Lecture 6

Chapter 19: Role of Government

Recap

Last time talked about market failure Markets are problematic in health care

because1. Don’t provide goods efficiently2. Don’t provide good equitably

This is why we see so much government intervention in health care.

Outline

Types of Government Intervention Types of Goods Reasons for Public Intervention Government Failure

Types of Government Intervention1. Inform: or persuade

consumers/providers/suppliers to act in a certain way.

• Publicize health risks (smoking, diabetes)• Disseminate information on disease patterns

(avain flu), or risks of medical procedures.

Types of Government Intervention2. Regulation: determines how a private

activity may be undertaken. At extreme government can prohibit goods or

activities. Setting standards for doctors and drug trails regulate insurers to provide certain

interventions.

Types of Government Intervention3. Mandates: obliges someone to do

something, and (usually, though not always) pay for it.

Mandated activity is different from regulation because the mandated activity must be performed. Producer can react to regulation by choosing not to undertake the activity.

Usually specified in laws E.g. employers of a certain size must provide health

insurance, children must be immunized at schools

Types of Government Intervention

Regulation and mandates appeals to legislators b/c tackles problems without incurring

government spending. Affects spending of those that are regulated e.g. two

day hospital days after delivery.

4. Finance: health care with public funds. Delivery can still be private.

Types of Government Intervention5. Provide: or deliver health services using

publicly-owned facilities and civil service staff.

Usually publicly financed and provided More typical of developing countries Developed countries usually provide a lot of

autonomy if publicly provided (crown corporations).

Types of Government Intervention6. Taxes/subsides on goods e.g. cigarettes

With diabetes increasing so quickly should certain foods be taxed more?

Types of Goods

Public Goods: 2 qualities Non-rivalous: someone’s consumption does not

reduce the amount available for others to consume. Control of disease vectors (malaria) Food and water safety

Non-excludable consumer cannot be excluded from consuming the good either by having to pay or through some other mechanisms. Classic example national defense.

Types of Goods

Merit Goods: goods that are thought to be good for someone regardless of the person’s own preferences. Compulsory education. Wearing seat belts or helmets on motor cycles. Tobacco and drugs.

Market failure because don’t consume enough of it.

Rational for Government Intervention Government’s often try to correct market failures

(market distortions). Remember the theory of the second best, fixing the

distortion won’t necessarily make people better off (may or may not). Need to think about when government intervention may be

appropriate. Can sometimes be a value judgment.

In health care governments are not aiming for perfect competition because not achievable for much of health care. Instead use other mechanisms than a price mechanism to ration health care.

Rational for Government Intervention1. Public Goods: Market failure because too little

of the good is produced in private markets. Usually large number of individuals. Individuals unlikely to cooperate to fund

substantial amounts of public goods through voluntary contributions.

Free-riders: can’t exclude them from the benefits, but free-ride b/c a voluntary contribution has a negligible impact on availability.

Rational for Government Intervention

Government takes responsibility for providing good.

E.g. control of disease vectors (malaria), clean air, food and water safety, information, medical research (some types), information, voluntary giving (redistribution)

Rational for Government Intervention2. Externalities:

Goods that have third-part effects. When a third party is affected by another person’s

consumption or production of a good, the price mechanism doesn’t always take the externality into consideration.

E.g. neighbors loud music, smoke, air pollution, contagious diseases (SARs, Bird Flu). Are you compensated for risk?

Problem is that externalities are not reflected in the price of a good.

Factories don’t pay extra because they made the air dirty (hopefully in the future they will).

Rational for Government Intervention

MC: Marginal Cost = Price Supply Curve

Price

Health Care

D: Demand curve or private marginal benefit curve.

MEB: Marginal external benefit

MSB: Marginal Social Benefit

QmQopt

Case of immunizations

Efficient point for society

Rational for Government Intervention

MC

Price

Health Care

D

MEB

MSB

QmQopt

Case of immunizations

MC with subsidy

Policy Response:

Subsidize price of good.

Rational for Government Intervention Are subsidies to producers passed onto

consumers? Depends on the slope of the demand and supply

curves.

P1

P1-SP2

S1

S2 : after subsidy

DP

Q

P

QConsumer and producer benefits

Only consumer benefits

D

S1S2 : after subsidy

Producer Surplus

Consumer Surplus

P1

P1-S

Q1 Qopt

Rational for Government Intervention Policy Options for Externality:

For negative/positive externalities (air pollution, dumping feces into water supplies) Tax/Subsidy Regulation and mandates (laws). Public provision or financing of some goods

immunizations in developing countries have vaccination campaign days and weeks

disease surveillance Charitable externality: can be sufficiently

important to justify large social insurance programs.

Rational for Government Intervention3. Incomplete Markets:

E.g. Insurance companies don’t want to insure you for pre-existing diseases (cancer, AIDS).

Can’t buy insurance.Policy Options: Could use mandates that make insurance

companies cover these people. May need to subsidize drugs or care. Could provide care.

Rational for Government Intervention4. Merit Goods

Use argument everyone should have access to health care.

Why many developing countries have free access to medical care (even if can’t afford to provide it).

Why you see universal health care systems.

Rational for Government Intervention5. Market Power

Monopolies, oligopolies etc. Any industry where the supply or marginal cost curve is

not flat (so are not price takers) Eg. Hospital, drug companies (patents), specialists,

Often create market power by differentiating products. (e.g specializing in different kinds of operations.)

Produce less and charge more than a competitive market.

Due to economies of scale, production may be more efficient if you have a monopoly (natural monopoly)

E.g power sector, hospital, medical research

Rational for Government InterventionPolicy options for market power Regulate

May set maximum prices. Negotiate prices with drug companies and

doctors. Mandate longer hospital stays (deliveries, started

to only insure 1 night stays, it was mandated that woman could stay 2 nights.

Public provision.

Government Involvement in US

Support for hospitals Government support started under the Hill Burton

Act in 1946 Idea was to expand rural health facilities by providing

matching grants to non-profit institutions. Requires states to survey its hospital needs and develop

a statewide plan for construction of public hospitals. State, county and municipal hospitals account for

20 % of total hospital beds.

Government Involvement in US

The Veterans Administration and CHAMPUS Largest public provider of health care in US.

Accounts for 20 percent of hospital beds in US Provide care for veterans Retired military personal and dependants. CHAMPUS: Civilian Health and medical program fro

Uniformed Services (CHAMPUS). Care for retired military personnel and dependents of active-

duty, deceased, and retired military personnel. Food and Drug Administration

Started in 1906 Regulates drugs quality.

Government Involvement in US

Mandated Health Insurance Benefits. Insurance industry is regulated at the state level. Tradition role is to ensure solvency of insurance

companies. Mandate insurance benefits.

In 1970, 48 mandates in 1991 1,000, in 1997, 600 new ones.

Often are due to special interest groups. Some research has found that they prevent

insurers from offering low-cost alternatives.

Government Involvement in US

Tax Policy Employer contribution to health insurance not part

of taxable income. Individual payments for health insurance and care

can be itemized and deducted if amount large enough.

Health Savings Accounts These subsidies do not promote equity, go to those who

can afford the most health care.

Government Involvement in US

Public Health Department of Public Health Center for Disease Control

Financing Health Insurance Medicare and Medicaid

Finance Medical Education and Research Institutes of Health (provides grants)

Government Failure

What is the extent and form of government involvement?

Hard to agree on objectives, choose from different policy instruments, and select the correct value of these instruments.

These difficulties could lead to government failure.

Government Failure

Economists tend to treat government as a benevolent despot who knows what is good for the economy and regulates accordingly

1. Theory of Local Capture: Some argue that politicians are like everyone else, they

want to maximize how many votes they get. So instead of doing what is good for the economy, may

do what is good for some special interest group. May reward voters with monopoly profits, or public goods

(common to build a hospital in your name in developing countries, beneficial regulation

Government Failure

Consumers could band together to be a special interest group but tend not to because difficult to agree on one interest, and due to free-rider issue.

Criticisms of capture theory Assumes all public officials are solely self-

interested. Leaves little room for ideology in politics. People

assumed to do what special interest groups want even if doesn’t follow party platform.

Government Failure2. Bureaucracy and efficiency

Government is a monopoly so if tries to provide goods will it do so at the minimum cost?

Government run by politicians who tend to prefer quick fixes rather than longer-term solutions.

Some of these criticism could also be made of the private market.

They do quick fixes when cleaning up environmental spills.

Not all managers are trying to maximize company profits, they may be trying to maximize their salaries, or length of stay in the job.

Government Failure

3. Don’t have capacity to administer Due to low wages may not be able to hire

competent people. Corruption may be large

More often the case in developing countries.

Role of Public and Private Sector No one right way Depends on level of income of the country

Poor countries cannot afford to provide health care for all, so tends to be a larger role for the private sector.

Don’t have ability to tax. Public funds need to be concentrated on the most

cost-effective interventions.

Role of Public and Private Sector Rich countries can afford to be more

involved in health care. How much you governments intervene often depends on beliefs.

There is a battle over superiority between regulation and competition

Role of Public and Private Sector1. Regulation: Increased government

involvement through expanded regulation and government programs to provide or finance health care.

Argue that information imperfections, flawed agency relationships, and other distortions cannot be readily corrected by private markets.

Point to the US record with the highest cost of health care, least regulation, and poor health outcomes compared to other developed countries as proof.

Role of Public and Private Sector2. Competition: An increased emphasis on

market mechanisms and market forces with a decreased in use of regulatory instruments.Is seen in two ways:a. Adhere to more of a competitive market. b. Rely on financial incentives instead of controls to

achieve goals. Under this view see laws, utilization review,

and mandated benefits as anticompetitive.

Role of Public and Private SectorCase of Unisured:

Regulation: Provide insurance to uninsured because seen that they cannot afford it.

Competition: unisured have insufficient income to afford insurance. Insurance is not low enough due to mandated benefits and other requirements which drive price up.

-- deregulate insurers so lower cost policies available. -- provide tax-credits so poor can afford health

insurance.

Role of Public and Private Sector Other things proposed by those who support

competition Increase cost sharing through high co-insurance

rates. Assumes the people are able to know what health

care they need and don’t need since won’t be able to afford it all.