Posts Tagged ‘demand management’

Trick question: To patients, what’s the price of free healthcare?

August 22, 2012

OK, everybody knows that ObamaCare largely wipes out co-pays and deductibles for preventive medicine.

In other words, patients don’t have to shell out any money … the definition of “free’”, right?

Not so fast.

I always assert to my students that people always, always, always under value their time

See archive post “Time is Money”

Think of the bargain entertainment center you can buy at IKEA for $299.

The purchase price is a steal compared to the fully assembled entertainment center at a furniture store.

But, it takes you two days to assemble it.

At, say $20 per hour, the implicit economic cost of your time is over $200.

Suddenly, it’s no bargain at all.

If you value your time higher than $20 per hour then then economics get even worse.

The principle: “price” is more than the money expended to acquire a product … it also includes the economic cost or searching, acquiring and putting a product into use …  and any on-going costs to keep the product maintained and operating.

What does that have to do with preventive medicine?

Simple connection.

According to an article last week in the WSJ: “To meet the promise of free preventive care nationwide, every family doctor in America would have to work full-time delivering it”.

In other words, demand is twice the capacity to supply.

“When demand exceeds supply in a normal market, the price rises until it reaches a market-clearing level.”

That’s Econ 101.

When a price is fixed below the natural “clearing price” then either the product has to be rationed or other economic costs kick in … like the implicit cost of of the time required to acquire the service.

Think about the time involved to get to see a doctor.

First is the scheduling call.

Ever been put on hold or forced to call back?

I have.

Ever been disappointed when told that the first available appointment slot is weeks off?

I have.

Note: For patients in need of services covered by Medicare, the typical wait to see a doctor was two or three weeks

Ever waited for an hour or two or more waiting to see the doctor?

I have.

Note: Studies report that 20% of the patients who come to an emergency room leave without ever seeing a doctor, because they get tired of waiting.

When demand exceeds supply, doctors have a great deal of flexibility about who they see and when they see them.

In marketing economics, it’s called “demand management”.

Demand management has a couple of underlying principles.

One is “Whenever demand exceeds supply take care of loyal customers first, then take care of the other customers willing to pay the most”.

So, if you’re a doctor facing demand that far exceeds your capacity, what do you do?

First, take care of longstanding patients … then service the patients that pay the most – those who pay out-of-pocket or have private insurance.

Who’s last on the list?  Government insured patients: MediCare and Medicaid.

How can they possibly do that?

Simple. They can simply act like airlines, restaurants, credit card companies  and banks.

For example, once a Medicaid patient’s phone number is in the system, their phone calls can be queued behind any calls from higher paying patients.

Financial service companies have been doing that for years.  Whales’ calls get priority routing and faster answers.

Similarly, appointment slots can be capacity constrained by payment type … with relatively few slots per day allocated to low price patients.

Airlines have capacity controlled low priced “leisure” seats for decades.

Once at the office, doctors can keep advancing high pay patients in the waiting queue.

What’s the worse that can happen? A patient that you’re going to lose money serving ups and leaves.  Oh well.

The bottom line: free isn’t really free … when you factor in your time … and the possibility of not being served at all.

It’s basic demand management economics.

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