ECONOMIC HEALTH

Economics of Healthcare

Economics of Healthcare

The Demand For or Supply of Health Care: Average vs. Marginal Concept

Marginal cost is equal to change in total cost per change in quantity. Marginal costs illustrate the cost related to production of an additional unit. Average cost is the total cost per total quantity. For example, if a hospital is operating with three machines and total cost of operations is £3 million, and it serves around 100 patients per day than total average cost per patient would be £30,000. Now, if the hospital adds another machine to its operations and now serving 150 patients, total cost would rise, let's say £3.5 million and average cost per patient would become £23,333. Marginal cost is change in total cost per change in total quantity would be equal to £10,000.

Economies of scale relates to long run operations. If a firm is achieving additional unit of output at lesser average cost for previous units, the economy of scale is achieved by the firm i.e. if average cost in the long run is above the marginal cost (in the long run).

The Rule of the Marginal Analysis

Economic analysis includes financial activities in line with marginal rules. Its importance is two-fold. First, analyzing the marginal values of economic variables helps in better decision making. Marginal return leads to economies of scale.

In order to understand the importance of marginal analysis instead of average cost analysis, let's take the example of schemes planned to reduce hospital inpatient surgical costs achieved by reducing the length of stay by discharging the patient early. The average cost of an inpatient stay is available to hospitals; therefore, calculating average costs is easy. However, these costs are not consistent. Particularly, the cost might be much smaller than the average towards the end of stay, since the average comprises allocation of the costs of cure and possibly of high dependency care that was provided at the beginning of an inpatient stay. If hospital reduces dependency days (end of the day), then it will result in scanty savings than expected. Whereas, analyzing marginal costs in regard to decrease or increase in number of dependency days would give correct estimates of savings (David 2009, web).

Economies of Scale and Of Diseconomies of Scale:

There are various ways through which economies of scale are accomplished. These include improved bargaining power for inputs, high fixed costs of production, organizational design, specialization and coordination (David & Brachet ...