, investor-owned for-profit, and state and local government community hospitals.

Consolidation of hospitals in the US has seen the growth of systems and network of hospitals, which is increasingly becoming the norm. The US hospital healthcare industry has evolved to form networks consisting of hospitals, physicians and other providers, insurers and other community agencies who work together to harmonize and supply a broad range of services to their community (Shepard, 2015). While the consolidation of hospitals has been partly attributable to the rise of managed care, it is evident that it has significantly affected the market environment of price negotiations between hospitals and healthcare plans, thus a strong incentive for hospitals to acquire a substantial bargaining power (Gaynor &Town, 2011). Therefore, the US hospital network has evolved to assume oligopoly power whereby only a few systems produce all or a considerable part of the market supply of a given service.

In the US, a small number of hospital networks dominate the industry, and thus, each system’s output is a significant share of the market. For that reason, the pricing, as well as output decisions of any given network, have a considerable effect on the rival firms, and because of the interdependence that exists among the networks, dependence on strategic behavior is commonplace in the hospital healthcare industry in the US. Although in oligopolistic markets, the competing systems may either compete or collude with each other, colluding is likely to result in the networks acting as a monopoly hence maximizing their profits (Cuttler& Morton, 2013). This attribute emanates from the fact that market power of hospitals has increased making it difficult for insurers to bargain effectively with one of only a few health networks available in the system.

 

Implications of the market structure on price of services

 

Evidently, the US hospital industry has brought together a group of sellers of healthcare service, thus forming a cartel, and under these conditions, the hospitals set quantity and price just like a monopolist. As a result, healthcare costs in the US are set by hospitals, which, in the recent past, have recorded an increase in their bargaining power as consolidation continues. Therefore, apart from producing a quantity of output that would be greater than the level produced in a monopolistic market at a lower price, the amount of the output generated in this market is less than that produced in a perfectly competitive market at a greater rate (Moriya et al. 2010). This situation then means that the supply and demand forces do not apply, as it should be, and as hospitals continue merging to form networks, the price determination of healthcare is likely to remain under the influence of the hospital systems. Supply and demand, which in most markets works efficiently, the same, does not translate well in healthcare. Given that the US hospital market structure is an oligopoly due to the increased formation of hospital networks, it follows that the hospitals set the price (Shepard, 2015). Therefore, in every way, these expenditures in healthcare as evidenced by the amount of dollars spent on healthcare related goods and services are a reflection of the demand side of healthcare. The price setting is thus independent of demand, as in this situation, the hospital networks view their demand as inelastic for price cuts, and elastic for price rise. In such a case, the costs become inflexible, and remain within the set limits, which are usually higher than in perfectly competitive markets and lower than those in monopolistic markets are (Cole et al. 2014). As consolidation, increases so will be the rise in the influence hospitals have on the price of healthcare services delivered.

Healthcare insurance plan is a necessity for most Americans, and given the fact that most of these schemes pay for the healthcare costs for all their enrollees, price becomes a non-issue because most of them do not perceive that they are indeed paying the price for the money is not directly coming out of their pockets. As a result, the demand for healthcare services, in the US, is inflated. According to Werling et al. (2014), hospital prices and market structure relate in many ways to affect healthcare costs. The bargaining power of hospitals and insurers culminates in a bargaining power that is divided between the two. The bargaining power of hospitals is evident when hospitals compete for inclusion into networks, for the value, any given hospital adds to a system has a significant effect on the bargaining power of the hospital, hence determine the price increase. Therefore, apart from the fact that prices of healthcare go high as hospital bargaining power increases, the willingness of consumers to pay to go to the hospital also has a contributory effect to the high prices.

According to Gaynor & Town (2011), apart from the hospital industry being one of the largest industries in the US economy, it also operates in a unique institutional setting. This unique setting has a considerable influence on modeling of the price setting behavior of hospitals. The statement above emanates from the fact that most of the representations of hospital undertakings recognize the role of institutional features of the hospital market in influencing competition, which affects prices as well as the quality of care. These unique institutional features of hospitals include the tendency of privately insured patients accessing hospital care primarily through health insurance. Moreover, patients do not directly pay for their patient care. Another feature is that, patients’ choice of health insurance is always made before the need of treatment, and hospitals in the US healthcare delivery system always negotiate with private insurers regarding their inclusion into their provider network and the portion of reimbursement they will receive from treating patients enrolled from their insurance plan.

Implication of third party payers on demand and supply of the hospital services

In the US, where third-party payment situations for healthcare services are commonplace, the demand for healthcare is limitless. This case emanates from the fact that the cost may not be a factor for the consumer (Werling et al. 2014). Moreover, in healthcare matters especially when life is at risk it becomes hard to put a limit on the demand for health services. Similarly, it becomes difficult for a health consumer to shop around for a physician or surgeon, and thus, this puts a limit on options available. Moreover, it is certain that the supply of doctors and other related services is not under the influence of normal market forces, but rather the income that characterizes specialization as the specialists are likely to make more than the primary care physicians (Cole et al. 2014). In the US, healthcare plans have more than doubled, in the recent past, and one of the reasons is the high market concentration in the health insurance industry. Therefore, apart from third party insurers influencing the demand for healthcare services thus resulting in increased demand, therefore, high prices, the tendency of hospitals bargaining with insurers on behalf of patients, has a significant impact on the demand and supply of the hospital services. This reasoning emanates from the fact that although hospital charges may be readily available, the charges are merely listed prices because the actual transaction prices are dependent on the bargaining that take place between insurers and hospitals. As a result, as long as a hospital and insurance payer forms part of a given network, it follows that the insurance payer will have to pay the amount set by the hospitals worth regarding the services it offers.

Given the fact that, for the US, the majority of private health insurance is provided by employers to their workers, it is confident that the demand for hospital services is not underpinned by the patients, but by employers (Cutler & Morton, 2013). This reasoning emanates from the fact that the employers are tasked with the responsibility of aggregating employees’ preferences, and because they want to attract and retain productive employees, the search for quality health services is a major factor. This determination then factors in the issue of adverse selection whereby health insurers will always compete on an increasingly benefit such that they include in their cover some of the most prestigious star hospitals. For this reason, plans that attract consumers with high costs are those that cover star hospitals because when sick, these customers prefer expensive tar providers (Shepard, 2015). For that matter, expensive star providers are likely to increase demand for star hospitals, as consumers will always keep insurance providers with star coverage hospitals. Therefore, the supply of hospital services is dependent on the demand for quality healthcare services such that most hospitals will strive to achieve the star status to make profits in return. For that reason, the addition of such star hospital to any given network is ma measure of the value it adds to the system, and in exchange the portion of the total amount that is attributable to its services.

It is evident that the US hospital market has consolidated a great deal to form a highly concentrated market that is localized around one main system, which is a Medical Centre,  2 to 3 smaller systems and a residual marginal of smaller institutions. This concentration has formed an oligopolistic market structure that is inclined towards a monopolistic market structure with increasing concentration over time. This market structure has significantly affected the demand and supply of hospital services, and independent operating hospitals have leaving consumers with limited options of places to go as most of them are consolidated into networks. Moreover, the prices for services have been inflexibly high as the hospitals have become price setters and given the fact that the demand has become inelastic due to insurance firms, the usual demand, and supply market forces have minimal effect on the price of the hospital-administered services.

 

List of references

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Cutler, D. M., & Morton, F. S. (2013).Hospitals, market share, and consolidation. JAMA,

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Gaynor, M., & Town, R. J. (2011). Competition in health care markets (No. w17208). National

Bureau of Economic Research.

Moriya, A. S., Vogt, W. B., & Gaynor, M. (2010). Hospital prices and market structure in the

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Shepard, M. (2015). Hospital Network Competition and Adverse Selection: Evidence from the

Massachusetts Health Insurance Exchange.Harvard University Job Market Paper.

Werling, J., Keehan, S., Nyhus, D., Heffler, S., Horst, R., & Meade, D. (2014). Research

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