NR 552 Week 3 Supply and Demand Analysis Example

Supply and Demand Analysis: Post-Discharge Home Nursing Visits in One Region, Where the Patient Pays Nothing, the Clinician Orders the Quantity and the Supply of Nurses Sets the Limit

Student Name

College of Nursing, Chamberlain University

NR 552: Economics of Healthcare Policy

Instructor Name

Month Day, Year

Supply and Demand Analysis: Post-Discharge Home Nursing Visits in One Region, Where the Patient Pays Nothing, the Clinician Orders the Quantity and the Supply of Nurses Sets the Limit

The Market, Stated in Units

The market analyzed here is skilled home nursing visits in the first 30 days after hospital discharge, measured in visits per month, for adults in our hospital's service area, a region of about 400,000 people served by three home health agencies. Our hospital's affiliated agency provides about 7,500 registered nurse visits a year, roughly 625 a month; the two other agencies together provide about 1,100 a month. The question is what determines how many visits are provided and to whom, and what would happen if our hospital launched a heart failure transitional care program requiring about 40 additional early visits a month.

Who Faces the Price

In an ordinary market, the buyer pays the price at the point of purchase and buys less when the price rises. For most patients in this market, the price at the point of use is zero. Medicare covers skilled home health services for eligible homebound beneficiaries without a copayment, and most commercial and Medicaid plans in our region have low or no cost sharing for home health after discharge. The patient therefore has little reason to limit how many visits they receive, and demand from patients is largely insensitive to price.

The party that feels the price is the payer, and its tools are rules rather than prices: eligibility criteria such as being homebound, requirements for a clinician to certify need and a face-to-face encounter, and payment per period of care rather than per visit. Those rules shape the quantity demanded far more than any price the patient sees.

Agency and the Recommended Quantity

The second difference is that the quantity is mostly chosen by someone other than the patient. A physician or nurse practitioner orders home health and certifies the need; the agency's nurse then sets the visit frequency in the plan of care. The patient accepts or declines. Arrow (2001) identified this agency relationship, in which the patient relies on the clinician's superior knowledge, as a defining feature of medical care markets. It means the demand curve for home visits reflects clinical judgment and institutional habits as much as patient preference.

Hospital incentives also enter through this channel. Because Medicare trims payments to hospitals whose heart failure readmissions, among other conditions, exceed the expected level (McIlvennan et al., 2015), hospitals have a financial reason to encourage home health referrals for heart failure patients. That is a demand shift originating in payment policy, not in patient need.

Supply

On the supply side, the binding input is nurse labor. Each agency can provide as many visits as its nurses can make, about five per nurse per day. Adding capacity requires hiring, and home health nurses in our region are scarce: our agency's last two vacancies took seven and nine months to fill. In the short run, supply is nearly fixed, a vertical line at current capacity. In the longer run, supply can expand, but only as fast as wages and working conditions attract nurses from hospitals, clinics and other regions.

Payment rates matter to supply but not in the usual way. Agencies are paid by the payer per period of care, not by the patient per visit. A higher payment rate lets an agency offer higher wages and hire more nurses, which slowly shifts supply outward. It does not change what the patient pays.

Elasticity

Patient demand with respect to the price the patient pays is close to perfectly inelastic, because that price is zero and does not change. Demand is much more responsive to non-price factors: referral practices, hospital incentives and eligibility rules. Short-run supply is nearly perfectly inelastic, because nurses cannot be hired quickly. Long-run supply is moderately elastic with respect to wages.

What Happens When the Heart Failure Program Starts

When the program adds about 40 early visits a month, the demand curve for early visits shifts right. With supply fixed in the short run and no price that can rise to ration visits, the adjustment happens through waiting and reallocation. Agencies triage. The most likely result, as the earlier discussion of fixed capacity suggested, is later first visits for other patients, especially those after joint replacement, and some referrals turned away and sent to the two other agencies, whose waits then lengthen.

In the longer run, if the program shows fewer readmissions, the hospital may decide the visits are worth paying for directly, by funding nurse positions, which would shift our agency's supply to the right. The evidence from a randomized trial that transitional care reduced readmissions and total costs among older adults with heart failure (Naylor et al., 2004) is the kind of evidence that could justify such a decision.

The Market Drawn in Words

If the market were drawn, the vertical axis would show the price per visit paid by the payer and the horizontal axis visits per month. Patient demand at the point of use would be a nearly vertical line, because patients pay nothing and take the visits their clinicians order. Short-run supply would also be nearly vertical, at the agencies' combined capacity of about 1,725 visits a month. The payer's payment rate sits on the vertical axis but does not clear the market; it is set by rule.

The heart failure program moves the demand line to the right by about 40 visits a month. With both lines nearly vertical and no price adjustment, the new demand simply exceeds supply, and the gap shows up as waiting and reallocation rather than a higher price. Over several years, a higher payment rate or hospital-funded positions could move the supply line right. That picture explains why the program's success depends on staffing decisions more than on anything the patient does.

Implications

Three implications follow for policy. First, because patients do not face a price, rationing of home visits happens through clinical and administrative decisions, and those decisions should be made explicitly rather than by default through waiting lists. Second, because hospitals' demand for home visits is shaped by readmission penalties, the program's value to the hospital depends partly on payment policy, which could change. Third, because short-run supply is fixed, any new program should come with a plan for staffing, or it will quietly displace other patients' care.

References

Arrow, K. J. (2001). Uncertainty and the welfare economics of medical care. Journal of Health Politics, Policy and Law, 26(5), 851-883. https://doi.org/10.1215/03616878-26-5-851

McIlvennan, C. K., Eapen, Z. J., & Allen, L. A. (2015). Hospital Readmissions Reduction Program. Circulation, 131(20), 1796-1803. https://doi.org/10.1161/CIRCULATIONAHA.114.010270

Naylor, M. D., Brooten, D. A., Campbell, R. L., Maislin, G., McCauley, K. M., & Schwartz, J. S. (2004). Transitional care of older adults hospitalized with heart failure: A randomized, controlled trial. Journal of the American Geriatrics Society, 52(5), 675-684. https://doi.org/10.1111/j.1532-5415.2004.52202.x