A major difficulty with subsidizing health care, whatever the method, concerns the existence of asymmetry of information. Purchasers of health care are not fully informed about the effectiveness of treatments. Therefore, you cannot be sure that injecting more money into the system will definitely lead to more socially beneficial treatment.
There may be a role for government in the evaluation of different treatments to
assess their cost-effectiveness. The government could use these evaluations to decide which treatments should be provided out of the fixed budget and which ones are not beneficial enough. The government could also collect and disseminate evidence on the effectiveness of different interventions and different providers to try to reduce the asymmetry of information between providers and consumers.
Activity 11.3
From your reading so far and your own experience and understanding, try and answer the following questions:
1 Licensing of doctors and other health care professionals is necessary and inevitable.
Why might it be inefficient though?
2 It has been observed that health systems with fee-for-service payment systems (i.e.
providers are paid for the care they decide to provide) have higher utilization rates.
What might explain this observation?
3 In a system with third-party payers (such as social insurance), there are theoretically three asymmetries of information. One is the doctor–patient relationship, which may lead to supplier-induced demand. What might be the other two?
Feedback
1 It was noted earlier that the existence of licensing is a barrier to entry into the health care market. As such it provides a potential for the exploitation of market power. In most countries there is a large number of doctors so we would expect the health care market to be competitive, but there are several reasons why this might not be the case:
a) Because doctors are much better informed than the purchasers of their services, they may be able to act as if they were a monopoly even though they are not.
They can influence price because purchasers are uninformed about the relative quality of different providers. Patients who are uninformed about the effective- ness of services may, on the advice of their doctor, buy them at a price that is higher than the benefit they receive. This is called supplier-induced demand.
Doctors will only have an incentive to do this if the financial reward for giving the service is relatively high.
b) Organizations that represent the interests of particular professions may have considerable power in a health service. It is important that these bodies do not have a role in setting fees for services. This would mean that doctors had control over both output and price in the health care market. If the fee was set relatively high then doctors would have incentives to increase provision beyond the allocatively efficient level (supplier-induced demand). You may recall that it was argued in Chapter 10 that there were efficiency gains in the US health care system after the powers of professional bodies were limited.
c) Specialist doctors may find that they really do have a monopoly on the ser- vices that they supply. They will be able to supply their services to patients or employers at a very high price.
2 Doctors have the ability to induce or reduce the demand of their patients for various services. This is because they are more informed than their patients about the
effectiveness of these services. If they receive a fee and the fee level is set relatively high then doctors have an incentive to encourage the patient to accept relatively ineffective tests or treatments. (The observation that health systems with fee-for-service payments have higher utilization rates has been cited as evidence of this. However, there are other interpretations of this evidence.) Doctors will only have an incentive to do this if the financial reward for giving the service is relatively high. Furthermore, if the fee levels are relatively low then they have an incentive to provide a less than optimal level of service. Another interpretation of the evidence is that the doctors in fee-for-service systems are providing optimal service levels but that the other systems are providing below the social optimum. It is also possible that there are differences in the quality of services between the different systems. Anecdotal evidence suggests that the non-medical aspects of care (e.g. accommodation) may be better where there is fee- for-service although not necessarily the effectiveness of treatment.
One role of government in the area of health care could be to control fee levels for doctors’ services. The government would try to set fees at the allocatively efficient level. This would be the level that would be set by the market if patients were perfectly informed.
3 Table 11.1 outlines the possible asymmetries.
You have read about the different types of inefficiency that occur in the health care market. In the next chapter you will look at the other major economic objective, equity, and you will see how this concept relates to health and health care.
Summary
You have learned about the role of government, according to economic theory, and the four situations in which governments can and should get involved: protecting public goods; controlling monopoly power; considering externalities; and coping with information asymmetries. You went on to learn about the particular features of health care markets.
References
Audit Commission for England and Wales (1995) A price on their heads: measuring management costs in NHS trusts. London: HMSO.
Mills A and Gilson L (1988) Health economics for developing countries: a survival kit. London:
London School of Hygiene & Tropical Medicine.
Table 11.1 Relationships with asymmetric information Informed party Uninformed party Market failure
Doctor Patient Imperfect agency
Doctor Payer* Provider moral hazard (supplier-induced demand)
Patient Payer* 1 Consumer moral hazard
2 Adverse selection
* Payers may be private insurers, the social insurance system, or the government
Parkin M, Powell M and Mathews K (2003) Economics (5th edn). Harlow: Addison-Wesley.
Schroeder SA (2001) Prospects for expanding health insurance coverage. New England Journal of Medicine 344:847–52.
Woolhandler S and Himmelstein DU (1997) Costs of care and administration at for-profit and other hospitals in the United States. New England Journal of Medicine 336:769–74.