HCAD 4354 – Economics for Healthcare

HCAD 4354 – Economics for Healthcare


Industry Analysis Term Paper
1. Purpose
The purpose of this term paper is to provide each student with the opportunity to apply economic analysis to a U.S. healthcare related industry and to learn how to deal with business problems from an economic perspective. There are five industries related to U.S. healthcare for choices:
• private health insurance
• physician services
• hospital services
• pharmaceutical
• long-term care
Students are supposed to choose one among the five choices to develop analysis paper for the industry in the U.S. operation.

2. Defining the Industry
It is very important to define the industry precisely; otherwise, there will be a tremendous amount of unrelated data available. The U.S. Standard Industrial Classification (SIC) system has been replaced by the North American Industry Classification System (NAICS) (you can find them trough any website search engine). These codes are widely adopted for record keeping purposes and are often used to index private publication such as market guides, directories of companies, and periodical indexes. Familiarize yourself with the SIC/NAICS categories. Remember: it is important to either narrow or broaden your industry definition based on how much information you are finding.

3. Data Collection
For any strategic planning process, it is important to understand the industry in which you are or will be operating, for without an understanding of that industry, your strategy is unlikely to succeed. Every manager must determine for him/herself the information required to address the decision at hand. In an increasingly competitive and dynamic business environment, success depends on a continuous updating of information on market trends, competitors, and customers.

There are two types of data that can be collected and analyzed: (a) primary data collected from government record; (b) secondary data collected from reference materials. Prior to conducting any primary research, savvy managers know that secondary research should be the starting point in the data collection process. The government and other agencies publish a great deal of information which
can be invaluable in an industry assessment, and which is readily available if you know where to look. While you may not be able to find out everything you need to know, secondary information is an essential management tool. The sources of this information are abundant (in printed documents, via the Internet, etc.), however, they are not always easy to find. Your first challenge is to know where to look and find the most current, relevant, accurate, and reliable information, in a timely manner, when there are so many sources to choose from and investigate. Data must be current, reliable, unbiased, accurate, and relevant to the problem at hand if they are to be useful to the manager. Good managers
rely on this information to make decisions that are based on the realities of the marketplace, not their opinions or conjectures. Decisions based on information, however, are only as good as the information itself.

Description. This is to be a general introduction to the particular industry. What does the industry produce? What is SIC/NAICS code and description? (4%)
History. A brief history. How has the organization of and the nature of competition in the industry evolved from its earliest beginnings? (3%)

Organization. What parts of the chain of production/service do the firms undertake themselves and what do they buy from outside suppliers or pass on to independent distributors or retailers? (3%)
Relevant governmental or environmental factors. What role does government play in the industry? How does (will) regulation or other government (future) policy (e.g. reform, trade policy …etc.) affect the industry? (5%)

IV. Market Structure (1 page): 10%
You need to answer the following two questions precisely:
A. How can the market structure of the industry best be characterized: perfect competition, monopolistic competition, oligopoly, or monopoly?
Briefly go over the market characteristics to confirm your definition here. (5%)
If your industry is competitive, your article should address at least one of the following: large number of firms, a low market share of the firms in a market, low barriers to entry (e.g., the small size of firms that have entered), product/service that is relatively homogeneous (indistinguishable among
competitors), and the availability of many substitutes or foreign competition, marginal cost pricing (pricing at the cost of producing an extra item), lack of market power (in other words, price taking, not price making), rapid adoption of new technologies, and the responsiveness of production to increased
profitability, low long-run profits in the market, low or constantly falling prices, adequate availability of commodity, efficient utilization of a firm's capacity (price is at minimum average cost), and efficient resource utilization (price equals marginal cost).
If your industry is oligopoly or (near) monopoly, your article should address at least one of the following: few firms in the market close to a 100 percent market share of the firms, blockaded entry or high barriers to entry, existence of economies of scale, product/service that is unique when compared with anything produced by anyone else, the lack of substitutes or foreign competition, lack of entry, the ability to set prices for the market (price making), price discrimination, reliable long-run profits in the market; excessively high or rising prices; inadequate availability of commodity and even shortages; inefficient utilization of a firm's capacity (price far above average cost); inefficient resource utilization (price above the marginal cost of resources).
B. How many major firms (up to top four if applicable) are there in the industry and what is their market share? A table showing the market shares in the U.S. is required here. (5%)

V. Industry Demand (1~2 pages): 15%

A. What are the key determinants of the market demand in your chosen industry? (10%)
B. Describe the current change (at least one) in the determinants that has caused the demand change. (5%)

You may want to think about the following factors: population and demographic changes, new regulation (reform), income and wealth trends, consumer tastes and preferences, prices of substitutes and complements in consumption, introduction of new substitutes or complements in consumption,
expectations about the future prices of this particular good/service. In general, your insight in this section will determine significantly the quality of paper.

VI. Cost Structure (1 page): 10%
You need to answer the following two questions precisely:
A. What are the key determinants of an existing firm’s (1) fixed costs and (2) variable costs in the short-run? (5%)
B. What is the shape of the existing firm’s (1) average cost cure and (2) marginal cost curve (i.e. U-shaped or L-shaped)? A graph illustration here will be a plus. (5%)

VII. SWOT Analysis (1 page): 10%
SWOT analysis is a structured planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a business venture. A SWOT analysis involves specifying the objective (i.e. profit growth) of the business venture and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organization. Please choose one of the top 4 firms in the industry to analyze the firm’s
objective of profit growth:

Strengths: characteristics of the firm that give it an advantage over others

Weaknesses: are characteristics that the firm at a disadvantage relative to others
Opportunities: external chances to improve performance (e.g. make greater profits) in the environment
Threats: external elements in the environment that could cause trouble for the firm

Please summarize the analysis in a SWOT Matrix. The following matrix serves as an example:

VIII. Analysis of Competitive Forces (Porter's five forces) (2 pages): 20% Please consider each of the following five forces for the industry. In the beginning of each force, please highlight the force as “strong”, “moderate” or “weak”.
A. The threat of entry by new competitors (4%)
For example, those industries with high entry barriers, such as pharmaceutical manufacturing, will have fewer firms entering. With fewer firms, there is less environmental complexity, and it is easier for one firm to begin to dominate the industry. Economic rents are usually higher in such an environment and entry becomes more attractive. For industries with a low barrier to entry, such as the physician service, new service providers come and go with great rapidity. This prevents dominance by
any one, or a few, firms. Economic rents are usually low.
B. The intensity of rivalry among existing competitors (4%) What are the current top firms and their market shares in the U.S.? How they compete (i.e. price or quality)? Any alliance or particular strategy is practiced now for competition? An industry characterized by high rivalry is unattractive because it limits the ability to achieve above normal economic rents. At the other extreme, industries with no rivalry are usually dominated by a few major firms which could limit strategic flexibility.
C. Pressure from substitute products (4%)
Are the industry’s products/services differentiated and, if so, according to what characteristics (design, function, price range, geographic market, etc.)? How innovative is the industry, and what are the sources of innovation? An industry will be attractive if there is no threat from substitute products. A substitute is any product or service that will fulfill the same need while using a different technology. The relevance is that substitutes can render obsolete the present capital investment of the industry.
D. The bargaining power of buyers (4%)
First, determine who the buyers are. What are the channels of distribution for the industry? Do not only consider the ultimate consumers unless there are no intermediaries. Identify significant macro-environmental trends, such as changes in customer demographics, needs, wants, lifestyle, etc.
that have/will positively/negatively affect the industry. Do buyers have strong power over firms to negotiate price in this industry? How the power is exercised?
E. The bargaining power of suppliers (4%)
What are the markets for inputs (labor, machinery, capital, raw materials, etc.) like? While we were concerned about threats in the "entrants" section, here we are concerned with power. Do suppliers have power over firms in this industry? The first step is to determine what this industry purchases. Not in detail, but as a generalization. Focus on suppliers of key items that firms in this industry must have. Would firms have access to labor on favorable terms? Does this industry have unions? If so, they limit
access to labor and usually increase costs. Do firms in this industry require highly skilled knowledge workers? How is the present labor market for this industry?

IX. Conclusion (1 page): 10%
Your analysis should lead you to reasonable conclusions. You have, by now, discovered a number of factors. State what you consider to be the opportunities and threats for this industry. Support your final argument as to whether this industry will be more profitable; or, what managerial strategies of profit growth for existing firms should be most effective. Make sure that  conclusion/recommendation and executive summary are consistent. Do not just repeat the sentences in the previous sections.

X. References: 3%
Please list the references that you cite, but also a listing of the material that contributed to your body of knowledge.

XI. Appendices (Optional)
Here you might put your tables, charts, or anything else that you think is important to an understanding of this industry.