Health Economics Harvard Case Solution & Analysis

Health Economics Case Study Solution  

Briefly discuss why profit-maximizing hospitals advertise more intensely when advertising elasticity is higher?

The higher advertising elasticity stipulates a significant increase in advertising, which leads towards a rise in the demand for the advertised services. The reason behind the intensely advertising hospitals is to connect people to the resources & remind patients of the high quality care received in their community. Another reason is that the advertisement leads towards an increase in the services’ awareness and it helps in showcasing what makes the hospitals unique, making it easier for the patients to make or take any decision.

Healthcare marketing is the driver of the physician branding, consistent patient growth and physician outreach as industry leaders. Also, the significance of advertisement is aligned with the fact that the consumers of healthcare are ethically entitled to the special treatment. Furthermore, despite of its higher advertising elasticity; the profit-maximizing hospitals advertise more intensely to increase the demand of the hospital’s services that could lead towards an increased profits returns over time. It is because of the fact that the profit-maximizing hospitals are concerned about generating higher amounts of profit to run the hospital operations smoothly and efficiently. This also helps in expanding the business operations in the near future.

In addition to this, the healthcare industry is highly competitive and is concentrated with low barriers to entry.The huge competition between the market players tends to benefit the patients, because it helps them in containing the costs, encouraging the innovation and improving the quality, but at the same time it threatens the survival of the business in case the hospitals fail to communicate and provide value to the target market. Hence, the aim of the advertisement or the healthcare marketing campaigns is to make the patients aware of the service that could benefit them.  By creating an awareness of the particular service; patients would be able to differentiate between the facilities provided by different hospitals, which will help them in making an informed decision.

Thus, the considerable impact of the advisement in making demand of the healthcare products and services more elastically shows that the profit-maximizing hospitals must spend an enormous amount of money on developing effective advertisement campaigns in order to allow consumers to buy more products or services. Furthermore, the demand of the hospital services and products are highly affected by the change in the advertisement expenditures, due to which the profit-maximizing hospitals advertise more intensely.

In a given year, a hospital in Dammam received 100 cases of patients seeking a specialized procedure at a price of SR 8,500 per case. During that time, the hospital spent SR 30,000 on advertisement. However, when the price declined to SR 8.000 per case, the hospital increased its advertisement expenditures to SR 35,000 and increased the number of cases handled to 115. From the given information

1. State the optimal advertisement expenditure formula?

The optimal advertisement expenditure formula = proportionate change in advertising

Proportionate changes in advertising expenditures

S₂-S₁  / A₂-A₁

S₂-S₁A₂-A₁

1. Determine the optimal ratio of advertisement expenditure to total revenue of the hospital

Q1 =100

Q2 = 115

A1 =30000

A2 =35000

P1 =8500

P2 =8000

% change in advertisement expense = 35000-30000/30000 = 0.166667

% change in quantity demanded = 115-100/100 = 0.15

% change in price = 8000-8500/8500 = -0.05882

E_A= % change of quantity demanded / % change in advertisement expense = 0.15/0.166667 = 0.899998

E_P= % change of quantity demanded / % change of price = 0.15/-0.05882 = 2.55

A/TR = E_A/E_P = 0.899998/2.55= 0.35294 or 35.29%.

Interpret the results in b) above

On average, the firms operating in the healthcare industry are required to allocate 36 percent of the total revenues, in order to gain the desirable outcomes in the near future. The advertisement would be the one way for the hospitals, with market power to differentiate their services and products........................

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