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Economic efficiency in health care

The Quik Service Walk In Clinic always has three M.D.'s and eight R.N.s working at its 24 hour clinic, which serves customers with minor emergencies and ailments. The clinic has hired an efficiency expert to examine its operations and make suggestions for reducing costs.

For some of the medical procedures done at the clinic, experienced nurses can perform the medical tasks approximately as well as the physicians can, as long as the nurses are supervised by M.D.s. Since M.D.s are more highly trained than nurses, the marginal product of M.D.s is higher than the marginal product of R.N.s.

The manager of the clinic is confused by the efficiency consultants report because the report recommendsusing more R.N.s and fewer M.D.s to lower the cost of providing a given level of medical services. Under what circumstances would it be economically efficient for this clinic to use more R.N.s and fewer M.D.s (given (MPmd>MPrn)? Explain?

Solution Preview

First, let's take a look at what marginal product (MP) means. It define the amount of input needed for the next additional unit of output. So when we say that MDs have a higher marginal product, we mean that the clinic's billable services increase more for an additional MD than for an additional RN.

However, when you think about it carefully, you realize MP does not really tell us much about profitability. That is because it does not take into account the costs associated with the additional inputs. Thus, just because an MD's MP is greater, it ...

Solution Summary

How the right mix of MDs and RNs can improve efficiency in a clinic.