Fundamentals of healthcare policy

Basically copied from Prof. M. Ramesh's excellent slides on the topic :

Health Care is a “private” good which markets can provide efficiently in a technical sense. Free competition among providers and insurers would ensure that prices are as low and quality as high as possible. Households would get the services they want and can afford and society would benefit from highest quality and lowest prices

Yet there are many features that make health care an atypical private good : 

Many public goods features

Information Asymmetries  

make estimation of quality, costs and benefits difficult

allow opportunity for supplier-induced demand

Moral hazard

Adverse selection by consumers, users and providers

Those least able to afford health care have the largest demand for it. 

Possibility of “catastrophic” health care expenses

Nearly impossible to save for all health care contingencies

As a result, market allocation of health care would lead to

Higher costs and prices

Poorer quality (except for the frills that consumers can see)

Inequity (because access related to income)

Technically, government can address the above failings :

Directly provide health care with public goods features

Pay for or provide the necessary health care to those who cannot afford it

Adopt measures to limit the market participants’ ability to exploit information advantage

Eg. Require transparency in pricing and outcomes

Regulate adverse selection

Adjust provider payment and financing mechanisms to reduce moral hazard

However, there are practical limitations to govt intervention:

Limited financial resources

Incomplete information on consumer and producer behaviour and the different medical options

Lack of analytical capacity to understand needs of the sector

Lack of administrative capacity to implement policy

Lack of political capacity to deal with conflicting demands of various stake-holders (Consumers, physicians, managers, insurers, healthy, etc )

Considering the potential and limitations of both markets and governments, an effective health care system requires health policy that employs extensive role for both to offset each others disadvantages

An optimal health care market is characterized by:

Competition among providers to attract. But competition over value rather than frills. 

Limitations on providers freedom to prescribe and charge, so that they do not take advantage of patients’ ignorance

Limitations on insurers’ freedom to select risk or set premium, so as to prevent cream skimming or passing on of costs to consumers or government

Limitations on consumers, so as to minimize moral hazard

Establish risk pooling to ensure redistribution of resources from more healthy and wealthy to less healthy and wealthy. 

Reduce out of pocket health expenditure 

Costs affordable to the society as a whole, rather than the govt. Considers TOTAL (and not public) health expenditures

A good health policy is one that sets out appropriate incentives :

Incentivize providers to improve quality while containing cost

Incentivize users to moderate consumption

Co-insurance or deductible (subject to a stop-loss)

Encourage users to use primary care facilities

Incentivize insurers to get better deal from providers on behalf of their members 

Instead of passing on costs to users or the government

Such an optimal health policy requires a strong governance structure characterized by

firm government stewardship

Functioning markets, where possible