5.1 Government Policy
5.1.1 Why Do Governments Intervene?
Government involvement in the economy is typically analyzed through the lens of market failure. However, when it comes to healthcare, there are several market failures to consider.
I. Externalities
One argument for public involvement in healthcare is the presence of externalities. If one individual is sick, then the likelihood that others around that person get sick increases. Individuals typically make decisions about their healthcare without thinking much about the effects of their decisions on the welfare of others. For example, a person may decide to go to work even though they are suffering from the flu because of financial strains, and may not think very much about the likelihood of infecting others. This scenario is a classic example of an externality.
II. Commitment
Through legislation passed in 1986, hospitals are required to treat patients in emergency situations whether or not they have insurance. The regulation is called the Emergency Medical Treatment and Labor Act, also known as EMTALA (Centers for Medicare & Medicaid Services, n.d.-a). Although the regulation applies only to those hospitals that accept Medicare, it is almost universal. Treating the uninsured is an inefficient way for a hospital to treat people. One consequence is that the uninsured are incentivized to seek routine care in hospital emergency rooms, even though this is an expensive place to provide care. Suppose hospitals could commit to only serving those with health insurance to ensure they are paid for the delivery of care. In that case, some of the uninsured might be induced to purchase health insurance instead of relying on emergency departments for routine care. However, hospitals cannot make such a commitment, and it would run counter to the Hippocratic Oath. “The Hippocratic Oath is perhaps the most widely known of Greek medical texts. It requires a new physician to swear upon a number of healing gods that he will uphold a number of professional ethical standards” (National Institutes of Health, 2012).
Review fact sheet (Centers for Medicare & Medicaid Services, n.d.-a): Know Your Rights: Emergency Medical Treatment and Labor Act (EMTALA)
Review webpage (National Institutes of Health, 2012): Hippocractic Oath
III. Adverse Selection and Moral Hazard
These concepts were presented in Chapter 3: Health Insurance. Please review 3.1.2 Adverse Selection and 3.1.3 Moral Hazard.
IV. Drug Quality & Doctor Quality
The healthcare market is filled with gaps in information. As a result, patients and even their doctors cannot fully assess the safety and efficacy of pharmaceutical products. Although drug companies test their own products, the government has a role in assessing this information and determining the safety and effectiveness of medications.
Another informational problem in the healthcare market is a patient’s inability to properly evaluate the quality of a doctor. A patient can look at some indications of their doctor’s ability, such as years of practice, school of graduation, and the number of people in the waiting room. But it is impossible to make a fully informed judgment about the quality of a doctor. Again, the government plays a role by requiring that doctors obtain specialized training and pass a licensing examination before they are allowed to practice.
V. Patents
According to the World Intellectual Property Organization (n.d.):
A patent is an exclusive right granted for an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem. To get a patent, technical information about the invention must be disclosed to the public in a patent application.
The investment into the research and development needed to create a new drug is substantial. The patent system exists to protect firms from potential competitors producing the same product and selling it at a lower price, which could negatively impact the firm’s ability to earn a return on the investment. Although price competition may be valued from a consumer’s point of view, it destroys the initial incentives a firm has to undertake for research and development. Therefore, governments provide patent protection for a period of time to induce firms to make substantial investments in research and development.
VI. Market Power
Market outcomes are inefficient when there are relatively few sellers of a product. This situation may occur in various healthcare markets because there may be relatively few doctors and few hospitals in a given location. Furthermore, pharmaceutical companies have market power based on exclusive knowledge of their specific product, as protected through patents. Finally, there are relatively few health insurance providers, and some are very large.
VII. Equity and Fairness
One argument for government involvement is to provide for a more equitable allocation of goods and services. From this perspective, the fact that many Americans lack health insurance and adequate healthcare is also a basis for government involvement. According to the United Nations (n.d.), Article 25 of the Universal Declaration of Human Rights includes the right to healthcare:
Everyone has the right to a standard of living adequate for the health and well-being of himself and their family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.
5.1.2 How Does the Government Intervene?
The government intervenes through tax free health insurance benefits and income taxes, reguations that influence market demand and supply, the provision of public health insurance, and the provision of health information.
I. Taxes and Subsidies
As previously mentioned, one of the key ways in which the government subsidizes healthcare is by allowing employees tax-free health insurance benefits provided by an employer. In this way, the government reduces the cost of firm-provided healthcare. It is now common for employment contracts in the United States to include a provision for healthcare.
One of the main issues surrounding employer-provided health insurance is the possibility of losing insurance when a person changes jobs (sometimes called the “portability problem”). In our economy, shifts in demand for goods and services and changes in productivity naturally lead to the creation of new jobs by some firms and the destruction of jobs by other (perhaps less profitable) firms. Therefore, the efficient working of an economy requires that workers leave old jobs for new ones. Unfortunately, insurance can get in the way of worker mobility. If a person has a job with health insurance, quitting their job to look for another may be costly for several reasons. First, they may lose insurance coverage while they are searching for a new job. Second, an ailment covered by insurance in their previous position could be viewed as a preexisting condition when they apply for insurance at a new firm. A preexisting condition can adversely affect insurance rates and coverage types. In some cases, people choose not to change jobs purely because of the implications on health insurance.
Healthcare is also subsidized through income taxes. If a person itemizes deductions for a taxable year, they may be able to deduct the expenses paid that year for medical and dental care for themselves, their spouse, and their dependents. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body (Internal Revenue Service, 2023).
II. Regulation
Government regulations are common in the health industry. These regulations influence both demand and supply in this market.
On the demand side, households are required to obtain certain medical services. For example, it is common for schools to require some vaccinations prior to admission. The argument for such interventions is that there are externalities from a person’s health to the health of others.
The government licenses or certifies many of the actors on the supply side of the healthcare market. This requirement is another form of quality control. Doctors who practice in a state must pass exams called medical boards. Hospitals are certified for the types of activities they offer. Often the certification occurs at the state level. Other providers of healthcare are also licensed. For example, a nursing home must be certified as a Medicare provider to receive reimbursements. The rationale for such interventions stems from the extensive information problems in the healthcare market. As consumers cannot accurately assess the quality of care provided by doctors and hospitals, the government provides a service to us all by regulating healthcare providers.
III. Provision of Insurance
The Department of Health and Human Services (HHS) is the federal agency that oversees the Center for Medicare and Medicaid Services, which administers programs for protecting the health of all Americans. Through its Medicare and Medicaid programs and the Children’s Health Insurance Program (CHIP), the government provides insurance to low-income, elderly, and disabled households.
There is continuing debate about expanding the availability of health insurance to the general population. A more fundamental question is whether the government should even be in the business of providing health insurance. One set of arguments for government involvement rests on the various market failures identified in this section. First, healthcare is complicated, and there are many ways in which healthcare markets depart from the competitive ideal. It is sometimes argued that spending on health services in the United States is very high because the market is inefficient. From that perspective, having the government in charge of this sector of the economy might reduce inefficiencies. Second, government involvement can be justified on the grounds of equity and fairness.
IV. Provision of Information
One of the primary roles of the government is to provide information to the public about health matters. Information comes in a variety of forms. In January 1966, the following warning first appeared on cigarette packs: “Warning: Cigarette Smoking May be Hazardous to Your Health.” This initial warning from the Surgeon General’s office of the United States was followed by many others concerning the consumption of cigarettes and other potentially harmful products. Such warnings are a good example of government provision of information. Each consumer of these products wants to know the impact on health. Gathering such information is a public good because the information is available to everyone and can be “consumed” by everyone simultaneously. Another form of information is through drug testing. The US Food and Drug Administration is responsible for testing drugs before they appear on the market. The FDA also supplies public information about a wide range of food items.
Knowledge Check
Drag each concept to its corresponding column.
