Government Intervention in the Health Care Market

 

a) As an economic adviser to the Health Minister, how would you respond to the following question raised by a member of parliament? “It is more of a basic human right to have access to food than to health care. Why do governments intervene more directly in markets for health care compared to markets for food?”

Introduction

In the western political tradition, basic human rights are universal: all rights are necessary in order to make up the fundamental requirements of a human being (Donnelly, 2013). However, in practice, human rights are hierarchical. As Montgomery (2002:373) declares, “people’s actual experiences with human rights reveal which ones are the most prevalent in their daily lives, and thus provide a possible basis for estimating their relative importance and for adopting appropriate policies”. Different cultural groups and nationalities have different experiences of human rights (Donnelly, 2013). For example, people from high income countries such as Britain have few experiences of the right to food, yet frequent (and even inevitable) needs for the right to health care (Macklem, 2015). As a result, it can be argued that while food is more of a basic right to life (i.e. without food one cannot live) than the right to have access to health care, the latter is far more applicable to the delivery of human rights in the social, economic and political context of early twenty first century Britain. This essay will examine the problem of basic rights in greater detail, looking in particular at the reasons why the government tends to intervene more directly in health care markets than markets for food. As will become apparent, in order to understand the issue, it is essential to consider the unique nature of the health care marketplace, and the underlying need for government regulation that this necessarily entails.

Government Intervention in the Health Care Market

In order to understand why governments intervene more frequently and directly in health care markets, it is essential in the first instance to consider the nature and the function of the marketplace. For most commodities (including food), the market performs a simple function that permits buyers and sellers to exchange a good or service for a fee (Harvey, 2011). Free markets therefore allow the price of the good or service to be determined by: (1) supply and demand; and (2) resources available (Harvey, 2011). Prices for food products are agreed by both the buyer and the seller with supply and demand dictating the pattern of the interchange between the consumer and the producer (Donaldson & Gerard, 2005). Viewed from this perspective, in a free market place (i.e. a marketplace that is characterised by an absence of government intervention) consumers are sovereign (Taylor & Mankiw, 2014). Consumers are thus free to make choices and producers respond in kind (Taylor & Mankiw, 2014).

However, the health care market is fundamentally different from food and other commodities that are bought and sold in the marketplace (Klein, 2005). Two points in particular are apparent. Firstly, when a consumer becomes seriously ill and needs to enter the health care marketplace, the costs of goods and services are likely to be extremely high (Donaldson & Gerard, 2005). For example, for the vast majority of consumers, the costs of complex surgery will far exceed what the customer is able to afford. Thus, consumers in the health care market place are not sovereign economic actors as they are in food markets where hunger is alleviated according to what kind of food the consumer can afford (Wiseman & Jan, 2011). Secondly, unlike consumers of food, health care consumers cannot predict when they will become sick or what their future health care needs might be (Donaldson & Gerard, 2005). Therefore, consumption in the health care market is not determined by choice but, rather, by uncertainty (Wiseman & Jan, 2011).

As a consequence, in the health care market, most transactions occur between insurers and health care providers rather than between the consumer and the commodity producer (Guinness & Wiseman, 2011). This, in turn, ensures that transactions which occur in the health care market place are influenced by complex processes of risk management, information asymmetry resulting from consumer ignorance and negative externalities (i.e. where health care exacts a cost to all consumers regardless of whether or not they are purchasing any products) (Guinness & Wiseman, 2011). Consequently, in the health care market, prices are not determined by supply and demand; rather, prices are determined by interactions between insurers and suppliers, and health care providers (Taylor & Mankiw, 2014). Furthermore, unlike in other commodity markets, the price of health care is not affected by the quantity or availability of resources: when the consumer is sick they have no option but to purchase the product that can make them better (Wiseman, 2011).

As a result, stripped of the power and influence of sovereign consumers, the health care market is fundamentally distorted. Where, in an ideal market, consumers act as a check upon the power of the producers, in a health care market suppliers and producers are predominant (Donaldson & Gerard, 2005). Consequently, left to its own devices, the health care market would be subject to endemic failure characterised by problems of distribution, resource inequalities and an absence of price controls (Walshe & Smith, 2011). It is for this reason that the government tends to intervene more directly in the health care market than in the food market. Government intervention in the health care market is required to regulate the marketplace, establish the parameters for prices, and allocate and fund scarce resources (Mills, 2011). Without government intervention, the public costs of consumption would exceed the private costs of production (Mills, 2011).

Conclusion

The Member of Parliament who raised the question has failed to grasp two important points. Firstly, although, from a theoretical vantage point, rights are universal, in practice rights are characterised by hierarchy. In Britain, the right to health care is of more practical value than the right to food. Secondly, because consumers are not sovereign, the health care market is susceptible to market failure. Although the existence of market failure and/or market inequalities is not in itself a reason for government intervention, the extent of the distortions and pervasive incentives that arise in health care renders government intervention in the funding and regulation of the health care market an economic necessity.

b) What do you think should be the objectives of a health care system? How would you finance and organise the system to achieve this?

Introduction

At the dawn of the twenty first century, health care is arguably the most contested area of public policy with the legitimacy of governments depending in large part upon the ability to meet the health needs of ageing populations in times of deep economic uncertainty (Buse et al, 2012). The centrality afforded to health care therefore demands that policy-makers have clear objectives and goals so as to set attainable long and short-term agendas for public health care delivery. This essay will examine the issue of objectives in greater detail, looking in particular at the goals of health care in the contemporary era. In addition, the essay will consider the ways in which the state should finance and organise the system in order to meet its objectives. Over the course of the essay, it will be necessary to discuss problems such as raising funds, paying doctors and financing hospitals and other front-line services.

The Objectives of the Health Care System

The core objective of any health care system should be two-fold. On the one hand, a health care system should endeavour to improve the health and wellbeing of all of the people who use the system regardless of wealth (Mahon, 2011). On the other hand, a health care system should look to reduce the economic burden of disease upon the state (Robinson, 2011). However, these two objectives cannot be achieved in isolation. For example, aiming to improve the wealth of the population demands that the health care system improves access to primary health care (Mahon, 2011). Likewise, reducing the burden of disease demands that health care systems improve the cost effectiveness of health services, and recruit the best medical professionals available to deliver health care (Donaldson & Gerard, 2005). Therefore, the core objectives of the health care system are undermined by an unresolved tension between social and economic goals: where social goals outline the primacy of equity, economic objectives underscore the importance of efficiency; likewise where social goals consider quantity, economic objectives emphasise quality (Maynard, 2005). As a result, the objectives of the health care system are determined by the nature of the institutional mix between public and private health care providers (Maynard, 2005).

Financing and Organising the Health Care System to Achieve Objectives

In order to examine how to finance and organise a health care system, it is essential to contemplate the question of opportunity cost. As Donaldson and Gerard (2005) attest, the principle of opportunity cost is constructed upon the premise that purchasing one item inevitably involves a trade-off against another. For example, a health care manager who decides to invest in a particular treatment cannot do so for a different treatment. Thus, the true cost of the allocation of scarce resources is the inability to pay for other resources that the health system requires (Wiseman, 2011). Therefore, opportunity costs suggests that there is always a trade-off between equity and efficiency (Maynard, 2005). This has been particularly prevalent in the NHS where certain areas of the health care system (for instance, coronary disease) have been prioritised over others (for example, mental health) (Ham, 2009). Financing and organising the health care system therefore demands that public health agencies incorporate the private sector into models of economic development (Balduzzi, 2011).

Public-private partnerships (PPPs) have already become a staple feature of health care economics (Klein, 2005). PPPs allow the state to shunt the responsibility for financing the building, operation and design of hospitals and other clinical and non-clinical services to private sector contractors in the guise of Special Purpose Vehicles (SPVs) (Broadbent & Laughlin, 2005). Although PPPs have been criticised for increasing the risk of financing health services back onto the public sector, the merging of public sector interests with private sector imperatives represents an ideal means of alleviating the economic burden of funding health care from the state (Klein, 2005). In particular, institutional diversity is able to address the problem of opportunity cost when there is only the one health care provider (Broadbent & Laughlin, 2005). PPPs should thus remain a central means of financing and organising health care services.

In addition, in order to raise funds, public health care providers should look to fuse taxation with income from patient charges (Donaldson, 2011). Moreover, significant funds can be raised from public health providers treating private patients. For example, NHS Foundation Trusts (FTs) have seen income from private patients increase by 16 per cent in the past two years, totalling £395.9 million in 2014-15 (Health Investor, 2015). Private sector initiatives can also be used to help to pay for the expertise that is required to deliver quality health services (Donaldson, 2011). Research undertaken by Donaldson (2011), for example, suggests that doctors respond positively to financial incentives (i.e. remuneration per consultation or per operation). Although financial incentives have been criticised for leading to over-recommend of health services, there is little evidence that this is an inevitable by-product of market-based remuneration (Donaldson, 2011). Contractual performance-related pay where wages are linked to market economies would therefore represent the most viable means of paying for and retaining the best medical staff in order to deliver the objectives of the health care system (Tofts, 2011).

Conclusion

The objectives of the health care system are both economic and social. On the one hand, a health care system should endeavour to improve the health and wellbeing of the population through improving access to care. On the other hand, a health care system should aim to reduce the burden of disease by improving the quality of health care provision. However, the problem of opportunity cost suggests that there is always a trade-off between efficiency and equity. It is therefore proposed that health care systems are financed and organised according to a public-private model. This, in turn, would help to build hospitals and other front-line services, pay doctors and raise funds for the allocation of resources. In the final analysis, quantity and quality can only be established by locating alternative means of financing and organising the health care system.  

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