The solution to problems in the market for Independent Treatment Centres

(2014Jord Smit (344682)Thesis supervisor: C.A. Rietveld MScThesis co-reader: Dr. P.W. Van der Zwan) (The solution to problems in the market for Independent Treatment Centres) (Bachelor Thesis International Bachelor Economics and BusinessSubject: Strategy, Entrepreneurship and health)

ContentIntroduction 2What types of markets do exist?52.1Monopoly52.2Oligopoly72.3Perfect Competition82.4Monopolistic Competition93.What does the market for Independent Treatment Centres look like?123.1What players exist on the ITC market123.2 How are the powers between the players distributed154. What market would best describe the market for ITCs according to theory?184.1 A-segment184.2 B-segment18 4.2.1 Market between healthcare provider and healthcare insurer184.2.2Market between healthcare insurer and patient205.What are the reasons for market failures in the current market?225.1Power asymmetry225.2Tariff control235.3Contracting principle235.4 Experience and field of interest246. How could one solve these problems?256.1Power asymmetry256.2Tariff control266.3 Contracting principle266.4Experience and field of interest277.What would happen if government would let go control of prices?288. Concluding remarks298.1 Conclusion298.2 Discussion298.3Limitations309. References31

1. Introduction

Good health has always been an important factor explaining all sorts of success, on the individual and aggregated level. Health is as well a very important factor for economic growth ( Welly, 2007) and therefore should be guarded seriously. The quality of the care provided has therefore grown over the years, resulting in a situation where more and more diseases become curable. However, managing a sustainable health care system seems to be a rather difficult task. When looked at The Netherlands, government and other authorities have implemented several reforms (Schut & van de Ven, 2005) in the health care sector to make and keep healthcare affordable for everyone. The perfect situation however is still not achieved. The urgency of this matter becomes more and more apparent, now that a crisis has hit the economy and cuts have to be made in the government budget.

When in 2008 the financial crisis started after the fall of Lehman Brothers, countries had to seriously overlook their budgets for the following years. Where economic growth was seen before as a normal matter, now it seemed not so normal anymore. This also changed the view on the healthcare market. Earlier, health was something that should not be measured in money equivalents at all, it was something you just had to receive when needed. Now the already exorbitantly high and still exponentially growing costs of healthcare are under the microscope. When looked at The Netherlands as an example, policymakers now try in every way to introduce a model that not only can contain, but preferably also reduces the costs.

In order to achieve this goal, the government further introduced a system with competition between healthcare providers. The idea was that when supply and demand would determine prices, there would be a serious efficiency gain. Healthcare was divided in 2 segments (a- and b-segment) where the a-segment has non-negotiable fixed prices and the prices of the b-segment have room for negotiation. Nowadays 70% of all prices are free negotiable between health care providers and insurers. A serious cut in costs for the treatments resulted, but it showed a new problem. There was an enormous increase in the quantity of treatments when the market came to realise that not quality was paid for, but the number of treatments. Healthcare providers simply provided more care, sometimes even more than necessary, in order to get the most out of their work. Minister of health, Ab Klink (2007-2010), cofounder of the health competition model, says about this: It is absolutely a fact that we looked at prices more than at volume. The insight in the volume increase came during my period as Minister. We definitely misjudged the effects of the introduced competition. (Vrij Nederland, 2013) So again the ideal situation for cost containment was not achieved. This means that nowadays 13% of GDP is spent on healthcare and the estimation is that this will increase to 31% in 2040(CPB, 2013).

In search for the perfect cost containment solution, insurers were given more power. They got the possibility to cut deals with healthcare providers in the form of contracts. These contracts are very important for the control of healthcare costs. They do not only decide what price will be paid for which treatment, but also what the maximum amount of treatments covered for by insurance is per provider. This means both costs and volume are controlled by healthcare insurers, having a huge impact on the daily business of the healthcare providers. Now doctors have to make decisions over what treatment to apply to which patient in order to stay under the maximum amount of treatments covered. Also, sometimes doctors come to the shocking conclusion that their maximum is already near halfway the year, meaning they cannot be reimbursed for provided services for the rest of the year.

The negotiations that lead to the contracts become tougher every time. Healthcare insurers have a huge advantage here. They can just hire someone who is very good in negotiation, where the healthcare providers are bound to themselves in this process. This causes trouble for the healthcare providers, since they have learned and studied to become a doctor of some kind instead of a negotiator. Therefore great frictions arise and an increasing number of practitioners chooses to work without a contract with insurers. An example is the speech therapist sector, where none of the practitioners worked with a contract in 2013 due to too low prices offered by healthcare insurers(Nederlandse vereniging voor Logopedie en Foniatrie, NVLF).

When a doctor chooses to work without a contract, he is burdening its patients with the hassle of the payment for treatments. A doctor who works with a contract can immediately get paid by sending an invoice to the healthcare insurers. Patients almost never have to pay something, unless the treatment is not fully covered for by the insurance. When a patient chooses to go to a doctor that does not have a contract with his healthcare insurer, he has to pay for the treatment himself and has to send the invoice to the insurer afterwards. Not all patients are in such a financial state that they can afford to disburse the price of the treatment. On top of that, insurers are less likely to pay out the full amount of the treatment, since they dont have a contract and thus claim that the prices are too high. This creates boundaries and less open competition. Again, prices seem a more important factor than quality.

The sector where these problems are most apparent is the Independent Treatment Centre sector (hereafter called ITC). ITCs are mostly specialised clinics that are completely autonomous. They look much like a small hospital. In such a centre often work several surgeons, revalidation specialists and all other types of doctors necessary for their specialisation. Also they provide services that are also provided in hospitals. Not surprisingly, the direct competitors of ITCs are hospitals and that is why the problems of contract negotiations are most apparent in this sector. Hospitals negotiate contracts for the full amount of treatments they have in every field of care they provide. Therefore doctors active in the particular segments that compete with ITCs never have to worry about contract negotiations, because this is done for them by the hospital board. This makes the position for ITCs a lot harder when they do not have a contract, because when a patient has to choose between paying for the treatment upfront or having no hassle about payments at all, they most likely choose to avoid the hassle.

This thesis will try to compare the market of ITCs to the markets described in literature and look for the market failures that arise due to the state of the current market. The research questions will be:

1 What does the current state of the market for Independent Treatment Centres look like?

2 How can this situation be improved?

This thesis answers these questions with the help of several chapters. First it describes the theoretical markets available in chapter two, then the market for ITCs in chapter 3. After the description of both markets, chapter four tries to apply one of the theoretical markets to reality. Possible differences in the comparison that could cause market failures are described in chapter 5, before chapter 6 can describe a possible solution to these failures. This thesis ends with a view on policy, where it describes a world where the market of healthcare is completely free for market dynamics.

2. What types of markets do exist?

This part of the thesis highlights the several types of markets explained in literature. The four markets are monopoly, oligopoly, perfect competition and monopolistic competition. This section explains their characteristics and conditions, in order to make a good and well-reasoned decision in which the ITC market fits best.

2.1 MonopolyThe word monopoly has its origin in the Greek words monos (alone or single) + polein (to sell). Translated to English, these words mean the right of exclusive sale. Strictly speaking, a monopoly exists when there is one supplier available at the market to provide or sell a good. The supplier is then called a monopolist and has power to influence the market price. This phenomenon provides them with significant power, since potential buyers cannot switch to other suppliers when they think prices are set too high or terms and conditions of the agreemen