Flaws in the medical care sector affecting supply, demand and quality of medical services
By Hritic Gautam and Siddharth Gulati
Since Adam Smith published his revolutionary work, there has been a great thrust on the idea of laissez-faire, a French term that translates as "leave alone". It refers to an economy, free from government interventions and subscribes to a notion that if everyone takes care of his/her interest, the interest of the society will be served automatically. The presence of the same idea in the first theorem of welfare economics is an attestation to its crucial role in competitive markets. The first welfare theorem states that a competitive market will tend to approach a weak Pareto optimal equilibrium; a condition of rest in which one can’t be made strictly better off without making others worse off. The market mechanism guarantees an efficient outcome in a competitive environment.
Our interest in the competitive market model is simply because of its ability to generate Pareto efficient results, with certain preconditions, as there exists no other way to allocate resources which will make all participants in the market better off. Hence, any alteration in the allocation of resources that makes everyone better off is the one that should be followed as a non-optimal allocation is not desirable.
Should we make medical care more competitive to make it more efficient? To answer this question, one needs to understand certain important features of the medical care sector. First, the subject is the medical-care industry, not health. The medical care sector is only a part of the health sector. There are many more factors for health such as nutrition, shelter, clothing, sanitation, etc. which, at times, maybe much more important than the medical sector. Second, the efficacy with which it satisfies the needs of society differs from a norm, the norm that economists employ to determine the flow of services, that would be offered and purchased and the prices that would be paid for them if each individual in the market offered or purchased services at the going prices. This deviation in the norm is because of uncertainty. Uncertainty has a crucial role to play in the medical care sector. Hence, the medical care market is much different from other markets and the special economic problems concerning medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and the efficacy of treatment which we will examine in further sections.
The first distinguishing feature of medical care is non-marketability. Non-Marketability is the failure of a market to provide a medium for the exchange of goods and services upon the payment of a price. Intrinsic technological characteristics associated with medical care are majorly the reason behind its inability to enforce suitable prices. For instance, in case of a communicable disease, an individual who fails to get immunized, not only risks his health but of others also. In an ideal price system, there would be a price which he shall pay to the person whose health is endangered, a price sufficiently high so that the victim would feel compensated. Alternatively, there can also be a price that others shall pay him for the immunization procedure. Practically speaking, both methods are not feasible as a collective intervention of subsidy or tax or compulsion is required.
Uncertainty as to the quality of the product is perhaps more intense here than in any other sector. Moreover, when there is uncertainty, information or knowledge becomes a commodity. These commodities provide the desired protection against many diseases. Like any other commodity, the information in the medical sector also carries a cost of production and transmission (required medical expertise/R & D), but is not available to everyone. It is concentrated only amongst the beneficiaries. If indeed, everyone knew the information, they would know the information itself and the entire medical sector would collapse.
However, unfortunately, many of these ‘commodities’, i.e., desired protection against many diseases are not adequately available to the physicians as well. This is because first, the probability of learning from one’s own experience is eliminated in case of severe illnesses and second, in the case of a communicable disease like COVID-19, where transmission rates are very high, stats is required as quickly as possible. For instance, China failed to provide the world, the stats for the burgeoning volume of severe coronavirus cases, especially in Wuhan and Hubei province, the epicenter of the world pandemic, which proved to be fatal and today, we seem to be living in a nightmare scenario. The coronavirus emerged in the middle of a golden age for media, but still, information is not available in adequate amounts. An array of dangerous misinformation, disinformation, and flawed amateur analysis fills the void, making it more difficult for the world to handle this severe surge of respiratory illnesses.
One more reason behind the unavailability of such commodities is the scarcity of research. Not only does the product have unconventional aspects as a commodity, but it is also subject to increasing returns in use, since new ideas, once developed, can be used over and over without being consumed, and to difficulties of market control, since the cost of reproduction is usually much less than that of production. Hence, it is not surprising that a free enterprise economy will tend to underinvest in research leading to the unavailability of the necessary information.
Another distinguishing feature of the medical care sector is the nature of the demand for medical care services. It is both irregular and unpredictable as medical services (life-saving) provide satisfaction only at the time of illness, which in itself is quite unpredictable. This property of the medical care sector reduces people’s desire to consume or save for medical care. Moreover, commodities and services with little risk attached to act as substitutes for the risk-bearing commodities this is why even after robust economic growth in India over the past two decades, gains in other indicators of “well-being” such as access to medical care continues to lag.
Moreover, in a country like India, the need for medical services is felt only during a medical urgency because of which we are usually underprepared. Furthermore, one demands medical care only when he/ she is ill but at the same time, his/ her health or capability to work also deteriorates, affecting his/her purchasing power and ability to demand. Therefore, avoidance of illness is not like the avoidance of food or clothing. It is not only a risk but a costly risk in itself even if we don’t consider the cost of medical care.
Next factor is the behaviour expected of a doctor. There is an immense difference in society’s expectations from a doctor as compared to a businessman. We expect a businessman to work according to the dictates of profit maximisation but not a doctor. Moreover, there is a strong inclination towards the idea that medical care services are underprovided due to lack of profit motive and the introduction of the same might make it more efficient, but wait! It is not that obvious. There is a huge inequality of information, possessed by a doctor in terms in of medical knowledge to that of a patient because of which medical sector is solely based on trust and confidence shown by a patient in a doctor. This inequality of information in favour of physicians is the major flaw affecting the ability of the medical care sector to determine suitable prices.
Furthermore, there exist some flaws in both the demand and supply sides of the transaction. The non-profit medical care system is generally highly subsidised because of private and public subsidies which in turn decrease the cost to be paid by a patient in so-called nonprofit hospitals. Another possibility arises from the fact that the association of profit-making with the supply of medical services arouses suspicion and antagonism on the part of patients and referring physicians, so they prefer nonprofit institutions.
A time may come when medical ethics will have to be considered in the harsh light of economics because that is the only way to decipher the true nature of the medical sector. One has only to have been poor to realise the error as somewhere we all know that price and income do have some consequences for medical expenditures.
Supply conditions in the medical sector also have a crucial role to play. Unmistakably, entry to this market is restricted by licensing, leading to restricted supply and an increase in the price of services. Licensing in the medical field is usually defended on the grounds to provide a minimum quality of medical services.
The huge subsidy provided for medical education is another factor affecting supply conditions in this sector. The purpose of these subsidies is to reduce the costs for students and provide them with better education and promote higher enrollment amongst them. These aims are phased out as apparently the benefits are more or less compensated by the limited entry in the medical sector which is accompanied by the risk of elimination of students during the medical-school career as well. Hence, educational institutions have a special role of simultaneously subsidising and rationing entry to the professions requiring advanced training like medical care. This process is an essential element of the resource allocation process but unfortunately, the anomaly is most striking in the medical field.
Some might argue that eccentricity is ultimately helping the existing medical care sector in profit maximization but there is another dimension to this story as well! The disease burden in a fast developing nation like India is naturally enormous. With a growing population, the need for more doctors is imperative. Since 1947 we have not been able to counter a load of patients turning out at outpatient departments and the number of doctors remains grossly insufficient to strike this balance. A study conducted by the Indian Medical Association in 2015 points out that physicians in training who work for extended hours remain at great risk of injuring patients or themselves. Surgical skills of house surgeons may also be affected negatively by sleep loss. Being motivated by the best intentions is not enough; they need to be given adequate rest. The time to regulate work hours is long overdue.
Testimony to the fact is "I am Overworked" campaign launched by doctors in 2019 as many of them are working in 15-hour shifts with no break rooms, food or water. Hence, even if this anomaly is helping the medical sector in profit maximization, it is very harmful to both the parties involved in the transaction and ultimately giving our healers some grave wounds.
Lastly, the irregular pricing practices of the medical profession are well known. Some people might argue that since hospitals initially bill all of their patients at their chargemaster prices (or the consultation fee), they do not engage in "price discrimination". Such bills, however, are insincere, as in reality hospitals accept different payments from different payers for the services which are more or less identical, and that can properly be called price discrimination. In many cases, apparent rigidity of so-called administered prices considerably understates the actual flexibility. For example, if physicians find themselves less occupied, rates are likely to go down, openly or covertly; if there is insufficient time for the demand, rates will surely rise. The "ethics" of price competition may decrease the flexibility of price responses, but probably that is all.
The presence of price discrimination in the medical sector and defending it in the face of large physician population present medical care sector as a collective monopoly and since this is not governed by antitrust laws; the situation becomes even more critical. However, price discrimination is not always for profit maximization and can be seen in the extreme case of charity but this argument proves that there exists a void in this model which is still a source of non-optimality.
All these intrinsic characteristics of the medical care market differentiate it from other markets and affect its ability to achieve Pareto efficient outcomes. Moreover, even if one tries to make the medical care market more competitive, it is not sure if he/she will move towards an efficient outcome or not. For instance, additional entrants to the market generally provide low-quality services and in reality, the increase in the supply of medical facilities, adjusted for quality, will be much less than expected. Furthermore, to achieve purely competitive conditions, not only we will have to remove restrictions from entry but also the subsidies from medical education but because of these students will have to bear the full cost of education, which is very high. Ultimately, this will act as a deterrent to entry in the medical field and eventually, we will end up having too fewer doctors.
Hence, the laissez-faire solution for medicine is intolerable. The characteristics mentioned above make the medical care market a unique market with some obvious flaws and complexities. These complexities, however, can be avoided if discussed thoroughly. Proper implementation of regulations is also required as when a market fails to achieve the optimal state, society will, to some extent at least, recognises the gap and the non-market social institutions will arise in an attempt to bridge it. It depends on these conditionalities as to what extent the gaps would be filled. We have to do this together by embracing the complexities of medical care. These complexities may metastasize and harm other organs of the economy. The girth of simultaneous problems today is an indicator of tomorrow’s bandaging. Maybe now is the time to lend a hand to the ailing Invisible Hand.
1. Arrow, Kenneth J. “Uncertainty and the Welfare Economics of Medical Care.” The
American Economic Review, vol.53, no. 5, 1963, pp.941-973.