Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.
Executive Summary
Private health insurance industries play essential role in the healthcare system of America. Reflectively, one dollar out of every three dollars spent in 2011 on healthcare was paid to private insurers (Davies and Crombie 22). The Standard Industrial Classification (SIC) was created to establish a standardized system of classification for business organizations to aid in the comparison of statistical data used in describing various aspects of the United States economy.
Reflectively, the main objective of health economics is to promote better understanding of economic aspects of health care problems so that corrective health policies can be designed. Therefore, it is important to analyze fixed and variable costs in private health care insurance industry and how these determinants interact with demand in the market.
Among the general strategies adopted by players in this industry include developments of an inclusive stakeholder strategy, designing of competitive insurance packages, and diversification in terms of designing tailored products. This reflective treatise attempts to explicitly reflect on the Porters model founded on the premises that corporate plans should meet the opportunities and pressure in the organizations outside setting.
Among the discussed factors include threat of entry of new competitors, the bargaining power of buyers, and suppliers bargaining power. In addition, the influence of substitute products and stiff competition between industries are analysed in terms of how they affects profit margins. Specifically, the focus is on management strategies to counter competition as applied by the Grand Valley Health Plan (HMO) Michigan.
Health Economics-SIC and NAICS
Introduction
Private health insurance industries play essential role healthcare system in the U.S. today. Davies and Crombie note that one dollar out of every three dollars spent in 2008 on healthcare was paid to private insurers (Davies and Crombie 22). Moreover, several public insurance plans now rely on services of private insurers to help manage a significant share of spending (Davies and Crombie 32).
In spite of this important role, the private health insurance segment has gained relatively modest attention from researchers, mainly because of limited availability of data on insurance contracts. By studying health economics, Neun and Santerre argue that Health economics encompasses a broad range of theories, concepts, and topics thus it is difficult to precisely define (4).
Davies and Crombie define health economics as study of supply and demand of health care resources among a population (Davies and Crombie 12). They note that the study of health economics encompasses the application of a range of micro-economic tools which include demand, to health concerns and problems (Davies and Crombie 32).
Description
The key objective of health economics is to promote the better understanding of economic aspects of health care problems so that corrective health policies can be designed. To be able to tackle the problems mentioned Office of Management and Budget (OMB) in collaboration with other agencies created the North American Industry Classification System (NAICS), a classification system that substituted the Standard Industrial Classification (SIC) system.
Since 1993 efforts have been made to enable the transition from NAICS to SIC, and in 2001 NAICS was formally adopted. These efforts have materialised into reliable and relevant classification systems within the periphery of private health care insurance industry. The NAICS, OMB, and SIC are associated with progress in the development of health economics solutions through insurance premiums. Besides, these agencies are associated with the review of health policies across the United States of America.
History
Standard Industrial Classification (SIC) was established in 1938, and since then has been recently revised. The Standard Industrial Classification (SIC) was created to establish a standardized system of classification for business organizations, and in so doing to aid in the comparison of statistical data used in describing various aspects of the United States economy.
After a series of revisions to SIC, the Office of Management and Budget (OMB) in 1997 approved the adoption of North American Industry Classification System (NAICS) to substitute the Standard Industrial Classification (SIC) in the collection of industry statistics.
As a replacement to the Standard Industrial Classification (SIC), North American Industry Classification System (NAICS) were established in 1997. Like SIC the NAICS has been revised and updated. For example, a result of the North American Free Trade Agreement (NAFTA) the NAICS codes have been revised in 2002 and 2007, and NAICS now apply to Mexico, Canada, and the United States.
Experts argue that rationale for introducing NAICS codes to replace the SIC was to permit the inclusion of industry ratios and averages that could be compared between the three countries, and to incorporate newer industries not covered in the SIC codes, like, high tech industries, biotechnology, and services industries (Tolley 33).
Organization
NAICS and SIC and industry categories cannot be compared directly because the NAICS codes change has split some SIC categories. Previously, under the SIC groupings; there was no distinction of corporate headquarters from the service or product they produced. However, under NAICS codes there is the recognition of corporate headquarters in the Management Sector.
Manufacturing, for example, has been is reorganized to include high-technology industries. Moreover, NIACS offers a more detailed account on a company including an additional breakdown of services sector in SIC system into nine new sectors.
Government policies
Office of Management and Budget established the Economic Classification Policy Committee in 1992 to pursue a fresh slate examination of economic classifications for statistical purposes1. Since 1939 the U.S. has been using the Standard Industrial Classification (SIC) system.
While SIC had undergone periodic revisions, the last one in 1987, rapid changes in the U.S. and world economies brought SIC under increased scrutiny. In response to the need for a classification system that better reflected the dynamic nature of economies, OMB established the Economic Classification Policy Committee 2. Government agencies from the United States, Mexico and Canada3 were tasked with the development of a system that accounted for rapid changes in the U.S and world economies.
Industry Demands: Determinants of existing firms
Fixed costs
Irrespective of the dynamics in the private health insurance industry, fixed costs does not change over time. For instance, utility costs are characterised as fixed cost since the accrued value remains constant irrespective of any change in other cost in private health insurance industry. However, an upsurge in business utilities may transform the same to variable cost in that it may determine profit levels.
This is minimal and has no substantial contribution towards influencing the industry demands. For instance cost of maintaining the insurance firm in terms of bills and rent may not change and has no impact on performance of the firm. Thus, fixed costs are assumed to be constant, are experienced internally, and often budgeted for as component of daily operation.
Variable costs
Variable costs are very responsive to swings in business environment in health insurance industry. As a matter of fact, since these costs are not constant, a firm is likely to experience impact of change in business environment. For instance, when the business volume increases, variable costs also increase.
On the other hand, when business volume decreases, variable cost will respond in the same way and decrease proportionally. Variable costs have direct influence on private health insurance industry demands. Variable costs are also called the deductable and influence the choice between partial and complete coverage as controlled by expected gains on utility.
For instance, an increase in the premium rates may negatively affect demand for private health care insurance since some customer may shy away from one insurance firm in favour of another. In the event of this scenario, demand will decrease. Examples of variable costs in private health insurance industry include expansionary cost, cost of preferring one product over another, and inventory.
Current changes
In the last decade, private health insurance industry has undergone series of changes in line with the American health care reforms agenda. Under the new arrangement, the private health care insurance industry must seek approval from the government and justify charges before clearance (Neun and Santerre 122).
As the cost of living increases, insurance industries offering private health cover have been forced to reduce their premium and embrace bottle neck competition from the government sponsored insurance cover for the citizens of America. In response, most of private healthcare insurance industries have opted for product tailoring and customisation as a remedy for survival. Unlike before, this industry now offers packages such as compensation against incurable diseases such as HIV/AIDS, cancer, and other viral infection to their clients.
Shape of curves
The above curve represents the relationship between price and quantity demanded in the long run. The as price for a product decreases, the quantity offered will also decrease. In the long run, an increase in price will respond positively with an increase in quantity of packages offered by private health insurance companies.
Key:
- AFC Average Fixed Cost
- AVC Average Variable Cost
- MC Marginal Cost
- ATC Average Total Cost
Among the components of marginal cost curve include the short run and long run curves which directly influence productivity and performance at ceteris peribus. As indicated in the above curve, production inputs changes up to a point of diminishing returns. At this point, market is exhausted. Further introduction of more products will not change returns. This means that economies and diseconomies of scale are exhausted. In relation to private health care insurgency industry, economies of scale margin are noted in the declining long-run average total cost curve. On the other hand, diseconomies of scale trigger the long-run average total cost curve to rise.
Analysis of Competitive Forces as applied in the Grand Valley Health Plan (HMO) Michigan
In 1980, Michael Porter in his book, Competitive Strategy: Techniques for Analyzing Industries and Competitor, identified a five competitive forces model for strategic analysis of an organizations industry structure and processes. Porters model is the founded on the premises that corporate plans should meet the opportunities and pressure in the organizations outside setting. In particularly, competitive strategy should understand the organization structures and their dynamism.
These forces according to Porter show the levels intense competition between industries and therefore, determine the productivity and charm of an industry. As a result, the corporate objective should be to adjust the driving forces in such a way that they improve the situation of the organization same as in the case of HMO which opted for diversification, introduction of competitive price mechanism, streamlining operations, and managing inventory.
Threat of entry of new competitors
Porter argues that competition, especially when stiff, is directly related to performance of a product or service in the demand market. When such phenomena occur, the new entrants have the capability to change key market determinants such as market prices, market share and customer loyalty.
Moreover, the threat caused by new entrants is subject to the barriers to entry in the business. For example, the insurance industry in the U.S. have laid down requirements for any company that intends to run an insurance firm; there is a minimum amount of money that must be deposited in the central bank.
For example, all states require insurers to be financially solvent and capable of paying claims. States also require prompt payment of claims and other fair claims handling practices. These high initial capital requirements have inhibited the numbers of new entries recorded over the decades as HMO remains established and profitable (Neun and Santerre 178).
Intensity of rivalry
Intensity of rivalry is applied by Porter to describe the levels of competition amongst existing industry players. Economically, whenever there is competition between industries pressure is often than not directed in to prices of goods and services. Thus, stiff competition between industries affects profit margins for every single company in that industry.
Porter states that competition between industries is greater when the existing industries have same strategies, there is less product diversification and when the industries are almost the same size. In the US on the contrary, apart from product differentiation by the private insurance companies have, the companies operate at very different levels in terms of economy of scales (Normand and McPake 78).
Competition generally determines the profit margin. Therefore, established companies may be in a better position to compete those weak firms. As a result, this aspect has a very strong influence on survival and performance of firms in this industry such as HMO since it has integrated the ability to survive and thrive amidst competition through tailoring of its family health insurance package.
Pressure from substitute products
Substitute products cause threats in an industry when alternative goods and services are available in the market and offer better prices and performance. Such substitute products are likely to capture a large portion of the market thus reducing the sales volume of each existing industry. The US private insurers provide a variety of insurance policies that suits an individuals income and needs.
As a matter of fact, these substitutes are spread across the market and may not necessarily satisfy demands of different customer. Though the number of substitutes may be substantial, many players may want to incorporate them in the bracket. Thus, volume of sales realised will be relatively lower as these players outdo one another through modification. However, HMOs products are unique products that fit different classes of clients from high end to low end income brackets.
Bargaining power of buyers
In addition, the bargaining power of buyers determines how much buyers can enforce pressure on market margins and volumes. The bargaining power of buyers of policies is high when the industry comprises great numbers of small and medium term operators and when buyers purchase large in volumes.
Most policy buyers in health insurance have the opportunity to buy policies from numerous insurance firms that increasing their bargaining power. However, if with this bargaining power, there are federal laws that guide the insurance industry on the amount of premiums to charge (Neun and Santerre 158). These federal laws control and regulate the types of premium which makes it into the market.
On the measurement scale, this aspect can be classified as having a strong influence since bargaining power of the buyer influence quantity of sales and overall returns. Behaviour of utilities is determined by the responsiveness of buyers and their purchasing power to purchase services offered by private healthcare insurance companies. In the last decade, HMO has managed to maintain position four due to its integrated pricing model that is friendly to clients.
Bargaining power of suppliers
Finally, Porter coined the concept of suppliers bargaining power to denote the ability of all those involved in the provision that particular service to influence the terms and conditions of policies in their favour. The private insurance companies without government regulations would want to sell their policies at the maximum possible prices (Davies and Crombie 43).
However, government regulation controls their activities and evaluates their policy before introduction into the market. Thus, government control, through regulatory authority, often influences overall impact of policies floated by players in this industry. As a matter of fact, this aspect has moderate effect on demand in HMO which often uses in house supply chains and outsources the most cost effective suppliers such as the Virginia Medicare.
Conclusion
Conclusively, competition is a major factor that influences operation and organization of private health care insurance industry. As a matter of fact, the aspect of historical review displays series of changes that has gripped this industry and threat of high living standards making some of their client opt for public healthcare insurance.
Fixed and variable costs in private health care are determinants of demand in the market. Variable costs change as the demand in the market change. However, fixed costs are assumed to remain constant irrespective of market swings since they are covered in the budget and are predictable.
Threat of entry of new competitors contributed minimal challenge to player in this industry as compared to the bargaining power of buyers which determines how much buyers can enforce pressure on market margins and volumes. Besides, suppliers bargaining power denotes the ability of all those involved in the provision that particular service to influence the terms and conditions of policies in their favour. This aspect presents a moderate challenge to player in this industry since they are easily replicable.
Substitute products cause threats in an industry when alternative goods and services are available in the market and offer better prices and performance. Generally, stiff competition between industries affects profit margins for every single company in this industry. Reflectively, the above aspects control survival and profitability of firms in this industry since they influence positioning and maintaining a market niche.
Works Cited
Davies, How, and Crombie Ian. What are confidence intervals and p-values? London: Hayward Medical Communications, 2009. Print.
Neun, Stephen, and Santerre Rexford. Health Economics: Theories, Insights, and Industry Studies. 5th ed. 2009. Alabama: Cengage Learning. Print.
Normand, Charles, and McPake Barbara. Health economics: an international. 2nd ed. 2008. New York: Taylor & Francis. Print.
Tolley Keith. What are health utilities? London: Hayward Medical Communications 2009. Print.
Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.