Lecture: Role of Government

1. Lecture: Role of Government Chapter 19

2. Outline • Types of Government Intervention • Types of Goods • Reasons for Public Intervention • Government Failure

3. Recap • Last time talked about market failure • Markets are problematic in health care because • Don’t provide goods efficiently • Don’t provide good equitably

4. Types of Government Intervention • Inform: or persuade consumers/providers/suppliers to act in a certain way. • Publicize health risks (smoking) • Disseminate information on disease patterns (swine flu), or risks of medical procedures.

5. Types of Government Intervention • Regulation: determines how a private activity may be undertaken. • At extreme gov’t can prohibit goods or activities. • Setting standards for doctors and drug trails • Regulate insurers to provide certain interventions. • Includes mandates: obliges someone to do something, and (usually, though not always) pay for it. • E.g. employers of a certain size must provide health insurance, children must be immunized at schools

6. Types of Government Intervention Regulation and mandates appeals to legislators • b/c tackles problems without incurring government spending. • Affects spending of those that are regulated e.g. two day hospital days after delivery. • Finance: health care with public funds. • Delivery can still be public.

7. Types of Government Intervention • Provide: or deliver health services using publicly-owned facilities and civil service staff. • Usually publicly financed and provided • More typical of developing countries • Developed countries usually provide a lot of autonomy if publicly provided (crown corporations). • Taxes/subsides on goods e.g. cigarettes • With diabetes increasing so quickly should certain foods be taxed more?

8. Types of Goods Public Goods: 2 qualities • Nonrival: someone’s consumption does not reduce the amount available for others to consume. • Control of disease vectors (malaria) • Food and water safety • Non-excludable consumer cannot be excluded from consuming the good either by having to pay or through some other mechanisms. • Classic example national defense.

9. Types of Goods Merit Goods: good that are thought to be good for someone regardless of the person’s own preferences. • Compulsory education. • Wearing seat belts or helmets on motor cycles. • Tobacco and drugs. • Market failure because don’t consume enough of it.

10. Rational for government intervention • Government’s often try to correct market failures (market distortions). • Remember the theory of the second best, fixing the distortion won’t necessarily make people better off (may or may not). • Need to think about when government intervention may be appropriate. • Can sometimes be a value judgement. • In health care governments are not aiming for perfect competition because not achievable for much of health care. Instead use other mechanisms than a price mechanism to ration health care.

11. Rational for government intervention • Public Goods: • Market failure because too little of the good is produced in private markets. • Usually large number of individuals. • Individuals unlikely to cooperate to fund substantial amounts of public goods through voluntary contributions. • Free-riders: can’t exclude them from the benefits, but free-ride b/c an voluntary contribution has a negligible impact on availability. • Government takes responsibility for providing good. • E.g. control of disease vectors (malaria), clean air, food and water safety, information, medical research (some types), information, voluntary giving (redistribution)

12. Rational for government intervention • Externalities: • Goods that have third-part effects. • When a third party is affected by another person’s consumption or production of a good. And price mechanisms to compensate these people. • E.g. neighbors loud music, smoke, air pollution, contagious diseases (SARs, Bird Flu) • Problem is that externalities are not reflected in the price of a good. • Factories don’t pay extra because they made the air dirty (hopefully in the future they will).

13. Rational for government intervention Case of immunizations MSB: Marginal Social Benefit Price MC: Marginal Cost = Price – Supply Curve D: Demand curve or private marginal benefit curve. MEB: Marginal external benefit Qm Qopt Health Care Efficient point for society

14. Rational for government intervention Case of immunizations Policy Response: Subsidize price of good. Price MSB MC MC with subsidy D MEB Qm Qopt Health Care

15. Rational for government intervention • Are subsidies to producers passed onto consumers? • Depends on the slope of the demand and supply curves. P P D S1 S2 : after subsidy P1 P2 P1-S Only consumer benefits Q Q Consumer and producer benefits

16. Rational for government intervention • Policy Options for Externality: • For negative externalities (air pollution, dumping feces into water supplies) • Subsidy • Regulation and mandates (laws). • Public provision/finance of some goods • immunizations in developing countries have vaccination campaign days and weeks • disease surveillance • Charitable externality: can be sufficiently important to justify large social insurance programs.

17. Rational for government intervention • Incomplete Markets: • E.g. Insurance companies don’t want to insure you for pre-existing diseases (cancer, AIDS). • Can’t buy insurance. Policy Options: • Could use mandates that make insurance companies cover these people. • May need to subsidize drugs or care. • Could provide care.

18. Rational for government intervention • Merit Goods • Use argument everyone should have access to health care. • Why many developing countries have free access to medical care (even if can’t afford to provide it). • Why you see universal health care systems.

19. Rational for government intervention • Market Power • Monopolies, oligopolies etc. • Any industry where the supply or marginal cost curve is not flat (so are not price takers) • E.g. Hospital, drug companies (patents), specialists, • Often create market power by differentiating products. E.G specializing in different kinds of operations. • Produce less and charge more than a competitive market. • Due to economies of scale, production may be more efficient if you have a monopoly (natural monopoly) • E.g. power sector, hospital, medical research

20. Rational for government intervention Policy options for market power • Regulate • May set maximum prices. • Negotiate prices with drug companies and doctors. • Mandate longer hospital stays (deliveries, started to only insure 1 night stays, it was mandated that woman could stay 2 nights. • Public provision.

21. Government Involvement in US • Support for hospitals • Started under the Hill Burton Act in 1946 • Idea was to expand rural health facilities by providing matching grants to non-profit institutions. • Requires states to survey its hospital needs and develop a statewide plan for construction of public hospitals. • State, county and municipal hospitals account for 20 % of total hospital beds.

22. Government Involvement in US • The Veterans Administration & Champus • Largest public provider of health care in US. • Provide care for veterans • Retired military personal and dependants. • Food and Drug Administration • Started in 1906 • Regulates drugs quality.

23. Government Involvement in US • Mandated Health Insurance Benefits. • Insurance industry is regulated at the state level. • Tradition role is to ensure solvency of insurance companies. • Mandate insurance benefits. • In 1970, 48 mandates in 1991 1,000, in 1997, 600 new ones. • Often are due to special interest groups. • Some research has found that they prevent insurers from offering low-cost alternatives.

24. Government Involvement in US • Tax Policy • Employer contribution to health insurance not part of taxable income. • Individual payments for health insurance and care can be itemized and deducted if amount large enough. • HAS • These subsidies do not promote equity, go to those who can afford the most health care.

25. Government Involvement in US • Public Health • Department of Public Health • Center for Disease Control • Financing Health Insurance • Medicare and Medicaid • Finance Medical Education and Research • Institutes of Health (provides grants)

26. Government Failure • What is the extent and form of government involvement? • Hard to agree on objectives, choose from different policy instruments, and select the correct value of these instruments. • These difficulties could lead to government failure.

27. Government Failure • Economists tend to treat government as a benevolent despot who knows what is good for the economy and regulates accordingly • Theory of Local Capture: • Some argue that politicians are like everyone else, they want to maximize how many votes they get. • So instead of doing what is good for the economy, may do what is good for some special interest group. • May reward voters with monopoly profits, or public goods (common to build a hospital in your name in developing countries, beneficial regulation

28. Government Failure • Consumers could band together to be a special interest group but tend not to because difficult to agree on one interest, and due to free-rider issue. • Criticisms of capture theory • Assumes all public officials are solely self-interested which is not the case. • Leaves little room for ideology in politics. People assumed to do what special interest groups want even if doesn’t follow party platform

29. Government Failure • Bureaucracy and efficiency • Government is a monopoly so if tries to provide goods will it do so at the minimum cost. • Government run by politicians who tend to prefer quick fixes rather than longer-term solutions. • Some of these criticism could also be made of the private market. • They do quick fixes when cleaning up environmental spills. • Not all managers are trying to maximize company profits, they may be trying to maximize their salaries, or length of stay in the job.

30. Government Failure • Don’t have capacity to administer • Due to low wages may not be able to hire competent people. • Corruption may be large • More often the case in developing countries.

31. Role of Public and Private Sector • No one right way • Depends on level of income of the country • Poor countries cannot afford to provide health care for all, so tends to be a larger role for the private sector. • Don’t have ability to tax. • Public funds need to be concentrated on the most cost-effective interventions.

32. Role of Public and Private Sector • Rich countries can afford to be more involved in health care. How much you governments intervene often depends on beliefs. • There is a battle over superiority of: • Regulation: Increased government involvement through expanded regulation and government programs to provide or finance health care.

33. Role of Public and Private Sector • Argue that information imperfections, flawed agency relationships, and other distortions cannot be readily corrected by private markets. • The point to the US record with the highest cost of health care, least regulation, and poor health outcomes compared to other developed countries as proof.

34. Role of Public and Private Sector • Competition: An increased emphasis on market mechanisms and market forces with a decreased in use of regulatory instruments. Is seen in two ways: • Adhere more of a competitive market. • Rely on financial incentives instead of controls to achieve goals.