Transcript Resource Allocation & “The Market”

RESOURCE ALLOCATION &
“THE MARKET”
• Demand, supply and the market
• Sources of “failure” in the market for
health care
• The “insurance” system of funding
health care
• Resource allocation in the absence of
the “free” market - for discussion
DEMAND, SUPPLY
AND THE MARKET
• 1.
• 2.
• 3.
Concept of Demand (“buyers”)
- demand curve
- influences on demand
Concept of Supply (“sellers”)
- supply curve
- influences on supply
Concept of the Market (“exchange”)
- interaction of d+s
- equilibrium (through price mechanism)
DEMAND
• Consumers purchase those commodities
which, subject to their income constraint,
maximise their utility
• “Demand” =
willingness and ability to pay
for a commodity at each and
every price, over a given
period of time, subject to all
else being constant (ceterus
paribus)
DEMAND CURVE
Price
$
2
1.50
0
2
D=MB
No. Mars Bars
4
DETERMINANTS OF
DEMAND
• (Full ) price of the commodity
• Prices of other commodities - compliments
- substitutes
• Consumer income/wealth
• Consumer “tastes” (need?)
INCREASE IN DEMAND
Price
$
A  B caused by fall in price
A  C caused by increase in income
A
2
C
B
1.50
D1
D
0
2
4
No. Mars Bars
“ELASTICITY” OF DEMAND
• Price elasticity = % change in quantity demanded
% change in price
• Shows responsiveness of demand to price
• If :
PE< 1 = inelastic
PE> 1 = elastic
PE = 1 = unitary elasticity
• Main determinant = availability of substitutes
PRICE ELASTICITY
ILLUSTRATED
P
po
P1
Dpe
Dpi
Q
Qo`
Qi
Qe
SUPPLY
• Firms produce those commodities
which, subject to capacity, maximise
their profit.
• “Supply” = willingness and ability to
sell a commodity at each
and every price, over a
given period of time,
subject to all else being
constant (ceterus paribus)
SUPPLY CURVE
Price
$
S=MC
2
1.50
0
2
No. Mars Bars
4
DETERMINANTS OF
SUPPLY
•
•
•
•
Price of the commodity
Prices of factors of production (cost)
State of technology
Other “goals” of firm
INCREASE IN SUPPLY
A  B caused by increase in price
A  C caused by improved technology
Price
$
S
S1
B
2
1.50
0
A
C
2
No. Mars Bars
4
ELASTICITY OF SUPPLY
• Supply elasticity = % change in quantity supplied
% change in price
• Shows responsiveness of supply to price
• If:
SE < 1 = inelastic
SE > 1 = elastic
SE = 1 = unitary elasticity
• Main determinant = flexibility in production
SUPPLY ELASTICITY
ILLUSTRATED
Si
P
Se
P1
Po
Q
Qo`
Qi
Qe
MARKET EQUILIBRIUM
Price
$
S=MC
2
0
2
D=MB
No. Mars Bars
EXCESS SUPPLY
Price
$
S
A
B
3
E
2
D
0
1
2
3
No. Mars Bars
EXCESS DEMAND
Price
$
S
E
2
A
1
B
D
0
1
2
3
No. Mars Bars
NECCESSARY CONDITIONS
FOR COMPETITIVE
MARKET
1 No barriers to entry or exit (large number
of independent buyers and sellers)
2 Consumer bears costs and receives
benefit
3 Consumer has perfect information on cost
and benefits
WHY HEALTHCARE MARKETS
“FAIL”
1. Uncertainty
2. Imperfect information and
knowledge imbalance
3. Monopoly
4. Externalities
5. (Equity)
INFORMATION ASYMMETRY
Lack information on cost, effectiveness,
benefits etc.
Not physically/mentally able to make
choice.
Leads to “agency relationship”.
Potential for “supplier-induced demand”.
IMPLICATION OF SID
P
S
D
D1
D2
Q
MONOPOLY
MONOPOLY
= one producer who
determines price and
quantity
OLIGOPOLY
= few producers who
collude to set price.
Engage in non price competition
EXTERNALITIES
Positive
eg.
Vaccination
Negative e.g. Antibiotic Resistance
POSITIVE EXTERNALITY
Price
$
S=MC
4
2
MSB
1
D=MPB
0
2
4
Quantity
EQUITY
• The competitive market will yield a
distribution of commodities which is
efficient.
• “Inequity” of distribution is NOT a “failure”
of the market - it is not “designed” to
achieve this.
• Equity is additional/alternative objective or
a constraint
THE “INSURANCE”
MARKET
Is a means by which a third party will pay for
care out of a central fund that individuals have
paid into; either by premium or taxation.
Is the “market” solution to uncertainty
concerning the timing and magnitude of
expenditure.
DEMAND FOR INSURANCE
Degree of risk aversion
Probability of requiring treatment
Cost of treatment
Premium “loading”
Income
SOCIAL REASONS FOR
“INSURANCE”
1. Systematic transfer from low to
high risk, young to old.
2. Systematic transfer of income
from rich to poor.
ADVERSE SELECTION
Insurance may cover more high risk than low
risk individuals. If too many high risk cases are
covered, there will be excessive payouts, the
insurance company will lose money, premiums
will have to rise further, and the insurance
company will eventually close.
IMPORTANCE OF ADVERSE
SELECTION IN “POOLING”
HEALTH RISK
1. Variation in individual cost extremely wide.
2. Significant proportion of variance in individual
cost is predictable.
3. High cost of insurers acquiring knowledge.
“SOLUTION” TO ADVERSE
SELECTION
experience rating
exclusions and benefit ceilings
subsidisation of those “in need”
 publicly financed health care systems
MORAL HAZARD

Once insured against “X”, “X” more likely to
occur.

Full insurance means money cost facing
consumer = zero.

Leads to “excess” demand - benefits from
resources used for providing health care
less that the benefits foregone from an
alternative use.
MORAL HAZARD
$ per unit of HC
D
Welfare loss
Po
MC
D
0
Qo
Quantity of HC
Q1
“SOLUTION” TO MORAL
HAZARD
 use of co-payments or user charges
 incentives to demand care from selected lowcost providers (PPOs)
 combining insurer with provider (HMOs)
 use of primary care as “gateway” to services
 non-price rationing (waiting lists)
CO- PAYMENTS
$ per unit of HC
D
Welfare loss
Po
MC
P2
D
0
Qo
Q2
Q1
Quantity of HC
PUBLIC INTERVENTION
Subsidisation and/or regulation of private insurers.
Selective subsidies or provision of free services.
Public provision and/or social insurance coverage.