The Imperfect Competitive Medical Marketplace

Health Care Economics

Medical Care is never free, although the individual may pay nothing?

Medical Care is both a commodity and a service. The process of consuming medical care has a cost, even if the after insurance price is zero to the consumer. For instance, there are hard costs that include the buildings, equipment and supplies that house the medical care or office. There are the wages that are paid for the administration and provision of healthcare, and a cost for every procedure, every drug, and every minute of healthcare operations. In an economy in which there is insurance coverage, costs are not static, but variable. The “cost” of something may be $100, but because of economies of scale and negotiations, the payment for that service may only be $60 once the insurance company has verified the claim. The individual may pay nothing of that if their firm pays their premium, or may pay only a very small portion of the overall bill based on co-payment arrangements. Similarly, if someone comes to the Emergency Room and cannot pay, there may be no out of pocket cost to them, but someone does have to pay, or absorb, the cost of doing business.

In the medical field, equipment is expensive, pharmaceuticals are expensive, and often, after 10-12 years of schooling and expertise, physician and specialist care is expensive. If we think of medical care as a tangible commodity, while we may not consume it in the traditional manner, we do consume it by using it; whether needed or unneeded. Then, when we add ancillary healthcare costs to the mix, we end up with the five major health risks brought upon by lifestyle costing over $135 billion to the American economy per year. The “costs” of medical care spiral — if 30% of a given population use the product but cannot pay, their bill may be $0.00; but the other 60% may have higher insurance premiums, deductibles, or co-pays simply because of this disparity. Just as it costs to produce a loaf of bread, once consumed, it is gone. Similarly, with healthcare, once consumed, even at high costs, it is gone.

Part 2 — What factors determine demand? How do they relate to price?

When economists think about a product in general, they think supply and demand. If there is no demand for the product, then there will likely be a smaller supply. If the item is rare and there is a high demand, then the product will be expensive. We can look at the demand for health care services; if prices rise too high, no one can afford to go to a doctor or hospital, or insurance premiums become so egregious that consumers are forced to use the Emergency Rooms. This could result in the number of people who are insured and the scope of their coverage, their disposable income, and even the number of people inside the healthcare industry. . The economics of healthcare also deal with the cases of scarcity — in health care dimensions, geographic areas, or economic/demographic conditions, and even rationing considering the percentage of Americans without healthcare. People demand healthcare, and for the nation to be productive, they must be healthy. As it is, illness from work costs the overall economy billions per annum. Smoking, obesity and alcohol cost employers and the country even more.

In general, price elasticity of demand is an economic measurement that shows the how responsive the quantity wanted is to the selling price. The demand for a good is elastic when greater than one is — or changes in price have a relatively large effect on goods demanded. Of course there are a number of variables present regarding price elasticity: type of good, luxury or necessity, duration of the market cycle, and availability of that good. In most economic scenarios, though, as price increases, demand decreases; again, depending on where the item was priced in the first place. Elasticity varies between products, just as price and consumer demand does. Something that is highly elastic means that if a small change in price leads to a sharp change in the quantity of demand — raise price and consumers no longer want the product. People need to live, though, so most will find ways to “demand” healthcare.

Part 3- What is the role of Physicians in the demand for care? Why is there a conflict? How can the conflict be addressed?

Physicians are individuals. They have years of training, variable years of experience, but different interpretations of medical care, needs, and philosophies. Some doctors may be cautious and proceed carefully with many tests prior to making a diagnosis or decision; others may believe case A needs B. And act; while still others are guided by their HMOs or administrative concerns. Ultimately, though, while the patient may have the utilitarian authority regarding their own healthcare, most opt to cede that authority to the doctor. The doctor then decides what the demand for care is based on their interpretation of what is best for the patient. Combine this with research, industry data, and new technology and one has a complicated formula.

For instance, in Area A in our hypothesis, the HMO provider of choice has decided that it will lower the reimbursement level for C-sections by 25%. There is a good chance that the number of C-sections will decrease based on the doctor’s unwillingness to take an economic hit for a procedure that may or may not be 100% necessary. If the doctor errs on the side of caution and performs a C-section, they will likely lose money; if they opt not to perform a C-section, they take the chance that the patient will develop complications, further taxing the system, but still within guidelines for the HMO.

Of course there is always a conflict between the medical decision and price; no one can predict exactly what will happen to a patient since medicine is both an art and a science. Conflicts in demand for care can be mitigated with sound ethical training, state standards for minimum care, peer review, and through the educational process of nurses and doctors. Insurance companies are complicit too, and must be willing to reimburse for fair services based on medical need, not financial performance.

Part 4 — How has the elasticity of supply of medical services affected the government’s cost of expanding healthcare to the poor and uninsured?

Changes in supply and demand of medical services occur as a result of physician, nurse, and healthcare shortages or surpluses. Because we are a country in a varied managed care environment, every product (service) has a low price quotient and every non-covered product or service has its own price elasticity. Typically, medical services were inelastic as a growth industry since fee increases would correspondingly increase revenues. But enter the era of recession and managed care, and we have a marketplace that is resistant to pricing pressures even though in some areas there are too many physicians, but not enough care, not enough nurses, and overpriced procedures and equipment.

What this means to doctors is that they are earning less, working more, and paying more for administration, support and protective insurance. Funding healthcare when the elasticity of medical services changes, though, becomes more problematic. As healthcare costs increase geometrically, and Medicare and Medicaid have budgets that are exponentially out of sync, then government funding for healthcare programs for the underinsured, the uninsured and the poor may falter. If money from taxes goes to simply keeping a system alive, then there are no funds to expand care, even though it is needed. And, while expanding care to the poor and uninsured would be a preventative measure, and therefore less expensive, the irony is that these individuals often use Emergency services that are both more expensive and more costly for the facility than preventative care. Thus, nothing is free, and if care is not given to the poor and uninsured based on economic demand curves, the costs will undoubtedly show up later at a greater overall cost. This, then, will likely be passed back to the consumer in terms of premiums, or to the citizens in terms of taxation.


Healthcare. (2010). EconomicsOnline. Retrieved from:

Out-Of-Pocket Health Care Costs. (2001, June). Retrieved from Partnership For Solutions:

The Imperfect Competitive Medical Marketplace. (December 19, 2007). MedicalExecutive Post. Retrieved from:

Friedman, D. (1990). Price Theory. Retrieved from:

Hurley, J. And Labelle, R. (1995). Relative Fees and the Utilization of Physician’s Services. Health Economics. 4 (6): 419-38.

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