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The cost of competition
The Cost of Competition tby Howard M, ©ollett
2
HOSPITAL AVIATION, JULY 1982
The standard of living Americans enjoy is largely a result of the free enterprise system to which we subscribe. One of the features of this system is competition. In fact, competition may be the major feature that creates quality: "Build a better mousetrap and the world will beat a path to your door." Competition, to some extent, also ensures a fair price for most products. Competition is a valid principle in a market where demand allows multiple products or brands to compete with each other in quality and price. But what about a market where demand is not sufficient for competition? What is the result of competition in such a market? Consider hospitals and helicopters. With at least 44 such programs currently in operation, it is interesting to note that competition is not a new phenomenon. Programs number 8 and 9 were both started in Salt Lake City in 1978. Programs number 14 and 15 both started in Phoenix in 1979. Since that time, competitive programs of one form or another have come into existence in Tulsa, Omaha, Iowa City/Cedar Rapids, Atlanta, and GainesviUe. While some of these programs may not be "hospital based" in the classical sense, they nevertheless compete for patients. Our last issue (Hospital Aviation, June 1982, p.11) presented a theoretical average program that, on a monthly basis, transported 40 patients and cost $60,000. The resulting cost per patient is $1,500. Such a program closely resembles statistics gained from programs around the country. Introduce the factor of competition and observe the results. For the benefit of doubt, it is assumed that the second program will also transport 40 patients per month. With the
same monthly cost, the cost per patient would not change. It would remain at $1,500. But what would happen if the second hospital, instead of starting a separate program, combined forces with the first hospital? Resulting monthly transports would number 80, and the increased monthly cost (still using one helicopter but flying it more) would rise to $72,000. The resulting per patient cost would plummet to $900 for a 40°7o decrease! Looking at an example from the other extreme, let's assume that the market was already saturated with 40 patients per month. Two programs would then each transport 20 patients per month, for a per program cost of $54,000. The resulting cost per patient would soar to $2,700 each! In either case, from a cost standpoint, the community is better served by a shared service rather than two competing services. Enter one last example: a metropolitan area where demand has exceeded the availability of a single helicopter. In such a case, it doesn't really matter who adds the second helicopter. Or does it? It is true that the addition of a second helicopter will effectively double insurance, aircrew, flight nurses, and other fixed costs. But it will not double the need for dispatch centers, marketing materials, or program managers. While the difference on the bottom line cost per patient will not be as dramatic as the first two examples, the shared service will still be the one with lower costs and greater efficiency. Joe Tye, ASHBEAMS President, addresses this issue in greater detail in his article beginning on page 4. Now, if we can just solve the problems associated with hospital politics, pride, and patient census .....
2
HOSPITAL AVIATION, JULY 1982
The standard of living Americans enjoy is largely a result of the free enterprise system to which we subscribe. One of the features of this system is competition. In fact, competition may be the major feature that creates quality: "Build a better mousetrap and the world will beat a path to your door." Competition, to some extent, also ensures a fair price for most products. Competition is a valid principle in a market where demand allows multiple products or brands to compete with each other in quality and price. But what about a market where demand is not sufficient for competition? What is the result of competition in such a market? Consider hospitals and helicopters. With at least 44 such programs currently in operation, it is interesting to note that competition is not a new phenomenon. Programs number 8 and 9 were both started in Salt Lake City in 1978. Programs number 14 and 15 both started in Phoenix in 1979. Since that time, competitive programs of one form or another have come into existence in Tulsa, Omaha, Iowa City/Cedar Rapids, Atlanta, and GainesviUe. While some of these programs may not be "hospital based" in the classical sense, they nevertheless compete for patients. Our last issue (Hospital Aviation, June 1982, p.11) presented a theoretical average program that, on a monthly basis, transported 40 patients and cost $60,000. The resulting cost per patient is $1,500. Such a program closely resembles statistics gained from programs around the country. Introduce the factor of competition and observe the results. For the benefit of doubt, it is assumed that the second program will also transport 40 patients per month. With the
same monthly cost, the cost per patient would not change. It would remain at $1,500. But what would happen if the second hospital, instead of starting a separate program, combined forces with the first hospital? Resulting monthly transports would number 80, and the increased monthly cost (still using one helicopter but flying it more) would rise to $72,000. The resulting per patient cost would plummet to $900 for a 40°7o decrease! Looking at an example from the other extreme, let's assume that the market was already saturated with 40 patients per month. Two programs would then each transport 20 patients per month, for a per program cost of $54,000. The resulting cost per patient would soar to $2,700 each! In either case, from a cost standpoint, the community is better served by a shared service rather than two competing services. Enter one last example: a metropolitan area where demand has exceeded the availability of a single helicopter. In such a case, it doesn't really matter who adds the second helicopter. Or does it? It is true that the addition of a second helicopter will effectively double insurance, aircrew, flight nurses, and other fixed costs. But it will not double the need for dispatch centers, marketing materials, or program managers. While the difference on the bottom line cost per patient will not be as dramatic as the first two examples, the shared service will still be the one with lower costs and greater efficiency. Joe Tye, ASHBEAMS President, addresses this issue in greater detail in his article beginning on page 4. Now, if we can just solve the problems associated with hospital politics, pride, and patient census .....