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When stores hike prices and then lower them to create the illusion of great bargains

JC-Penney-Testing-Less-Sales-Strategy

For some reason, the psychology of retailing has always fascinated me, and thus I find  THIS STORY especially interesting:

When the board of J.C. Penney ousted its chief executive, Ron Johnson — news that broke last Monday — you might say it was, in some small way, because he didn’t understand Tracie Fobes.

Ms. Fobes, who lives in Raymore, Mo., plans meals around discounts offered at the grocery store and always checks coupon apps on her cellphone before buying clothes. When, a little over a year ago, J. C. Penney stopped promoting sales and offering coupons and instead made a big deal about its “everyday” low prices, Ms. Fobes stopped shopping there. It wasn’t that she thought the prices were bad, she said. She just wasn’t having any fun.

“It may be a decent deal to buy that item for $5,” said Ms. Fobes, who runs Penny Pinchin’ Mom, a blog about couponing strategies. “But for someone like me, who’s always looking for a sale or a coupon — seeing that something is marked down 20 percent off, then being able to hand over the coupon to save, it just entices me,” she said. “It’s a rush.”

Devoted coupon users like Ms. Fobes may be more frugal than the typical consumer. But most shoppers, coupon collectors or not, want the thrill of getting a great deal, even if it’s an illusion. In recent months, Penney recognized that human trait and backtracked on its pricing policy, offering coupons and running weekly sales again. And it started marking up items to immediately mark them down for the appearance of a discount.

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8 Comments

  1. Brian Opsahl

    After reading this post I had to tell a story about J C Penny.

    When my parents were killed in an auto crash back in the 60s my Grandfather had to take care of there estate. He had to pay off 3 bills that were left over. One was from the family Doctor one was from the family Dentist,and one was from JC penny.

    The young Dentist would not take any payment (he said he had no bill for them) he could not afford this at all but he did it anyway his name was Leo K Sabean he was my Dentist until he retired.
    JC pennys also said that they had no bill in my parents name. (wouldn’t accept any money)
    The very well off Doctor on the otherhand wanted every dime owed to him….says alot about our Doctors doesn’t it…?

  2. No, it says alot about that doctor, who is apparently likely long since dead.

  3. Brian Opsahl

    Your correct Doc: I get mad when other people lump everyone together on an issue and im quite certain not all doctors act this way. I was just telling my story from what my family went through. I have always spent my money at Pennys and I will do until the day I die. The family Doctor I have now is a great guy when it comes to charity I have seen him in action. He goes way above and behond his job dutys to help you and explain your issues

  4. Brian, I wouldn’t be surprised if, back in the 60s, that doctor justified his demand to be paid by whining about how the big bad government was ruining his business model through socialized medicine.

    Medicare was passed in 1965 over strong objections from the AMA and conservative Chicken Littles like Reagan, Goldwater and Dole.

    This, despite the fact that Medicare is certainly not socialism. It was designed as an EARNED entitlement, and still is today. Some people will pay in more than they receive back and others will get back more than they paid in, but this is the practice with any form of insurance, public or private.

    http://content.healthaffairs.org/content/14/4/62.full.pdf

  5. Medicare certainly screwed up the incentives that hospitals and physicians had to take care of patients. The newest version of health care reform may do the same.

    I strongly urge you to read this long piece, it provides intersting food for thought.

    http://www.theihcc.com/en/communities/policy_legislation/the-new-health-law-bad-for-doctors-awful-for-patie_gn17y01k.html

    Underpayments
    Medicare reimburses hospitals and doctors, on average, 71 and 81 percent, respectively, of private rates.7 Medicaid reimburses doctors even less, on average 56 percent of private rates.8 The federal government’s payments to health care professionals are so low that on average, overall, hospitals lose money caring for Medicare and Medicaid patients. In 2008, hospitals received only 91 cents from the government for every dollar spent on a Medicare patient. That same year hospitals received only 89 cents for every dollar spent on Medicaid patients.

    According to data compiled by the American Hospital Association, on average, Centers for Medicare and Medicaid Services (CMS) payments are less than hospital costs and the amount of underpayment has increased over time. In 2000, Medicare and Medicaid’s underpayments amounted to $3.8 billion. By 2008 they had increased to $32 billion.9 At first glimpse, this is the doctor’s problem and not that of the patient. Unfortunately for the nation’s infirmed, this is not the case. Ultimately, these consequences are passed along to the patient.

    From an economics point of view, Medicare’s below-market reimbursements create cost-shifting onto private payers where hospitals raise private payer fees to compensate for lower payments from government programs. In a 2006 Health Affairs study, researchers focused on this phenomenon by studying data from California private hospitals. The authors discovered a statistically significant inverse relationship between Medicare fee changes and private payer fee changes.

    The research revealed that a 1 percent decrease in average Medicare price correlated with a .17 percent increase in private payer price, and that a 1 percent decrease in the Medicaid rate was associated with a .04 percent increase. From 1997 to 2001, Medicare and Medicaid cost-shifting accounted for 12.3 percent of increases in private payer prices.10

    From a clinical perspective, Medicare’s underpayments result in diminished access and compromised quality care. The most widely cited effect is the difficulty that Medicare and Medicaid patients encounter trying to find a physician. This problem is increasing. The American Academy of Family Physicians discovered 13 percent of doctors surveyed did not partake in Medicare in 2009, up significantly from 6 percent in 2004.

    *snip*

    Perverse Incentives
    As if Medicare’s declining reimbursements was not a big enough deterrent to lengthier, more satisfying higher-quality visits, Medicare’s reimbursement system actually outright punishes doctors for spending more time with patients. As the length of visit increases, Medicare reimburses physicians marginally less. For example, in the D.C. metro area, Medicare reimburses physicians $47.53 for a 10-minute follow up visit (CPT 99212), but only $154.76 for a comparable 40-minute visit (CPT 99215). Financially, doctors are better off taking care of four established patients in a 40-minute block as opposed to seeing one patient for 40 minutes. This puts additional pressure on physicians to see more patients in less time, with job satisfaction and quality of care suffering as a result.

    These perverse incentives span the country from Fifth Avenue to Ghiradelli Square. In Manhattan, physicians receive $48.92 for a 10-minute follow-up visit, compared to $158.86 for a 40-minute follow-up appointment. In San Francisco, doctors receive $51.82 for a 10-minute established visit versus $165.52 for a 40-minute visit. As a result of this paradox, on average nationally, doctors lose approximately 17 percent of potential Medicare reimbursements by seeing fewer established patients in more time in an outpatient environment.

    *snip*

    Republicans and Democrats would both agree that health costs are spiraling out of control. Ultimately, there are only two ways to lower costs. One approach empowers and incentivizes patients to be smarter health care consumers. This entails solutions such as expanding health savings accounts, creating a national market for health insurance, and leveling the tax playing field. These could bend the cost curve down and strengthen the patient-doctor relationship. The administration shunned this approach. Instead it opted to empower bureaucrats. PCORI could easily lay the foundation for bureaucrats implementing rigid formulas and making tough medical decisions for patients. This focuses on the best interest of society overall as opposed to that of the individual patient.

    It would be very tempting for federal regulators to exploit comparative effectiveness research to ration care. This could be implemented by financially punishing physicians prescribing these “less effective” interventions with lower reimbursements or refusing to pay for them outright. If prepared to go down this route, the government could apply tremendous pressure on physicians to coerce them to practice to its liking.

    A recent Health Affairs paper by Dr. Steaven Pearson and Dr. Peter Bach advocates for such a reimbursement regimen where reimbursements would be tied to the comparative clinical effectiveness of a product.42 This would be a stark deviation from Medicare’s current “reasonable and necessary” benchmark. It would stifle medical innovation and limit patient choice.

    This would be allowed under the PPACA. The legislation explicitly says it should “not be construed as preventing the Secretary from using evidence or findings from such comparative clinical effectiveness research in determining coverage, reimbursement, or incentive program.”43

    PCORI will recommend treatment regimens for the standard patient. These recommendations, coupled with reimbursement changes, could easily pave the way for government dictating to patients the medicines, tests, procedures, and medical interventions that they can and cannot have, irrespective of willingness to pay and individual preferences. This one-size-fits-all approach could replace the professional judgment of the physician actually examining and talking to the patient with rules set by regulators and bureaucrats in Washington. While this could indeed control rising costs, such an approach would not “bend the cost curve” as the president has promised, but arbitrarily flatten it by government fiat.

    A one-size-fits-all model for health care does not benefit patients. Patients are individuals, not programmed robots. Despite similarity in name, Tim, Timmy, Timothy, and Timberly are all very different. A hypothetical patient, Tim may respond quickly and positively to Bactrim, a cheap and common treatment for urinary tract infections (UTI).

    In fact, most people respond this way. However, not everybody responds this way. Tim’s hypothetical cousin Timberly might take the same dose of the same drug (Bactrim) for the same illness (UTI) and get Stevens Johnson Syndrome, a very serious and potentially fatal adverse drug reaction. The problem is that not everybody is the same. In medical school, future physicians are taught the saying “Patients do not always read the book.” It emphasizes that patients have different manifestations of the same illness and respond differently to the same therapies. It’s just not possible for a regimented health care algorithm to account for the innumerable vagaries and complexities of the human body. CER ignores these crucial differences.

  6. Brian Opsahl

    Take a guess at what President forsed Hospitals to take on all comers with or without insurance. He did this as a reaction to all the mental patents and dirt poor people folks he through out into the street….?

    None other than Ronny Reagan. Fact…!!

  7. Milton Waddams

    Another good article to read is from the recent issue of Time magazine, entitled Bitter Pill. It is unavailable for free from Time, but here is a pdf version of it I found online. I would be interested to hear expdoc’s thoughts on the article. It’s long, 28 pages, but well worth a read and it highlights the elephant in the room throughout the whole healthcare debate.

    http://livingwithmcl.com/BitterPill.pdf

  8. Brian Opsahl

    I looked over my hospital bill from a shoulder surgery I paid like 80 bucks for something they called glutoen glaiserid something something….I found out it was the jello I had for diner….80 freakin dollars for a cup of jello..

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