Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Should UK health care be provided by the government or private sector? Tom Allen To see more of our products visit our website at www.anforme.co.uk The case for government provision of health care • Since the NHS was founded in 1948 it has been held that health care should be ‘free at the point of delivery’ and people should ‘pay in according to their means.’ There are three arguments for state e intervention which will be examined in turn: • Merit goods are under-consumed in a free market. • The government can get the benefits of economies of scale in health provision. • Private providers of health care may put profit before patient care. Merit goods are under-consumed in a free market 1 • We start by assuming there is no NHS and health care is provided by private practitioners, with demand and supply determining equilibrium price and output. • We now look at a hypothetical free market for an inoculation against influenza. • The marginal private benefit, MPB, e reflects the utility that a consumer gains from consuming an extra unit of health care. People like the elderly, the very young and those with underlying health problems would gain a large MPB from a ‘flu jab’. • These consumers would be willing to pay a high price for the jab and would represent the upper portion of the demand curve, D = MPB1. Merit goods are under-consumed in a free market 2 • Those consumers who feel they are less likely to catch flu and may suffer less severe consequences from it are less inclined to pay for the flu jab. • They represent the lower portion of the demand curve, D = MPB1. e • Supply of inoculations is directly linked to price, and a higher price will result in greater provision of the service, since a greater profit can be made. • This results in a free market equilibrium at A, with Q1 units produced and consumed in a year and a market price of £40. Merit goods are under-consumed in a free market 3 • Health care is a merit good and a defining feature of a merit good is a potential failure of information on behalf of the consumer. • This could result from uncertainty about the probability of catching flu; the degree of incapacity it might cause; and, the effectiveness of the inoculation. • Consumers often underestimate the e answers to these questions, therefore underestimating their MPB, such that D = MPB1 gives an under representation of the true benefit from having the jab. • If consumers were fully informed, demand would be higher at D = MPB2, meaning the good is underconsumed in a free market by (Q2 – Q1) – representing a market failure and a misallocation of resources. Merit goods are under-consumed in a free market 4 • Merit goods also tend to be associated with positive externalities, which are additional benefits to those not directly involved in the transaction. • Thus the marginal external benefit, MXB, can be added to the MPB of the consumer to give a Marginal Sociale Benefit, MSB, which is the total benefit gained by society from the consumption of the good. • The consumer of the inoculation is unwilling to pay for the MXB received by a third party and so consumption fails to reflect the full MSB, resulting in overall under-consumption of (Q3 – Q1), heightening market failure. Merit goods are under-consumed in a free market 5 • The government should therefore provide Q3 health care via the taxation system to correct these market failures. • This should result in more resources devoted to health care and increased allocative efficiency. e • It should also help to redistribute income and wealth from rich to poor, as the rich pay more into the system and many poorer groups, such as the elderly, make greater use of this ‘benefit in kind’. The government can get the benefit of economies of scale in health provision • This figure shows provision of health care by two providers where average costs fall as the scale of production rises. Firm A, a small private business, provides Q1 units per annum at an average cost of C1. • Firm 2, the government, providese Q2 units at a lower average cost of C2 due to reduced borrowing costs and increased buying power. • The government can thus produce at lower unit cost, increasing the economy’s productive efficiency and increasing output per unit of input. Private providers of health care put profit before patient care • The incentive for many private producers is to maximise profit. • This is done by charging high prices and cutting costs. • Critics of health care privatisation argue that patient care might be compromised by attempts to cut ecosts. • Private producers might also refuse complex and expensive cases leaving the NHS to treat these patients. The case against state provision 1: Diseconomies of scale arising from universal health care provision • If the government is producing at Q3 on the previous diagram, it could be incurring rising average costs due to diseconomies of scale. • There is some truth in this as the NHS is a huge organisation with problems of co-ordination and poor communication. • e compared to the rest of the NHS workers take more sick leave economy, which may suggest low morale, although they are also subject to more emotional stresses in dealing with sick people. The case against state provision 2: The minimum efficient scale for health care provision is low. • There is less scope for economies of scale than in many other industries. • Initial capital outlay is relatively low in some areas of health care. • Thus the average cost curve is shallow, and the minimum efficient scale (the lowest output level at which ethe firm becomes productively efficient) is a small percentage of industry output. • This implies that there is room for multiple, efficient practitioners in areas such as dentistry, psychiatry and general practice and these practitioners could come from the private sector. The case against state provision 3: Monopoly provision may lead to x-inefficiency. • The NHS is a technical monopoly, providing over 90% of all UK health care. • Economic theory would suggest that a profit-maximising monopolist restricts supply and raises price. • This is not true of the NHS as it is not a for-profit organisation. e • But, there is still a lack of competition in many areas. • This could lead to x-inefficiency coined by Harvey Leibenstein in 1966. • This is where areas such as ‘organisational slack’ and ‘motivational inefficiency’ might allow a monopolist’s costs to drift upwards, but the firm remains in business due to lack of competition. The case against state provision 4: The lack of price signals linking producers and consumers • The price mechanism plays a vital role in the efficient allocation of resources where a rising price signals that a product is in demand. • This causes the producer, whose incentive is to maximise profits, to expand production and allocate more resources to the production of this good. e Rising prices also signal to consumers, who are trying to maximise their total utility from consumption, to ration their expenditure away from this good to a rival product. • • Such price signals are absent in the NHS since output is free at the point of consumption. • Thus demand does not reflect marginal private benefit gained from consumption and supply does not reflect the marginal private cost of the producer, resulting in a misallocation of resources. The case against state provision 5: The problem of zero price provision causes demand to outstrip supply • The demand for health care seems to be inexhaustible, yet resources are finite. • State provision at zero price results in excess demand and waiting lists. • The systems of rationing adoptede by government are not always equitable or logical. • It would be better to have private provision with a positive price. The best of both worlds? • Attempts have been made in recent years to combine the best features of public and private provision in the NHS. • Internal markets were created by the Conservative government in the early 1990s to split buyers of health care – often the GPs – from the sellers of health care – such as pharmaceutical companies and NHS hospitals. This caused both sidese to become more aware of costs and resulted in efficiency gains. • Also, the Private Finance Initiative allowed private firms to tender for contracts to build and maintain NHS buildings, thus opening up competition. But many of these contracts have since been found to provide poor value for money for taxpayers. • The Labour Government (1997-2010) expanded PFI and in 2011 the Coalition government announced further decentralisation, putting budgets in the hands of GPs and trying to cut bureaucracy. Conclusions • The NHS will remain funded by the government. • But the move towards increased private provision and use of internal markets will continue. • It looks as though both private and state owned hospitals will be able to e marketing their services. engage in price competition when • This again raises the question of whether profit might come at the expense of patient care.