Is economic helpful in assessing efficiency in health care sector?

Is economic helpful in assessing efficiency in health care sector?

Introduction
The main concern of economic is how to use limited resources efficiently, including health resources. Efficiency in economic is achieved through market mechanism, which is at the point where demand and supply are equilibrium. This equilibrium can be achieved under certain conditions or assumptions. A number of important assumptions will describes belows. Such condition is rare occur in health sector, therefore market is failure in health care sector. I will explain how this failure occur both from demand sides and supply sides, and briefly discussed a number of specific strategies to overcome the failure.

Market and Efficiency

Efficiency in economic market can be achieved when supply and demand are equilibrium. This usually can be achieved if the degree of competition in market is high enough. Under high competition, in order to survive, the suppliers or firms should allocate resources to most efficient use. Each firm try to keep prices as low as possible to attract consumers or buyer. The prices (P) are set equal to marginal cost (MC). It means that P and MC is equivalent to demand (D). If the market operate under this condition, then efficiency, particularly efficiency in consumption can be achieved. By this, it means that benefits to community or social efficiency are maximized. Under this condition, marginal social benefits (MSB) are equivalent to marginal social costs (MSC).

This could be happenned under certain conditions, such as supplier are prices takers, no barrier to entry market. Form demand sides, purchaser try to maximize utility and they have soverignity and perperct knowledge what they want to buy. I will descriabe briefly such conditions and show how these assumptions are failure in health sectors. Description both from supply sides and demand sides

Supply Sides

Price-taker is one of crucial condition in free market. Firm should be price-takers in all product and factor market. There is no one firm that able to influence the price of good or services. They compete based on price. This only occur if there are many producer selling product or providing services. Each firm only produce or provide a tiny fraction of total ouput or particularly good or services. Producers and purchaser are well informed about price.

However, in health sector, price-takers are rerely occur. If so, only for very simple product or services. Usually, some firms or providers able to influence the price in the market. For example, a pharmaceutical industry that has a patent right to produce certain medicine. That firm have market power to influence the price. This creates market failure.

In addition, this monopoly is a also very commond occur in other health services. This is mainly related with supplier that are very limited. In some area, there are a number of supplier, but in other areas, it is very limited. Then patient do not have many choice. Moreover, there are a very few close subtitute of services.

If there is a provider want to enter the market, they face many barriers. Professional body is very powerful and licence is needed to enter market. Consequently, under this monopoly will transform consumer surplus to producer surplus. However, the lost cost in consumer is bigger than gain in producer surplus. Therefore, there is an overall lost to cociety or deadweight loss.

Demand sides

In the perpect market, the purchaser have soverignty. They have information about the product and able to judge the cost and benefit of product or services and purchase those services where benefits exceed cost.

However, in health sector, there is asymetric information between providers and patients. Patients very difficult to judge the the benefit of health care. Even after pateint received the treatment, they can not sure whether the treatment has worked. Under this situation, it is very difficult to define indifferent curves. This will create market failure. When demand side instition is fail, then resources allocation perform by new institution through agency relationship. Under limited knowledge, patients rely on health care professional. They act as agency on behalf of patients. However, the agency relation is not perfect. There is a tendency to over supply and induced demand over consume. This is particularly true if agency know that financial risk is not by consumer. In short this will create inefficieny and market failure.

Conclusion
In short market failure in health care can be explain from demand and supply sides. Market failure from demand side mainly related with asymetric information. When demand sides intitution is fail, then resource allocated by new institution through agency relation. However, the relation is not perfect. Then market also fail

June 10, 2006