What role should governments play in healthcare?

This article is published in collaboration with the Bill and Melinda Gates Foundation.

Scientific advancement in healthcare has allowed human beings to double their life spans and effectively address lethal diseases such as malaria, cholera and the plague that have in the past wiped out entire civilizations. While there is no disagreement among policymakers on the importance of healthcare, a key area of debate relates to the relative role of the government and the market in the provision and financing of healthcare.

The position of the market purist is that since people can buy all the services that they want, the invisible hand of the market will produce the best possible outcomes. If some people do not have enough money, the purist would argue that the government needs only to tax the rich and transfer cash to the poor so that they too are able to freely participate in the market for healthcare services. In their view, any other intervention using the heavy hand of the government will only serve to make everybody less happy than they could have been if they were left alone.

Early on, it becomes clear that markets, however well-functioning, do not by design have the ability to provide public goods such as a well-functioning legal system or a pest control programme, which have the general characteristic that it is not possible to deny access to individuals who choose not to pay for them and whose consumption by one does not reduce its availability for another.

As a result, even market purists modified their original position to also include the financing and provision of public goods as a legitimate part of government intervention in the economy. In the context of healthcare, this meant that the provision of services, such as good pest control, sewerage systems, and water purification systems, could be included within the purview of government health expenditures over and beyond cash transfers to low-income families. However, the purists forgot that for the market to work even for other types of goods, a number of conditions need to be satisfied. Most notably, consumers must have the knowledge and the state of mind to be able to make informed choices, have consumer sovereignty and not let others affect their preferences easily, have the time and resources to shop for alternatives, and that choices exist in the market. It does not take an Economics PhD to figure out that many of these conditions are not satisfied in most situations related to healthcare. Besides, how often are prices and quality known before patients have to make their choices. Further, recent studies have shown we as human beings do not worry about the future as much as we rationally should (hyperbolic preferences) and that we are unable to fully comprehend both, our own health status, particularly in the context of non-acute diseases, such as diabetes and high blood pressure, and the complex advances in the science of healthcare, which even as we speak, continue to happen at a faster and faster pace.

We all know that despite being in the best of health, there is a possibility that any one of us could have a serious accident or have a mutation in our genes resulting in cancer. Medical science knows how to treat these rare diseases but the treatments are very expensive and can lead to catastrophic levels of expenditures for families. The mechanism of health insurance offers an obvious market-based solution. In some cases, a health insurance agency might also play a role to fill the knowledge gap between the provider and the patient.

The purist view is that since such a solution is available and individuals are free to purchase it, no intervention by the government is necessary. However, because as human beings we characteristically undervalue insurance when we are healthy, there is an inadequate demand for such voluntary insurance. And, even if people demanded it, the market worked against them because insurers worked hard to exclude those who needed insurance the most.

A view, therefore, began to gain currency that the government needed to intervene either to require that everybody buy such insurance or to use some of its tax resources to do this for the poor instead of handing over the amount to them as direct cash benefit transfers. However, while this does address some of the problems, it does not by itself result in a good health system design without the benefit of several other complementary interventions which change the manner in which healthcare is purchased and how providers are paid. And, don’t forget, the invisible hand works only in so far as price serves as the signal to direct resource allocation. For that to happen, the price has to be set at or near the cost of production.

Unfortunately, asymmetry of information between providers and patients give providers significant monopoly power, if left unregulated, to set prices way above cost. Further, providers have the ability to influence patient preferences by recommending them more quantity and more intensive treatment than clinically justified (supplier induced demand), leading to waste and inefficiency, and ultimately, they are paid for by the patients. Governments have every role and responsibility to set the right price for both providers and consumers in these situations.

Given all of these features of healthcare, it is now clear to all countries, including almost entirely free-market based economies such as the US, that policymaking based on a simplistic understanding of the role of the government and that of the functioning of markets is likely to lead countries seriously astray and result in equilibria that are neither efficient nor welfare maximizing.

However, it is not the case that the only alternatives to market fundamentalism are full financing of the healthcare system from general tax revenues or the full provision of all healthcare by the government. Each country and, for large countries like India and China, each region within a country, would have to carefully think through its unique situation and find answers to these complex questions in a manner that best suits its environment, culture and resources. It is gratifying to observe that countries as different as the Philippines, Ghana, Thailand, Indonesia, Kenya and Kazakhstan have started down this journey and are in the process of putting in place the pillars of a sound health system, which combine the role of the government and the free market in a thoughtful way.

Publication does not imply endorsement of views by the World Economic Forum.

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Authors: Nachiket Mor is senior advisor at Bill & Melinda Gates Foundation and former board member at Reserve Bank of India. Winnie Yip is Professor of Health Policy and Economics at the Blavatnik School of Government, University of Oxford.

Image: A surgery nurse puts on gloves before procedures on a patient. REUTERS/Fabrizio Bensch.