Lecture: Role of

Government
Outline

 Types of Government Intervention

 Types of Goods
 Reasons for Public Intervention
 Government Failure
Recap

 Last time talked about market failure

 Markets are problematic in health care
because
1. Don’t provide goods efficiently
2. Don’t provide good equitably
Types of Government Intervention

1. 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.
Types of Government Intervention

2. 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
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.
4. Finance: health care with public funds.
 Delivery can still be public.
Types of Government Intervention

5. 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).
6. Taxes/subsides on goods e.g. cigarettes
 With diabetes increasing so quickly should
certain foods be taxed more?
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.
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.
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.
Rational for government intervention

1. 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)
Rational for government intervention

2. 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).
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

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

 Rational for government intervention

 Are subsidies to producers passed onto

consumers?
 Depends on the slope of the demand and supply
curves.

P D S1 P

S2 : after subsidy
P1
P2
P1-S

Q Only consumer Q
Consumer and producer benefits benefits
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.
Rational for government intervention

3. 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.
Rational for government intervention

4. 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.
Rational for government intervention

5. 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
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.
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.
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.
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.
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.
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)
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.
Government Failure
 Economists tend to treat government as a
benevolent despot who knows what is good for the
economy and regulates accordingly
1. 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
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
Government Failure

2. 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.
Government Failure

3. 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.
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.
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:
1. Regulation: Increased government
involvement through expanded regulation
and government programs to provide or
finance health care.
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.
Role of Public and Private Sector

2. Competition: An increased emphasis on

market mechanisms and market forces with
a decreased in use of regulatory
instruments.
Is seen in two ways:
a. Adhere more of a competitive market.
b. Rely on financial incentives instead of controls to
achieve goals.