Health Economics
Answer 1)
i) The maximum price which Celgene should spend is the intersection point of demand curve and marginal cost, as any consideration above this point will be above his ATC, and will bring losses for the firm.
Answer 2)
i) Annual Revenue of top four companies : 130+74+58+49= $311 Billion
Total Revenue of all the companies in the industry: 130+74+58+49+34+17+14+13+10+271=$670 Billion
Four-Firm Concentration Ratio: 311/670= 46.41%
ii) HHI:
Note: HHI = Sum of square of market share of all the firms
iii) As a basic rule, Justice Department always challenges any merger activity in a market where HHI exceeds 1800. Therefore, with US healthcare insurance industry indicating HHI multiple of 2305, Justice Department will surely challenge the merger between two entities citing it being anti-competitive. In other words, it is highly possible that using the blanket of trimming the administrative cost, the merger between Anthem and Cigna might lead to significant gain in their market share which might further reduce the competition in this industry.
iv) Yes, the healthcare insurance industry in New Hampshire is highly competitive, and any merger activity between the firms may not attract any scrutiny from the local regulatory authority.
Answer 3)
In my opinion, the explanation to this instance can be explained by Conventional theory under which an economist, Pauly asserted that any mandatory participation endowed on consumers will reduce purchase welfare for the consumers. In other words, if individuals are forced either through taxation or penalties to purchase insurance, this will create inefficiency and the net change in utility from a compulsory purchase of this ‘insurance’ could well be negative.
Answer 4)
The stock price of Humana should have increased as the verdict by Supreme Court was an optimistic news for the healthcare insurance industry as the decision to upheld federal subsidies for healthcare insurance products purchased on Health Exchanges meant improvement in healthcare insurance market.
Answer 5)
a) With the increase in co-insurance amount, the individual will have to pay more out of his pocket. In this case, the demand curve will shift leftwards.
Price
Increased co-insurance leads to decreased demand
Demand for hospital services
b) Since a hospital in the central locality attracts more patients, the decision to relocate to a distant suburb will lead to decrease in demand for the hospital services. As a result, the demand curve will shift leftwards.
Price
Distant relocation will lead to decrease in demand
Demand for hospital services
c) A negative cross elasticity indicates that the both physician services and inpatient hospital services are complimentary goods. Therefore, with physicians offering their services at discounted rates, this will increase demand for their services and also for the hospital services. Therefore, in this case, demand curve will shift rightwards.
Price
Increase in demand for physician services will lead to increase demand of its compliment
Demand for hospital services
Answer 6)
While both quantity demanded and price do share a negative relationship, but here, the demand for emergency medical services can be classified as highly inelastic as a patient or a family cannot postpone or reject to take medical services. Therefore, with the increase in the average price for Emergency Room, the physician will be able to increase his revenue.
Answer 7)
i)
Cost
Average Total Cost(Jackson Hospital)
Since Jackson is serving higher number of patients than Trinity, it is possible that its factors inputs have entered into diminishing stage now.
ii)Since Jackson Hospital is handling more patients than Trinity Hospital, it is possible that it has arrived at a point where this level of patients is disturbing the optimum ratio between variable factors and fixed factors is disturbed, which is eventually leading to diminish returns and pushing the average costs higher.
Answer 8)
Using the given numbers, we found the following cost figures for the company under the assumption that the physician increases his patient in the unit of 1:
Therefore, since SAVC is showing an increasing trend, another patient load will lead to further surge in Short Run Average Variable Cost, while our answer is derived from the U-Shape of the SAVC.
ii) As we can postulate from the SATC and SAVC curve, as soon as SAVC increases, SAFC will also increase as the proportionate increase in average variable cost will be greater than the increase in average fixed cost.
Answer 9)
a) Since AT 2220 and Myozome offers a joint utility, i.e. they satisfy a want of a consumer in a combined manner, they can be classified as complimentary goods.
b) Since demand patterns of complimentary good yields positive relationship, decrease in price of Myozyme will result in increased quantity demanded for it, and also the demand for its complimentary good, AT 2220 will also increase.
c) The possible reason for the partnership is the brand name of GlaxoSmithkline which is the also world’s sixth largest pharmaceutical company. If Amicus markets the drug solely under its own name, it may not be able to get the required publicity and market share as what it may get with the partnership from an industry behemoth such as GlaxoSmithkline.
d) With only few sellers and millions of patients to buy the drug, the pharmaceutical industry under this state can be classified as Oligopoly Market Structure. In terms of pricing policy, since firms under oligopoly market structure are dependent on pricing-output policy of rival firms, the price of AT 1001 will be same as that of Fabrazyme.
