Week 8

Question 1

Quantity supplied:

Answer 1

The amount of goods or services a supplier or market is willing to supply at any one price during a specified time; a change in quantity supplied refers to a movement along a given supply curve in response to a change in price.

Question 2

Supply

Answer 2

A supply curve. The quantity supplied at each price.

Question 3

Supply curve

Answer 3

(1) For a single firm, the quantity the firm is willing to supply of a service at alternative prices of the commodity. (2) For the market, the relationship between the quantity that all firms are willing to supply and alternative prices of the service.

Question 4

Supply function

Answer 4

(1) For a single provider, a quantitative relationship between the quantity the supplier is willing to supply and a series of variables that influence the supplier’s behavior, such as price, technology, case mix, quality, and input prices. (2) For a market, the quantitative relationship between the quantity that all suppliers in the market are willing to supply and a series of variables that influence all of the suppliers’ behavior, including price, technology, case mix, quality, input prices, and the number of suppliers in the market.

Question 5

define and identify the dependent variable in supply analysis—the quantity of the service supplied.

Answer 5

○ There are two levels of supply analysis—that for which the supply unit is the single firm, and that for which the supply unit is made up of all firms in the market.
○ The analysis of market supply is based on analyses of individual suppliers.
○ The product of the health care provider is health care.
○ A health firm supplies a single product, such as a doctor’s examination, a doctor’s visit, a hospitalization, and so on.
Each product is assumed to be homogeneous; that is, all products are the same.

Question 6

identify the price received by a firm, the marginal revenue, and the market conditions that affect the price received.

Answer 6

○ A price-taking firm is one that will take the price given—the price taken is beyond the control of the firm.
Hence, for a price-taking firm, the price of each unit is given. The marginal revenue is the additional revenue taken in by the firm for each additional unit sold. Since what the firm receives in revenue from selling one more unit is the price, which is a constant, the marginal revenue is equal to the price, and it is also a constant. This statement is true only if the firm is a price taker.

Question 7

AVERAGE VARIABLE COST (AVC)

Answer 7

§ The unit variable cost for a specific volume of output; total variable cost divided by quantity of output.

Question 8

MARGINAL COST (MC)

Answer 8

§ The change in cost resulting from a change in output by one unit. Because fixed costs do not change with output, marginal cost is related only to variable cost.

Question 9

MARGINAL REVENUE (MR)

Answer 9

§ The additional revenue that a firm obtains from selling one more unit of a service.

Question 10

PRICE

Answer 10

§ An amount of money paid or received per unit of a service or commodity.

Question 11

PRICE TAKER

Answer 11

§ A supplier that has no influence over the price of the goods or services it sells; the supplier can alter its rate of production and sales without significantly impacting the market price of its product.

Question 12

PROFIT

Answer 12

§ Total revenue minus total cost. Accounting profit is defined as total revenue for a period’s sales minus costs matched to those sales. Economic profit is total revenue minus economic costs.

Question 13

identify the assumptions that apply to the supply model of a price-taking firm.

Answer 13

○ The basic assumptions of the supply model are the revenue assumption, the cost assumption, and the behavioral assumption.
○ The revenue assumption is that price received is given (a constant). This assumption can be expressed either in total terms (total revenue) or in marginal terms (marginal revenue). Both are shown in Figure 6-1 on page 143 of your textbook.
○ The cost assumption relates to the cost conditions. These conditions are shown in Table 6-1 and in Figure 6-1 (pages 142 and 143 of the textbook) in total terms, and in terms of average and marginal cost. The basic assumption is that marginal costs will eventually rise, and that average variable costs will show a U-shaped graph. Thus, although the marginal costs are increasing, for some ranges of output they may still be below the AVC. Because it rises continually, assume MC will eventually be above AVC. Note that there can be both fixed and variable costs.
The behavioral assumption (also called the objective function) is that the firm maximizes profits, defined as TR − TC. Without this behavioral assumption, you could not tell which quantity a firm will select as its point of supply.

Question 14

predict the supply relationship between the quantity supplied and price for an individual firm when

 P < AVC, and when

Answer 14

When the price is below the minimum point on the AVC (see Figure 6-2, page 145 of the textbook), the firm will not supply any output at all. Variable costs are avoidable costs. The firm can do better (lose less) by not operating at all and avoiding these variable costs. Note that we reach this conclusion because of the behavioral assumption that the firm seeks to maximize TR − TC. Minimizing losses is the same thing as maximizing profits; it is in effect, minimizing negative profits.

Question 15

predict the supply relationship between the quantity supplied and price for an individual firm when

    P >= AVC.

Answer 15

When the price is equal to or above AVC the firm will supply some output, because if P > AVC, it will be at least covering its variable (avoidable) costs and more. For these points, the profit-maximizing quantity is where the price equals the marginal cost.

Question 16

predict the effect of changes in the following conditions on the supply curve of the individual firm:

cost-shifting variables, and

Answer 16

§ Shifts in the cost curve can occur because of changes in
□ input prices,
□ the quality of care, and
case mix and case severity.

Question 17

predict the effect of changes in the following conditions on the supply curve of the individual firm:

    nonpatient revenues.

Answer 17

§ Any change that causes a shift in a firm’s cost curve will also cause a change in its supply curve. For example, an increase in input prices will shift the marginal cost (and therefore, the supply curve) to the left. This situation is interpreted as a reduction in supply.
Furthermore, when a firm expands—builds a bigger plant or an additional plant—the cost curve will move to the right, and thus, the supply curve shifts to the right.

Question 18

identify the assumptions of market supply.

Answer 18

The market supply curve is made up of the sum of the quantity supplied by each firm at each price. Therefore, the number of firms is a factor in the market supply curve. Thus, in developing a model of market supply, economists must add another assumption to those discussed previously—the number of firms in the market is given. This number can increase, and if it does, the market supply shifts to the right.

Question 19

predict the effect of the following conditions on market supply:
○ alternative prices, and
changes in cost-shifting variables.

Answer 19

§ Just as increased prices will lead to a higher quantity supplied for each individual supplier, they will also lead to an increased quantity supplied for the market. When the price increases, all suppliers will increase their quantity supplied, and therefore, the quantity supplied in the market at each price will also increase.
§ As you know, the cost curve itself will shift in response to changes in input prices, case mix and severity of cases, or product quality. Hence, these same variables will affect the supply curve as well.
For example, an increase in input prices will shift the individual cost curves, and therefore, the individual supply curves, to the left (upward). The market supply curve will similarly shift inward to the left, since it is derived from individual supply curves. When the supply curve is shifted to the left, a lower quantity will be supplied at any given price.

Question 20

fee for service,

Answer 20

§ According to this basis, the physician receives a fee for every service performed, often in accordance with a given fee schedule. Thus, the physician might receive $95 for a complete physical exam, $700 for a tonsillectomy, and so on. Note that the physician can perform more than one service during a single visit.
Under a fee-for-service payment system, providers will receive more revenue (have a positive MR) when they supply more services, more visits, or more patients. An increase in any of these units will result in more services, and hence, more revenues.

Question 21

fee per visit,

Answer 21

§ Under this form of payment, the physician would receive a fixed fee for the entire visit, regardless of how many services were provided. This payment mechanism allows for different types of visits, so if a visit were complicated, the physician might bill for a higher level of service.
Under a fee-per-visit payment system, providers do not obtain any additional revenue from providing more services. They only obtain a positive MR from supplying more visits, or from having more patients (who yield more visits).

Question 22

salary, and

Answer 22

§ Under this basis of payment, the physician receives a given salary for an entire period, no matter how many patients are seen, how many visits are made, or how many services are provided.
Under a salary system, there is no additional revenue from any services, visits, or patients.

Question 23

fee per patient (capitation).

Answer 23

§ According to this basis, the physician receives a set fee for all specified care provided to a patient during a specified period of time. For example, in Canada, a Health Services Organization (HSO) receives a certain amount of money to provide all ambulatory (non-inpatient) care for a patient during a specific time period. In the United States, a Health Maintenance Organization (HMO) receives a yearly fee to provide all care (inpatient and ambulatory) to a person for the year.
§ Under a fee-per-patient payment system, providers obtain no additional revenue from services or visits; however, serving more patients yields a positive MR.

Question 24

Physician output

Answer 24

can be broken down into components that include the number of services per visit, the number of visits per patient, and the number of patients treated. Services include specific tests, examinations, and individual procedures (e.g., a wart removal). A visit is counted each time the patient comes to see the doctor. The number of individual patients is the number of patients who are in some way attached to the physician.

Question 25

To develop a measure of the total number of services

Answer 25

you would express total services as the product of the above three components. For instance, assume a physician’s practice had 600 patients, each of whom was seen four times a year. Assume further, that each time a patient visits the physician, he or she receives an examination and a lab test, and has a wart removed (for a total of three services). In total, the physician will have provided 600 × 4 × 3 = 7,200 services in that year.

Question 26

The marginal revenue/marginal cost (MR/MC) framewor

Answer 26

can be used to make predictions about the effects of various payment bases on output supplied. The MR/MC framework states that a profit-maximizing provider will increase quantity supplied whenever MR is greater than MC. The provider can increase the supply of services per visit, generate more visits for each patient, and change the number of patients seen. The MR/MC model allows us to predict how providers will behave—that is, which components of output they will focus on.

Question 27

per diem reimbursement,

Answer 27

§ Under this payment basis, the hospital is paid a fixed amount of money for each day of care provided, regardless of the length of stay. Generally, all cases receive the same amount.
§ Under a per diem payment system, the hospital will obtain no additional revenue by providing more services per day—the hospital receives a fixed amount per day, regardless of its service intensity. However, the hospital receives a payment for extra days, regardless of how they are provided. Current patients can stay extra days, or new patients can be admitted. In either case, the MR is positive.
An increase in the per diem rate will have a positive influence on the length of stay and the number of admissions (but not the service intensity),

Question 28

per case reimbursement, and

Answer 28

Under this payment basis, the hospital receives a given sum for the entire hospital stay, and generally, reimbursement is made according to the type of patient. Hospitals vary according to the types of cases they treat; some hospitals treat more severe cases on average, than others. More severe cases (e.g., transplants) have higher costs. The concept of case mix is used to measure the average severity level for a hospital. Payers of hospital care have devised classification systems of patients in which different resource requirements are attached to different classes of cases. Such payment systems are a more complex form of per case systems.
§ If the hospital receives a fixed, per case payment, no additional revenue is received for additional intensity or for longer stays. However, there is additional revenue for more admissions.
and an increase in the per case rate will increase the case volume (but not the intensity or stay).

Question 29

global budget.

Answer 29

§ Under a true global budget, the hospital receives a fixed payment, regardless of the number of services, days, or cases. This type of payment is analogous to paying a salary to a doctor, regardless of the volume of services provided. Canadian hospitals have generally been paid global budgets in the past, although these budgets were not truly global, in that they were usually adjusted annually for changes in patient days of care and other factors.
§ If the hospital receives a true global budget, it will not gain additional revenues from greater intensity, longer stays, or more admissions. However, in many Canadian provinces, global budgets were adjusted for hospital patient days. Hence, these global budgets were not fixed budgets; they had elements of per diem payments in them. The statement about how revenue varies with output only holds true if the budget is not output related.
An increase in a true global budget will affect none of these outputs.

Question 30

CASE MIX

Answer 30

Grouping of patients according to characteristics (age, gender, diagnoses, treatments, severity of illness, etc.) and then determining the proportion of total falling into each group.

Question 31

INTENSITY OF CARE

Answer 31

The amount of resources and services embodied in a unit of care (e.g., a day of hospitalization, a hospital stay, or a physician visit).

Question 32

PER DIEM PAYMENT

Answer 32

A flat-rate payment to a hospital or other institution for each day the patient is an inpatient in the institution.

Question 33

Case-based funding

Answer 33

is used to reimburse hospitals across many jurisdictions in Canada. The following article examines the framework for understanding how incentives work and their role in determining hospital output. Although the research that formed the basis of this article was undertaken years ago, the concepts and outcomes of the study remain relevant today.