Health care market failures (and what can be done about them)

This post complements one yesterday that focused on market failures in health insurance (read it first). It’s loosely based on the content of Economics of the Public Sector, by Joe Stiglitz. Here’s a run down of market failures pertaining to the provision of health care. Please alert me to anything I’ve missed or relevant papers.

Failure of competition. The hospital industry is highly concentrated in many areas, though greater competition exist more broadly for physician services. Antitrust enforcement can play a role. Government also affects competition by trading it for incentives to innovate through the patent system (pharmaceuticals, devices).

As is the case for health insurance, competition can never be perfect in health care. The products, treatments, are not identical due to both provider and patient factors (your doctor does it differently than mine, I respond differently than you). Thus, health care services don’t really compete with one another as equal goods. Each is a unique product with its own degree of monopoly power. This is a source of market power that cannot be fully purged from a market-based health system, no matter what government does or does not do.

Public goods. Some aspects of health are public goods, meaning it costs nothing for an additional individual to enjoy the benefit and it is not possible to exclude an individual from enjoying it. An example is herd immunity. As evidence that a free market might under-supply herd immunity, public school systems (governments) require documentation of childhood vaccinations (or evidence of a qualifying exemption). Public assistance (Medicaid, public clinics and hospitals) also increase access to care, facilitating the provision of the public goods aspects of health care, among others.

Externalities. Herd immunity is a positive externality of health care. So might be increased educational attainment and work force participation associated with good health. Both can reduce demands on public programs and buoy economic growth that benefits society in ways not captured by the participants in health care transactions. Therefore, the market might under-provide health care. (A related phenomenon is when a health insurer rationally does not “invest” in preventative care for its policyholders because it is not likely to capture the long-term benefits as policyholders switch to other insurers.) Government mandates and subsidies are among the possible responses.

Information asymmetries. Physicians generally know more about how health services will affect patients than patients do. This can foster supplier-induced demand, contributing to an inefficiently high level of utilization. In general, private-sector solutions can be as or more effective than public ones. They included various means of contracting, monitoring, fraud detection, and care management.

What else? About that, a few correspondents — all good economists — have suggested I discuss equity (income transfers) and the view of health as a merit good (one we should be compelled to consume for our own best interest, i.e., paternalism). The former strikes me as outside the realm of market failures, but still important. Perhaps the latter can be folded into market failure as a special case of an information failure (people don’t know what is good for them due to lack of information (?)).

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