Topic 3_Market Failure in Health Care Markets.ppt

Market Failure in Health Care Markets

1. MARKETS AND MARKET FAILURE IN
HEALTH SERVICES

2. Definitions
Market = where demand and supply adjust through
price.  can be seen as a tool or mechanism, for
allocating resources in a society.
Market failure = all the ways in which a specific market
may not meet the conditions for social optimality.
E.g. if there are barriers to entry, or a lack of information, then that market
will fail to produce the best possible outcome.
In bureaucracies  “government failure” = the ways in
which a bureaucratic approach may fail to optimize social
welfare.

3. Market mechanism
Markets produce goods
efficiently by balancing
demand and supply
through the price
mechanism
Market distribute goods
according to the ability and
willingness of consumers to
pay for them –
demand/supply.

4. Conditions for perfect market
1. Perfect information
- Symmetric
2. ‘Rational’ behavior
- Incorporating both individual and societal costs/benefits
3. Market exists
- for all products desired by all people
4. Many buyers and sellers, homogenous products
- so each is price taker
5. Equity or politics not considered

5. Market failures
1.Imperfect information
2.“Irrational” behavior
3.Externalities
4.Public goods
5.Incomplete competition
Reason for government intervention:
Regulation, legislation, provision, …
Also: social equity

6. Information asymmetric
= One party to a transaction has better information that
the other.
e.g. car salesman, market for insurance or credit.
Leads to less than ideal provision:
-People avoid products
-People pay less/more than what it might be worth
Unless:
-use of warranty, reputation
-Performance related payments
-Norms and standards

7. Information asymmetry - Health
Uncertainty about products:
Knowledge patient/doctor
Difficult to distinguish products (heterogeneous)
Supplier-induced demand
Over/under-production
Low quality, high price
Role of government:
Accreditation
Quality Assurance
Health education

8. “Irrational” behaviour
= People might not always do what is best for themselves
(still “rational” choice based on personal utility)
Leads to:
- Over-consumption of “bad” goods (cigarettes)
- Under consumption of “good” goods (education)
Need to change incentives…

9. “Irrational” behavior - health
Merit goods (good goods)
= vaccines, vitamins, physical activity
De-merit goods (bad goods)
= cigarettes, drugs, speed
Role government:
Health education
Subsidising / taxing consumption
Legislation

10. Externalities
Side-effect of consumption or production of goods and services,
that are not considered when consuming/producing.
Positive externalities:
Individual benefit < social benefit
Individual cost > social cost
Under-production / consumption
Negative externalities:
Individual benefit > social benefit
Individual cost < social cost
 Over-production / consumption
e.g. listening to
the radio from a
person in the
next room, well-
kept front
garden, public
artwork,
volunteer,
vaccine
e.g. pollution,
over-fishing,
smoking

11. Externalities - Health
Positive externalities
E.g. prevention contagious disease, immunization, treatment
STDs, caring
 benefit of consumption/production is lower for individual for
society as a whole
 price paid will be below price it is worth
 supply will be below what is ideal for society
Role government:
Subsidize consumption/production
Provision  create market
Funding

12. Public Goods
= non rival and non-exclusive good
E.g. radio broadcast, fresh air…
Impossible to set a price:
Non payers cannot be excluded
Extra consumer doesn’t lead to extra costs
No body willing to pay (free riding)
Nobody willing to supply
No additional
costs to extra
consumer
No one can be
excluded from
consumption

13. Public goods - Health
Healthy society:
Everyone benefits
Incentive to “free ride”: leave the healthy life-style and preventive
measures to others.
e.g. incentive not to be vaccinated if everyone else is?
Who would invest in Research and Development for medicines in a completely
liberalized private market?
Role of government:
-Subsidize consumption/production
-Provision
-Funding
-Regulation (e.g. patient law)

14. Incomplete competition
= One or few providers of goods (monopoly: single seller), or one
or few buyers of a goods (monopsony: single buyer), who thus
have power in the market to influence prices.
e.g. OPEC: artificially high prices because of power of suppliers (as
long as no alternatives)
 artificial shortage of oil

15. Incomplete competition - Health
Health care facilities often monopolies:
High start-up cost (investment in building and equipment, risks)
High barriers to enter market as supplier (specialized, long training,
licensing)
Limited choice for consumer:
Price set higher than costs, no incentive to be efficient or to provide quality
services
Role of government:
Provision
Quality control
Price regulation
Legislation

16. Equity
Equity = being fair or just.
Perfect market
 technical (how) and allocative (what) efficiency,
regardless of who gets
 so inequality is not a market failure
BUT
Still reason for government intervention
Trade-off between equity and efficiency?
Social welfare as positive externalities?

18. Equity - Health
Health = Human right (Constitution of Kenya 2010)
Ethical duty of health workers to treat according to NEED, not
ability to pay.
In private market:
Less supply at higher price than ideal for society
Role government:
Guarantee human right for good health
Provision
Subsidizing
Funding

19. Recap…
Perfect market
Market failures
Government intervention
Legislation, regulation, subsidizing/taxation, funding, provision,
social protection, …
Government failures
1.Imperfect information
2.“irrational” behavior
3.Externalities
4.Public goods
5.Incomplete competition
6.Equity
D=S, price adjusts, efficiency

20. Government interventions
Enabling
Changing environments
in which private agents
make decisions (making
markets work)
Public Provision
Government provides
health care services itself
Examples:
Subsidies, user fee,
exemptions, quality
standards, regulation
Examples:
MoPHS, MoMS,
vaccination programme,
research KEMRI

21. Market and government - health
Elements of both market & government in health care:
Public funding of primary health combined with user fees for other,
less essential services
Private health insurance combined with social insurance
Government subsidies/funding of education for health care workers
but re-payment of student loans by employed workers
Health education and information to assist consumer choices
Public sector contracting to private sector including PPPs.

22. Thank You