HCM 320 Module 3 Elasticity Short Paper Example

Ten Dollars More: Price Elasticity and the Minimum Visit Fee at Valley Community Health Center

[Student Name]

Southern New Hampshire University

HCM 320: Healthcare Economics

Module Three Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Ten Dollars More: Price Elasticity and the Minimum Visit Fee at Valley Community Health Center

Uninsured patients at the center pay on a sliding scale based on income, with a minimum fee of $20 per visit. Facing a budget gap, the finance committee has proposed raising the minimum to $30. Supporters say patients will barely notice; the medical director worries that some will stop coming. This paper uses the economic concept of price elasticity to estimate what would happen.

What Elasticity Measures

Price elasticity of demand captures how sensitive buyers are to price: how far use moves when cost moves. To compute it, take the percent shift in how much people use and divide it by the percent shift in what they pay. Demand is called inelastic when the absolute value is less than one, meaning quantity changes proportionally less than price, and elastic when it is greater than one. Health care is generally inelastic, but not perfectly so: people do use less care when it costs more out of pocket.

Evidence on Health Care Elasticity

The most cited test of this idea is a randomized study run by RAND in the 1970s and early 1980s. Newhouse (2004), one of its leaders, reviewed its lessons two decades later: participants with bigger out-of-pocket shares cut back sharply on care, reducing both care that was clinically appropriate and care that was less needed, with little measurable effect on health for the average participant but worse outcomes for some poorer and sicker participants, such as those with high blood pressure. Researchers commonly summarize the experiment's findings as an elasticity of about minus 0.2.

Calculating the Percentage Change in Price

Raising the fee from $20 to $30 is a $10 increase. As a percentage of the original price, that is 10 divided by 20, or a 50% increase. A midpoint calculation, based on the average of $20 and $30, would put the rise at 10 divided by 25, or 40%. This paper uses the simpler 50% figure for illustration.

Estimating the Change in Visits

With an elasticity of minus 0.2, a 50% increase in price would reduce visits by 0.2 times 50%, or 10%. Patients paying the minimum fee made about 18,000 visits last year, so visits would fall by about 1,800, to roughly 16,200. Because the center's patients have low incomes, their true elasticity may be larger than the average RAND estimate, making this a conservative projection.

Why Low-Income Patients May Respond More

Elasticity is not the same for everyone. A $10 increase is a trivial share of income for a higher-earning patient but a meaningful share for someone earning $18,000 a year, who may need that money for rent, food or transportation. Economic theory predicts, and studies generally find, that people with lower incomes are more responsive to out-of-pocket prices for health care. Valley's minimum-fee patients are, by definition, those with the lowest incomes the sliding scale serves. The center's front-desk staff already report that some patients ask to postpone visits when they cannot pay the current $20.

Time and Travel as Prices

The fee is not the only price patients pay. Time off work, bus fare, childcare and waiting time all add to the true cost of a visit. For many Valley patients, these nonmonetary costs already exceed the $20 fee. Raising the fee adds to an already high total price, and patients near the margin of coming or not coming are the ones most likely to drop out. This helps explain why modest fees can have larger effects in safety-net settings than national averages suggest.

What Happens to Revenue

When demand is inelastic, raising price increases total revenue even though quantity falls. At $20, 18,000 visits bring in $360,000. At $30, 16,200 visits bring in $486,000, an increase of $126,000. On paper, the proposal closes part of the budget gap.

Table 1. Estimated Effects of Raising the Minimum Fee

Note. Composite estimates for patients paying the minimum sliding fee.

Which Visits Would Be Lost

The key question is not how many visits are lost but which ones. The RAND results suggest patients cut necessary and less necessary care alike, because they cannot always tell in advance which visits matter. At Valley, many minimum-fee patients have diabetes, hypertension or depression and need regular follow-up. A patient who skips a blood pressure check to save $10 may not notice any difference for months.

The Offset Effect

Chandra et al. (2010) studied California public employee retirees whose copayments for office visits and prescription drugs rose. Physician visits and drug use fell, as expected, but hospital use rose among retirees with chronic conditions, partly offsetting the savings. The lesson is that cost-sharing can shift spending rather than eliminate it, moving care from inexpensive clinics to expensive hospitals.

Applying the Offset Lesson

For Valley, which absorbs little of the cost of hospital care, the offset may not show up in its own budget. It would show up in local hospitals' uncompensated care and in patients' health. If even 60 of the 1,800 lost visits led to an emergency department visit costing $1,500, the added hospital cost would approach the center's revenue gain.

Equity Considerations

A flat $10 increase takes a larger share of income from the poorest patients, who are also likely to be the most price sensitive. It could widen gaps in care between uninsured and insured patients, contrary to the center's mission.

Alternatives

The center could instead close part of the gap by helping qualifying self-pay patients sign up for Medicaid or subsidized plans, which brings in more revenue per visit without raising patients' costs, and by reducing missed appointments, which waste staffed capacity. Screening every uninsured patient for coverage eligibility could bring in more than the fee increase, and coverage keeps patients connected to primary care: Nocon et al. (2016) reported that Medicaid patients anchored at health centers ran up smaller overall bills and made fewer trips to hospitals.

Recommendation

Although the fee increase would raise revenue because demand is inelastic, it would reduce visits by at least 10%, likely including necessary chronic disease care, and could raise hospital costs elsewhere. The center should keep the $20 minimum and pursue coverage enrollment and no-show reduction instead.

Conclusion

Price elasticity explains why a higher fee would raise revenue while reducing visits. Evidence on which care is lost and on offset effects shows why revenue alone is the wrong test. For a safety-net clinic, the patients priced out are often those who most need care.

References

Chandra, A., Gruber, J., & McKnight, R. (2010). Patient cost-sharing and hospitalization offsets in the elderly. American Economic Review, 100(1), 193-213. https://doi.org/10.1257/aer.100.1.193

Newhouse, J. P. (2004). Consumer-directed health plans and the RAND Health Insurance Experiment. Health Affairs, 23(6), 107-113. https://doi.org/10.1377/hlthaff.23.6.107

Nocon, R. S., Lee, S. M., Sharma, R., Ngo-Metzger, Q., Mukamel, D. B., Gao, Y., White, L. M., Shi, L., Chin, M. H., Laiteerapong, N., & Huang, E. S. (2016). Health care use and spending for Medicaid enrollees in federally qualified health centers versus other primary care settings. American Journal of Public Health, 106(11), 1981-1989. https://doi.org/10.2105/AJPH.2016.303341