Understanding the demand and supply in healthcare is an essential aspect of explaining the consumption patterns in the healthcare industry. The healthcare industry has evolved over the last decade, creating various types of treatment that compel patients and healthcare professionals to choose some treatment approaches over others. This behavior can be understood through multiple concepts such as utility and elasticity of demand. The central idea is that the cost of healthcare is one of the factors that influence profit maximization and contribute to the shift in the shift between demand and supply. Generally, healthcare demand is inelastic, but it depends on the type of healthcare.
The Concept of Utility and Elasticity in Healthcare
Utility in healthcare refers to the cardinal values that individual gains after using a particular healthcare approach over another. The measurement of healthcare utility is assessed at the interval scale, where zero is equated to death. In situations where healthcare utility is zero, it indicates that the treatment fails to help the person to recover. For instance, if a patient has cancer, and the various available treatment approaches such as chemotherapy fail to yield the expected outcomes for recovery, the utility obtained from this intervention mechanism remains to be zero. Utility in healthcare, therefore, plays a significant role in explaining the elasticity of demand in healthcare. Elasticity varies depending on the type of demand to be implemented by the patients. In some circumstances, treatment approaches are treated as either necessity, while others are considered to be luxuries.
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Generally, the elasticity of demand in healthcare is perceived to be inelastic. For instance, the price elasticity of demand in healthcare is inelastic, indicating that an increase in the price does not lead to a decrease in the market for products because health is a necessity rather than a luxury. For instance, the elasticity of demand for healthcare is perceived to be -0.17, indicating that an increase in price for healthcare expenditure by one unit leads to a decline in spending on healthcare by 0.17 groups (Ellis, Martins,& Zhu, 2017). However, the income demand for prices is inelastic. For example, the income elasticity of health is assumed to be approximately 0.2. The positive sign in the income rigid in healthcare indicates that an increase in demand leads to a rise in healthcare demand. Even though the stable demand for healthcare in general, elasticity differs depending on the type of care. For example, preventive and pharmacy benefits are healthcare. After all, they prove to have a high price and income elasticity because they are assumed to be luxuries but not necessities (Ellis et al., 2017). In situations where the costs of these services rise, people will find little utility in paying high prices for these services.
Shifters that May Affect the Supply and Demand Relationship in Health Care
Several factors that influence the demand and supply of healthcare influence the relationship between the demand and supply curve in the healthcare industry. For instance, a shift in the demand curve in healthcare is associated with socioeconomic status. For example, in circumstances where the demography has people with lower socioeconomic status is associated with lower consumption of healthcare services. People with a more moderate social-economic condition are associated with a higher mortality rate because there is a lower level of use of healthcare services. For instance, if people have a lower socioeconomic status, the demand curve shifts to the left, lowering the level of demand. However, an increase in socioeconomic status leads to an increase in the demand for healthcare services. The connection between education and income also indicates that people with higher levels of income are always in a position to spend more on healthcare expenditure. According to Ide et al. (2017), healthcare in the United States expensive is expensive compared to Europe, thus explaining the reason to why there is a low expenditure in Healthcare in the United States.
From the supply side of healthcare, the number of physicians in a hospital to offer treatment in a healthcare program plays a critical role in determining the utilization of healthcare resources. For instance, assuming that the number of physicians increases from 10 to 20 in a healthcare facility, there is a possibility that demand for healthcare services rises because people are aware that their issues will be addressed. This change is strengthened by government change in healthcare policy. For example, the introduction of the Medicare system in Canada to support healthcare access in the country increased the demand of healthcare services among the people in the lower socioeconomic status (Ide et al., 2017). This information indicates that government policy can cause a shift in the supply curve to the left, depending on its impacts on the population.
How Economies of Scale Affect Profit Maximization in Health Care
An economy of scale is an essential approach required by organizations to lower the costs associated with their operations. The central idea is that organization operating on a large scale creates room for cost-sharing and promotes efficiency in companies. In the healthcare industry, economies of scale have been built in several companies, and healthcare organizations have engaged in mechanisms such as mergers and acquisitions to operate on a large scale (Lapointe, 2018). However, the outcomes of these strategies have been associated with both positive and adverse impacts. From the positive view, classic economies of scale can reduce operational costs per patient treatment, and the impressions reflect through increased volume of patients seeking treatment services in these healthcare facilities. For instance, the implementation of mergers and acquisitions resulted in cost-saving between 15% and 30% in the United States in 2016 (Lapointe, 2018). These benefits accrue as a result of spreading the fixed costs across a large number of patients and creating room for negotiation for lower prices, especially for primary treatment services. However, other studies show that there is a negative connection between large scale and healthcare facility operations because they may add costs to stand-alone healthcare organizations.
In the modern healthcare market, several factors such as the cost of training physicians and other professionals required in the organization, specialists, and medical professionals. These costs are associated with several programs, such as materials needed in offering treatment services. The presence of ambulances, many clinical experts, and pharmaceutical products increases the supply of healthcare services and is accompanied by an increase in demand for similar services. However, a decline in the presence of these services leads to a reduction in order for the services. The presence of these services indicates that healthcare facilities have to increase additional expenditures in creating these services. For example, acquiring service requirements in a healthcare facility and employing the required number of professionals comes at additional costs. The presence of other services such as healthcare insurance companies increases the demand for healthcare services because the charges appear to be lower. For example, healthcare services in the United States are considered to be improved and expensive than in Europe (Lapointe, 2018). These issues indicate that in situations where the healthcare facility creates all the services needed by patients; they incur costs covered through the expenses required by patients.
Conclusion
Demand and supply in healthcare are influenced factors that have a financial indication. Social-economic status, income, and level of education determine the need for healthcare services. However, the supply side is affected by various aspects, such as the cost of services, government policies, and the supply of physicians in a healthcare facility. The expenses that occur as a result of creating these services have financial implications through the costs and prices set for achieving such services. These differences explain the reason as to why the quality of healthcare services and prices differ across countries.
References
Lapointe J., (2018). Key Strategies for Health Systems to Achieve Economies of Scale. Retrieved from: https://revcycleintelligence.com/news/key-strategies-for-health-systems-to-achieve-economies-of-scale
Ellis, R. P., Martins, B., & Zhu, W. (2017). Health care demand elasticities by type of service. Journal of health economics, 55, 232-243.
Ide, H., Takeuchi, K., Fujita, S., & Takabayashi, K. (2017). Estimation and Evaluation of Future Demand and Supply of Healthcare Services Based on a Patient Access Area Model. International journal of environmental research and public health, 14(11), 1367.
