That’s the price a vendor charges for a loaf of homemade sourdough bread at the Farmers’ Market.
Inflation aside, twelve dollars seems a bit high, would you agree?
Now here’s where it gets interesting…
Four booths down is another vendor selling, you guessed it, sourdough bread: this time for six dollars a loaf.
Both loaves are sourdough but differ in shape and texture.
The first vendor sells round-shaped sourdough (Boule), whereas the second one sells loaf-shaped sourdough, ideal for sandwiches.
Both seem to be doing just fine selling their bread.
I’ve bought and tried both breads; they are good… but there is a part of me that refuses to pay $12 for a loaf of bread.
How is this relevant to your practice?
This little story demonstrates that the price of a product or service is not set in stone, but may be far more elastic than most of us imagine.
Price elasticity is an economic concept that refers to the response in demand for a service or product to changes in its price.
Price elasticity of demand measures the change in consumer demand in response to a change in price.
Price elasticity of supply measures the change in quantity supplied in response to a change in price.
While there are formulas to calculate the exact changes in supply and demand, we can say the following:
- If a change in price leads to a measurable change in demand, a service or product is price elastic.
- If demand doesn’t change much when price changes, a service or product is considered price inelastic.
Price Elasticity in Your Practice
In the context of your practice, price elasticity helps explain how changes to your pricing structure may affect the number of patients you can expect to see.
Here are a few examples:
Cash-Based Practice
- If you own a cash-only practice, raising your visit fee from $100 to $125 might significantly reduce patient volume, especially if competitors charge less for a comparable service. In this case, demand is more price elastic, as it responds to changes in price.
- However, if your patients value convenience, short wait times, or your specialty, they may be willing to pay more, making your demand less sensitive to price, less price elastic.
- The key here is to differentiate your services from those of your competitors! The more unique, targeted, and fine-tuned your services are, the less sensitive they tend to be to changes in price.
Specialty Services
- If your practice provides specialty services like hormone therapy, functional medicine, etc., there tends to be lower elasticity because fewer providers offer these services, and comparable care may be harder to find.
Limitations to Price Elasticity
As you may have guessed, there are several situations where price elasticity does not apply or has limited relevance.
These include scenarios where patient choice is limited, demand is driven by non-price factors, and pricing is set by insurance.
Insurance-Covered Services (Third-Party Payers)
When a patient’s out-of-pocket cost is fixed (e.g., a $20 copay), price elasticity becomes nearly irrelevant from the patient’s perspective.
If you raise your fee from $130 to $160 per visit (assuming the insurance will reimburse the new fee), but the patient’s copay remains the same, patient demand is unlikely to change.
Here, elasticity is irrelevant because insurance absorbs the price change.
Lack of Substitutes
If you offer a unique or hard-to-find service, such as women’s health in a rural area, hormone therapy, or diabetes care, patients may have fewer alternatives.
Hence, elasticity is limited or even irrelevant because patients have limited options to access comparable care.
Emergencies and Urgent Needs
When a patient needs immediate care, price sensitivity tends to drop sharply. In an emergency, people are far more concerned with access to and the speed of care than with the cost.
Someone with a raging UTI won’t call around for price comparisons; they want treatment now.
Highly Loyal and Niche Clientele
Established patients with strong relationships to your practice, or patients who prefer a concierge environment, prioritize trust, continuity, and convenience over price.
Here, price is irrelevant, because continued use of your service is based on the value you provide, not cost.
Regulatory and Ethical Constraints
Finally, healthcare pricing isn’t as fluid as the pricing in other industries. Most industries are free to change their pricing as they see fit.
But not in healthcare.
Legal, ethical, and contractual limits, including those established by Medicare, Medicaid, and other insurance fee schedules, may prevent you from increasing prices even if demand would support it.
In Conclusion…
The concept of price elasticity is a valuable tool for strategically growing your practice.
It helps you assess how changes in your fee structure may affect your bottom line.
However, price elasticity has its limitations, particularly in the healthcare sector.
It doesn’t apply when third parties set prices, and has limited application when:
- The need for a service is urgent or irreplaceable
- Patients are loyalty-driven rather than driven by price
- Legal or ethical directives determine your pricing flexibility
Practices can limit their sensitivity to price elasticity by differentiating themselves from similar practices.
Regardless of whether offering similar or identical services, a practice can stand out by:
- providing a superior experience to patients
- offering highly flexible office hours
- offering add-on services to patients
The opportunities to create a distinct practice that stands out from the crowd, offers a unique experience to patients, and mitigates price sensitivity are countless.
What do you think about $12 for a loaf of bread? And what do you think about price elasticity… do you consider it when planning? Share your thoughts; let us know by leaving a comment below.
By Johanna Hofmann, MBA, MAc., EAMP; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.“