Healthcare As A Market Failure: Why Public Policy Should Step In
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Healthcare As A Market Failure: Why Public Policy Should Step In

Describes and briefly analyzes the results of market forces on American healthcare. Touches on how the concept of healthcare in america has changed from an economic good into a moral, ethical value, and a public good.

Many have made the claim that healthcare in America is a broken system. They point to the 47 million people who are uninsured as proof that American style healthcare doesn’t do what is suppose to: provide people with healthcare. It seems that the development of modern medicine, coupled with ever improving medical technology, has created better healthcare opportunities for the average person.

This is evident in the increased life expectancy that many people now enjoy; whereas not very long ago the average life expectancy was roughly 10 years lower. I see two major changes that have occurred within society in the last 15 to 20 years. First, it appears that the public is much more aware about the innovation being made in medicine. Second, the public is much more concerned about their individual health and the health of their loved ones. This by no means is a new phenomenon.

Healthcare has been an important political issue for at least 50 years, but it is only in the recent past that it has really become a salient issue. People care so much about healthcare that they now believe, in my opinion, that they have a right to healthcare. People will argue that the public does have access to healthcare, but they have access in principle only and not de facto. The extremely high price of healthcare in America is preventing the public from receiving quality healthcare. The increasing amount of companies who do not offer healthcare benefits to their employees is only worsening the situation. Access to healthcare has worked its way into the American value system, and the current healthcare system is a clear example of a market failure to meet the peoples’ needs.

In the United States, health care is provided by several legal entities. Health care in America is combination of public and private health insurance. People pay their insurance premiums in a private plan or, in the case of public plans, meet certain criteria to be eligible for government subsidized care. In fact the U.S. spends more on health care, on both a per capita scale and as a proportion of GDP, than any other nation in the world. Despite this, the healthcare needs of the public are not being met. Some estimates even put current U.S. health care at approximately 16% of GDP, and that number is expected to climb. When you take this data and compare it with the rest of the industrialized world you begin to see some stark contrasts in terms of efficiency. There are other modernized states that provided universal healthcare. Notable examples are Canada and the U.K. For the year 2007, the U.S. spent 2.26 trillion on healthcare. That comes out to 7,439 dollars per person. Therefore, in America we spend more on healthcare but cover less people than in countries that have universal healthcare. There they spend less and cover everybody. From these facts it becomes apparent that healthcare in America is an example of a market failure. General equilibrium for healthcare in America is non-existent. The quantity of healthcare being supplied is not equal to the amount being demanded, and this makes it inefficient.

Government has perhaps been aware of this. They must have had some reason for creating the Medicaid and Medicare health systems. Medicaid and Medicare were attempts by government to cover the difference between the amount of healthcare being demanded and the amount being supplied. This may or may not have worked then; now it has become evident that they do not. The government has been aware of this failure for some time now and has attempted to remedy it. Medicare and Medicaid were their first attempts but they were not their last. Government has subsidized healthcare through tax breaks. In effect an individual does not pay the full costs of their healthcare expenditures because the government will let you deduct or write off the expenses on your income tax. Depending on your tax rate you can save as much as 25 percent on healthcare bills. Another government method used to help ease the cost of healthcare is allowing individuals to make pretax payroll contributions to their company health plans. This in effect saves the individual money by lowering the their taxable income, which in turn lowers their tax liability, all while the individual makes his payroll contributions. A few reasons these methods do not work are that young people, who are the least insured, choose not to itemize deductions, which in effect nullifies tax subsidies, and the cost of health care in general too high. The cost is so high that people may not be able to afford health insurance or healthcare despite the tax incentives. These problems are further complicated by the fact that traditional employee health care benefits are becoming rarer and rarer.

Is healthcare a public good? Some would argue that yes it has become a public good. The idea of a right to healthcare is one that has made its way into the American consciousness; it has permeated American value systems. If healthcare is something that is no longer considered economic and is instead seen as a moral, ethical, or value laden issue, then it is well within the government sphere and can be considered a public good. In its current state it is a private good in that it rivalrous and excludable. But those are conditions created by the market. If government were to take complete control of healthcare then it would be possible to make it both non-rivalrous and non-excludable. In effect it would become public good by definition. Society as a whole would pay for healthcare and then they would all share in it. However, this presents its own problems. Mainly it has the potential to create a “free rider” problem or another “tragedy of the commons”, in short if healthcare were transformed into a public good it would be subject to congestion. The classic solution of assigning property rights would in this case be ineffective. Assigning property rights to healthcare is what caused the need for government intervention in the first place.

The importance of human dignity in our socioeconomic system further complicates matters. One of the reasons for the existence of government is to support and uphold important societal values that the market alone will not. Healthcare has made it into those important values. One of the reasons this is so is because of the remarkable advances in medicine. In past times the medical treatment received by both the rich and the poor alike, was, scientifically speaking, not much different. That is simply not the case anymore. The innovation in medical science has come at a price and that price must be passed along to someone. So it is that the rich can now afford much better care than the lower socioeconomic classes. This raises questions about fairness. It is the government’s role as the facilitators of community to maintain some semblance of fairness. Humans want or need a sense of fairness or wellbeing if they are to be part of a community. The concepts of justice and moral integrity have become applicable to the idea of healthcare. This was not the case in the past. Because healthcare has become so important to people, and because it is being incorporated with the values of justice and moral integrity, healthcare has made its way into the public sphere; it has transformed into a public good. The market has failed because it is not able to provide all those who need healthcare with healthcare. Further proof of this transformation is the salience of the issue it politics. Candidates now run on healthcare reform platforms that promise change for the better.

Despite government efforts to provide insurance and cushions for individuals who are not able to afford healthcare, inefficiencies in healthcare access persist. The lack of equilibrium for a good as vital as healthcare is excellent rationale for public policy. The market has failed to resolve issues of scarcity and so the government should step in to provide the good for all. This would be the fair and just thing to do. The government has obligations which are not economic in nature, and among those is the protection of the cultural and societal values that underlie our socioeconomic system. Among those values are the concepts of fairness, justice and human dignity. To further exemplify the failure of the private market in providing healthcare I point to the fact that as recently as 2004 government paid 44% of all healthcare expenses, yet despite this assistance the market was unable to provide all with healthcare. If you conceptualize transaction as both the occurrence of a transaction and non-occurrence of a desired transaction, then this market failure also produce negative externalities for society. For instance, an injured or ill person who cannot seek care will undoubtedly stop working. This is a negative externality for that person’s employer who must now seek and train a replacement. Further if you multiply this effect by the total number of people who are ill but cannot seek care, then you have the possibility of very dire consequences. For these reasons and many more, it is evident that the current status of the American healthcare system is the result of a market failure.

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