Posts Tagged ‘Free’

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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Creative marketing: Mickey D goes from “free” to “almost free” …

December 2, 2011

San Fran parents said kids were pressuring them to buy non-nutritious happy meals to get the free toys.

So, the San Fran city council passed a  law making it illegal for fast food chains to include free toys in happy meals.

According to the Wash Post, McDonald’s crafted a creative workaround: for 10 cents, patrons can buy a toy to go along with a happy meal.

10 cents isn’t “free” it’s “almost free”.

The kicker: all the dimes all go to charity – the Ronald McDonald Houses.

The downside: consumer behavior is such that there’s a big fall off in demand when a price is raised from free to almost free.

So, Ronald McDonald Houses probably won’t get much money from the program

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Not everyone can be the marginal cost consumer…

September 30, 2011

Punch line: Netflix got into a hole by initially giving away its video streaming offerings … in essence, pricing based on marginal cost.

That can work, when everybody isn’t a marginal customer …

Excerpted from The Atlantic by Megan McArdle:
The Qwikster and the Dead

Netflix tried to build their streaming video service by giving it away for free, as an add-on to their snail-mail service. 

This was a good way to add customers.  But the history of the internet indicates that once you convince people something is supposed to be free, or close to it, you will have a devilishly hard time getting them to pay for it. 

People decided that they were supposed to be able to stream unlimited movies for free.

This never made any sense; people were confusing the marginal cost with the average cost. 

You can always get a sweet deal if you are the customer who gets marginal cost pricing

Medicare does this — reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. 

European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.

The problem is that as voters and as customers, we often get the notion that marginal costing can be extrapolated to everyone. 

So liberal policy wonks want to save money by putting everyone on Medicare, or some equivalent program that uses the government’s monopsony pricing power to get lower prices for everyone.

But, it doesn’t work that way.

Everyone cannot be the marginal cost consumer. 

Someone has to cover things like overhead and development costs. 

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The perils of ‘free’ … Netflix tries to divide and reconquer … bet the under.

September 28, 2011

Punch line: Netflix tried to ‘seed’ their steaming video business with an irresistible offer: free.  But, customers revolted when asked to pay.Now, trying to be clever, Netflix is trying corporate fission: breaking into 2 parts.

I’m betting the under …

* * * * *
Excerpted from the Atlantic, by Megan McArdle:
The Qwikster and the Dead

Netflix admits that they’d really messed up the transition when they announced the end of free streaming, and that in order to fix it, they  decided to more decisively split their DVD and streaming services.

The DVD part will now be called “Qwikster” and have its own website; the streaming service will retain the Netflix brand.

The internet’s collective reaction sits somewhere between foaming rage, and an enormous collective “What the hey, Netflix?”

It’s so bizarre.. What problem does this solve?

Netflix does have a huge problem.

The company never wanted to be in the mail-order DVD service long-term; it’s not a good business.

Redbox was threatening to carve off the casual users, leaving them with the high-traffic movie buffs who don’t make them money.

Plus any idiot can see that the future is likely to be in painlessly streaming movies over the internet, not putting physical discs in little envelopes and mailing them.

The fact that the Postal Service is near bankruptcy tells you a lot about the viability of business models based on mailing things.

The problem is that they tried to build their streaming service by giving it away for free, as an add-on to their snail-mail service.

This was a good way to add customers.

But the history of the internet indicates that once you convince people something is supposed to be free, or close to it, you will have a devilishly hard time getting them to pay for it.

Unfortunately, users had been conditioned to expect unlimited free ice cream; they didn’t like having to pay for it.

Subscriptions dropped instead of rising.

Netflix stock went into a  rapid decline.


So I understand that Netflix was in a bad place.

But I don’t understand how Qwikster solves any of these problems.

It doesn’t improve their bargaining position with the content providers.

It doesn’t soothe angry customers who don’t like having to pay for stuff they used to get for free.

Thanks to Tags for feeding the lead.

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