HEALTHCARE & ECONOMICS

Healthcare & Economics

Healthcare & Economics

Over the past few decades competition in the United States (US) healthcare market has increased, with a trend toward less government involvement. This paper will provide a background of the traditional models of competition, describe critical assumptions of competitive markets, and describe conclusion of these assumptions to healthcare policy in the US. This paper posits that economic theory does not provide strong justification for the superiority of competitive market policies in the health care area. This is because the competitive model is based on certain important assumptions that, we argue, do not appear to be met.

In the consumer theory, people tend to maximize their utility, which can be determined by the bundle of goods and services that they possess and acquire. These services and goods are bought according to consumer's desires, tastes and prices of alternative goods, all relative to how much income a consumer can afford to spend. This utility is obtained by a consumer through the consumption of alternative quantities of different goods and services.

For producers in the healthcare industry, technology can help achieve greater output. Throughout this paper the reader should equate the use of the term firm with a healthcare business, company, physician group or individual physician. In this sense, if a firm produces more output relative to the technology it possesses, then the company is technologically efficient. This does not imply that being technologically efficient a firm is also economically efficient. To be economically efficient, firms need to use a combination of inputs to incur the least costs possible. Fewer costs will enable the company to maximize profits. Additionally, in order to produce in an economically efficient manner, firms must consider the prices of alternative inputs since these also have a direct impact on the costs incurred.

Once the business chooses an economically efficient mix of inputs, they must decide how much to produce and the price of their product. In a competitive marketplace, such as the healthcare industry where products of alternative firms are indistinguishable, the market itself dictates the price. Therefore, firms have to choose a market according to the price it will charge. A healthcare business will lose market share if it charges a higher price than the going price in the market, at the same time it will not maximize its profits if it charges less than this going price. A general prinicple for choosing the quantity of output to produce is to have the marginal cost of production (the cost of producing the last good) equal “to the market price that can be obtained by selling the good” (Rice 2002)(pg. 16).

Like in any other industry, profits are what motivates and drives the firm's decisions. At the same time, if a business is making substantial profits due to the increased demand caused by changes in consumer wants and needs or because of the change in technological inputs, then the existing firms will expand their output and/or other firms will enter the ...