The Value of Coverage in the Medicare Advantage Insurance Market - Assignment Example

Business Proposal of the of the Introduction The assignment is prepared by selecting a new product or service that is to be introduced in an existing industry. This report will include a business proposal including an economic analysis for launching a private health insurance service in the existing healthcare segment of the United States of America. The health care system in the United States of America is highly dependent on the private health insurance schemes. The private health insurance schemes in the country are the main sources of insurance coverage for most of the American Population. As per a report presented by the Centre of Disease Control, more than 58% of the American population is covered by private health insurance schemes. This business proposal concerns the introduction of a new private health insurance scheme in the country which will cater to the varying needs of the low to middle income group residents of the United States of America. Market Structure An oligopolistic market is a market structure in which a handful of firms compete and overshadow. The insurance market in the United States of America is a highly competitive market. As per the principles of Economics, when a market sector is communicably connected between few dominating firms, then it becomes a highly competitive market. In an oligopolistic market, although a few companies dominate, there remains a possibility of a number of small companies operating in the same market. For example, in the health care insurance market of the United States of America, there are multinational companies like Blue Cross organizations, Etna and Kaiser who are the main players in the sector. However, in addition to this, there is also some small scale independent health care insurance coverage provided as a part of creating a support system for the low income groups of people. Also, there are small private insurance companies which provide specialty insurance services for disabled and needy people (Economics Online Ltd, 2014). Economic Analysis This business proposal is focused on the emerging and existing demands in the market related to health insurance coverage. Also, the factor of the significance of health insurance coverage for the consumers and the manner in which premiums and coverage for these plans change in order to adapt to the external competitive environment are taken into consideration in the selected business proposal. A necessity of examining the results of certain quality metrics related to demands in the health care insurance market has been identified in the insurance market of the United States. The features of the conditions related to and modified by the reaction of the consumer groups to the changes in the competitive health care insurance market are also significant factors that influence the economic decisions related to this market (Enthoven, 2003). Elasticity of the product There is no exactly established range for price elasticity of health care insurance. The choices related to health care insurance plans may vary greatly, not only in terms of price elasticity but also in terms of income elasticity. The demand for health care services like insurances is complicated to measure and thus, measuring the elasticity of demand for the health care services is a complex process. Consumers have the demand for health as a product. However, this product cannot be directly purchased. So, the consumers have to purchase different health care services like the health insurance plans which may be used for the ultimate production of health as a good. Thus, the demand for health and healthcare services is a derived demand and not a direct demand. There may be several approaches to evaluate the elasticity of health care insurance services. The first approach is to consider the premiums that are implemented by the companies to identify the pricing considerations. The second approach is to consider the distinctions in the tax ratios in the states and cities for recognizing the price elasticity of these insurance products and services. The demand of these services reveals that out of pocket pay is a factor which has much weight in deciding the economic success of the introduced health care service in the market (Dunn, 2010). Pricing related to elasticity of the product The price elasticity of demand for the health care insurance service may help to predict the results related to spending trends of the consumers when the pricing of the products change. In general, if price elasticity of demand becomes inelastic, then a rise in the price of the goods or services will lead to the consumers spending more and a fall in the price would lead to the consumers spending less. On the other hand, if price elasticity of demand becomes elastic then a rise in the price of the product or service will lead to the consumers spending more and a decrease in the prices would lead to the consumers spending more. Considering the fact that the price elasticity of demand for the health care insurance service is relatively inelastic and the level of competition in the United States health care market is high, it can be identified that using the competitive and penetrative pricing strategies to price the new health care insurance plan will help the company to leverage on the inelasticity in the demand for the service. Fixed cost and variable costs Fixed costs of insurance include the costs directly to the product that are to be paid irrespective of the sales volume of the plans. Variable costs are the costs that vary according to the volume for sales. The variable costs generally go up with an increase in the sale of the insurance products. These may include labor costs, costs of materials and costs of consumable products. Some hypothetic data may be considered for the business proposal. This can include the fixed and variable costs that may be incurred by the business. Apart from these, certain market data like average demand levels for the healthcare services, the deductible expense and the out of pocket expenses, premiums and charges of co insurance are to be considered while pricing the products and while estimating the demand for the products in the selected market segment. It can be identified that the out of pocket expense and the deductibles are main components of an insurance plan which may affect the timing and limit the changes related to the demands of the insurance product in the market. Also, it can be identified that higher volumes of deductibles are not desired by the customer groups and the insurance plan should be established with a pre decided cost limit. Shared costs would be a definite strategy to compute the costs associated with the introduction of the health insurance scheme. Also, a health insurance plan with a number of varied options and offerings are often more accepted and valued products in the health care service sector of the United States of America. How changes in quantity supplied as a result of pricing decisions affect the marginal revenue and marginal cost? Marginal cost and marginal revenue are two important measures for the economic feasibility of a product or service as per the discipline of Economics. Marginal revenue can be estimated by dividing the differences in the total revenues of a product by the percentage change in the output quantity of the product or service. Since the marginal revenue follows the law of diminishing returns, therefore, although marginal revenue can remain stable for a fixed period of time, it will experience delay at a certain point of time. In case of the health care insurance market, as the output level causes an increase in the demand for the health care services like health insurance plans, therefore, in an oligopolistic market like the United States healthcare segment, the companies will continue producing the outputs till the time marginal costs would become equals to marginal revenues. In case the marginal costs will surpass the marginal revenues, then the business can increase its profits by decreasing the prices and thereby attracting more consumers to opt for this health care insurance plan. Non Pricing Strategies In an oligopolistic market, often the level of dominance of the existing players is high because the barriers to entry in the market and the costs for gaining access into the market by new companies are very high. A company may deliberately create the barriers to entry in an oligopolistic market or can even exploit the existing barriers to strengthen its own position in the market. The non pricing strategies are as significant as the pricing strategies in an oligopolistic market and as such the company may use non pricing strategies like promotion, after sales services and high quality management. Sales promotion activities like loyalty schemes, lower premium levels, reduction of deductible amounts etc. are common non pricing strategies that may be effective in the health care services sector of the United States of America. Conclusion The new business proposal for the introduction of a differentiated health care insurance plan for the low to middle income group of people in the health care segment of the United States should be developed on the basis of the consideration of the oligopolistic market structure, existing competitive companies and economic potential of the proposal. Also, the most effective pricing and non pricing strategies as discussed in the previous sections should be formulated for successful penetration into the market. The economic analysis shows that the price elasticity of demand for this product is low in the market. As such, changes in the prices and output volumes would have significant effects on the marginal revenues and marginal costs of the plan, As such; the business should focus on managing these factors in order to set up a feasible and successful business so as to add value to the existing health insurance sector in the country. References Dunn, A. (2010). The Value of Coverage in the Medicare Advantage Insurance Market. Retrieved from https://www.bea.gov/papers/pdf/medicarepaperWorkingPaper9_2_10.pdf. Economics Online Ltd. (2014). Oligopoly, Defining and measuring oligopoly. Retrieved from http://www.economicsonline.co.uk/Business_economics/Oligopoly.html. Enthoven, A. C. (2003). Why Managed Care Has Failed To Contain Health Costs. Health Affairs, 12 (3): 27-43. Read More