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HEALTH ECONOMICS

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest

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Authors: Éva Orosz, Zoltán Kaló and Balázs Nagy Supervised by Éva Orosz

June 2011

Week 3

Role of the state in health care

Author: Éva Orosz Supervised by Éva Orosz

Overview

• Arguments for government intervention in health care: issues of equity and efficiency

• Goals, domains and tools of government intervention

• Theory of government failure

• Consequences of market and government failure for health policymaking

– Possible instruments for improving the efficiency of the government intervention in health service provision

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Goals of / justifications for state intervention in health care markets

• Good health

– Improving health status and decreasing inequalities in health

• Equity (both in access and in finance)

• Efficiency

– Correcting market failures

– Controlling overall level of health spending

• Satisfaction on the part of both consumers and providers

Arguments for government intervention in health care

• High costs of a serious disease can lead to poverty

• Extensive market failures in health care markets

• Supply side actors can influence the demand for health care (due to asymmetry of information)

– The supply side has a dominant role in terms of quality of care and health spending

• Characteristics of health insurance markets – Moral hazard

– Risk-selection

The market cannot ensure the socially optimum level of consumption for several goods:

• Public goods (e.g., preventive programmes; information on healthy behaviours)

• Externalities (e.g., vaccination)

• Goods with considerable market failure (e.g., health insurance)

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Domains / instruments of state intervention

• Information-provision (for the population as a whole, the patients, the health professional)

• Regulation (e.g., in the interests of optimal operation of the public and private sector, etc.)

• Mandate (e.g., immunization, private health insurance, etc.)

• Financing health care with public funds (to ensure equity in access to a defined set of health care)

• Providing health care, using publicly-owned facilities

Equity in the provision of health care

Principles

• Horizontal equity: the equal treatment of individuals or groups in the same circumstances

• Vertical equity: individuals with unequal need should be treated according to their level of need

Possible interpretations of equity

• equal access

• equal utilization

• equal money spent on a patient

• equal outcome of interventions

• equal health status

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Public goods – arguments for provision by government

• Public goods: consumers cannot be excluded

• Consequence: the phenomena of ”free-riding”:

• People can consume such goods without having to pay for them

• No one will produce them for sale

Externalities: governments instruments for correction

Possible instruments

• Taxes (e.g., on tobacco)

• Fines (e.g., environmental pollution)

• Support for avoiding externalities

• Regulation to avoid / limit external effects

• Encourage innovation. Making information available to the public

• Compensating for harmful effects and distributing the costs of compensation among actors concerned

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Need, demand and supply for health care

Factors contributing to imbalances between need, demand and supply

Imbalances between

• demand and supply

• demand and need

• need and supply

Competitive private markets are generally the best way to bring demand and supply together. In contrast, they are much worse suited to make demand or supply match

Source: (Musgrove, 1996)

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7 people’s need.

State intervention is aimed at satisfying needs; however it has the risk of failing to take account of demand.

Justifications for state intervention in the case of low-cost private goods

• Ignorance / limited information (on positive effects of certain goods)

• Externalities

• Parents may be inadequate ‘agent’ for their children.

• Achieving optimal health-gain → can justify the modification / limitation of individuals’ choice (e.g., smoking in public places)

• Adequate state intervention: information and regulation, and mandate in few cases (e.g., immunization)

• Public finance of low-cost private goods is reasonable only if poverty exists.

State intervention in the insurance markets

The causes of the dominant role of social health insurance in high-income countries (except US):

• Historical (social solidarity)

• Equity in access to health care is a widely shared value

• Compulsory social insurance: reduce the problem of adverse selection (if there is more insurance fund, the advere selection cannot be entirely eliminated - as insurance contributions and the benefit packages can differ)

• Tax-financed, centralised public organization financing health care can more effectively tackle adverse selection than a decentralized insurance system.

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• Compulsory insurance does not have the problem of preventing workforce mobility (in contrast to private insurance offered by employers).

• If the state intervenes appropriately, the public finance is more efficient at societal level– due to failures of unregulated health insurance markets.

• This does not imply that public finance is more efficient at the level of individual clinical decisions (however, unregulated markets are neither ab ovo more efficient).

• Public finance is more efficient in improving population’s health status (it can better concentrate on evidence-based interventions).

• Empirical experience: health systems with the dominance of public finance have been better able to contain the growth of health expenditure than has the USA.

Summary: arguments for state intervention in health markets

If the state intervenes appropriately, both equity and efficiency can be improved through:

• ensuring the optimal level of the production and consumption of public goods and goods with externalities

• making health insurance more equitable and efficient

• supporting the poor who are not able to buy insurance or even pay for low-cost private goods

Government failures

Government failures occur when – compared to optimal / efficient intervention –, the government is:

• trying to do too much (e.g., in service provision)

• doing too little (e.g., information-provision, regulation)

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• Main reasons

– Political interests / influence of bargaining among key payers – Lack of adequate information

No one best solution for the way of state intervention

Experts and decision-makers should be aware of

• limited availability of data;

• limitations of methodologies;

• other health policy goals (there may be trade-offs: cost-effectiveness vs. equity);

• information (knowledge) in only one element of real life decision making process.

Asymmetry of information in public sector

• between patients (population) and health care providers;

• between patients and the administrators of the health system (the health system as a whole);

• health care providers / personnel and administrators (leaders) of the health system as a whole.

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Problems in making public sector accountable

• Manifold, complex interests, goals

– In ideal circumstance, public sector can be made accountable, if social values / interests are largely homogenous in society, and related health policy programmes and bureaucratic interests are in accordance

– In reality: interventions create winners and losers

• Several unsolved procedural issues

• Political short-sidedness

• Corruption

• Limitations in performance measurement

Only a “second-best” solution is possible

• The question: the areas and relative degree of government intervention and market and how to harmonize them.

Research can contribute

• Building up knowledge base, e.g. through economic evaluation

• Revealing good practices of governance

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Means, intermediate and final ends of a health system

References

• Hsiao, W. and Heller, P. (2007) What Should Macroeconomists Know About Health Policy? IMF Working Paper WP/07613. International Monetary Fund

• Musgrove, P. (1996) Public and private roles in health. Theory and Financing Patterns. HNP Discussion Paper, The World bank

• Roberts, M. J.(et.al) (2008) Getting Health Reform Right. Qxford University Press

• Preker, A. és Harding, A. (2005), Állami és magánszerepek gazdaságtana az egészségügyben – az intézményi közgazdaságtan és szervezetelmélet szemszögéből. Kormányzás, Közpénzügyek, Szabályozás, I. évfolyam 1. szám, 4- 32.

Source: IMF WP 07/13

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