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Inaugural KEYSTONE Course on Health Policy and Systems Research 2015

Health EconomicsSession 2

Microeconomics for Health

Health EconomicsSession 2

Microeconomics for Health

Keystone HPSR Course25th Feb 2015

New Delhi

Recap: Perfect Competition

Background: Health sector debates• Public-private partnerships/ privatization: Buzzword

• Separate budget line in NRHM budget: A.8.2• New strategies for PPP being mooted by different states

• Chiranjeevi scheme in Gujarat• 108 referral transport in Punjab• Contracting-in and contracting-out of specialist services

• Empanelment of private hospitals for delivery of care under RSBY and other public-funded state health insurance schemes

• Privatization of health care: corporate hospitals• Corporate hospitals being offered cheap land adjacent to public hospitals• Empanelment of private hospitals for delivery of cancer care in Punjab

Market Equilibrium• Only in equilibrium is

quantity supplied equal to quantity demanded.

• At any price level other than P0, the wishes of buyers and sellers do not coincide.

Essential conditions for perfectly competitive market to function

• Perfect information across buyers and sellers

• Rational buyers and sellers

• Large number of buyers and sellers

• Homogeneity of product

• Free entry and exit for all players

Analysis of health care marketCondition 1: Perfect Information across buyers and sellers

Actual scenario in health care market1. Asymmetry of information across buyers and sellers

a) Example of arrhythmia treatment

2. Principal-agent information a) Supplier-induced demand

3. Uncertainty in health care a) Consumer and supplier-side

Analysis of health care marketCondition 2: Large number of buyers and sellers

Actual scenario in health care market

1. Health care workforce scarcity

2. Skewed distributiona) Rural-urban, state-wise and inter-country distribution

3. Monopolies in health carea) Increase with specialization

Analysis of health care marketCondition 3: Homogeneity of product

Actual scenario in health care market

1. Extreme Heterogeneity

a) Consumer and Supplier end

• Example of arrhythmia patient/ cancer patient

Analysis of health care marketCondition 4: Free entry and exit for buyers and sellers

Actual scenario in health care market

1. Barriers to entrya) Limited number of medical undergraduate seatsb) Even limited seats for specialization and superspealizationc) Licensure examinations: effect much more pronounced in US

2. Patent laws for drugs

3. Monopolization in health carea) Increase with specialization

Market Failure in Health • Failure of conditions necessary to establish a perfectly competitive

market in health

• Result:

• Hospitals become price setters rather than price takers: set higher than optimal prices

• Reduces demand for health care: welfare loss

Why should Government engage in health?• Market failure in health

• Externalities: positive and negative

• Public goods argument

• Merit goods argument

• Incomplete markets

• Social justice arguments

Externalities: Positive and Negative

• Market transactions: buyers and sellers make rational decisions

• Dependent on personal costs and benefits

• Externalities: actions of one person affects the utility/ welfare of other

who is not involved in transaction

• Positive externality: immunization

• Negative externality: passive smoking, firm/ vehicle emitting pollutant waste,

infectious diseases

Public Goods• Public Goods’ Properties

• Non-excludable: a person cannot be denied the consumption of a good or service based on inability to pay

• Non-rival: a person cannot be denied consumption of a good as a result of another person’s consumption

• Example: national defense, street light, information through mass-media such as wall painting

• Problem of public goods• Problem of ‘free-riders’: markets will not establish

Policy Response• Regulation of private provision

• Taxation

• Subsidy

• Audits/ case reviews etc

• Other incentives

• Public provision

Problems with Public Provision• Inefficient

• Not a universal truth• Example: publicly financed publicly provided model of referral transport• Biggest inefficiency of public sector: underfunding

• Inequitable• Universal provision leads to inequity: inverse equity hypothesis• No good means test for targeted provisioning• Still more equitable than private provisioning

• Non-responsive• Needs improvement though better governance

What is the final word?

• No single solution which is perfect

• Large private market exists, hence cannot ignore its role in provisioning

• Private market needs regulation: herculean task

• Need to invest higher in public sector

• Manage the resources in public sector better

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