Should the government intervene in healthcare?

When appraising the economic debate regarding government intervention in healthcare, it is vital to consider three areas of impact: individuals, firms and the wider UK economy as a whole. These areas will be affected directly through potential new access to health care provision and related price changes, and also indirectly through impacts on wider incentive mechanisms and market structures.

Highlighting the main arguments, the anti-intervention position rests upon the supposed merits of the free-market’s ability to direct resources to those that value the services – via price signals. Additionally, the anti-intervention argument suggests that any government intercession in the sector will likely “crowd-out” more cost efficient private firms from the health care market, whilst spending public funds that could be more effectively used elsewhere.

The pro-intervention position highlights that because of the unique nature of health care, an efficient allocation of is far from certain. Therefore the government should intervene to guide the market to a correct level of demand and supply of health care services. Elsewise, in a free market, many individuals may not use health care even though it would be in their best interest due to imperfect knowledge of the long-term value of health care. Nor importantly, individuals may not potentially have access to vital services purely because of high health care costs. Moreover, as the government would not be solely reliant on market signals to guide its actions, its intervention can consider a wider range of factors than price when debating provision – e.g. the positive impact on the overall economy of having a uniformly healthy workforce on national productivity.

The anti-intervention arguments

Government Failure!
The main anti-intervention argument rests upon the premise that the government is unable to centrally design an efficient allocation of resources for intervention because it operates outside of market pressures. The impact is that public money that could be more effectively spent elsewhere is being mis-allocated to fund any intervention. Or funds are raised at expensive interest rates through public borrowing, placing the ultimate cost on future generations of taxpayers.

Individual Optimalisation!
The argument continues that it would be better to allow for each individual to self-assign the amount of health care they each need, because every individual knows best how must they need and how much of their income they would be willing to spend comparatively to everything else they purchase. If this were allowed to happen naturally, across the whole economy an efficient allocation of national resources would automatically arise.

Crowding out!
Another anti-intervention argument assesses the potential impact on firms in the economy if governments were to intervene in the health care market. Were the government to intervene, the presence of any publically funded agent would dissuade private actors from providing health care services, despite their otherwise ability to operate profitability. This is as private firms are subject to the market – that is they necessarily prioritise creating maximum value for shareholders by delivering services at lowest possible cost. Meanwhile, a government agent would not be under such pressures. Thus the agent would be able to under cut the opportunity for private firms to generate a profit. The impact is that health care firms would refuse to enter the industry and services would not be naturally provided at lowest possible cost. This would thus represent a wastage of scarce resource at a national level across the economy.

Free-Rider Problem!
Furthermore if healthcare was being provided by government intervention, oblivious to cost and allocated by central mandate, consumers may begin to consume more health care services than they would actually need or desire if they had to pay for it personally. Thus the impact of separating the cost of health care from the personal availability of health care would result in an inequitable use of shared resources.

The pro-intervention arguments

Redistribution!
The contrary position re-interprets the lack of market pressures governing state intervention by suggesting that it actually frees government actors to prioritise socially positive factors instead. The availability and accessibility of services will no longer be governed by individuals’ own willingness to pay, or importantly by their ability to pay, market-determined rates. An example can keenly illustrate this point: demand for health care generally increases with age, however after retirement one’s ability to pay for such services rapidly reduces. Thus government intervention may limit the occurrence of this socially unappealing situation, by provisioning state resources for those in need.

Market Failure!
Alternatively, a main tenet of the pro-intervention position questions the suggestion that non-intervention automatically results in an efficient allocation of resources to health care as a natural case. Firstly, individuals are not uniformly capable of self-assessing the exact amount of resources they should devote to health care spending.

Imperfect Information!
This is because most individuals do not have sufficient knowledge of the latest health care treatments, nor recognise the optimal time to seek medical attention. Secondly, individuals do not have full foresight of their future health care needs and therefore cannot ration personal resources perfectly. Thirdly, “health” is not a replaceable good such others that fit into the free market schema. Each individual only has one body, thus its “performance” or expiry date as a result of health care spending is not easily valued in a market fashion.

Abuse of Market Power! (Monopoly)
Meanwhile from a supply side point of view, health care is not principally a uniform product that is identically available universally at any time. In local areas, health care may be scarce and specialist doctors may be unavailable. Therefore health care providers in these situations may act as monopolies – singular suppliers – and therefore may dictate prices to those far in excess of local individuals willingness and ability to pay.

Asymmetric Information!

Even if individuals were able to overcome the issues above by purchasing health insurance contracts, this would not automatically result in a perfect allocation of national resources throughout the economy. This is as private insurance providers are naturally less aware of individual’s true healthcare needs than the individuals themselves. Thus in spite of any actual actuarial risk of individuals needing health care, insurance providers may raise prices excessively or completely withhold health insurance from great swathes of the population to protect themselves from potential losses. Similarly, private insurance firms may withhold insurance arbitrarily because of the fear that individuals will begin excessively demanding resources once holding an insurance contract. They withhold insurance in this fashion to protect their profits from this potential occurrence. Due to the funding methods open to government actors, this arbitrary withholding of health care services is less likely to happen.

Positive Externalities!
From a macroeconomic point of view, there are numerous external third-party benefits to having widespread health care availability detached from market forces. Firstly, if health care provision is universally available, it potentially results in a healthier and larger workforce. This stronger workforce would be able to produce more and demand more goods, thus national income potential would rise.

Destructive Cycles!
Secondly, such healthcare provided by government intervention, but not otherwise available provisioned by the market, can help avoid destructive societal cycles. The anti-intervention argument above mainly focused on the individual – however health care costs and implications are not burdens carried solely by the individual. If the primary wage earner in a family were to suddenly fall ill and unable to work, the health care cost impact would fall upon the whole family – including their children. This could feasibly cascade into a negative cycle limiting the potential of all family members and thus also a destructive pattern of poverty.

Conclusion
 
Ultimately, some level of government intervention in healthcare is clearly necessary because the market fails to automatically deliver an efficient solution. Additionally, there are a number of non-automatic benefits that arise from government intervention that would not arise naturally.

Nonetheless, this debate leaves open the discussion on what the most efficient form of intervention would be.

© Patrick Tsui and liminaleconomics.wordpress.com, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Patrick Tsui and liminaleconomics.wordpress.com with appropriate and specific direction to the original content.

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