Should Governments intervene in the Healthcare market?

The economic arguments as to why governments should or should not intervene in the health care market all centre on the concept of efficiency. What we mean by this is the Pareto efficient standard- the inability to make someone better off without making another person worse off. The First General Welfare Theorem states that under perfect competition and information, the allocation of resources will align such that the economy reaches a Pareto efficient equilibrium. However, moving away from this highly theoretical perfect world, what are known as ‘market failures’ cause many aspects of our economy to be fail  reach this lofty standard, and some are even highly inefficient. However, just because there is a lack of efficiency, does not give a government cause to intervene- it should act if by doing so it can increase overall efficiency in the market place, taking into account all explicit and implicit costs. As almost all government activity is financed through taxation, it is also hugely important to account for any distortionary effect taxes have (for example, income tax tends to reduce the amount of labour supplied at lower income levels).

Regarding the market for healthcare, it is useful to first consider what it would look like were there no government involved. Thus, all healthcare would be financed via private insurance companies, and hospitals would be run as private companies. Such a system would be suffer from many market failures, and would not be Pareto efficient. The reasons why are laid out below.

Bounded Rationality: Pareto efficiency assumes that there is perfect information among all actors, and that people make rational choices. However, as healthcare is in of itself a very technically complex subject matter, there is a limit to what one can learn, without actually becoming a doctor themselves. Thus, people will not be able to make fully informed decisions, and will need to rely on the advice of doctors.

Monopoly of Doctors: Unlike other goods, such as food or housing, people do not generally have the ability to ‘shop around’ for the best deal on prices, particularly in times of emergency. Most doctors meanwhile belong to a medical practitioners association, and often consult on prices. In addition, they have little motive to compete on prices, being more motivated by prestige than money.

Adverse Selection: People are much more aware of their physical health than insurance companies are. With medical insurance being quite expensive, healthy people, knowing they are unlikely to need it, will opt out, while more unhealthy people, thinking the opposite, will buy health insurance. This will cause premiums to rise, driving more people out of the market, except the unhealthy, who will still save money by being insured. This will eventually result in only the unhealthiest being left in the market, with insurance companies being unable to function.

Moral Hazard: Once one has paid their healthcare premium for the year, the cost of going to the doctor or using the healthcare service effectively drops to zero. Thus, people will go to the doctor more frequently than they need to, leading to over-consumption of healthcare. In addition, many healthcare factors, such as pregnancy, can be exogenous in nature. One could purchase health insurance, and then choose to have a child, forcing the insurance company to pay for your healthcare costs.

Incomplete Contracts: Actuarial insurance rests upon the principle that the probability of any risk occurring is less than 1. If it is exactly 1, then it is not a risk, but a certainty, and will thus be uninsurable. This is exactly the case with many inherited diseases, making it impossible to get insurance. The problem becomes even more severe when one considers advancements in medical screening, and would lead to a vastly unequal, eugenics-lite society.

As a result of the above failures, the market for healthcare would be plagued with inefficiencies. Whether or not the government should intervene however, and the scale that intervention should take, is widely debated. This has given rise to several competing theories.

Neoliberal Approach

This approach argues that healthcare is so prohibitively expensive precisely due to excessive amounts of government regulation. For example, by restricting the right over who can and cannot call themselves a doctor, the government ensures that doctors salaries will be very high, as will the cost of healthcare. In addition, despite all the attention it receives, healthcare is just one factor which effects one’s health and well-being, and public production does little to reduce the gap between rich and poor in terms of life expectancy. By allowing for private production, you ensure high levels of standard. Low income individuals meanwhile, can receive transfers in order to allow them to purchase insurance. This was the system used in the United States prior to the introduction of Obamacare.

Pros: No waiting lists, high levels of technological advancement, excellent standard of healthcare

Cons: little empirical evidence to support idea, large number of uninsured, high costs

Public Provision

This approach starts by acknowledging that healthcare is itself not a normal good which should be subject to the whims of the free market. It suffers from too many market failures, and so public provision is the most efficient way forward. This is the system used in the UK, the NHS. Almost all healthcare is provided free of charge to the public. This allows for the correction of almost all the aforementioned market failures, except moral hazard- people tend to over-consume healthcare, which leads to waiting lists. As there is no discrimination based on pre-existing medical conditions, people get the healthcare they need. It also tends to be very cost efficient, particularly compared to its neoliberal rival. In 2007 in the UK for example, average spending on health per person was $3,000, compared to $7,000 in the US. However, because it is free, rationing is essential, and government intervention tends to focus more on value for money than medical innovation. In addition, there is strong empirical evidence to suggest that the rich and middle class benefit more from this system than the poor.

Pros: Cost efficient, all are insured, no market failures,

Cons: Waiting lists, low innovation, wealthy benefit more.

Hybrid approach

Most governments do not use either the US or the UK as their model, instead they factor somewhere in between. Healthcare is provided by insurance companies, and is mandatory, although people cannot be discriminated against. Premiums are subsidised by the government. This approach tends to have slightly higher costs than the UK model, but much lower waiting lists.