Ch 16 Outline

I. The Demand and Supply of Health Care Labor A. Production Functions and Isoquants (most of this content was also covered in chapters 5 and 6, which you can also refer to) B. Figure 16-1: how do the figures show differing abilities to substitute inputs? (Pg. 393) Panel A: Labor and capital are GOOD substitutes: Lower prices of labor will lead to a relatively large substitution of labor for capital and vice versa. Panel B: Labor and capital are NOT good substitutes. Changes in the factor prices will not change the capital-labor ratio. Example: Specialized surgeries may require specific ratios of labor to capital with little substitution available. C. Marginal Productivity of Labor 1. What does marginal product (MP) measure (how is it measured)? the increase in output when the input is increased by 1...measured by the amount of extra output per additional input. ex. adding a lab tech but keeping the machines etc the same...more output with extra staff same amount of machines. p 646 the additional total output resulting from an additional unit of the variable input. 2. What is the law of diminishing returns? refers to a point at which the level of profits or benefits gained is less than the amount of money and energy invested p646 - after some point the marginal product of variable input must diminish 3. How is marginal product used to determine whether additional units of an input should be hired? by weighing if an additional employee would create more revenue with their output than their wages (is their a profit or are they breaking even/overspending) 4. What is marginal revenue product (MRP)? the addition to a companies revenue associated with hiring more staff to help produce output p647. the addition to a firms total revenue associated with employing one more unit of variable input 5. How is MRP related to MP? they both relate to increasing input (eg. staff) to increase output. MP = the addtiotion to total output resulting from an additional unit of the variable input D. Figure 16-2 1. Why is the MRP curve downward sloping? The downward sloping line is showing the law of diminishing return 2. How does it relate to demand for the resource? depending on wage rate, at a higher wage the company demands fewer workers 3. What does it mean to say input demand is a “derived demand”? the demand placed on one good or service as a result of changes in the price for some other related good or service E. Factor Substitution and Labor Demand: how does substitutability affect demand for resources? p395 The labor demand curve shows the value of the marginal product of labor as a function of quantity of labor hired. consider if substitutionality increases (a lower paid employee can perform more/higher level of work) this makes the lower paid employee a better substitute and therefore there will be an increased demand for the lower paid employee. this change will also shift the demand curve for the higher paid employee and make it more elastic (flatter/moe respoonsive to wage rate) therefore if there is greater substitutionality between inputs there will be more resistance to input price changes - replacing expensive inputs with cheaper ones. F. The Supply of Labor p396 1. What factors affect the elasticity of supply? availability of resources innovation of technology amount of producers. gov’t policy 2. What factors affect supply increasing or decreasing? Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price. G. Figure 16-3 p395 1. How is the equilibrium identified in the graph? the labor market equilibrium, and consequently the equilibrium wage are the point where the supply anad demand curve intersect (E) 2. What causes changes in the demand for an input? The labor demand curve shows the value of the marginal product of labor as a function of quantity of labor hired. demand is affected by: The output price. When output price rises, the labor demand curve shifts to the right { more labor is demanded at each wage. When output price falls,less labor is demanded at each wage. 3. What causes changes in the supply of an input? Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price. 4. How is the equilibrium affected by changes in demand or supply? (Refer to chapter 2, p. 32-35 to review the factors that affect supply and demand) an increase in demand causes the equilibrium price to rise. On the other hand, a decrease in demand causes the equilibrium price to fall. An increase in supply causes the equilibrium price to fall, while a decrease in supply causes the equilibrium price to rise. II. Factor Productivity and Substitution Among Factors A. How is average product measured? avg product of labor = Q/L (p397) = total outpu (Q)/ amouint of a particular labor input (L) =one of uses the dollar value of output/weighted sum of related inputs B. Measurement of Physician Productivity: what has the research shown? 397 reinhardt (1972) - marginal product increased to 25h/wk - and went to 0 @110h/wk starting from a base of 60 h/wk a 1% increase of physician input woud increase # of pt visits by 0.8%. C. The Efficient utilization of Physician Assistants: Substitution Among Inputs p397 1. What does the research indicate about substitutability? spending $1 more on aides vs md’s increased pt visits 2. Does the type of practice setting affect productivity? solo less productive than group (22% more prod) because groups employed PAs each 1 hr of md = $60 of non md. np/pa can do 50-90% of what MD can do without compromising quality. D. Read Box 16-1. (398) higer quality teams (more educated) can be more productive (ie obtain the same amout of output with lower inputs. III. Health Manpower Availability and the Meaning of Shortages A. Review Table 16-1 p(400) B. Availability of Physicians the pattern of available physicians is not changing. C. Read Box 16-2 D. Economic Definitions of Shortages of Health Professionals shortage = dmand>supply @Market price in healthcare there is no natural tendency towards an equilibrium since prices are gov’t controlled. 1. Excess Demand: what is the economic definition of a shortage? if w1=Ld1-Ls1 it may not be a shortage at w2 (so if wages increase there may no longer be a shortage in supply and there may be a decrease in demand. 2. Review Figure 16-4 p402 3. Relatively Rapid Increases in Wages: Dynamic Shortages supply of physicians can be slow to respond - it may momentarily increase then fall off because of a previous shortage 4. Review Figure 16-5 5. Relative Rates of Return How to measure the monetary gains from prof. training – Hansen 1964- must take into account the various opportunity costs incurred by professionals in obtaining their training. 6. How might very high rates of return have an effect? .the higher the rate of return the greater the financial rewards are to investment in human capital gained through education. High and even excessive rates of return may occur when ever supply of labor doesn’t respond quickly to changes in demand. (barriers of entry) 7. What might cause a low response in labor supply? Barriers to entry (controls on slots of medical schools, licensure laws) E. The Role of Monopsony Power: Shortages of Registered Nurses 404 1. What is a monoposony? How is it different from a monopoly? 647 – a monopsony is a situation in which a producer faces a positively sloped supply curve in the product or factor market because it is the only buyer. The supply curve facing the monopsonist market is the market supply curve. 647 a monopoly – situation in which a producer faces a negatively sloped demand curve – no other firm produces a close substitute for the firms product. The demand curve facing the monopolist market is the market demand curve 2. Monopsonistic Labor Markets 404 A hospital may report unfilled or budgeted positions – even though the firm is in equilibrium - it may announce it will hire but it really won’t.- the monopsony hospital is willing to hire more nurses at the current wage but has no intention of paying a higher wage. 3. Review Figure 16-6 404 4. Reported Shortages The hospital wants more nurses at the current wage. IV. Medical Education Issues and the Question of Control A. Sources of Medical School Revenues: what are the sources? (p. 406) -Tuition represents a relatively small source of revenues for many medical schools so students only pay a relatively small portion of true cost. -Governmental support for operating revenues and through grants/contracts is typically 30% of total revenues. - Largest share about 50% comes from reimbursement of health services provided to patients. B. Teaching Hospitals, Medical Schools, and Join Production 1. Table 16-2 (p. 407) 2. How is the cost of pure education calculated? Pure education is the total cost less the cost of producing only patient care. 3. How is the cost of pure patient care calculated? Pure cost of patient care is total cost less the cost of producing only education. 4. How is the joint cost calculated? Joint costs are total costs less all pure costs. 5. Why are some concerned about identifying the separate costs of production? Much of the controversy with respect to funding revolves around who will pay for the joint costs as in medical schools there are medical education costs, patient care, and research products. C. Foreign Medical School Graduates: How do they affect the market? Foreign National FMG’s already trained but practicing elsewhere can respond more quickly so the availability makes total physician supply in the US, in principle, more elastic. D. The Control of Medical Education - Victor Fuchs refers to the claim that physicians restrict entry to their profession in order to drive up prices for their services and make larger incomes. -Historically physicians often earned above normal returns -Kessel (1958) argued that organized medicine attained monopoly power through the licensure of physicians and the control of access to education (example is control of medical education exerted by physicians through American Medical Association). E. Control Over Entry V. Licensure and Monopoly Rents A. What is the conventional economic view of licensure requirements? that organized medicine has used control of licensure for self interest by limiting entry (and by influencing the licensure requirements of potential competiter providers to the advantage of physicians.) B. What is the public interest argument?. Some however have the advanced punlic interest arguement for licensure- that is a result of information imperefections the public demands quality controls. licensure and certification help fill these inforamtion gaps. C. What are “economic rents” and why do they occur? Payments to factors over and above those necessary to induce them to provide their services. D. What does the price-cost margin measure and what does research indicate about it? the price cost margin is zero. if physicians have monopoly power and the ability to maintain price above marginal cost, the margin will be positive. researchers estimated the margina t 23% overall, these estimates represent “nontrival” levels of monopoly power that produced a welfare loss (due to insufficiant care) to the U.S economy of about 8billionin 1996 dollars. E. Public Interest and Self-Interest Theories of Regulation: what are the theories? (Pg. 411) Public Interest Motive Theory: The demand for regulatory measures such as licensure stems from the limited information patients have about quality and the high costs of obtaining information. Self- Interest Motive Theory: This theory sees regulation as a return to special interests that provide financial and political support in return for favored legislation. Thus, a demand for political favors arises from the rent-seeking behavior of special interest groups. F. Evidence of Public Interests versus Self-Interests: what does the evidence reveal? (pg. 412) Legislators respond to organize interests, the public interest, and their own legislative environments. G. Licensure and Quality: does licensure improve quality? (pgs. 412-413) Though no-one is suggesting that eliminating licensure and other requirements will reduce negative outcomes, regulation does not ensure quality care. VI. Other Physician Labor Issues A. Specialization: are there differences? 413 Quality healthcare requires access to an appropriate mix of specialists.policy efforts are to encourage more md to go into primary care. There is however a wide gap in earning. 284 k for specialist vs 195 k for primary md. Status also plays a role. Physicians respond to income (lifetime income as well) other influences – 1. Hours worked, 2. Length of training 3. Skill set needed 4. Barriers to entry in some specialties. (this is the greatest influence) B. Private Practice or Employed 414 62% are employed. hospitals have been aggressively purchasing practices to take advantage of the incentives under the affordable care act.- to form networks and accountable care organizations. For physicians the move from FFS to quality creates uncertainty. Private practices have limited ability to deal with 3rd party payers that reducing payment rates. Salaried pros = more reliable work week, malpractice coverage. Cons = decreased independence in 2014 private practice was more lucrative for primary md (12%) and specialist (28%) C. Physician Income by Gender: The Increasing Role of Women 415 Women =50% of med school grads 30% of active mds. Female physicians earn less than males – because they are more likely to choose lower paying jobs (specialties), work fewer hours (family burdens) – 11% less if married, 14% less with 1 child,22% less with more than 1 child. Hoff- found that there was a true pay gap not associated with any of the above – when looking at hospitalists. D. Read Box 16-3 416 gender pay gap $16819 possibly due to large number of female new grads - more flexible jobs that come at the price of lower pay VII. Conclusions VIII. Suggested End-of-Chapter Questions A. Discussion Questions: 4, 6, and 11 (12 in the 7th edition) 4. What is the marginal product of an input? Marginal product of an input is the increase in output when that input is increased by one unit. Example If one more lab tech is hired by a hospital then the increase in output would be the marginal product of labor. Marginal revenue product? It is the incremental revenue generated by increasing the input by one unit. Example. If one more lab tech brings in $100 of revenue than that would be the marginal revenue product. Why does the demand for a factor correspond to the marginal revenue product curve? The marginal revenue curve is found by multiplying marginal product with the price of output. If the MP is high it means the output per extra input is high which would increase the demand for factor. If the price of output increases then the MRP increases and so does demand- (MRP curve corresponds to the demand factor). What will determine whether the demand for a factor will be elastic or inelastic? The elasticity of demand of factor would be determined by the price of outputs. The higher price would provide a cushion for the demand to stay the same even if the wages increase. 6. What is meant by the term barriers to entry? They are the obstacles placed by the existing players to discourage the entry of new competitors in the market. Example High startup costs. What are some entry barriers for someone who wants to be an obstetrician? $$$ for medical college and licensing. For someone who wants to be a nursing assistant? Low salary, registration fees, and student debt. 12. What is joint production? It refers to the process of producing many outputs from common input simultaneously. What does the term joint production costs mean? JPC Is the cost of common processing to produce separate outputs. Implies that joint production cost is incurred prior to the point when separate products emerge from the process. Given that medical schools engage in joint production of education, patient care and research, what interference can be drawn about the economics of scope in producing these three outputs? Economies of scope refer to cost benefits that occur by producing multiple goods rather than specializing in production of one good. Medical school engages in joint production of education, health, and research which lowers the combined cost of production thus producing economies of scope. B. Exercise: 1, 2, 3, 4, 5, 6, and 7 1. Consider the firm’s demand (MRP) for labor, such as in Figure 16-2. If the demand of elasticity is – 0.5, what will be the effect of increased wages on total labor earnings? If elasticity of demand = -0.5 (demand decreases by 50% with 100% increase in price). If wage increase then the MRP decreases and less labor is demanded. Price of output increase by twice the magnitude of demand decrease, leading to increase in total labor earnings. 2. Using 16-3, graph and analyze the impact of an increase in the price of lab tests on labor market. If the price of Labs increases, then the MRP increases which means labor demand increases. When demand for labor increases then wage rate increases. Impact on Market 3. Consider the market for highly skilled laboratory technicians. Graph the impacts on market wages if limitations on immigration were lifted. Would more or fewer services be provided? What happens to the price. ****If limitations were lifted supply of lab technicians would increase and wage would fall for workers**** If limitations on immigration was lifted 4. In this chapter, we discuss how physicians’ MP rise up to 25 hours and then slowly fall to zero at 110 hours. Graph both marginal and total products from this statement. Marginal and Total Product Curve The Graph shows both the marginal product curve and total product curve for the statement. At 25 hours of work, Point A shows the maxima of marginal product curve. Correspondingly the slope of total product curve is increasing from origin till point B. From 25 hours to 110 hours of work marginal product decreases to from maximum to zero. Correspondingly the slope of total product curve is decreasing from point B to point C. Beyond point C, the marginal product becomes negative and total product starts declining. 5. Using supply and demand analysis, model the equilibrium level of physicians’ wages. What would the impact on physicians’ wages of more stringent policies on the employment of foreign medical school graduates? There would be a reduction in the supply of physicians if more stringent policies were imposed on the employment of foreign medical school graduates. The supply curve would move inwards and wages would rise. 6. Suppose that a medical school provides three outputs patient care, education, and research-and that the total cost of school is $100 million per year. If the school produced only education its costs would be $60 million. If the school produced only patient care, its costs would be $30 million. If it produced only research, the costs would be $20 million. Joint costs for each pair would be $10 million. Numbers are in millions of Dollars a) What are the pure costs of education, patient care, and research? Pure costs of education=60-10=50 Pure cost of patient care= 30-10=20 Pure cost of research=20-10=10 b) What are the joint costs? Joint Costs= total cost-sum of all pure costs. Answer: $10 Million 7. Suppose that the licensure requirements for health care providers were eliminated. Use supply-and-demand analysis to predict what may happen to the price and quantity of health care services? If this were the case the supply curve would shift outwards leading to the fall of health care prices. The variety of health care services would appear in the market and even alternative medicine would flourish. Are there other considerations-in particular, mechanisms-that could evolve to replace licensure? Suppliers would opt for accreditation because customers value quality and are willing to pay for it.