Question

the change in reimburse mentioned systems from a cost basis to a prospective payment system, the decrease in inpatient occupancy and the emergence of price competition make cost containment a top priority for all healthcare managers.what are the four implications of cost containment and where does management engineering fit in with them? give an example from your organization.

Answer 1

Containing the costs of care can be useful to government, employer, and household budgets, but it may have a detrimental impact on innovation, since health care costs are the main source of revenue for medical innovators. Developers seek profits and so are attracted to industries and innovate where they believe profits can be made. Policies that reduce health care costs and, in turn, developer?s profits may have a dampening impact on innovation.

The expectation of profits leads to investment in innovation. Profits are the difference between (discounted) revenues and (discounted) costs over the life of the product. According to economic theory, all else being equal, policies that lower costs of development or production or raise revenues, through higher prices or larger quantity demanded, should result in the development of more drugs. Policies that lower costs or raise revenues stimulate R&D, while policies that raise costs or lower revenues will reduce R&D. Several studies have found that increases in profits (or related measures) for drugs leads to increases in R&D. Scherer postulates three possible links between gross profits and R&D^[4]. First, R&D investment leads to new products, which if successful, increase the company?s profits. Second, profits provide a cash flow for financing R&D. Third, future profit expectations will be influenced by current profitability. Scherer found that pharmaceutical industry R&D is characterized by a ?virtuous rent-seeking model? in which increases in profits lead companies to increase R&D and, possibly, marketing costs until the profits are dissipated.

Acemoglu and Linn looked at the impact of market size on innovation^[5]. They measure market size by looking at demographic changes in the US population. They found that the increasing average age of the population has lead to increases in availability of pharmaceuticals used by middle-aged relative to young consumers. They found that a 1 percent increase in the potential market size for a drug category leads to approximately a 4-6 percent growth in the entry of new molecular entities.