This essay was written as part of final year studies in University College Cork.
Class: EC 3135 Health Economics The Role of Public Policy
Grade: 1st Class Honours
‘Kenneth Arrow’s 1963 paper entitled “Uncertainty and the Welfare Economics of Medical Care” identifies the unique characteristics of the health care market and health care commodities. He states that “the list is not exhaustive, and it is not claimed that the characteristics listed are individually unique to this market. But, taken together, they do establish a special place for medical care in economic analysis”. Discuss this statement making use of applied examples and references where appropriate’.
The American entrepreneur and motivational speaker Jim Rohn once said “Take care of your body it is the only place you have to live” No matter what way one looks at health and health care their importance is infinite. This quote shows the importance of studying healthcare from every perspective. Economically included. When Kenneth Arrow wrote his paper “Welfare Economics of Medical Care” he was correct that the healthcare system as a market brings with it many unique features or characteristics that are not seen in other markets. In this text, what makes the health care so unique as a market will be discussed. This will be followed be suitable references from Ireland and abroad.
The first characteristic that is unique to medical care in economic analysis is embodied by the concept of the behaviour of the doctor who in this context can be seen as the seller of a service and the patient who can be seen as the buyer or receiver of the product or service. The fact that “the customer cannot test the product before consuming it, and there is an element of trust in the relation.” (Arrow 1963) This is a contrast from most other products. For example, when one goes to a car dealership to buy a car, one will get to test drive the car before they must commit to buying it. This gives the consumer an opportunity to see if the product will fulfil the role required of it. A patient does not receive this luxury. They must try the recommend treatment and hope that it will work. Still dealing with the point of view of the patient, that patient “expects that the same physician will normally treat him on successive occasions.” (Arrow 1963). Again, this cannot be said for other goods. For example, if somebody does their food shopping, there is no expectation that the customer will always be attended by the same employee.
Now, switching the focus to the point of view of the doctor. Doctors like many professionals provide a service, but they do not sell a service even if they do make money. “Advertising and overt price competition are virtually eliminated among physicians.” (Arrow 1963) This is because doctors, unlike business sellers, are expected to act in the best interest of patients or to quote Arrow “be governed by a concern for the customer's welfare.” While often the job of a salesperson is to maximise revenue. One way in which doctor’s work in the best interest of patients is to subscribe the use of generic drugs. This is done to reduce the amount of money both the government and patients have to pay for medication. In Ireland, over €1 billion is spent on branded drugs. Because of this, it was estimated that the government could “cut millions from that figure.” By using generic rather than branded drugs. (Irish Times 2005) Again this is a contrast from a sales rep who would often be instructed to upsell to customers.
The second characteristic that makes the medical care market so unique is demand. Healthcare unless most products, is a product with an inverted demand. This means consumers of the product or service do not want the product itself which is healthcare but rather the effect of the product which is good or better health. People would rather just have the health. This is a difference from most products. For example, the purchasing of clothing. Yes, people enjoy the reward of purchasing clothes, but they also want to have the clothes. As already mentioned the same cannot be said for healthcare. Another product with an inverted demand just like the health market is insurance. People don’t want the insurance itself they want the security that comes with it. While the need for insurance and healthcare may be similar up to this point, they do still have their differences. People's demand for healthcare is “irregular and unpredictable” (Arrow 1963) as it is often unknown when somebody will need it. In comparison, the demand for insurance is more fixed. People tend to buy for example car and house insurance at the same time, every year, often because it is illegal not too. “Having car insurance is a legal requirement” (Rac 2017)
Delving further into the characteristic of demand, the demand for healthcare is often vital because of a “major potential for loss or reduction of earning ability” as well as “risk of impairment of full functioning.” (Arrow 1963) If somebody avoids healthcare, it will have serious consequences, unlike other products like movie tickets or a new car.
Having spoken about demand, it is now the only natural to speak about the supply of healthcare. The amount of healthcare that can be provided has many restrictions. Licensing “increases the cost of medical care.” This is because doctors need to be of a certain standard to provide such a complicated service. These standards lead to “high cost of medical education” (Arrow 1963) Not just on patients but students as well. When prices are high, this can reduce demand as people cannot afford the service. For example, to attend Harvard Medical School, the fee is $58,050 per year for one student. (USA News 2017) On top of the large fees, students also need to achieve higher results than most when leaving school. In Ireland, the CAO points required to do degrees such as medicine, nursing and dentistry are all over 400 points. (CAO 2015) This need for licensing stops “all others from engaging in any one of the activities known as medical practice.” While for many other professions qualify can help. Without a degree, there is no legal barrier stopping somebody from becoming, for example, a receptionist, marketer or musician.
The final characteristic that will be discussed is that of price practices. Variation in price does occur in the medical market but often in different ways to most markets. In this market “Price competition is frowned on” (Arrow 1963). It is very seldom if ever one would see doctors compete with one other for price. There is no race to the bottom, like what is seen in other markets. The other pricing practice that is different with this market is “price discrimination by income” For example in Ireland this can be seen by the use of medical cards, which people receive for differing reasons. For example, when somebody is 70 years of age or older. Doctors often charge less also, if they are aware that money may be short in a family. For example, a member of the family lost their job, or the family is paying high hospital fees elsewhere.
In summary, the healthcare market has many characteristics that together make it a unique market. These characteristics stretch from demand, supply, entry, pricing and more. These characteristics effect both doctors and patients. The effect of these traits can also be felt in other markets or sectors such as education and insurance. It can be argued that the key to a thriving healthcare market is down to getting the correct balance between the characteristics Arrow mentions in his paper.
Irish Times 2015 https://www.irishtimes.com/news/use-of-generic-drugs-could-save-state-millions-1.1179819 25/10/2017
Rac 2017 https://www.rac.co.uk/insurance/car-insurance/why-do-you-need-car-insurance 26/10/2017
No comments:
Post a Comment