Assume that you are the CEO of Gold Coast Healthcare, a large regional hospital serving a patient population of
more than 300,000. The hospital has virtually no competition and hence has a strong position in the local inpatient services market. However, the local health insurance market is dominated by two large companies; one national in scope and the other a major statewide player. You fear that the purchasing clout of the two third-party payers will put so much pressure on prices that the hospital will have difficulty maintaining sufficient profitability to ensure financial soundness.
To counteract the market dominance of the payers, the hospital is starting its own managed care organization, beginning with a sing HMO style managed care plan. Once the managed care plan begins operations, it will send any of its covered patients who require hospitalization to Gold Coast. Thus, a decision must be made regarding the hospital's pricing policy for its self-operated managed care plan. Should the hospital price high (full-cost pricing) to maintain strong margins, or should it price low (marginal-cost pricing) to help the fledgling managed care plan attract members?
What do you think? Which pricing approach makes more sense for Gold Coast? Is the optimal pricing strategy the same in the short run as in the long run?
Despite the fact that the hospital is a monopoly, it's venturing into insurance services which in the... View the full answer