Health Care Industry Engages in Classic Business Strategies

Article excerpt

As is the case for many people, part of my holiday season was spent in pleasant gatherings of friends, colleagues and acquaintances. It's not unusual at such gatherings for someone to tell me how lucky I am to be part of an industry that is always expanding and isn't affected by the normal ups and downs of the marketplace in the way that other industries are.

How do I respond to such a comment?

I usually begin by saying that in the past, such a statement would have been on target. For a long time, the American health care industry appeared immune to the ups and downs of the marketplace. Other industries struggled through unpredictable and uncertain times, but health care seemed to be inflation-proof and recession- proof. For physicians and hospitals alike, the health care industry seemed to have no financial downside, only upsides. The problem, as it turned out, was that the economics of health care were not based on normal market principles. For instance, we know from basic economics classes that demand for a good or service in a market will eventually generate a supply to meet the demand. When the supply begins to exceed the demand, prices fall. In the old days of health care, even this basic law of supply and demand was not observed. Why? First, there was an insatiable demand for what the health care industry was turning out. Second, the patients generating the demand were cut off from any negative financial consequences of their decisions. For the most part, it was the government or an employer that was paying the bill. The result was that demand accelerated faster and faster without the brake of marketplace prices to slow it down. The normal economies on price were not a factor, and we entered a long period of double- digit medical inflation, often exceeding normal inflation by two or three times. Oh, how times have changed, I tell my partner in conversation. Weary of rampaging medical inflation, the business community and government stepped out of the background several years ago to force health care to begin obeying the laws of economics. Because of the emergence of managed care and the ability of purchasers of health care to demand and receive price concessions, health care is now responding to economic pressures as if it were any other mature industry. As an example, again consider supply and demand. In the old days, the voracious appetite for health care services caused hospitals to add capacity at a tremendous rate. As a result, in today's market there is too much capacity. As in any oversupplied market, purchasers can demand that prices be reduced. The exercise of this leverage has brought painful results for providers of health care services. Physicians for the first time in the last 50 years have begun to see their incomes erode, and hospitals find themselves dismantling services in order to dramatically reduce their costs. For these reasons, I tell the person who struck up the conversation, we're now seeing health care providers engaging in several classic business strategies that one might see in any mature industry. First, some health care providers have decided that they will become the lowest-cost provider in their market. They elect not to worry about esoteric kinds of services that might be found in hospitals with expertise in sophisticated specialities. …