Abdullah Omari

SSST
Health care economics
Introduction

There are many different health care systems around the world, with each one being a little

bit different from the other. Many industrialized countries either provide health care directly

through the government or provide government funded health insurance with wide coverage.

We will specify the basic types of systems used and compare a few examples. According to

(FOLLAND, 2017) 30 advanced health care systems can be classified according to three core

system dimensions, which are regulation, financing, and service provision. Which are

provided by three categories of actors; state-based, which are typically employees of the

state, non-profit providers, and private market based actors.

THE UNITED KINGDOM—THE NATIONAL HEALTH SERVICE

Great Britain established its national health care system (NHS) in 1946, and it provides

healthcare to all British residents. About three-quarters is funded by general taxation, with

about 20 percent from national insurance and about 3 percent each from user charges and

other sources of income. Capital and current budget filter from the national level down to the

regional and then to the district level. The plan pays general practitioners on a capitation basis

and hospital physicians largely on a salaried basis. In addition to the NHS, there is also a

private-sector health system. About 11 percent of Brits purchase private health insurance.

Services are not entirely free. English patients pay 7.40 British pounds for each prescription,

although about 90% of prescriptions are free of charge, and patients in Scotland, Wales and

Northern Ireland are not charged.

A model of rationed healthcare and private markets

We can examine the practices of an NHS-type of organization diagrammatically. In panel A

of Figure 22-2, we treat the supply of health services as totally price inelastic, because The

supply curve, reflecting what the government provides is irrespective of price, is a vertical

line. This indicates that the quantity supplied is not responsive to the price of the services.

Furthermore, the money price of the services is set by the government at P*, which is less

than Pc, the market clearing price. Predictably, we see excess demand (Q* – Q0) at the

administered price P*. Because most health care cannot be bought and resold, other forms of

rationing, largely time related, become important. For many ailments, the waiting period for

treatment by the NHS is months, or even years.

as might be predicted, a private market for services has developed for those who choose to

enter the private market without governmental aid, either due to strong preferences for private

care or due to the ability to pay more than the NHS price. Returning to Figure 22-2B, with

excess demand at P*, that excess demand represents, in part, people who are queued and who

may wish to pay in the private sector to avoid the long waits. Those who participate in the

private market, shown in panel B, will pay Pp for the quantity of services, Qp. The two

markets exist simultaneously, although as Box 22-1 indicates, not always comfortably.

China as an emerging system

China’s health economy has went through major changes since the people’s republic was

formed in 1949. Government policies changed from a doctrinaire pollical system with fixed

prices in the first three decades, to a more market-based process since the 1980s, affecting

coverage and focus.

China is a large world economy, but its per capita income is small compared to most of the

west countries. Table 22-3 compares the Chinese health economy to developing nations India

and Indonesia, as well as to Japan, with its more advanced economy. According to the World
Health Organization (WHO), China spends considerably more on health per capita than do

India and Indonesia, but less than Japan. Measures of life expectancy at birth and probability

of dying are more favourable than India and Indonesia, but less favourable than Japan.

Eggleston and colleagues describe the development of separate three-tiered urban and rural

systems starting in the early 1950s. In urban areas, the three-tier network was composed of

street clinics, district hospitals, and city hospitals. In rural areas it consisted of village clinics,

township health centers (THCs) and county hospitals. Provincial and central hospitals

provided high-level referral care. Under this system, the Ministry of Health or the local

Bureau of Health managed the majority of the provider organizations.

The authors note that the three tiers that characterized the original system remain today. Since

the early 1980s, however, the government has allowed providers to generate, retain, and

manage surpluses, with subsidies to providers constituting smaller and decreasing shares of

provider financing. When the government routinely subsidized the providers, the variation of

administered prices from costs had little impact because deficits could be made up from the

subsidies. Without government subsidies, however, providers have tended to favor high-

technology diagnostics at the expense of less-profitable basic services. The combination of

rapid private sector growth, and decreased organized financing, have made health care less

affordable for many. According to National Health Surveys, between 1998 and 2003, the
proportion ill in the previous two weeks who did not seek care for financial reasons increased

in both urban and rural areas (Ministry of Health, 2004). Ma, Lu, and Quan (2008) note that

health insurance coverage fell by about 20 percentage points in urban areas between 1993 and

2003, while rising slightly in rural areas. (See Figure 22-3.) Some 700 million rural Chinese

must pay out of pocket for virtually all health services, leading to the deferral of care and

untreated illness.

The 1990s saw the initiation of several new policies in both urban and rural areas. In urban

areas, municipal risk pooling for employees, known as Basic Medical Insurance (or BMI)

was established. The government also established a series of medical savings accounts, but

they did not stipulate the means of provider payment. As a result, most people purchase

treatment under a fee-for-service (FFS) model.

DIFFERENCES IN HEALTH CARE SPENDING ACROSS

COUNTRIES

Different countries have different incentive systems, as well as different percentages of

national product in the healthcare sector. We have briefly examined and described some of

these systems, therefore we shall examine why the shares and percentages differ from one

country to another.

A Model of Health Expenditure Shares

Consider a model of health expenditures and call total expenditures on health care E. By

definition, these expenditures equal the price of health care multiplied by the quantity of

health care consumed, or E = PQ. Defining the share of national income spent on health care

as s, we calculate s as the ratio of E to national income, Y, or: s = PQ/Y

The share, s, can increase because either the price or quantity has increased, or because the

national income has decreased. mathematically it can be shown that:

(% Change s) = (% Change P) + (% Change Q) – (% Change Y)

If the price of health care, P, increases by the same rate as the price of all other goods, so that

Y increases at that same rate, then the health care share of national income does not change.

We try to examine why these changes occur, the prices of healthcare are related to the type of

heath system the country has or the social insurance policy. Keep in mind as well the amount

or quantity of health care used, Q, tends to increase when national income, Y, increases. Keep
in mind that the quantity of health care, Q, is negatively related to the price of health care, P,

through the demand relationship.

It is important to examine the differences among countries with respect to payment

mechanism. Economists often implicitly view expenditures in the context of perfectly

competitive markets. If this view is valid, as noted in Figure 22-5A, then the total health

expenditures figure (the numerator of fraction of GDP going to health care, indicated by the

box with bold outlines) accurately reflects the resource costs P* of health care at the margin.

Anderson and colleagues (2003), however, note that the markets for the health workforce

(especially physicians) are still largely national and even local within countries. Moreover,

many markets related to health care within localities do not satisfy the rigorous conditions of

the textbook model of competition.

We find varying degrees of monopoly power on the “sell” side of the market and varying

degrees of monopsony power on the “buy” side. Because monopolists (Figure 22-5B) equate

marginal costs to marginal revenues, they are able to raise prices above those they would

obtain in perfectly competitive markets. This earns them “rents,” defined as the excess of the

prices received by sellers above the minimum prices the sellers would have to be paid to sell

into the market. Figure 22-5B shows that the resource costs (the box defined by the supply
curve) are considerably less than the total expenditures (the sum of the resource costs and the

monopoly rents), with the difference going as rents to providers. Monopoly quantity Qb is

also less than Q*, under competitive markets because in order to increase prices,

monopolistic providers must sell less. Countries differ in the degree to which they try to

reduce the rent earned on the supply side through the creation of market power on the buy

(monopsony) side of the market. A single-payer system (similar to the one used by Canadian

provinces) would be called a “pure monopsony.” Because a pure monopsonist (Figure 22-5C)

must pay increased resource costs to all supply factors, the monopsonist faces a market

marginal cost curve, not unlike the monopolist’s marginal revenue curve. Here, the producer

provides quantity Qc, but expenditures are much smaller than in Figure 22-5B.

Note again that in either the monopolistic or the monopsonistic case, the quantity of services

provided falls short of the optimum Q*. but in the monopolistic case, extra resources are

transferred as monopoly rents from the buyers to the sellers.

Conclusion

In this chapter, we have examined a variety of health care systems found elsewhere.

Variations exist in terms of financing, provider payment mechanisms, and the role of

government, including the degree of centralization. The study of comparative systems

suggests several features of other systems that may be worth adopting. It also suggests that

cultural differences among countries could dictate that systems tailored to the local culture

continue to differ even in the long run.

References
FOLLAND, S. (2017). ECONOMICS OF HEALTH AND HEALTH CARE. [S.l.]:
ROUTLEDGE.