Economic Principles - Module One Short Paper

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Feb 20, 2024

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1 Module One – Short Paper Nikkia A Bates Southern New Hampshire University IHP-620-Q4551 Economic Principles-Healthcare Dr. Jim Dockins April 22, 2023

2 Module One – Short Paper Introduction In regard to competition and choice in the healthcare industry there are two economic principles that are thought of. The two principles are market concentration and market power; the two principles play distinct roles in decision making in healthcare. To analyze the efficiency of healthcare services it is key to understand the two principles. Market Concentration Market concentration measures the extent of domination of sales by one or more firms in a particular market (Economic Times, n.d.). In order to measure the market concentration agencies such as the Antitrust Division of the Department of Justice (DOJ) and Federal Trade Commission (FTC) utilize a tool named the Herfindahl-Hirschman Index (HHI) (Fulton, 2017). The Herfindahl-Hirschman Index (HHI) tool calculates market concentration by squaring market shares of competing firms and totaling the values across said firms. The resulting figures can range from 0 (perfect competition) to 10,000 (monopoly) (Fulton, 2017). Utilizing market concentration can deliver efficiencies that result in benefiting health services, however studies show different results. According to Fulton, studies of hospital markets have found that concentrated markets are associated with higher hospital prices, with price increases often exceeding 20 percent when mergers occur in such markets (Fulton, 2017). Market Power Market power is defined as a company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand, or both (Kenton, 2020). I ncreases in the Herfindahl-Hirschman Index ( HHI) indicate a decrease in competition and an increase in market power. The closer a market approaches a monopoly, the more concentrated it becomes

3 Module One – Short Paper (and the lower its competition). If a single corporation owned 100 percent of the market. For example, any organization that has a monopoly in the market will have an HHI close to 10,000; if the firm is the only player in its industry segment, it will have a 100% market share and thus, an HHI of 10,000. On the other hand, if there were several thousand competing firms in an industry, each firm would have 0% market share (Gordon, 2023). Principle of Competition According to the Federal Trade Commission, competition in the health care industry benefits consumers because it helps maintain costs, improve quality, and encourage innovation (Federal Trade Commission, n.d.). The Federal Trade Commission plays a huge role in health care industries competition, due to the agency being considered a “law enforcer” part of their job is to stop firms from engaging in anticompetitive conduct that harms consumers. The FTC also provides guidance to market participants, which include health professionals, hospitals, healthcare organizations, pharmaceutical companies, and health insurance companies (Federal Trade Commission, n.d.). Market concentration, market power, and principle of competition all have similarities. When an organization is secure within their market power, it is concentrated, and entering the market will become achievable. When organizations do not have leverage over the other, the market tends to be less concentrated. As a result of this action, the market may become more competitive. Economic Principles & Healthcare Industry Costs and spending on healthcare have risen dramatically over time (Archer, 2013). Instead of being influenced by competition, healthcare costs and spending are governed by

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4 Module One – Short Paper monopolistic providers and insurers seeking to maximize profits. Healthcare markets have become so concentrated in recent decades that healthcare professionals no longer must compete to deliver high-quality care and services. Large healthcare organizations are known to dominate marketplaces and rob other dominant insurance firms of their high rates (Archer, 2013). To counteract the rise of healthcare costs and spending, in 2010 the Affordable Care Act (ACA), also known as Obamacare, was implemented. The goal of implementing the ACA was to provide better health insurance coverage for all Americans and lower the cost of healthcare cost and services in general (Centre for Public Impact, 2017). The ACA did in fact do what it was intended to do; the ACA transformed the marketplace and the responsibilities of stakeholders in healthcare.

5 Module One – Short Paper References The Affordable Care Act in the US (Obamacare) . Centre For Public Impact (CPI). (2017, April 13). https://www.centreforpublicimpact.org/case-study/affordable-care-act-us-obamacare Health care market concentration trends in the United ... - health affairs . (2017, September). https://www.healthaffairs.org/doi/10.1377/hlthaff.2017.0556 Herfindahl Hirschman Index (HHI) - explained . The Business Professor, LLC. (2023, March 27). https://thebusinessprofessor.com/en_US/business-transactions/herfindahl-hirschman- index-defined Kenton, W. (2020, December 16). What is Market Power (Pricing Power)? definition and examples . Investopedia. https://www.investopedia.com/terms/m/market- power.asp#:~:text=Key%20Takeaways-,Market%20power%20refers%20to%20a %20company's%20relative%20ability%20to%20manipulate,so%20must%20be%20price %2Dtakers . No competition: The price of a highly concentrated health care market . (2013, March 6). https://www.healthaffairs.org/do/10.1377/forefront.20130306.028873/ Vedova, H., & Technology, T. F. T. C. O. of. (2023, January 19). Competition in the health care marketplace . Federal Trade Commission. https://www.ftc.gov/advice-guidance/competition-guidance/industry-guidance/ competition-health-care-marketplace What is market concentration? definition of market concentration, market concentration meaning . The Economic Times. (n.d.). https://economictimes.indiatimes.com/definition/market-concentration

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