Question

Explain the concept of “diseconomies of scale” and discuss how a physician-firm might encounter this issue. Then, consider two ways in which the physician-firm might pay its physicians: fee-for-service or salary. Discuss which of these payment schemes might be best for limiting diseconomies and any negative impacts such a payment scheme might have for patients.

Answer 1

Diseconomies of scale is defined as the increment in cost for a firm with increase in production as size of firm becomes larger. It is opposite of economies of scale which says there is a decrement in cost with increase in production.

In case of a physician-firm with increase in output there is a increase In payment or cost of physicians which lead to increased cost.

Fees-for-service: it is the way in which a part of income or fixed percentage is given to physician for service and a part of it is kept by firm as commission. In case of small output it is preferred as it reduces burden of paying a fixed salary.

Salary: if firm size is too large then firm must opt salary method of paying as it cut down and reduces cost. They need not to pay the physician a percentage of income.

Fees-for-service is good for patients as physician will be receiving a part of payment for each patient so he will focus more but in case of salary he will not care much As he will be getting a salary Which do not depends on number of patients.