Introduction
The healthcare sector differs from other economic sectors; while it is a market capitalist economy subject, it also has many similarities with non-profit organizations. As all people may become ill, medical care availability is an important question: if not all people obtain medical help, it diminishes their human rights. Thus, medicine should be available, while medical providers should still have the possibility to earn money for their services and innovations. Such tensions between free-market principles and the necessity of regulation are central to the healthcare sector, and their resolving is a task for various regulating organizations.
Current Market Model
In Pennsylvania, healthcare is usually regulated by health maintenance organizations (HMOs), which help citizens obtain medical aid at affordable prices. Managed-care programs are widespread, and most of the population uses them to get cheaper healthcare services (Franco Montoya et al., 4). Thus, HMO acts as an agent between the healthcare facility and the end-user (client). The facility offers a service via HMO, and a patient obtains it at a fixed price. The efficiency of this model is mixed: as will be described below, HMOs lead to decreased motivation among physicians and reduce the healthcare quality. As the service price is not based on its value, physicians are less motivated to work (Numerof & Abrams, 6). In that way, the current healthcare market model needs improvements to maintain low prices for citizens, high quality, and good motivation and earnings for hospitals and physicians.
An example of healthcare economic incentive available in Pennsylvania is the government support of small rural hospitals across the state. It is realized by providing them with a fixed amount of costs based on their calculated needs, intended to be used for inpatient maintenance and preventive medical care (Pennsylvania rural health model, 7). This model’s significant advantage is that it increases the availability of medicine to citizens living outside large cities, but it may possibly have drawbacks similar to those of HMOs. Physicians are usually motivated by their achievements, and when they obtain a fixed amount of money for their work instead of those based on treatment efficiency, their motivation may diminish (Berdud et al., 1). In that way, while the rural health model effectively increases access of the population to healthcare facilities, it may lower the quality of this healthcare, similar to HMOs.
Competitive Forces in Healthcare
As in all other markets, healthcare markets are driven by powers of supply and demand; however, they are quite different from other market types. A perfectly competitive market model, with a significant number of supply providers, a homogenous product, no barriers to entry, and a customer’s familiarity with a product, does not fit well in the healthcare market (Dewar, 3). In that way, competitive forces in the healthcare industry are not limited by standard demand-supply balance.
There are barriers to entry for all players in the healthcare market for two main reasons: the high level of knowledge necessary for entry and the necessity of licenses to start the healthcare business. Current medicine is a high-tech and knowledge-intensive industry built on the advances of modern biology science and medical technologies, such as X-ray tools (Dewar, 3). Without knowledge of various branches of science and technology, a physician cannot work and will not even obtain a license for it. It also reduces the number of supply providers, as not all can get the license or pay for costly education and equipment necessary to enter the medical market. In addition, due to the knowledge intensity of the industry, its customers have little familiarity with medical services. It is a frequent situation when patients have no idea about the tools used for their treatment (Dewar, 3). Thus, the industry is challenging and complex, and the forces acting in it include knowledge management and various regulations.
The service provided by the healthcare industry, as mentioned, is very different from all other services. It is connected with the life and well-being of all people, and thus, its product is not homogenous. Some people need medical treatment more than others, such as disabled or severely ill ones, and thus healthcare business is always value-oriented (Numerof & Abrams, 6). If the regulation of the industry ignores its orientation on values, it will diminish its quality, as one may see in examples of unsuccessful HMOs or monopolistic state regulation of medicine.
Monopoly and Monopsony in Healthcare
Monopoly means that a single provider has a complete or most of the market share on the market. It is usually a case of states where a government owns the healthcare sector and regulates all medical services and their prices. Examples of such states are former and existing communist countries and others with centrally-planned economies, such as Czechoslovakia until 1989 (Lábaj et al., 5). While such a position enables a government to ensure that all citizens will have access to medical care, it may severely limit its quality and ways of its development. When all clinics and healthcare facilities belong to the government, free competition is limited, and all products may only be introduced from above. This situation leads to decreased inner motivation among physicians, the main driving force for their work, and a lack of innovations (Berdud et al., 1). Thus, hospitals become outdated, medical aid quality decreases severely, and both healthcare providers and patients lose such a state monopoly.
Monopsony is the opposite of monopoly: the situation when one seller is dominant on the market. It is widespread in the healthcare sector, as governments often buy healthcare services to make them more available for all citizens (Chown et al., 2). It is similar to the monopolistic position described in a previous paragraph. Still, in this case, hospitals are free to choose prices for their services: thus, competitiveness is preserved with all its benefits. State monopoly is usually destructive for healthcare businesses, but monopsony allows reasonable regulation. The term “monopsony power” means the ability of the government to buy medical services at market prices and then sell them to customers at diminished prices (Chown et al., 2). States widely use such power to improve healthcare quality and make it more accessible for their citizens.
HMO-Managed Care: An Analysis
Managed care is a set of measures launched by the government to extend the availability of medical aid for the population. It is a type of monopsony described above: the government uses its monopsony power to pay for some part of medical services, and thus, people may obtain these services for less cost (Dewar, 3). In addition, such measures include cost reduction, organization improvement, and the introduction of various incentives for physicians to increase their quality of work. Health maintenance organizations (HMOs) are an example of such measures, providing medical care at fixed prices (Franco Montoya et al., 4). They are designed to connect healthcare providers and recipients and ensure that both sides will be satisfied.
The positive side of managed care incentives is that they lower the costs of medical aid, making it more accessible for all citizens. They provide more health services for less price, which is particularly beneficial for the disabled and severely ill people, increasing their access to healthcare. In addition, HMOs monitor the health level in the population where they are established: it is expressed in factors known as social determinants of health (Franco Montoya et al., 4). Examples are pollution, food and water quality, and other factors that directly or indirectly influence population health. From the physicians’ point of view, HMOs organize their connections with patients and ensure that they will more likely sell their service.
However, there are also drawbacks to HMOs creation, both for medical care providers and customers. Disadvantages for providers are more pronounced: such incentives may limit their profits in attempts to provide low-cost medical aid. For-profit hospitals are less motivated to work in areas where HMOs are highly implemented, as they will likely earn less money (Dewar, 3). HMOs usually propose fixed payments for healthcare providers, which means that they cannot manage prices for their services by themselves. In that way, the price depends not on the treatment’s outcomes but is fixed by the health maintenance organization (Numerof & Abrams, 6). Thus, despite HMOs helping medical providers connect with their patients, they also cut their incomes. If the government does not compensate for those losses of healthcare providers due to diminished prices, using its monopsony power, the such incentive will harm the healthcare business.
HMOs and other medical care facilities aim to increase care quality and decrease costs, but the quality is often decreased too. Physicians are less motivated to work in conditions where their earns are not connected with the outcomes of their work. In that way, price reduction via HMOs is often unnatural and disadvantageous for healthcare facilities. Patients often lack the motivation to obtain such aid, even at a diminished price. There is evidence that managed care incentives reduced monthly professional visits in some states where HMOs were implemented (Franco Montoya et al., 4). In that way, HMOs failed to solve all problems which they were intended to solve and, in addition, created new ones.
Thus, while HMOs were intended to promote equity in healthcare, their effect was mixed. They diminish the intrinsic motivation of physicians to increase the quality of their work and fix their mistakes (Berdud et al., 1). While managed care incentives may be beneficial when they increase the physicians’ motivation, they should be more appropriately designed instead of simply providing fixed payments regardless of the treatment’s outcomes. The model of public-private partnerships, where benefits and responsibilities are equally distributed between for-profit and not-for-profit parties, is suitable for HMOs’ further development (Solheim-Kile & Wald, 8). To conclude, the idea of health maintenance organizations is good, but its realization needs improvement.
Conclusion
While government regulation is an integral part of the healthcare sector, both over- and under-regulation are bad. Overregulation leads to a decrease in motivation and innovations in the industry and, thus, a loss in quality and industry development. Under-regulation causes high prices on healthcare services, leading to their unequal distribution. HMOs aim for fair regulation of the healthcare industry, but they have reached only mixed success, connected with failures, such as quality diminishing. Thus, the regulation model should be improved, for example, based on the public-private partnership (PPP) model between for-profit and not-for-profit organizations.
Sources
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Dewar, D. M. 2016. Essentials of health economics (2nd ed.). Jones & Bartlett Learning. Web.
Franco Montoya, D., Chehal, P. K., & Adams, E. K. 2020. Medicaid managed care’s effects on costs, access, and quality: An update. Annual Review of Public Health, 41(1), 537–549. Web.
Lábaj, M., Silanič, P., Weiss, C., & Yontcheva, B. 2018. Market structure and competition in the healthcare industry. The European Journal of Health Economics, 19(8), 1087–1110. Web.
Numerof, R. E., & Abrams, M. 2016. Bringing value to healthcare. Amsterdam University Press. Web.
Pennsylvania rural health model. 2017. CMS Innovation Center. Web.
Solheim-Kile, E., & Wald, A. 2020. Public–private joint ventures in the healthcare sector: Enlarging the shadow of the future through social and economic incentives. International Journal of Public Sector Management, 33(6/7), 647–662. Web.