Price Discrimination in the sale of health care
Introduction
Prices in the health care industry are irrational and opaque as they do not show any relation with the costs and quality of the services offered. The root cause of this problem emerged on May 2003 when the federal government allowed hospital charges and this has led to public outrage. Despite the public shocks, hospitals argue that the practices are not price discrimination since patients do not pay the charges. In addition, they continue to inflate the charges through insurer’s bargaining leverage. Price discrimination is a natural and pervasive phenomenon in health care industry and this is contributing many challenges as patients are not receiving equal health care. It is true that process in the health care industry vary since some patients have insurance coverage while others are uninsured. However, this should not lead to price discrimination and it should be ensured that the process is transparent so that patients can have equal access. The current health care system has price discrimination in that patients without insurance cover pay three to four times higher than those who are insured with Medicare or Medicaid. Price decimation becomes unethical when health care ignore patients who are uninsured in order to take advantage. However, it is ethical if price discrimination has commensurate value and meets certain conditions. The problem with many hospitals industry is that price discrimination is used to bring profits. Health care services comprise different services and the purchase of prescription drug and other equipment is also a service where price discrimination occurs. The research will also examine the price discrimination on prescription drug and medical devices since hospital industry are providing different prices to these commodities. Irrational hospital pricing contributes to devastation effects to health care markets, to uninsured patient, to insured patients whose deductible health plans are high and lastly, it affects the health care system leading harm to all people.
Price Discrimination and how it affects the Uninsured, Insured and health care market
The hospital industry might argue that there is not price discrimination since every patient receives their bill from charge master prices. However, it is important to understand that price discrimination is when prices for identical goods differ to different customers. From this definition, the point is that hospitals charge different patients different prices for similar health care services (Elegido, 2011). A point to note that heath care industry and other industry like telecommunication, hotel and more practice price discrimination and this is unethical or in other words it is unfair act simply because they hold higher fixed costs where customers has price-sensitivity. Based on the health care sector, price discrimination is a way of increasing revenue by behaving like profit-maximizing enterprises. The hospital’s charge master has brought a systematic problem of price discrimination. The latter is apparent as hospitals prices are opacity and unfair where price variation is seen in the charge master data and health insurance companies (Elegido, 2011). Even though hospitals sometimes do not charge different prices for identical services, they ensure that different payers pay different prices. This is known as price discrimination since patients who are insured or those who are unable to pay the bill are charged higher amount. All payers have unique payment methodology and the methods of payment are confidential. Due to enormous administrative costs, patients pays the bill after receiving health care services but this procedure has made the practicing system to be complicated as hospitals are maximizing profit through costs inflation (Elegido, 2011). On price discrimination, the hospital industry use the cost shifting theory to argue that patients who have Mediocre and Medicaid pay less and for this reason, patients who are uninsured should pay high to cover the loss. In other words, costs shifted are directed toward private payers but hospitals fail to understand two consequences brought by the cost shifting theory. First, hospital focus on their market power on Medicare reimbursement cuts and this puts them in a risk of reducing cost and second, the cost shifting theory cannot fully explain why self-pay patients pay higher yet their make up about 57% of the total health care provided. This shows that there is a price discrimination which is brought by enormous complexity of payment practices. What hospitals should know is that price discrimination does not maximize profit as they expect but rather it raises cost (Elegido, 2011).
Price discrimination or irrational hospital prices cause devastating effects to patients especially middle-class patients who do not have insurance cover, patients whose deductible-plans are high and patients who are not covered. Such patients are unable to pay the inflated charge master prices and finally experience unfair debt collection practices (Fuse Brown, 2014). Second, price discrimination affects the health care market as it faces challenges in coordinating and controlling costs. The bad thing with modern pricing system is that patients receive a high hospital bill and when compared with the services offered, the price is not reasonable. Price varies in different hospitals and within hospitals with respect to the patient’s payment status. The point is that in the pricing system, there is not transparency and patients cannot discover the amount until the bill is rendered. For patients to understand the hospital pricing or costs that they should pay, a hospital charge list with thousands of items and procedures is provided (Fuse Brown, 2014). Prior to the creation of health insurance, patients paid hospitals charges as charge master rates but this was modified as Medicare brought new method of paying where patients pay costs. Through Medicare, hospitals allows both private and self-pay individuals to conduct paying charges and for this reason, the health care market play role in controlling and maintaining charge and costs. However, the pricing system is opacity since the charge master prices do not show any relation to the costs and quality of services provided. In other words, the charges are higher than the actual cost and the difference our during the process of calculating the cost which is full of complexity and variation. On insurance coverage, the charge master prices are higher than the actual costs and the fraught is as a result of gathering extensive financial data from the hospital which comprises data from charges, utilization, costs and more. Generally, the irrational hospital pricing is characterized by price discrimination where the insured patients with low bargaining power pay higher than those who are insured (Fuse Brown, 2014).
The modern health care system has created a monopoly system which is characterized by price discrimination, First, the author explains the root cause of price discrimination by stating that economists argue that the medical profession creates a discriminating monopolist while the medical profession argue that price discrimination occur due to the fact that the collection agency are paid by charging well-to-do patients a higher amount. The income achieved is distributed to hiring doctors who offer health care to poor patients. Discriminatory price occur when non-charity patients are charged higher for medical charity activities (Fuse Brown, 2014). However, the main argument is based on the fact that different charges should be supported by difference in demand. The medical profession hypothesis is based on different charges are due to difference in income. The economics concludes that price difference should be due demand and it should not affect the personal income. Thus, the sliding fees are process of price discrimination since there is fees difference between insured and uninsured. If price difference affects the personal income, then those who are covered by insurance should pay higher prices than those who are uninsured. Hover, the medical profession does not consider this but rather it relies on ‘what the traffic will bear” and its results effect the income (Fuse Brown, 2014). Charging higher fees to well-to-do patients is incompatible with the indemnity principle and this has affected the insurance industry by diminishing their existence in the insurance market. A point to note is that the value of price discrimination has been influenced by the consumer credit and the credit bureaus is collecting data based on consumer income. This acts as a supported testimony and doctors are able to price discriminated. To address these issues and ensure that people who are uninsured are not highly charged, techniques such as no-criticism rules, prohibition of advertising that affect market share, avoiding malpractice suits and more should be implemented to maintain discipline and avoid discriminating monopoly (Fuse Brown, 2014).
President Obama and Congress experience a high federal deficit and this has increased the interest in researching the status of middle-class uninsured and their subsidies benefits. The congress has noticed that the insured people face a double financial whammy due to the high costs of care and rate of inflation. In addition, there are affected by the low bargaining power and leads to higher hospital charges. The Congress has noticed that the root cause of these challenges is price discrimination where hospitals have created a sliding-scale fee. For example, a study found that 49% of insured patients paid higher hospitals charges than patients who patients by Medicaid in year 2005. 27% of insured patients also pain higher amount than commercial insures (Reinhardt, 2009). However, the calculation on the average prices showed that the net prices of the uninsured was the same as the costs pain by Medicare. From this study, it is clear that price discrimination cause harm to uninsured patients and families. The families are affected in that when patients fails to pay the bill, the hospital writes off the unpaid bill and collect agencies charges higher interest rates and can also arrest family members for failing to pay the bill. The family suffers from bankruptcy, loses their homes and education and other basic and social needs are affected as the family lack money to cater for all needs. The patient’s health status deteriorates due to stress and this may lead to risks of suicide. Despite the fact that many insured suffer from bankruptcy, they continue to receive higher charges for hospital charges simply because they have low bargaining power. Under the Affordable Care Act, the challenges which uninsured patients face are being eliminated by ensuring that all are covered. However, a large number of people specially the nonelderly are not covered and for this reason, irrational hospital prices is a big issue which need to be addressing using strategic measures (Reinhardt, 2009). For example, there are hospital’s financial assistance policies which hospitals should adhere to. The pollutes state that hospitals should have an eligibility criteria for calculating hospital charges, patients should not pay ‘gross charges’ and hospitals should shun from ‘extraordinary collection actions’. Since these measures do not fully help patients who are not insured, further measure includes new approach for hospital billing and collections (Reinhardt, 2009).
Price discrimination does not only harm the uninsured patients and families but the health care market is also affected. Pricing discrimination leads to dysfunctional system that increases the costs of health care to the economy and affects the entry to health plans (Fuse Brown, 2017). It also affects methods and efforts which could be implemented to control the health care costs and maximize higher-quality care. The variation in hospital prices affects the market share and the hospital market power. Due to price variation, big hospitals have high capital improvement and this empowers the dominant hospitals on elevating health care prices. The disparity between insured and uninsured affects the heath care prices and this is leading to high per capital in health care. For example, patients in U.S spend high on health care for purchasing services and items. In addition, total national GDP used for health care spending is 18% and these discriminatory pricing is widening the price variation (Fuse Brown, 2017). Even though the medical profession argues that the monopoly profits benefits the patients and community, ordinary patients receive minimal benefits. This is because a high amount of health is directed to power care providers. In other words, the monopoly profits benefits heath insurance companies and purchasers of health insurance. The health insurance is the root cause of the redistribution of wealth and this leads to an economic buffer where the monopolistic hospital earn more that the average profit (Lambrecht et al, 2012). The inflationary pressure gives the insurance company the power to distribute wealth to powerful healthcare providers. On new insurance plans, price discrimination creates barriers that hinder heath insures from creating new insurance plans. Barriers to entry hinder the health insurers from competing due to lack of number of providers. Health insures lack competitive discounts and lack of health plans increases the consumers cost (Lambrecht et al, 2012).
Price Discrimination in drug prices
According to Wagner & McCarthyu (2004), patients pay different prices to same drug prescriptions and the price differentials are in different classes of consumers. This has raised a public outrage since patients who pay high are financially poor and those who pay less have the ability to purchase drug in higher amount. The author states that in order to solve these issues, change the pricing structure and has a bright future; the healthy industry should understand the effect of price discrimination on individual and the health system in general. Other thing to understand is that the price discrimination affects the revenue and future investment (Wagner& McCarthy, 2004). Other issue is that the government plays part in price discrimination it fails to collect pricing data that ensures effectiveness. Second, manufacturers engage in price discrimination by charging different prices. In many countries, there are single-source drugs where patients receive for free but manufactures of these drugs s offer them at higher prices. This means that patients in undeveloped countries will not access the single-source drugs. The manufacturing companies sell the drugs at high prices to hinder resale markets from low-income countries. Other point to understand is that even though manufacturers may be willing to offer the drugs at low prices, political and health insurance sectors by fail to empower the manufacturers (Wagner& McCarthy, 2004). In addition, manufactures are protected by the marketing rights from the national government, buyers find it difficult to resell the prescribed drug and wholesalers and retails are not controlled by the cross-national licenses and for this reason they can sell to all countries. Price discrimination also occurs as buyers have the willingness to pay higher prices for them to get clinical benefits. This means that buyers from low-income countries cannot afford the drug at higher prices and for this reason they prefer fulfilling other basic needs like food. Generally, the health care sector engages in price discrimination when the manufacturer of single-source drugs and the sellers sells the drugs at different prices. Since countries have own regulations for markets rights, separate buyer classes is formed where buyers are allowed to negotiate (Wagner& McCarthy, 2004).
Price Discrimination in medical devices
On price discrimination of medical devices, medical technologies required by modern hospitals increase the health cost. The medical profession rely on the phenomena that the technology lowers costs. However, The author introduces a device known as the coronary stent and states that the ‘ Drug-eluting stents’ generates more than $5billion annual revenue to manufactures and 30% billion to hospitals (Grennan, 2013). Hospitals generate higher revenue from insurer reimbursement. Hospitals and insurer negotiates on reimbursement rates and the negotiation varies across different hospitals. The reimbursement rates for doctors are %812 and for hospitals is $10,422. Medicare patients whose angioplasty produces is over 50% receives a fixed reimbursement rates while the reimbursement rates for uninsured is negotiated (Grennan, 2013). The price variation occurs due to different costs and charges for stenting procedures. In addition, different prices are due to competitive environment, the market share, the number of diagnostic procedures and frequency of the procedures. From the research, the author finds that manufacturers and hospitals negotiates on the medical device and in the hospital, doctors offer different prices to different patients. Generally, prices of medical device are in business-to-business markets where negotiation is empowered. In other words, the bargaining effects affect supply and demand of the device across hospitals. Price discrimination due supply and demand creates a competitive nature where the prices of devices are increased by 9% (Grennan, 2013). In price discrimination, the buyer side increases the firm profitability since those with insurance coverage will have the power to purchase the device.
Conclusion
Price discrimination in the hospital industry has led to devastating effects to individuals and health care markets. Patients who are insured suffer from the inflated hospital charges and this leads to financial burden. The system of hospital pricing affects the healthcare market in that insurance companies are unable to control the costs. The hospital costs and charges do not relate to the health services offered but what happens is that the higher costs are directed to uninsured patients who have low bargaining power. The current pricing system is complex and by focusing on market necessities, hospitals do show the willingness to rationalize the system. They rely on gaining leverage, expanding the market power and charging different patients different prices. However, the medical profession argues that a discrimination prices are harmless since the uninsured patients do not pay the full prices. The reality is that the uninsured especially the middle-class people pay higher costs and suffer from financial burdens. This result to inequality and uncertainty and affect the efforts of the health care market in controlling the costs.
Reference
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