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 Porter’s 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
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).
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.
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).
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.
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.
Determinants of existing firms
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 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.
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
Average cost curve
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.