Health Care Market Failure and Government Intervention

Part A

Aim:

Understanding the reason why government intervene more directly in health care market rather than food market, which is the intention of this short essay.

Introduction

The government puts more attention on the health market than the food market in the country thus raising the question which is more important or which sector deserves more government intervention. The main reason why more attention is given to the health sector is because the health sector is more prone to market failure than the food market. In addition, health is a merit good which draws various setbacks in the economy when provided without government intervention.

This essay explains why the government directs more attention on health care market rather than the food market.

Market failure of health sector

            Health is a merit good, which means people are more likely to underestimate it benefits. Markets for merits good presents a good example of an incomplete market because consumers are highly reluctant to spend on them. There are various factors that contribute to health care market failure.

Market failure of health insurance

            Health insurance market failure is caused by various factors that are contributed by both the consumers and the insurance market.  Consumers contribute to market failure in two ways; moral hazard and adverse selection.  The insurance market exhibits some characteristics that promote market failure. There is no perfect competition in the health care insurance despite of the huge number of insurance companies, the market is incomplete and there is also the issue to information asymmetry that characterize the insurance market (Folland et al, 2007).

Moral hazard 

            Moral hazard is where the insured person fails to guard against risk thus leading to inefficient allocation of resources. Basically this is depicted through the many times that an insured person visits a hospital because the insurance will be responsible for the cost. In efficient allocation of resources comes about because insured people are more likely to visit health facilities for medical services as compared to the uninsured people thus leading to misuse of resources.

Adverse selection

            Adverse selection is a situation where party of a contract is equipped with more information than the other party thus brings the issues of unfairness in the contract signed.  For instance the person being insured usually has more information about his/her medical condition than the insurance company. In addition, unhealthy people are more likely to seek for insurance policies than those in a good health condition. According to Handel (2011), the adverse selection that faces the insurance market is the main factors that contribute to the switch of the cost of health policies and thus the need for government intervention.

Externalities

            There are positive and negative externalities that comes with health care status in a country. For instance, a patients should seek medical services because they sickness may affect other people in the economy. This means it is the role of the government to ensure that care is given to everyone because of the infectious nature of diseases, which is a negative externality. The positive externality is that health care promotes economic growth because health workers are more productive than unhealthy workers. In addition due to the focus given on health care, it promotes technology and information directed towards good health in the society and research on various treatments methods and vaccination ((Folland et al, 2007).

Lack of information

Patients strongly depend on their doctors for the health services because they are not well informed. The ignorance can cause high cost in the provision of health services which some low income earner may not be able to afford.  By fully relying on the doctors, it gives the doctors a good opportunities to manipulate the patient thus extort more funds from the patients or their insurer than it is necessary.

Competition

            Although there is a high increase in the number of insurance companies, competition can never be perfect because they do not trade on similar products. The difference in the policies provided causes the health insurance company to vary in price.

Incomplete market

            Unlike the food market, the health market is an incomplete type of market because there is not actual measure on the bundles of good that should be exchanged with the other. For instance in the health insurance sector, the incompleteness is brought about by the fact that there are some areas of perils that are usually exempted from the cover in addition there some illnesses that insurance can avoid to pay. In addition, health comes with both positive and negative externalities to the economy, which means an infection by one person can easily endanger the other people in the economy. Therefore the government intervenes in the health care market to ensure efficiency in terms of allocation of resource and to ensure that all the citizens are able to access quality health (Vaithianathan, 2006).

Information asymmetry

            The information asymmetry is caused by the information difference that is held by the patients and the insurance company. When patient enroll for health policies in insurance, they are more aware of their health condition, thus putting the insurance companies at more risk. The information asymmetry brings in the issue of moral hazard and adverse selection. Because of the inadequacies that are likely to face the health insurance market, it is the role to the government to ensure equilibrium is achieved in the market. The government helps achieve equilibrium by imposing regulation in the industry, subsidizing the insurance companies as well establishing programs to ensure that all the citizens are covered by insurance companies.

Conclusion

Unlike the food market, the health market is more prone to market failure thus causing the government to put more focus on health sector. There are various factors that lead to health market failure which includes information asymmetry, incompleteness of the market and externalities. The government intervenes in the health care market failure by imposing regulations and establishing various health programs.

Part B

Aim:

The purpose of this part is to describe about the objectives of health care system and the process of financing and organizing the system to achieve this objectives.

Introduction

It is the role of the government to ensure that there is high quality health care in the country and every citizen is accessing health services.  Because of the inadequacies of the health market, the government intervenes in order to ensure that there is adequate supply of health care services. An effective health care system should be focused towards ensuring that there is maximum quality of health care as well as equally accessible to the entire population. In order to achieve this, there should adequate supply of funds and proper management of the sector.

This essay examines the objectives of health sector and how the government funds the sector.

Health care system objectives

According to Goddard and Smith (2001), an effective health care system should ensure there is efficiency and equity in the provision of health services in the country. This means, the resources directed towards the health sector should be used to promote quality health and that all the citizens in the country should have an equal access for quality health care services. This essentially because resources are limited and should be put to maximum utilization and also due to the fact that equity helps reduce the negative externalities in the health care such as the spread of infection diseases.

Efficiency:

            The main reason why the government intervenes in the health care market is to counter the failures that characterize the health sector. According to Chisholm and Evans (2010), health care efficiency is promoted by ensuring that the available resources are put to the maximum use in the provision of health care services.  Efficiency includes giving the patients an option to select the health care procedure that will suit them by availing information about their medical condition having a good management of the funds directed towards the sector. The government can ensure efficiency by allocating adequate funds to health sector, and monitoring how the funds are utilized by the medical institutions.

Equity

Health care equity is achieved by ensuring that all the citizens have equal access to quality health care services.  For instance in the united States, the government have enacted various medical programs, such as Medicaid and Medicare,  to ensure that all the citizens have equal access to quality health care (Chisholm and Evans, 2010).

Raising Funds:

There are various methods that can be used to fund the health care system in a given economy. It is the responsibility of both the government and the public to provide funds to boost health in the country. Citizens can contribute to the health care either directly or indirectly.

Publicly funded:

 The government uses tax revenue to fund various health programs in the country.  In the United States the country government allocates a huge part of the budget on medical insurance programs such as Medicaid and Medicare to ensure that all the citizens have equal access to medical services in the country.  The government funds the health care from the tax revenue through the yearly budget allocation on health sector. In addition, social insurance helps the government ensure that the public also contributes to the funding of the health care in the country. The social insurance such as Medicare is contributed by the workers and companies thus helping the employees to access health services incase of sickness (Ridic et al, 2012).

Privately funded:

Individual can also fund their own medical expenses by contributing a particular amount of money to toward medical insurance that will cover them when they go medical treatment.  Private funded programs can be initiated by employers on behalf of its employees or out of an individual pocket. This achieved by buying of insurance premiums from the insurance companies (Drummond, 2015).

Methods of paying doctors:

            Doctors play a significant role in the provision of health care in the country thus should be motivated by being paid proportionately to their contribution in the health care. There are various methods that can be used to pay the doctors, which include:

Fee for Service: this is where the doctor is paid based on the type of medical service and the frequency with which he/she administers the service.

Salaries: These are weekly or monthly earnings that are given to the doctors employed in a medical facility. This method can either be calculated on hourly bases or the frequency with which the doctor visits the facility.

Reorganization of allowances: These are additional benefits given to the doctor for offering quality services or adhering to a particular service agreement.

Charges for patient: This is the amount of money that patients are required to pay either as full payment for the medical services rendered or part of the payment of the medical cost.

Private practice: doctors usually engage in private practices to supplement the salaries they earn from their professional practices.

Financing hospitals and other care services:

Retrospective: This is where medical facilities are reimbursed for the expenditure their have incurred for a given period of time.

Prospective: Unlike retrospective, in prospective, the hospitals are given a fixed amount of money that they are required to spend under a particular fixed budget for a given period of time.

Clinical budgeting: Clinical budgeting is an effective method that can be used to ensure that all the funds given to hospitals are properly spent. The clinical budgeting involves taking estimations of the expenditure that the hospital is likely to incur in a given period of time. Working budget is important in monitoring how the money allocated to a given hospital is spent thus bringing in the aspect of accountability (Orszag, and Ellis, 2007).

Conclusion

Because of the strong correlation between health and economic growth, the government aims at ensuring that the health sector is performing to its best. An effective health system should focus on ensuring quality and accessibility of the health services by the entire populations. The government ensures this by establishing various programs such as Medicaid and Medicare to help the low income earners and other vulnerable groups such as pregnant women to have an easy access to quality health care. In order to achieve quality and equity in provision of health services, the government requires enough funds and effective oversight on the utilization of the funds.

Bibliography

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Chisholm, D. and Evans, D.B., 2010. Improving health system efficiency as a means of moving towards universal coverage. World health report.

Drummond, M.F., Sculpher, M.J., Claxton, K., Stoddart, G.L. and Torrance, G.W., 2015. Methods for the economic evaluation of health care programmes. Oxford university press.

Folland, S., Goodman, A.C. and Stano, M., 2007. The economics of health and health care (Vol. 6). New Jersey: Pearson Prentice Hall.

Goddard, M. and Smith, P., 2001. Equity of access to health care services:: Theory and evidence from the UK. Social science & medicine, 53(9), pp.1149-1162.

Handel, B.R., 2011. Adverse selection and switching costs in health insurance markets: When nudging hurts (No. w17459). National Bureau of Economic Research.

Orszag, P.R. and Ellis, P., 2007. The challenge of rising health care costs—a view from the Congressional Budget Office. New England Journal of Medicine, 357(18), pp.1793-1795.

Ridic, G., Gleason, S. and Ridic, O., 2012. Comparisons of health care systems in the United States, Germany and Canada. Materia socio-medica, 24(2), p.112.

Vaithianathan, R., 2006. Health insurance and imperfect competition in the health care market. Journal of health economics, 25(6), pp.1193-1202.