Free markets and health care policy

Health care in general, and health insurance in particular, have been described as classic examples of sectors rife with market failures. One of the best examples of this is the challenge facing government hospitals across much of developing world in their efforts to fill up large numbers of doctor vacancies in the face of competition from private hospitals.

The Times reports that China too is facing problems arising from doctors preferring the tertiary hospitals in large towns, thereby causing impoverishment of the primary and secondary hospitals in small towwns and villages.

In countries like India and China, which produce a few thousands of doctors every year, merely liberalizing private investments in health care without simultaneously strengthening the existing government primary and secondary health care facilities is a recipe for disaster.

In the absence of a strategic policy framewrk, the large numbers of corporate hospitals that continue to proliferate "crowds out" all the best doctors from the government health care system. This "crowding out" effect works in many dimensions

1. The older doctors in the government medical colleges, especially the most reputed ones, are incentivized to join corporate hospitals with handsome salaries (shares in each patient treated).

2. The newly graduated doctors, for whom the alternative is to either join a medical college or the primary health care hospitals as junior doctors (with attendant consequence of working in small towns and villages), the attraction of the large salaries and choice of staying on in the larger towns, is often irresistable.

3. Some older doctors who stay on in government hospitals consult part-time for the private hospitals. Some even have their own clinics. The result is reduced incentives to work sincerely in their government posts and even siphoning off of patients to the private hospital.

4. All the aforementioned effects are highly pronounced for specialists, whose scarce numbers (both existing ones and fresh graduates) cannot meet the massive demand in both government and private hospitals. In the competition for procuring the services of specialists, the private hospitals trumps the government ones with their much higher salaries and more flexible terms of employment.

5. The government hospitals are finally left with doctors who have not received offers from the private clinics (presumably because they are not considered as efficient or qualified as their peers who were offered jobs). Since the better doctors do not stop with the basic degree and work towards acquiring specialist skills, only those with the basic degree (and without the talent/opportunities to acquire the specialist skills) are left in the government system.

In other words, in a free labor market for doctors, the incentives are inherently structured such that the private hospitals end up displacing a large number of good doctors from the government hospitals and also "crowding-in" the better among the fresh graduates.

What is the policy framework that can regulate this "crowding out" so as to retain the effectiveness of government hospitals without adversely affecting the quality of private hospitals? Though arriving at the most effective mix of policies is a massive challenge, I will try to examine some of the possible solutions in forthcoming posts.