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Application of Economic Concepts to Health CareResearch Paper

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Financial Management for Health Care Operations

The economic theory of regulation holds that politicians are self-interest maximizers, and therefore regulation will reflect their self-interest. The structure of the political system is such that politicians are dependent on financing to get elected, and that this financing comes from corporate backers and interest groups. The regulation that a politician supports will reflect the interests of those groups, as their money essentially aligns the politician with their interests (Peltzman, 1989).

These predictions are quite a bit different from the public interest theory of regulation, which is based on the notion that politicians take power in order to serve the public interest. Their regulation, therefore, would support the public interest first and foremost. Certificate of Need legislation is a concept wherein an organization seeking to build or expand a facility needs to demonstrate to regulators that there is a need for that new capacity. This has been used in health care, for example, when there is a desire to build a new facility or expand an existing one, to show that there is a need for the facility in the community.

On the face, certificate of need is directly related to community interest, but a rudimentary understanding of economics supports the idea of it is the economic theory of regulation that holds here. An industry that operates at capacity will have a high level of efficiency and will therefore be profitable. An industry characterized by overcapacity will be less efficient and thus less profitable. It is difficult and time-consuming to adjust capacity in health care, and thus a facility may run at an operating loss for an extended period in order to cover fixed costs, because the exit costs are simply too high. Thus, the certificate of need allows local governments to protect the interests of the existing players in their region, by managing health care capacity so that existing operations can remain as close to peak efficiency and capacity as possible.

The public, on the other hand, would benefit more from overcapacity, as this would drive down wait times and prices, so it seems that certificate of need does not actually serve the public need, but rather creates a protected market for existing health care players in an area, effectively constraining the forces of the free market.

2. There are many different types of government intervention in health care, and realistically these do not always reflect economic rationale. Governments do intervene on the basis of social, public outcomes. But economics and social outcomes actually go hand-in-hand quite a bit. Take something like the ACA. Getting more people insured is a social issue, one of equity and social justice. But there are economic considerations as well. First, the ACA allows the government to increase its bargaining power, and reduce information asymmetry, both things that will constrain the prices in the industry, or at least slow the runaway growth in health care costs. Furthermore, many uninsured are working class people, who work in the sorts of jobs that do not provide health care coverage. Time lost due to sickness/illness is time these workers are taken out of the productive economy. Moreover, while health care is economic activity, it is not necessarily something that helps the U.S. gain competitive advantage on the world stage. Allowing people to be healthier, and spend less of their money on health care, puts more capital and labor back into productive activity. Thus, there are tremendous long-run economic benefits to not only increasing government bargaining power but increasing insurance coverage levels among the working poor. It should be noted, however, that increased coverage for the working poor does not necessarily mean better outcomes as is so often assumed (Katz & Hofer, 1994).

Other interventions will often have economic rationale as well. Medicare is a good example of this. Older people are the biggest consumers of health care services. However, they have limited capacity to increase their spending on health care, as they no longer work and thus rely on pensions and other forms of fixed income for their ability to pay. If seniors were forced to pay out of pocket for their medical expenses, they would in all likelihood simply be unable, leading to bankruptcy, but also leading to financial instability on the part of health care providers. Arguably one of the biggest benefits of Medicare is to ensure that health care providers are paid for this work -- they might whine about… [END OF PREVIEW]

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