Why would the market fail to provide the optimum amount of healthcare?

1. Introduction

The purpose of this report is to analyse why the market would fail to provide the optimum amount of healthcare and also to consider the advantages and disadvantages of alternative policies that are open to a government to ensure effective healthcare provision.
In order to achieve this, let’s first analyse the UK healthcare market and the way it is operated then we’ll identify the potential alternatives and their pros and cons.

2. The UK healthcare market.

As the NHS is primarily funded by taxation, which means that if the demand increases, then the taxes devoted to NHS will also have to increase. This system has pros and cons for sure, but the way high demand is dealt with from a financial perspective makes sense if we consider the solidarity aspect of the philosophy of this business model. This is the reason why the budget has increased and is now over the GBP 100 billion. So NHS healthcare is free, therefore the demand is high. There are other factors that may jeopardize the current budget: the population is ageing, costs of new treatments due to lifestyle decreases.
According to Wanless (2002), high demand is shouldered by the government through provision of additional investment in the NHS. From the report, NHS is now funded at close to the EU average and the 100 billion should suffice to cover its needs including inflation and demography changes. To deal with the high demand, some services are subsidised, so the patients have to pay a minimal amount. So this may help to cope with the demand but, as some won’t be able to pay this amount, it may also be seen as a breach of NHS core principles (NHS 2010):
o That it meet the needs of everyone
o That it be free at the point of delivery
o That it be based on clinical need, not ability to pay
Another way of dealing with the high demand is the queuing system which works based on illness severity i.e. urgent treatments will take place immediately while less urgent ones may be postponed for days, weeks or months.

The advantages of the current system are mainly:
Costs: as it is free for patients as included in the taxes, everyone makes similar contribution whether they are heavy users or not.
Services availability: indeed there is a huge range of services delivered in many ways like direct calls, pharmacists, general practitioners, walk-in centres, etc….
Quality: there are regular reviews and the NHS is under constant monitoring to ensure better quality in services delivery.

The main disadvantages of the current NHS model are:
Costs: overall running costs increased by almost 20 billion between 2007 and 2009
High demand management: waiting lists and services that are subsidised (not free). These tend to make the system unpopular and even pushes people to go for private insurances and even go abroad for e.g. surgery.

3. Why would the market fail to provide the optimum amount of healthcare?

There are multiple reasons for why the market would fail, the first one could be that people can’t afford treatments anymore due to income distribution. This would mean that the very poor would not have access to treatments as the solidarity principle would be broken. In this case the only way to maintain the status quo would be to work on taxes to ensure that no one will be left out. It will also offer to redistribute incomes to achieve greater social efficiency equitably. Everyone is taxed, even those who are very poor. Also since tax is equitably imposed, it is most likely that those who pay the least are the ones who will be spending more in terms of healthcare, given their very poor health conditions.

Difficulty for people to predict their own medical needs i.e. uncertainty of falling ill in the future and hence requiring medical treatment. This may lead people who can afford it to go for private medical insurance as this will avoid the waiting list issue and offers more flexibility but at a much higher cost as, anyway, you pay for NHS coverage through the taxes. Additionally those who have good health conditions or who require little medical treatment may end up paying much more than would have otherwise be needed.

Externalities are external benefits provided by the healthcare to the patient (Sloman and Wride 2009). For instance, a person having a contagious disease will be seeking healthcare, but it will not only benefit the patient, but also the people interacting with him or her. However, if the patient is required to pay for treatment, they may not be able to afford, hence contributing to social cost as those around him/her maybe infected as well. This may be mitigated by law in the sense that in the context of e.g. a pandemic, the government may make the decision to quarantine contagious people, running the risk to stigmatise part of the population.

Patient ignorance is also a reason why the system could fail as the doctors who know better could advise more expensive treatments for different reasons like incentives from pharmaceutical companies, etc….

This market answers the oligopoly characteristics:
• Small number of sellers.
• Interdependence of sellers
• Undifferentiated or differentiated product
• Restricted entry
• Some control over price.
• Size of the companies can vary as it does for the product differentiation.
• Demand curve uncertainty (due to the number of sellers), mainly due to the lack of opportunity to forecast policies changes by the competitors.
This thus means that there is a risk of collusion between doctors and hospitals to set-up standards and prices and so impact, at the end of the day, the NHS costs and subsequently the taxes. There is then a risk that overall quality goes down for cost cutting reasons using patients’ ignorance.

4. What could be the alternative policies?

One of the alternative of NHS would be privatisation, but then it means that the government would lose grip on healthcare in the country, and private companies, who will be looking to make profit, will charge as much as they can (price differentiation). The potential advantage will be for the ones who can afford insurance and get best in class healthcare, while others won’t potentially have access to minimum service. Private insurances can provide peace of mind, higher standards and also shorten waiting times to get treatment. There is, on the other hand, a concern, due to the cost of such a cover, that it is “elitist” and would only be for people who can afford it. Pragmatically, the government would have to keep an “NHS” alongside the private healthcare sector to provide the minimum services to the population. The other main disadvantage of private insurances is that the premium will depend on your profile e.g. age, diet, medical history and so the more likely you are to fall ill, the higher the premium will be and there are also usually exclusions in the contracts.

Another alternative could be to go for government cash benefits for the lowest incomes and decrease taxes related to NHS and so for the ones above the threshold the state will define, there will be the private healthcare sector. The main drawback is that, for the ones just above the defined income, it may be hard to afford treatments but on the other hand the tax weight on each citizen will decrease. We would also run the risk that the overall quality of health services would go down and won’t reach the social minimum a government should deliver to its population.

Another option would be keeping the NHS but getting the patients to pay and get reimbursed. This may then give more administration as it will be more complex. The advantage here is that only the patients are paying and the solidarity contribution would decrease but it will be overall less expensive. The downside is that there will then be a necessity to have an insurance system to fill the gap, but this will also be more affordable. Alongside this alternative, a higher health education would help people to detect their symptoms earlier and proactively take mitigating actions and subsequently reduce costs.

5. Conclusions

There is no perfect system unless there is unlimited funding from the government. Having said this, the goal will be to find the best balance to offer the best quality health services to all at an affordable cost without excluding the poorest fringe of the population.
According to me, the best balance would be 100% free services for the population earning less than a specific amount. For the rest of the population, the government would subsidise the services (e.g. social security) and a private insurance would complete the amount.

6. References / Bibliography:

MONETOS, 2010. Private health insurance. [online]. Hamburg, Germany: MONETOS GmbH. Available from: http://www.monetos.co.uk/insurance/health-insurance/private/ [Accessed 30 November 2010].

MONETOS, 2010. The National Health Service / NHS. [online]. Hamburg, Germany: MONETOS GmbH. Available from: http://www.monetos.co.uk/insurance/health-insurance/nhs/ [Accessed 30 November 2010].

NHS, 2009. Core principles. [online]. London, The UK: Department of health. Available from: http://www.nhs.uk/NHSEngland/thenhs/about/Pages/nhscoreprinciples.aspx [Accessed 30 November 2010].

SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.

WANLESS, D., 2004. Securing Good Health for the Whole Population. London, The UK: Department of health.


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