Market failure occurs when the market does not clear due to lack of an equilibrium point. In most cases, it is when the supply does not meet the demand. It also occurs when there is an alternative situation for the same market to be in and more people to gain from it rather than that situation. The resources can be utilised for greater consumer utility.
What are the major reasons that a free unregulated market in medical care might not be optimal?
- The existence of monopolies in the market. Monopolies are known not to cater for the welfare of the consumer and to charge high price. In this case consumers, who are the sick people, will be exploited because some medical resources are concentrated in the hands of few business men.
- Externalities affect the health care market. This is mostly when the actions done on a person will have influence on the other. It is also because such actions will be enforced by law in the private sector. A good example is immunization and vaccination of a person from polio; it protects all those around him as well.
- Health care is a public good and in this case it means that no one can be denied health care especially on an emergency case. However this creates loop hole where people may not be able to afford can easily slide away and leave the burden to those who are have medical insurance. This creates financial crisis where funds are stretched beyond what they were budgeted for.
What assumptions of the perfectly competitive marketplace are violated in medical markets?
Imperfect information- in the medical markets violates perfectly competitive market structure. The medical market is characterised with asymmetric information a situation whereby patients have to completely rely on physicians to make the correct diagnosis and the correct prescription. The charges made on the services offered are most of the times unknown to the patients especially in a case where the hospital has direct contact with the insurance company.
Barriers to entry- given the fact that the medical experts will serve a large population, there should not be barriers to entry. However in an effort to protect the public from poor medical services from incompetent physicians, the government regulates the number of hospitals that are available. This is through licensing and certificate of practitioners.
As much as this restriction into market entry is meant to protect the public, it creates a monopoly market, ensuring the price of medical services is maintained at a high level.
Third party- in an effort to reduce defaulters, most of the hospitals prefer to deal with patients who have an insurance cover. In this case direct payment from the patients is not experienced; in this case the price does not reflect the consumer’s willingness and ability. The demand is to some extent skewed.
How does each affect equilibrium price and quantity?
Barriers to entry, ensures that the quantity supplied is limited; demand is higher than the supply, thus the price is higher than it should be if the supply was as demanded and the market would clear. Third parties ensure that demand is not based on price, in this case the consumers will be overcharged without them being aware. Asymmetric information ensures that consumerism is not based on information. Consumers completely believ the physicians and even when the price is exaggerated they may not be aware because they believe their condition is serious.
Is the demand for medical care a derived demand?
The demand for medical care may be viewed as a functional relationship medical care and it determinants;
Medical care = M (Hs, Dc, Es, Pf)
Where Hs = Health Status
Ds = Demographic Characteristic partial factors
Es = Economic Standing
Pf = Physician Factors
eX: Demand for eu higher demand for foreign goods
Assumes that you are a medical doctor and that both you and David, your partner in a private medical practice, want to increase your firm’s total revenue. You argue that in order to achieve this goal you should lower your consultation fee (price). David on the other hand, thinks that you should raise your fees. What assumptions are each of you making about your firm’s price elasticity of demand?
With lower prices, the hospital will be able to attract more patients and thus there will be an increase in revenue and profits. This is because medical care is a service like anny other and is affected by the economic factors. However, David believes that we should increase the price because the market is based on asymmetric information and dealing with third party. This means that demand is not affected by the price level and increasing it will increase the revenue earned by the hospital.
Discuss two measures of health status
- Efficiency- this means that what is produced meets the demand in terms of benefit and desire. Allocative efficiency will ensure that production will be based on the taste and preference of the patients since they are the consumers. Technical efficiency is based on cost and methods of production should be efficient.
- Equity- there should be equitable distribution of opportunities and resources in order to ensure fairness at all sides of the medical care market. This is the role of the government to ensure that there is equitable distribution of medical facilities and to limit the effect of trade offs on the outcome of the population’s health.
Examine the following statement:
“Estimating a model of health care demand by the individual patient is a futile exercise, because physicians determine what their patients use”
The above statement is true because patients are usually at the mercy of their physicians. This is the reason as to why the government has put in place regulations to limit the entry of firms into the market; counterfeit medication and incompetent physicians can lead to an unhealthy population. The medical care market is based on expertise on the human anatomy and the fact that if poorly handled it can lead to death is a fact enough to allow consumers to allow their physician to make all the decisions.
At the same time the model cannot work because of the presence of the their parties that deal with the hospitals to the extent that the patients may not know the charges for their medical care.
Explain the significance of economic evaluation in health care
- Cost effectiveness – this is based on the premise that the effectiveness of a medical procedure should be effective in terms of results. This means that if a drug is to be administered to patients it should work effectively, then the cost will be approved. However, there is no need of enduring the cost of a procedure or drug that is not effective because it still leaves room for the solution to be found.
- Cost benefit analysis- the benefit of any medical endeavour should have greater benefit than the cost. When the cost of a project is higher than the benefit it is considered as not viable.
Assume a new treatment is discovered that improves survival probability from 85-95%. Discuss the different ways that a hospital/health centre might discuss the results.
Increase in survival extends the lifespan of an individual which will be good for the hospitals. This is because an increase in survival means longer years to live; while at old age people experience more health issues.
At the same time the medication may increase the immunity, decreasing the chances of people getting sick. This will decrease the quantity of medical care demanded and the price will decrease. At the same time the third parties might lose their role and demand for medical care will be based on price, willingness and ability. At the same time projects that earn from research into finding drugs will reduce and there will be reduction in employment of resources and inputs in the medical care industry.
