Examine The Arguments For Governments Providing A Free Healthcare System - What Role Might A Price System Play In Overcoming The Disadvantages Of A Public (NHS) System?

Under-consumption of healthcare results in a net welfare loss to society such that the benefits forgone are greater than the cost of providing basic healthcare.  Social efficiency is maximised where marginal social benefit equals marginal social cost. Where MSB = MSC Pareto optimality is achieved providing perfection competition and absence of externalities are fulfilled. The provision of public healthcare, as shown in the diagram below, indicates that MSB exceeds MSC but only at the expense of D>S when P=0.  This premise is the fundamental problem with a publicly provided healthcare system, for example, the NHS, in that demand for healthcare is greater than supply; and in the absence of the price mechanism, demand is rationed through waiting lists. If we assume that consumer demand for healthcare slopes downwards from left to right in the conventional fashion, and that the supply of healthcare services is perfectly inelastic in the short term, fixed by the quantity of NHS resources available in terms of hospitals, doctors, beds, nurses, equipment etc. demand exceeds supply by amount equal to (0Q1 – 0Q2) when price equals zero. This shortage of resources is an extremely familiar feature of the system.

The answer to the ‘waiting list crisis’ or rather the excess of demand over supply would appear to be the provision of an increase in NHS resources, or rather the facilitation of a rightward shift in the position of the supply curve. However, a publicly provided healthcare system, such as the NHS generates revenues through the hypothecation of public taxation and government budgetary revenues. Supply of healthcare in the UK has been limited by government funding constraints and public sector pay freezes have reduced the attractiveness of the medical professions. A lack of investment due to the endemic under-funding of the NHS has resulted in the NHS lacking the facilities and infrastructure to cater for the rising demand. Staff shortages are the result of poor working conditions and pay, which discourages prospective GPs and ancillary medical staff. These shortages of skilled labour have contributed to the waiting list problem and, due to the extra workload for GPs, significantly reduced morale. If a political decision is made to increase government expenditure on factors of production of healthcare (i.e. training more doctors & nurses, building hospitals, providing more equipment etc) then in due course the supply curve will shift to the right to equate supply with demand when price equals zero.  

However, the suggestion that a significant increase in supply will eliminate the waiting list assumes that the demand curve is static, which experience has indicated to the contrary in that demand for healthcare increases over time behaving in a somewhat counter-intuitive way. Says Law, as it is sometimes referred to, provides a rare example in economics of supply ‘creating its own demand’. One of the most fascinating aspects of the market for healthcare is the view frequently put forward that the success of the NHS in providing universal healthcare free at the point of access has led to increasing social awareness about health and rising expectations among the population of better health, as well as rising real incomes, an ageing population, increased expectations and the availability of new medical technology. Increased supply of healthcare is constrained by the likely need for still further increases in resources to satisfy further rises in demand. 

The provision of public health system, such as the NHS however is argued to be significantly more productively efficient with regards to economies of scale in comparison to the private healthcare systems of continental Europe and the USA.  Bed utilisation is considerably higher than in Europe or the USA because the NHS has much greater control of when patients are to be treated; equally, drug costs are lower because doctors in the NHS are encouraged to prescribe the minimum doses necessary of the cheapest drugs available. The amount spent on the NHS is about two-thirds of that in France and Germany and half that of the USA as a percentage of national income. It can be argued that this is because the NHS provides lower quality healthcare than in other countries.

Diseconomies of scale is also claimed to be present within the NHS, due to its large bureaucracy that management is unable to control costs and utilise resources efficiently. The NHS does exhibit x-efficiency though with the creation of internal markets where hospitals compete amongst one another for patients.  

Inherently, a publicly provided healthcare system does exhibit problems of inefficiency looking at the NHS in the UK due to the absence of a price mechanism. A healthcare system determined by price would operate on the basic competitive model of supply and demand. Healthcare goods and services would be regulated through the incentives of the price mechanism, coordinating the plans of rational consumers exerting their consumer sovereignty according to budget constraints, and profit maximising producers with privately owned resources with some government regulatory controls.

Equilibrium is achieved when demand equals supply; consumers demonstrate rational utility maximising behaviour – they allocate their relatively scarce incomes in ways that yield, to themselves, the greatest ‘value for money’ in the healthcare sector- in conjunction with the rational profit maximising behaviour of firms to mutually reconcile the level of supply of healthcare with the level of demand. Figure 1 below illustrates this point.  

Under the assumption of a price mechanism healthcare system:

• Demand Price = marginal utility for the consumer; IC = BC
• Supply Price = marginal costs of production for the firm.
• MC = MU for all producers and all consumers.
• Competition between firms maintains equilibrium; a firm’s inability to monitor consumer demand or supply at equilibrium price without providing a differentiated product that matches consumer utility will exit the market.

The introduction of the profit-motive into the healthcare market would result in competition through pressure to lower costs of production and lead to subsequent competition in the factor market for healthcare; economic theory suggests that adjustments will occur in each related market with a corresponding change in resource allocation until a position of general equilibrium is obtained. This corresponds to labour and capital costs of healthcare.

A price system within healthcare would therefore demonstrates to an extent the presence of economic – allocative and productive – efficiency; Resources would be used in an optimum way to gain maximum utility with production at the lowest possible cost i.e. efficient production; P=MC. A private healthcare sector would also be dynamically efficient through innovation and investment in research and development due to greater revenues generated as a result of the price mechanism.  

The foreseeable problem with a healthcare system wholly dominated by a price-mechanism would be social unfairness with regards to providing healthcare to poorer people and the fear of under-consumption of healthcare due to its merit and public good properties; notwithstanding over consideration of the profit motive to ‘cut corners’ within healthcare, for example, the NHS repeats the AIDs test three times whilst private health companies in the UK carries out the test only once on the same blood sample.

Perhaps a ‘private-public partnership’ would provide greater social efficiency whereby only certain elements of healthcare were co-ordinated through the price mechanism and the majority publicly provided. One idea, adopted in Sweden, is to charge patients for appointments. As well as providing an additional source of income for the NHS, it would also decrease the number of time wasters in GP waiting rooms. This charge would also encourage patients to make more use of services provided by pharmacies and NHS Direct thereby reducing the workload of GPs. To ensure that the poor and elderly aren't discouraged from seeking treatment, exemptions could be made based on income or age.  

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