Health Policyin Economic Perspectives:

Market Failure08 NOV 2007

서울대학교 의과대학

의료관리학 교실

김영치

Young Chi Kim, MD, PhD, MPH

THE INVERSE CARE LAW

Julian Tudor Hart. The Inverse Care Law. The Lancet 1971, 297(7696): 405-412.

INEQUITY IN UTILIZATION

INEQUITY IN UTILIZATION

아플 때 도움을 요청할 데가 없는저소득층 비율

(한국은 2004년 한국종합사회조사다른 나라는 2001년 국제사회조사기구 조사결과)

0 2 4 6 8

한국

핀란드

뉴질랜드

영국

미국

스페인

헝가리

일본

People’s Want from a Health Care System

Good health

Low cost

Satisfaction on the part of consumers and providers

Equity, both medical and financial

Objectives of a Health Care System

Cost control

Good health outcomes

Equity

Popular satisfaction

Medical Care MarketplaceCost of Care

Medical Care MarketplaceCost of Care

Medical Care MarketplaceCost of Care

Medical Care MarketplaceCost of Care

- 동아일보 07 NOV 2007 A13

Medical Care MarketplaceCost of Care

Medical Care MarketplaceCost of Care: Prospects for the Future

Medical Care MarketplaceCost of Care: Prospects for the Future

Total Expenditure on Healthper capita, USD ppp

1980 1990 2000 2003

US 1055 2738 4539 5635

UK 482 986 1833 2231

Canada 783 1737 2502 3001

Germany 965 1748 2671 2996

Netherlands 757 1438 2259 2976

France 711 1568 2456 2903

Japan 580 1115 1971 2139

Korea 164 377 771 1074

OECD 1416 2371 2853

Total Expenditure on Healthper capita, USD ppp

0

1000

2000

3000

4000

5000

6000

USA UK

CANA

DA

GER

MAN

Y

NETH

ERLA

NDS

FRAN

CEJA

PAN

KORE

AO

ECD

1980

1990

2000

2003

Public Expenditure on Healthper capita, USD ppp

0

500

1000

1500

2000

2500

3000

USA U

KC

ANAD

AG

ERM

ANY

NETH

ERLA

NDS

FRAN

CE

JAPA

NKO

REA

OEC

D

1980

1990

2000

2003

Total Expenditure on HealthShare of GDP

0

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US

UK

CAN

AD

A

GERM

AN

Y

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ERLAN

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KO

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D

1980

1990

2000

2003

Growth of Total Expenditure on HealthCompared to GDP Growth

1980-2003 2003 real per capita

GDP Total HE Health Expenditure (1992=100)

US 2.0 4.4 145

UK 2.2 3.7 146

Canada 1.6 3.1 128

Germany 0.9 2.0 124

Netherlands 1.7 2.9 141

France 1.6 3.2 131

Japan 2.1 2.9 137

Korea 5.8 7.3 204

OECD 2.2 3.4 147

Public Expenditure on Healthper capita, USD ppp

1980 1990 2000 2003

US 438 1085 2008 2503

UK 430 824 1482 1860

Canada 592 1295 1760 2098

Germany 760 1593 2098 2343

Netherlands 525 965 1425 1856

France 569 1201 1862 2214

Japan 413 865 1602 1743

Korea 55 139 356 531

OECD 822 1409 1524 1685

Public Expenditure on HealthShare of GDP

012345

6789

10

US

UK

CANAD

A

GERM

ANY

NETH

ERLAND

S

FRANC

E

JAPAN

KO

REA

OEC

D

1980

1990

2000

2003

Growth of Public Expenditure on HealthCompared to GDP Growth

1980-2003 2003 real per capita

GDP Total HE Health Expenditure (1992=100)

US 2.0 4.8 152

UK 2.2 3.4 144

Canada 1.6 2.7 121

Germany 0.9 2.0 120

Netherlands 1.7 2.4 140

France 1.6 2.9 130

Japan 2.1 3.6 143

Korea 5.8 9.5 292

OECD 2.2 3.4 151

Health Expenditureby source of funding, 2003(total expenditure on health = 100)

Total Public GOV’T SS Schemes Total Private Insurance Out-of-Pocket

US 44 22 13 56 37 14

UK 83 83 0 17

Canada 70 69 2 30 13 15

Germany 78 10 68 22 9 10

Netherland 62 4 58 38 17 8

France 76 3 74 24 13 10

Japan 82 16 66 19 0 17

Korea 49 9 40 51 2 42

Efficiency: PPF

Public sector

U

I

Private sector

카스퍼 다비드 프리드리히 - 안개 낀 바다의 방랑자

MARKET FAILURE

In any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers.

A market is not efficiently allocating goods and services.

The social costs of producing the goods and services are not minimized, resulting in a waste of some resources.

Market forces do not serve the perceived public interest.

The Competitive Market Model

Self-interest

Invisible hand

Optimizing behavior

Efficient outcomes

Allocative efficiency and technical efficiency

Economic efficiency and social equity

Equilibrium

Price

P1

P0

P2

S

0 Q0

Surplus

ShortageD

Quantity

Perfect Competition

Perfect competition:

All firms sell an identical product.

All firms are price-takers.

All firms have a relatively small share.

Buyers knows the nature of the product being sold and the prices charged by each firm.

The industry is characterized by freedom of entry and exit.

Perfect Competition

P P MCS

D

AC

P0 P0 D = MR

QQQ0

q0

Representative FirmMarket

Market Failure

Definition:

Where the market mechanism fails to allocate resources efficiently“ Pareto Efficiency”Social Efficiency

Allocative Efficiency

Technical Efficiency

Productive Efficiency

Market Failure

Social Efficiency = where external costs and benefits are accounted forAllocative Efficiency = where society produces goods and services at minimum cost that are wanted by consumersTechnical Efficiency = production of goods and services using the minimum amount of resourcesProductive Efficiency = production of goods and services at lowest factor cost

Causes of Market Failure

Imperfect Knowledge

Market power: Imperfect competition

Externalities

Public goods

Inequality

Market FailureImperfect Knowledge: Akerlof(1970)’s “Market for Lemons”

Consumers do not have adequate technical knowledge

Advertising can mislead or mis-inform

Seller knows more about a product than the buyer.

Producers cannot accurately measure

productivity

Decisions often based on past experience rather than future knowledge

Market Failure

Market Power:

Existence of monopolies and oligopolies

Collusion

Price fixing

Abnormal profits

Market Power

Definition: When one buyer or seller in a market has the ability to exert significant influence over the quantity of goods and services traded or the price at which they are sold

Monopoly

Oligopoly

Monopsony

Pricing and Output under

Imperfect Competition

PriceMC

D

P0

Q0

P1

Q10 Quantity

MR

Natural Monopoly

Definition: One firm can produce a desired output at a lower social cost than two or more firms-that is, there are economies of scale in social costs.

railways, telecommunications, water services, electricity, and mail deliveryA natural monopoly and a monopoly are not the same concept. A natural monopoly describes a firm's cost structure (high fixed cost, extremely low constant marginal cost). A monopoly describes market share and market power; the two are not synonymous.

Oligopoly: Collusion

Uniform prices

A penalty for price discounts

Advance notice of price changes

Information exchanges

Swaps and exchanges

Monopsony

PriceMC S

(Opportunity cost)

P0

Q0 QDQuantity

D

Externalities

Positive and Negative ExternalitiesThe effects of a decision by consumers and producers that has an impact on a third party

Positive Externalities – beneficial effects on third parties

Negative Externalities – costs incurred by third parties

Positive and Negative ExternalitiesCosts and benefits in production:

External costs in production – where MSC = MSB – MPC

e.g. air and water pollution, congestion, housing development on green belt areas, destruction of hedgerows and wildlife, noise, pollution, anti-social behaviour, crime

External benefits in production – where MSC < MPC

e.g. human resource development, research and development in industry

Externalities

MarginalPrivate Cost

MarginalBenefit

P*

Pm

MarginalSocial Cost

Cost perCommuterMile

MSCm

Commuter Miles

QmQ*

The External Costs of a Daily Commute

Public Goods

Definition: goods or services that can be consumed by several individuals simultaneously without diminishing the value of consumption to any one of the individuals

Non-rivalry

Non-excludability

Optimal Output: Private versus Public Goods

PricePrice

Supply

∑D

D1D2

0

P0

Q0 Q1

∑D

D1

Supply

P1

P2

P3 D2

0Q* Q*Quantity Quantity

Public GoodPrivate Good

Free Rider

Price

Ds

Supply

∑D

Quantity

The Free Rider Problem

Ronald Coase, The Lighthouse in Economics 1974

Market Failure

Merit Goods

Education – nurseries, schools, colleges, universities – could all be provided by the market but would everyone be able to afford them?

Market Failure

De-Merit Goods

Goods which society over-produces

Goods and services provided by the market which are not in our best interests!

Tobacco and Alcohol

Drugs

Gambling

Market Failure

Inequality:Poverty – absolute and relative

Distribution of factor ownership

Distribution of income

Wealth distribution

Discrimination

Housing

Market Failure

Measures to correct market failureState provisionExtension of property rightsTaxationSubsidiesRegulationProhibitionPositive discriminationRedistribution of income

Market Failure

Objections:

Advocates of laissez-faire capitalism – libertarians and economists of the Austrian School

Public Choice School -Milton Friedman – Government Failure

Marxian economists – high levels of inequality (equity)

Coase theorem

Individuals can organize bargains so as to bring about an efficient outcome and eliminate externalities without government intervention:

- Property rights are well defined

- People act rationally

- Transaction costs are minimalAn important basis for most modern economic analyses of government regulation, especially in the case of externality.Economic basis to the ‘cap and trade’ approaches to addressing climate change

Market Failure

Neoliberalism:

“Market-oriented solutions” to market failure

Internalizing the external cost, e.g., the pollution permit – Government creates an artificial market for pollution rights

Market Failure in Medical Markets

● Traditional Sources of Market Failure

— Market Power

— Externalities

— Public Goods

● Imperfections in Medical Markets

— Imperfect Information

— Barriers to Entry

— Prevalence of Third-party Payers

Information Asymmetry

Kenneth Arrow, Uncertainty and the Welfare Economics of Medical Care, 1963

Adverse selection

Moral hazard

George Akerlof, The Market for Lemons, 1970

Why The Public Role in Health Care Matters

Consume large resources: 8% of world incomes

60% is public spending

Many health systems are inefficient or inequitable or both (“crisis”)Is there an appropriate frontier between private and public action, and a best combination for the state to use when it intervenes?