Economic Principles of Healthcare

This document discusses the economic principles of healthcare, including market concentration and market power. It explores how market concentration affects competition and pricing in the healthcare industry. The document also highlights the relationship between market power and the cost of healthcare. References are provided for further reading.

Running head: ECONOMIC PRINCIPLES OF HEALTHCARE
Economic Principles of Healthcare
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1ECONOMIC PRINCIPLES OF HEALTHCARE
Table of contents
Answer 1)...................................................................................................................................2
Answer 2)...................................................................................................................................3
Reference list..............................................................................................................................5

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Answer 1)
Market concentration is used for measuring the extent to which sales in a market gets
dominated by one or more business. Market concentration is a useful economic tool since it
reflects the degree of competition in the market. It measures the extent to which the shares of
the market are usually concentrated between a small numbers of organizations. Therefore, it
can also be used for measuring the competition and is also directly related to the profit of the
industry. The market concentration within an industry is the degree to which a small number
of firms usually provides a major portion of the total production of the industry (Stiglitz &
Rosengard, 2015). The industry will be known to be competitive in nature when the
concentration is low. On the other hand, the industry will be known to be either oligopolistic
or monopolistic in nature, when the concentration is high in nature.
The ability of the organization to raise the price of the product or the service above
the marginal cost is referred as the market power. The producers in case of a perfectly
competitive market do not enjoy any kind of market power. An organization with a high
market power can affect the total price of the economy. Market power also provides the
organization the ability to engage in unilateral anti-competitive behaviour. A firm with high
market power can raise the price without losing any consumers to competitors. Monopoly can
be stated as one of the best examples for stating the market power. Therefore, it is the extent
to which the industry can influence the price of the product as well as services by exercising
the control over the supply and demand.
The Herfindahl –Hirschman Index is used for measuring the market concentration.
Lower index of the Herfindahl Hirschman states that the market is more competitive in
nature. The market with an HHI measure which exceeds 2000 is characterised as highly
concentrated. One of the most common measures of the market power is the concentration

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ratios. the market concentration ratio is examined with the help of concentration ratio. The
standard tools that are used to measure the market concentration and market power are the
Herfindahl Hirschman index and the concentration ratios.
In case of perfect competition, the index tends towards zero and therefore it can be
said that lower the index, the more competitive the market becomes. One of the most
common ways that is used for measuring concentration is the four firm concentration ratios.
It can be defined as the percentage of the output sold by the industry by the largest firms
(Stiglitz & Rosengard, 2015). The index can be calculated by adding the square root of the
share of the market of the individual organization in the industry.
Answer 2)
It can be said the price is one of the major drivers of the cost of the health care in case
of United States. According to the health care economists, the market power leads to increase
in price and is also associated with payment variation for both hospitals and the physician
services. The excessive growth in the expenditures of the health care will have a serious
economic consequence for the country. The burden of which falls on those people who use
and pat for the services of the healthcare. The excessive growth in the health care
expenditures is rising without any improvements in the quality. Therefore, it can be said that
instead of quality, the market power is linked to the higher cost of the healthcare (Lewis &
Pflum, 2015). More expensive healthcare facilities tend to have high market leverage, huge
participation in the healthcare system and less competition. According to a recent report it has
been found out that the cost of healthcare in New York were 2.7 times higher in some
hospitals as a result of increased market power. Hospitals found in Albany known to have
higher cost of healthcare because of their rural status since there were only one hospital

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system, few rural hospitals and one medical centres (Lewis & Pflum, 2015). As patients have
fewer options for treatment, these hospitals will be charging exorbitant price for the
treatment. with the rise in market leverage, hospitals are known to have gained more
bargaining power with the private players.

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Reference list
Bowles, S. (2009). Microeconomics: behavior, institutions, and evolution. Princeton
University Press.
Fisk, P. C. (2018). Study measures effect of labor market concentration on wages. Monthly
Labor Review, 1E.
Lewis, M. S., & Pflum, K. E. (2015). Diagnosing hospital system bargaining power in
managed care networks. American Economic Journal: Economic Policy, 7(1), 243-74.
Microeconomics, E. E. (2015). KELVIN WONG. Cell, 808, 386-8406.
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth
international student edition. WW Norton & Company.