METHODICAL INSTRUCTION FOR STUDENTS OF THE
LESSON № _7_ (PRACTICAL – 6 HOURS)
Theme: 1. Medical Care Production and Costs. – 6 hours.
Aim: 1. To understand various microeconomic principles and concepts that can be used to analyze the cost structure of medical firms and thereby determine the true relation between firm size and costs of production.
Professional orientation of students: All medical firms, including hospitals, physician clinics, nursing homes, and pharmaceutical companies, earn revenues from producing and selling some type of medical output. Production and retailing activities occur regardless of the form of ownership (that is, for-profit, public, or not-for-profit). Because these activities take place in a world of scarce resources, microeconomics can provide valuable insights into the operation and planning processes of medical firms. In this topic, we focus on various economic principles that guide the production behavior of all types of firms, including medical firms. We begin by analyzing the short-run production process of a hypothetical medical firm.
To simplify our discussion of short-run production, we make five assumptions. First, we assume the medical firm produces a single output of medical services, q. Second, we initially assume only two medical inputs exist: nurse-hours, n, and a composite capital good, k. We can think of the composite capital good as an amalgamation of all types of capital, including any medical equipment and the physical space in the medical establishment. Third, since the short run is defined as a period of time over which the level of at least one input cannot be changed, we assume the quantity of capital is fixed at some amount. This assumption makes intuitive sense, because it is usually more difficult to change the stock of capital than the number of nurse-hours in the short run. Fourth, we assume for now that the medical firm faces an incentive to produce as efficiently as possible. Finally, we assume the medical firm possesses perfect information regarding the demands for its product.
1. Individual Students Program.
Theme № 1 for the Practical Class on “Medical Care Production and Costs”
1. The Short-Run Production Function of the Representative Medical Firm.
2. Marginal and Average Products.
3. Elasticity of Input Substitution.
4. A Production Function for Hospital Admissions.
5. Short-Run Cost Theory of the Representative Medical Firm.
6. The Short-Run Cost Curves of the Representative Medical Firm.
7. Short-Run Per-Unit Costs of Production.
8. Factors Affecting the Position of the Short-Run Cost Curves.
9. Estimating a Short-Run Cost Function for Hospital Services.
10. The Cost-Minimizing Input Choice.
11. Long-Run Costs of Production.
12. Shifts in the Long-Run Average Cost Curve.
13. Neoclassical Cost Theory and the Production of Medical Services.
2. Test evaluation and situational tasks:
a) For the Practical Class on “Medical Care Production and Costs”
1. The marginal product or quantity of medical services associated with an additional nurse-hour can be stated as follows:
A. q = f(n, k)
B. STC(q) = w ×+ r × k
C. MPn = Δq/Δn
D. SMC = ΔSTC/Δq
E. TC(q0) = wR × RN + wL × LPN
2. What economic law is central to market regulation mechanism?
A. Increase of income
B. Competition
C. Balance of demand and supply
D. Costs
E. Money circulation
3. What economic category is basis for answer to question “For whom to produce?”
A. Necessity
B. State order
C. Unprotected population
D. Able-bodied population
E. Solvency of consumers
4. What is common for simple and common production?
A. Production of financial commodity
B. Market
C. Production of immaterial commodity
D. Production of service as commodity
E. Production of intellectual commodity
5. Strategies used to control the total spending on health care services is the:
A. Cost-plus pricing
B. Cost containment
C. Cost shifting
D. Cost Reimbursement
E. Cost-Benefit Analysis
3. Correct answers of test evaluations and situational tasks for Practical Class on “Medical Care Production and Costs”:
4. References:
А – Basic:
1. Rexford E. Santerre, Stephen P. Neun. Health Economics: Theory, Insights, and Industry Studies, 5 editions. – S-th-W-rn C-ge P-b, 2009. – ISBN: 0324789076. – 624 p.
2. Philip A. Musgrove. Health Economics in Development. –W..d B-k P—ns, 2003. – ISBN: 0821355708. – 455 p.
3. A.J. Culyer, J.P. Newhouse. Handbook of Health Economics, Volume 1A. –Publisher: Nor the
4. Rice, Jones. Applied Health Economics. – Routledge, 2007. – ISBN: 0415397715. – 335 p.
5. Jordan Braverma. Health Economics. – Pharmaceutical Press, 2009. – ISBN: 0853698678. – 359 p.
6. Peter Zweifel, Friedrich Breyer, Mathias Kifmann. Health Economics. –Springer, 2009. – ISBN: 3540278044. – 529 p.
7. Ceri J. Phillips. Health Economics: An Introduction for Health Professionals. – Wiley-Blackwell, 2005-11-04. – ISBN:0727918494. – 160 p.
В – Additional:
1. Anthony J. Culyer. The Dictionary of Health Economics Publisher. – Edwаrd Elgаr Pub., 2005-09-05. – ISBN: 1843762080. – 390 p.
2. Stefan Felder, Thomas Mayrhofer. Medical Decision Making: A Health Economic Primer. – Springer, 2011-07-25. – ISBN: 3642183298. – 217 p.
3. David Hyman. Improving Healthcare: A Dose of Competition (Developments in Health Economics and Public Policy). – Publisher: Springer, 2006. – ISBN: 0387257519. – 436 p.
4. Francesco Paolucci. Health Care Financing and Insurance: Options for Design (Developments in Health Economics and Public Policy). – Publisher: Springer, 2010. – ISBN: 3642107931. – 115 p.
5. Barbara Mcpake. Health Economics: An International Perspective. – Routledge, 2002. – ISBN: 0415277361, 0415277353. – 344 p.
6. Anthony Scott, Alan Maynard, Robert Elliott. Advances in Health Economics. – Wiley, 2003-01-17. – ISBN: 0470848839. – 274 p.
7. Dr. Ross M. Mullner. Encyclopedia of Health Services Research. – English, 2009. – ISBN: 1412951798. – 1409 p.
5. Methodology of Practical Class. (900-1115)
Theme № 1 for Practical Class on “Medical Care Production and Costs”
Work 1.
1. Suppose you are to specify a short-run production function for dental services. What inputs might you include in the production function? Which would be the variable inputs and which the fixed inputs?
2. In your own words, explain the law of diminishing marginal productivity. Be sure to mention the reason this law tends to hold in the short run.
3. Explain the difference between technical efficiency and economic efficiency.
4. Discuss the relation between the marginal and average productivity curves and the marginal and average variable cost curves.
5. What does the elasticity of substitution illustrate? How is it expressed mathematically? What two factors affect its magnitude?
6. Explain the difference between the explicit and implicit costs of production. Cite an example of each.
Work 2.
1. Suppose that with 400 patients per year, the SAFC, SATC, and SMC of operating a physician clinic are $10, $35, and $30 per patient, respectively. Furthermore, suppose the physician decides to increase the annual patient load by one more patient. Using short-run cost theory, explain the impact of this additional patient on the SAVC and SATC. Do they increase or decrease? Why?
2. What factors shift the short-run average variable and total cost curves? Explain why these curves would shift up or down in response to changes in these factors.
3. Suppose you are to specify a short-run total variable cost function for a nursing home. Explain the variables you would include in the function. What is the expected relation between a change in each of these variables and short-run total variable costs?
4. What does economies of scope mean? Provide an example.
5. Explain the reasoning behind the U shape of the long-run average total cost curve. Why might this cost curve shift upward?
Work 3.
You are responsible for hiring one of two hygienists for a dental office. The first dental hygienist has 25 years of experience. Given her record, she is likely to satisfactorily service 16 patients per day. Her hourly wage would be approximately $16 per hour. The other hygienist is new to the industry. He is expected to satisfactorily service 10 patients per day at an hourly wage of $8. Which dental hygienist would be the better hire? Why?
Work 4.
Santerre and Bennett (1992) estimated the short-run total variable cost function for a sample of 55 for-profit hospitals in
ln STVC = 1.31 + 0.47ln q + 0.80ln w + 0.73ln QUALITY
(0.69) (3.31) (4.42) (2.58)
+ 0.11ln CASEMIX + 0.29ln k + 0.07ln DOC
(1.48) (3.16) (0.88)
+ Other factors
Adj. R1 = 0.95
N = 55
where STVC = short-run total variable cost, q = a measure of output (total inpatient days), w = average wage rate or price of labor, QUALITY = a measure of quality (number of accreditations), CASEMIX = an indicator of patient case-mix (number of services), k = a measure of capital (beds), and DOC = number of admitting physicians. All variables are expressed as natural logarithms (ln), so the estimated coefficients can be interpreted as elasticities.
1. How much of the variation in STVC is explained by the explanatory variables? How do you know that?
2. Which of the estimated coefficients are not statistically significant? Explain.
3. Does the estimated coefficient on output represent short-run economies or diseconomies of scale? Explain.
4. What are the expected signs of the coefficient estimates on w, QUALITY, and CASEMIX? Explain.
5. Provide an economic interpretation of the magnitude of the estimated coefficient on w.
6. What do the estimated coefficient on k and DOC suggest about the amount of capital and physicians at the representative hospital?
Work 5.
Draw a U-shaped LATC curve. Then draw the related long-run marginal cost (LMC) curve, keeping in mind the geometric relation between marginal cost and average cost (see the discussion on short-run cost curves). What is the relation between LATC and LMC when increasing returns to scale are present? Between LATC and LMC when the production process exhibits decreasing returns to scale? What type of returns to scale holds when LMC equals LATC?
Work 6.
Describe the two limitations associated with the cost theory provided in this topic when it is applied to explain the behavior of medical firms.
Work 7.
Suppose that you are interested in comparing the costs of producing inpatient services at Saving Grace Hospital with those at
1. Why may these two dollar figures not represent the economic cost of providing inpatient services at these two hospitals? Explain fully.
2. Suppose that these cost figures accurately reflect the economic costs of providing inpatient services at these two hospitals and that the two hospitals face the same average total cost curve. Draw a graphical representation of the average total cost curve (only) and graphically show and verbally explain why
3. Using cost theory as presented in class and the text, identify and fully explain four other factors that might explain why
4. Fully explain how the comparative analysis becomes muddled if one considers that one (or both) of the two hospitals is not organized on a for-profit basis.
6. Seminar discussion of theoretical issues. (1145-1315)
7. Student’s independent work (1315-1400).
8. Initial level of knowledge and skills. (1415-1500)
9. Students should know:
Theme № 1 for Practical Class on “Medical Care Production and Costs”
1. Microeconomic principles and concepts.
2. Various production characteristics.
3. What are economies and diseconomies of scale and scope?
4. The primary types of costs.
5. The major categories of costs.
10. Students should be able to:
Theme № 1 for Practical Class on “Medical Care Production and Costs”
1. Analyze the cost structure of medical firms.
2. Determine the true relation between firm size and costs of production.
3. Uses the resulting production theory to derive short-run and long-run costs of production.
Methodical instruction has been worked out by: Assoc.Prof. Panchyshyn N.Ya.
Methodical instruction was discussed and adopted at the Department sitting
____on August, 27th___2012. Minute № _1__
Methodical instruction was adopted and reviewed at the Department sitting
__________201_ . Minute № ___
