p.202, ESSENTIALS OF ECONOMICS

John Sloman, 4th Edition, Pearson Education Printing, 2007

Should health-care provision be left to the market?

A case of multiple market failures

When you go shopping you may well pay a visit to the chemist and buy some paracetamol tablets, some sticking plasters or a tube of ointment. These health-care products are being sold through the market system in much the same way as other everyday goods and services such as food, house-hold items and petrol.

But many health-care services and products are not allocated through the market in this way. In the UK, the National Health Service provides free hospital treatment, a free general practitioner service and free prescriptions for certain categories of people (such as pensioners and children). Their marginal cost to the patient is zero. Of course, these services use resources and they thus have to be paid for out of taxes. In this sense they are not free.

But why are these services not sold directly to the patient, thereby saving the taxpayer money? There are, in fact, a number of reasons why the market would fail to provide the optimum amount of health care.

People may not be able to afford treatment

                This is a problem connected with the distribution of income. Because income is unequally distributed, some people will be able to afford better treatment than others, and the poorest people may not be able to afford treatment at all. On the grounds of equity, therefore, it is argued that health care should be provided free- at least to poor people.

                The concept of equity that is usually applied to health care is that of treatment according to medical need rather than according to the ability to pay.

Pause for thought: Does this argument also apply to food and other basic goods?

Difficulty for people in predicting their future medical needs

                If you were suddenly taken ill and required a major operation, or maybe even several, it could be very expensive for you if you had to pay. On the other hand, you may go through life requiring very little if any medical treatment. In other words, there is great uncertainty about your future medical expenses if you had to pay for treatment. As a result it would be very difficult to plan your finances and budget for possible future medical expenses if you had to pay for treatment. Medical insurance is a possible solution to this problem, but there is still a problem of equity. Would the chronically sick or very old be able to obtain cover, and if so, would they be able to afford the premiums?

Externalities

Health care generates a number of benefits external to the patient. If you are cured of an infectious disease, for example, it is not just you who benefits but also others, since you will not infect them. In addition, your family and friends benefit from seeing you well; and if you have a job you will be able to get back to work, thus reducing the disruption there. These external benefits of health care could be quite large.

                If the sick have to pay the cost of their treatment, they may decide not to be treated- especially if they are poor. They may not take into account the effect that their illness has on other people. The market, by equating private benefits and costs, would produce too little health care.

Patient ignorance

Markets only function well to serve consumer wishes if the consumer has the information to make informed decisions. For many products that we buy, we have a pretty good idea how much we will like them. In the case of health care, however, consumers (i.e. patients) may have very poor knowledge. If you have a pain in your chest, it may be simple muscular strain or it may be a symptom of heart disease. You rely on the doctor (the supplier of the treatment) to give you accurate information: to diagnose your condition. Two problems could arise here with a market system of allocating health care.

                The first is that unscrupulous doctors might advise more expensive treatment than is necessary, or drug companies might try to persuade you to buy a more expensive brand product rather than an identical cheaper version. This is an example of the principal-agent problem and the problem of asymmetric information.

                The second is that patients suffering from the early stages of a serious disease may not consult their doctor until the symptoms become acute, by which time it may be too late to treat the disease, or very expensive to do so. With a free health service, however, a person is likely to receive an earlier diagnosis of serious conditions. On the other hand some patients may consult their doctors over trivial complaints.

Oligopoly

                If doctors and hospitals operated in the free market as profit maximisers, it is unlikely that competition would drive down their prices. Instead it is possible that they would collude to fix standard prices for treatment, so as to protect their incomes.

                Even if doctors did compete openly, it is unlikely that consumers would have the information to enable them to ‘shop around’ for the best value. Doctor A may charge less than Doctor B, but is the quality of service the same? Simple bedside manner- the thing that may most influence a patient’s choice- may be a poor indicator of the doctor’s skill and judgment.          

                To argue that the market system will fail to provide an optimal allocation of health-care resources does not in itself prove that free provision is the best alternative. In the USA there is much reliance on private medical insurance. Only the very poor get free treatment. Alternatively, the government may simple subsidise the provision of health care, so as to make it cheaper rather than free. This is the case with prescriptions and dental treatment in the UK, where many people have to pay part of the cost of treatment. Also the government can regulate the behavior of the providers of health care, so as to prevent exploitation of the patient. Thus only people with certain qualifications are allowed to operate as doctors, nurses, pharmacists, etc.

Pause for thought: If health care is provided free, the demand is likely to be high. How is this high demand dealt with? Is this a good way of dealing with it?