The Market for Health-Care

1. Economics
Coursework 1
The Market for Health-Care
Task
Healthcare systems throughout the world are endeavouring to rise to the challenges
that result from an ageing population, the growth in chronic diseases, burgeoning
technical possibilities and public expectation. To cope with such elements, an
increasing proportion of GDP is spent on health in OECD countries, with Europe being
no exception.
The downturn in the world economy has increased concern about the sustainability of
such a state of affairs. The UK is contemplating the most radical reform of the NHS
since the service was developed over sixty years ago in an attempt to optimise quality
of care whilst seeking huge efficiency savings. A greater focus on prevention and public
health, patient empowerment and out-of-hospital care is integral to the proposals.
Other European nations have proposed or are contemplating their own solutions to the
challenge of meeting health care demands within constrained budgets, including for
example the Netherlands and Switzerland.
Despite our differing histories and cultural diversity, European countries are
characterised by social solidarity on issues such as health. Furthermore, amongst EU
member states, healthcare professional and patient mobility can occur. It thus seemed
timely and highly appropriate to create a forum to examine the nature of the
healthcare challenges we face, and to draw on European experience as well as policy
makers and academic experts in the search for potential solutions. The future of
healthcare in Europe and ultimately the health and wellbeing of European citizens
relies upon the right answers being found.
Suppose you are working for a government of a European country that is considering
making health care of your country privately funded by individuals. That is patients pay
doctors or hospitals directly for their treatment, such as paying a fee for each visit to
the doctor, for each treatment or medicine prescribed.
You have decided to do better than just a general layman’s explanation. Instead, you
decide to write a full report on the health care market, describe the forces that are
taking place in the real world healthcare markets by using economic terms, such as
supplier incentives and motivations. Your report will be written simply, but using the
language of economics. Before you commit to this policy, you study examples of other
countries, including the UK.
Start reading the following recent BBC News articles and others:
 http://www.bbc.co.uk/news/health-30902552 (14 September 2016)
 Nick Triggle (2015), http://www.bbc.co.uk/news/health-35062121
 Hugh Pym (2015), http://www.bbc.co.uk/news/health-34484197
 Devon Herrick(2013), Why Can’t The Market for Medical Care Work Like Cosmetic
Surgery? http://healthblog.ncpa.org/why-cant-the-market-for-medical-care-work-
like-cosmetic-surgery/#sthash.mrJKzUZQ.dpbs
As an introduction, but also research further and use academic reports as well.

2. Overall your report will be between 1200 and 1600 words long (this page contains 429
words), covering the following points but in a coherent report. Do not answer the questions
in the style of an examination.
(i) Write a short, meaningful introduction into the topic. 10
(ii) Explain, using the example of health care, the economic functioning of
the market, using terms including demand and supply, price mechanism,
incentives, market equilibrium, equilibrium price and quantity. 10
(iii) Explain the demographic demand pattern for heath care: Are certain
groups of the population need health care more often than others? 5
(iv) Explain possible causes for and effects of shifts in demand and supply in
this market. 5
(v) Explain, using the example of health care, own price, cross-price and
income elasticity of demand; consider own price elasticity for various
demographic groups. Use diagrams where applicable. 15
(vi) Explain all possible market failures in relation to health care. 10
(vii) Explain possible options for government intervention to correct such
market failures. 10
(viii) Describe how such government intervention could affect supply for health
care; discuss limitations, costs and benefits of the options for government
intervention. 10
(ix) Based on above analysis, make recommendations to the government. 10
(x) Use appropriate sources for your analysis, including government, business
and academic reports and journal articles, reliable news services, and
excluding internet sources of uncertain or questionable origin. 5
(xi) Acknowledge all your sources fully and according to Harvard style. 5
(xii) Format your report appropriately and professionally with a title page,
contents, page numbers, and clear tables and diagrams with titles,
numbers and sources. 5

3. Contents
LIST OF TABLES & FIGURES ..............................................................................................................................2
INTRODUCTION ...................................................................................................................................................3
1. Demographic demand pattern for health care ............................................................................................4
2. Economic aspects of health care market .....................................................................................................4
3. Market failures & government intervention in health care market...........................................................6
4. Recommendations to the government .........................................................................................................7
REFERENCES.........................................................................................................................................................8

4. LIST OF TABLES & FIGURES
Table 1: Health care services utilisation by age group in 2005.............................................................4
Figure 1: Demand & supply curves of free health care services...........................................................5

5. INTRODUCTION
Health care services are accessed & offered via “markets”; however, those “markets” do own specific
features which make health care market different from other ordinary markets. According to Adam
Smith, market can lead to the best economic results because both buyers and sellers look for their
own interests. However, the theory of invisible hand has been broken down (i.e., lower quality health
care at higher cost) in health care industry due to its fatally flawed assumptions when applying for
this special market.
In this research, the heal care market will be analysed in four main parts:
- Part 1: Demographic demand pattern for health care
- Part 2: Economic aspects of health care market
- Part 3: Market failures & government intervention in health care market
- Part 4: Recommendations to the government

6. 1. Demographic demand pattern for health care
The notable demographic demand pattern for health care relates to age group. Logically, the old
people need health care more often than others. For example, table 1 summarises the health care
services utilisation by age group in 2004 & 2005. Whereas, old people (i.e., having ages from 65 and
above), especially ones with age above 75 years old had higher probabilities of using health services
& spent more time at hospital.
Table 1: Health care services utilisation by age group in 2005
Source: Hing et al (2006)
Other demographic categories, e.g., sex, race, socioeconomic status, etc. also indicates significant
differences in both (i) health status & (ii) the usage of health care services (Benedict et al., 2008).
According to NCHS (2007), between females & males, it is likely that females enjoyed longer life
expectancy. Specifically, males are highly exposed to heart disease / cancer / diabetes, etc. in
comparison to females (Robinson, 2007). In contrast, females could be more easily have osteoporosis
/ arthritis / asthma, etc. (FIFFARS
1
, 2006).
2. Economic aspects of health care market
According to Adam Smith, market can lead to the best economic results because both buyers and
sellers look for their own interests. However, the theory of invisible hand has been broken down (i.e.,
lower quality health care at higher cost) in health care industry due to its fatally flawed assumptions
when applying for this special market. The health care demand is empirically proved to be price
inelastic – estimated of being around -0.17. Moreover, the health care demand is also proved to be
income inelastic – estimated of being in the range of 0 to 0.2 (Aneconomicsense.org, 2014).
1
Federal Interagency Forum on Aging Related Statistics

7. Because that health care is a merit good, these services are largely provided free at the point of
consumption. Thus, in the case of free health care services, unlike private goods, the price
mechanism could not work out to efficiently distribute resources. Having no price indicates that a
shortage is expected due to expanding to maximum of demand. The health care supply is fixed in the
short - term while the health care supply curve is perfectly inelastic (as in Figure 1).
Figure 1: Demand & supply curves of free health care services
Source: Economicsonline.co.uk (2017)
Four factors can cause health care demand curve shifts, which are (Aneconomicsense.org, 2014):
- Number of Buyers: When number of buyers increase, e.g., an increase in population, the
older population distribution, an increase in substance abuse, etc., the demand will shift right
& vice versa.
- Tastes and Preferences: For instance, TV, movies, etc. encourage the preference for cosmetic
surgery, the demand of this service will shift right.
- Income: Health care services are normal goods. Thus, increasing inflation - adjusted income
causes the health care demand curve right shifted.
- Prices of Substitutes: The price of a particular medical good / service that is a substitute can
influence the other medical goods / services demand.
Two factors can cause health care supply curve shifts, which are (Aneconomicsense.org, 2014):
- Number of Sellers (e.g., hospital, nursing home, physician, etc.): Restriction on the number
of sellers will cause a left shift of the health care supply curve & vice versa.
- Resource Prices: When costs of underlying resources (e.g., wage, materials, medicine, etc.)
the health care supply curve will shift leftward & vice versa.

8. 3. Market failures & government intervention in health care market
Health care services are accessed & offered via “markets”; however, those “markets” do own specific
features which make health care market different from other ordinary markets (Frakt, 2017).
Consequently, the health care market could not lead to efficient outcomes & high level of
administrative costs. Limited competition in market, especially domestic markets is expected.
Moreover, the provider which offering the most efficient health care services is not rewarded. In
other word, the market pressure influencing on the system is weak; thus, we cannot expect that
market power can shift the system to the providers who offer the best value of health care services
(Nutting, 2017).
In general, health care market failures could be categorised as (i) uncertainty, (ii) adverse selection,
(iii) moral hazard, (iv) asymmetric information, (v) free riding, (vi) monopolistic behaviour & (vii)
externalities (Frakt, 2017). Among those, three market failures & the government intervention in
some cases will be discussed in detail.
Failure of competition: In health care market, the competition is not perfect. Because for
each doctor or patient, the product & treatment are not identical. Thus, health care services
are not “equal goods” & each health care service can be considered as a unique “product”
with a certain level of monopoly power (Nutting, 2017). Those monopoly powers are hardly
totally purged from a “market - based health system”, regardless of the governments do or
do not intervene. However, the governments can influence the competition through trading it
for incentive to innovate via the patent system (e.g., pharmaceutical, device, etc.).
Moral hazard: Under several views, health care services can be considered as public goods
(i.e., there is no cost & for individuals to freely access the benefits). The notable example is
childhood vaccinations. However, if the governments intervene to raise the health care
services supply, government failures might be exist in the form of moral hazard. Moral hazard
is the phenomenon that individuals know that free & effective health care is available, thus
are not encouraged to take actions to avoid the risks that the health care insurance is against
(Africa, 2013).
Information asymmetries. This phenomenon happens when the physicians in general
have more advantage of knowing about the impacts of health services than patients do. That
will encourage supplier-induced demand, resulting in a high level of inefficient utilisation.
Generally, private - sector solution could be more effective than public - sector solution.
Various ways of contracting / monitoring / fraud detection / care management are available
(Nutting, 2017).
In practices, there are lots of trade-offs among the health policies objective, e.g., achieving better
health results, lowering cost, achieving more equity, & consumer satisfaction (Frakt, 2017). Thus, in
some cases, even if the governments’ action look so sound, the failure of governments’ intervention

9. might still rise (e.g., to finance unneeded physicians’ trainings, to pay for low - value discretionary
services in order to better - off patients, to protect the domestic industries, etc.)
One of the most critical issues that the government has to deal with is how to decide about health
care. The government might misjudge the impacts of intervention in reality. The government might
not be capable of administering / implementing policies well. In most cases, the government policies
have focused on providing everything to everybody (i.e., as much health care as possible to as many
people as possible), with modest attention to other problems (Nutting, 2017).
4. Recommendations to the government
Almost all of governments agree that one of their responsibility is ensuring certain basic public health
services provision (e.g., immunisation). A feasible solution for the government is some health care
policies contented & implemented as ObamaCare.
According to Obamacarefacts.com (2017), the full name of ObamaCare is “The Patient Protection and
Affordable Care Act” - a health reform law signed on 23/03/2010 by Former President Barack Obama,
addressing lots of aspects of “the US healthcare crisis”. This US healthcare reform law tries to expand
& improve the accessibility to care, while also control the spending via regulation & tax. The Act
focuses mainly on (i) offering more Americans with accessibility to affordable health insurance, (ii)
enhancing health care & health insurance qualities, (iii) governing health insurance industry, & (iv)
decreasing the US health care spending. The Obama Care does the following important things, which
are (Obamacarefacts.com, 2017):
 Offer Americans lots of new healthcare benefits, rights, & protections.

 Set up a Health Insurance Marketplace (i.e., HealthCare.Gov) in which Americans could buy
federally regulated & subsidised Health Insurance.

 Expand Medicaid to most of adults.

 Improve Medicare for those are seniors & with long - term disabilities.

 Expand employer coverage.

 Since 2014, require having coverage each month to get an exemption.

 Introduce new tax & tax break.

10. REFERENCES
Africa, S. S. The roles of the government and the market in health. World, 41, 1-7.
Aneconomicsense.org (2014) The Economics of Health Insurance and the Health Care Market: Econ
101.[online] An Economic Sense. Available at: https://aneconomicsense.org/2014/01/27/the-
economics-of-health-insurance-and-the-health-care-market-econ-101/ [Accessed 22 Feb. 2017].
Benedict, L., Robinson, K., & Holder, C. (2008). Retooling for an Aging America: Building the Health
Care Workforce.”. Washington, DC: National Academies of Science.
Federal Interagency Forum on Aging-Related Statistics. (2006). Older Americans update 2006: Key
indicators of well-being . Washington, DC: U.S. Government Printing Office.
Frakt, A. (2017). Health care market failures (and what can be done about them).[online] The
Incidental Economist. Available at: http://theincidentaleconomist.com/wordpress/health-care-market-
failures-and-what-can-be-done-about-them/ [Accessed 22 Feb. 2017].
Hing, E., Cherry, D. K., & Woodwell, D. A. (2006). National Ambulatory Medical Care Survey: 2004
summary. Advance data, (374), 1-33.
Nutting, R. (2017). Markets don't work for health care. [online] MarketWatch. Available at:
http://www.marketwatch.com/story/markets-alone-cant-cure-health-cares-maladies-2009-08-20
[Accessed 22 Feb. 2017].
Obamacarefacts.com (2017). What is ObamaCare | What is the Affordable Care Act?. (2017). [online]
Obamacare Facts. Available at: http://obamacarefacts.com/whatis-obamacare/ [Accessed 22 Feb.
2017].
Robinson, K. (2007). Trends in health status and health care use among older women. Aging trends
(Hyattsville, Md.), (7), 1.

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