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Why is economics valuable for managers?

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1. Economics helps managers focus on key issues. 2. Economics outlines strategies for realizing goals given the available resources. 3. Economics gives managers ground rules for strategic decision making. 4. Economics gives managers a framework making sense out of costs. 5. Economics gives managers a framework for thinking about value. 6. Economics sensitizes managers to fundamental ideas that affect the operations of every organization.

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What special challenges to healthcare managers face?

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1. The central roles of risk and uncertainty 2. The complexities created by insurance 3. The perils produced by information asymmetries 4. The problems posed by not-for-profit organizations 5. The rapid and confusing course of technical and institutional change

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Cost

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The value of a resource in its next best use

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Economics is a map for decision making

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1. It suppresses what is not important 2. It highlights what is important

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Marginal/Incremental

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Involving a small change from the current situation

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Marginal/Incremental costs

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The cost of producing an additional unit of output

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Rational Decision Making

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Choosing the course of action that gives you the best outcomes, given the constraints you face

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Economics analyzes the allocation of scarce resources

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True

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Resource

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Something useful in consumption and production

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Scarce

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has alternative uses

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Limits to Rationality

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Management time is scarce Complete rationality is irrational Managers use decision shortcuts

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Three Questions relevant to economics

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- What shall we produce? - How shall we produce it? - Who gets what we produce?

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What are major challenges for healthcare managers?

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1. Insurance 2. Risk and uncertainty 3. Information asymmetry 4. Not-for-profit organizations 5. Technical and institutional change

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Insurance as a challenge

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- Multiple "customers" (patient and insurer) - Complex billing rules - Dependence on a handful of insurers (Medicare, Blue Cross)

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Ongoing Changes to Insurance

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- New Types (high-deductible plans, Individual plans) - New focus on costs

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Risk and Uncertainty as a challenge

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- The usual uncertainties of business (behavior of rivals, state of the economy)

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Information Asymmetries as a challenge

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The party with more information has an opportunity to take advantage of the party with less information; recognizing a disadvantage the party with less information may become skeptical of the other party's motivation and decline a recommendation that would be beneficial

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Information Asymmetry definition

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When one party in a transaction has less information than another

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Adverse selection

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- High-risk consumers' willingness to pay more for insurance than low-rick consumers - Organizations that have difficulty distinguishing high-risk from low-risk consumers are unlikely to be profitable

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The special problems in healthcare with risk and uncertanty

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- Good luck/good performance = good outcomes - Bad luck/bad performance = bad outcomes

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Who gets what we make? How will products be allocated?

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1. Prices (if prices are high, only those who are able to pay would receive product) 2. Waits (whomever was willing to wait for product) 3. Insurance coverage (if somebody else is paying for your product, would people be more interested in getting product?) 4. Rules and Regulations (medications should be governed by rules and regulations, limiting the population who may receive your product)

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Information Asymmetries are common problems for

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1. Supervisors and subordinates 2. Professionals and clients 3. Insurers and customers 4. Insurers and providers

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Reactions to Information Asymmetries

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1. Accepting flawed recommendations 2. Rejecting sound recommendations 3. Emphasis on reputations and repeated interactions 4. Warranties 5. Extensive performance monitoring

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Not-for-profit Organizations

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- Major players in healthcare markets - Have multiple objectives and can be: * hard to run * vehicles for tax avoidance * useful vehicles for social goals

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Change is a challenge for healthcare managers

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- The financing system is changing * Very expensive * yields mediocre outcomes - Technical change is constant * Drugs * Imaging and testing - Falling behind is a recipe for disaster

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What economic information do healthcare managers need?

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- Customers compare cost and value with: * other providers' products * other healthcare products * other products available - Managers need to know where they stand

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How can you compare your products to other providers' products or other available products (both Medical and Non-medical)

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Shop around for the products and compare

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You manage a hospital. What other information should you seek?

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- What rivals plan to do * Other hospitals * Non-hospital competitors - Whats happening to purchasing power * Wages and incomes * Insurance coverage - What changes in public policy are likely

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Economic Tasks

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Description Explanation - Analysis of historical data - Analysis of theoretical predictions - Testing predictions on analyzed data Evaluation -Efficiency - Equity

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Most economic studies combine all 3 economic tasks:

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Description: How do HMOs pay doctors? Explanation: Do incentives reduce costs? Evaluation: Would changing doctor pay increase efficiency?

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Which of these are not efficient? A: Cost $200 at 98% Quality B: Cost $150 at 98% Quality C: Cost $150 at 90% Quality

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B: is the most efficient. A costs more than B at the same percentage of quality. C costs the same as B at a lower percentage of quality. A & C are not efficient.

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Both Total and marginal analysis are valuable

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True

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Total analysis

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Is this project worth doing? Does its total value exceed total cost? Does its total revenue exceed total cost?

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Marginal analysis

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Should we do more or less of this? Would doing more add more value than cost? Would doing less cut revenue than cost?

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Positive Economics

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Using objective analysis and evidence to answer questions about individuals, organizations, and society

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Normative Economics

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Using values to identify the best obtions

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Using Marginal and Total Analysis: For profit firm: One Clinic Two Clinics Revenue $200,000 $ 340, 000 Cost $ 150,000 $ 300, 000 Profit $ 50, 000 $ 40,000

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The firm is more profitable with one clinic. When a second clinic is introduced, profit decreases by $10,000. Marginal analysis says it is less profitable to have two clinics.

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Managers need Economic skills to

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- describe - explain - evaluate - plan

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Benefit

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value we place on the desired outcome

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Analysis example: 16 oz soda costs .89; 24 oz soda costs .99; the incremetal cost of the larger size is (99-89)/(24-16) or 1.25 cents per oz In conclusion:

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1. the incremental benefit of the larger soda exceeds its incremental cost (buy the larger size) 2. the incremetal cost of the larger soda exceeds its incremental benefit (buy the smaller size) 3. the total benefit of both sizes was less than their total cost (buy neither)

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Economics focuses on

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- description of "relevant" data - analysis of data - evaluation of outcomes

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The value of economics lies

answer

chiefly in the questions it asks

HCM 402 Economics for Healthcare Managers Unit 1: Chapter 1 – Flashcards

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