Why Government Should Provide Health Care: Market Failures

Introduction: The Case for Government Involvement

The government should provide health care because the economic characteristics of health care make it ripe for abuse in a market environment. Governments should provide, as a service to their populations, those goods that — for one reason or another — are open to abuse in a normal market economy. Normally, the main condition justifying this is natural monopoly, which makes the case for government involvement in commodities like electricity, water, or policing. Health care is not a natural monopoly in that there can reasonably be a number of different providers, but it has other characteristics that make it a strong candidate for government intervention.

In even the freest capitalist economies, there are public goods that the government provides. Government provision of certain services is accepted by populations because the alternative — total anarchy — results in a severely degraded quality of life. No government services at all produces a failed state; one of the clearest examples in the world today is Somalia. In the absence of any viable government, the quality of life is reduced to Hobbes' state of nature, characterized mainly by continual fear of death, given the lack of security, which in turn means perpetual violent competition for the basic means of survival (Lloyd & Sreedhar, 2014). Even the most ardent libertarians in today's society accept that communities benefit from at least some government intervention, if only to govern and regulate the most fundamental of markets.

Where one draws the line on which goods and services are public — and therefore subject to government involvement — is a matter of social preference. The wealthiest, most powerful individuals might see freedom from regulation as more opportunity than threat, while the poorest among us have little power to defend their interests and may therefore prefer more government intervention in markets, so as to increase their own market power. It is perfectly reasonable for a society to reject the idea that health care should be subject to government intervention.

The interesting thing about that argument, however, is that health care is already one of the most heavily regulated markets in America. Moreover, many goods that are entirely superfluous to the quality of daily life are subject to myriad regulations. Consider the humble bottle of cola. This product is entirely unnecessary, and nobody would suffer in the slightest if it were banned entirely, yet it is subject to FDA mandates regarding its production, Department of Justice mandates guarding against monopolies in its industry, and SEC rules defending against securities fraud by executives. Health care is arguably far more important than cola and is thus subject to many more, and more stringent, restrictions on its trade.

Opposition to Government-Provided Health Care

The level of government intervention in a market is ultimately determined by the society in which the market exists; it is a matter of collective preference. The opposition to government provision of health care is seldom without bias. Typically, opponents cite economic arguments — holding that competition drives down prices, increases quality, and improves availability. All of these claims are conditionally true, but only if one's understanding of the underlying economic concepts is thorough. Government provision of health care would most certainly reduce market efficiency: taxes would need to increase, and this would reduce the allocative efficiency of the economy (Sanders, 1989). Additionally, opponents argue that people would lack the incentive to look after their own health because they would not directly bear the costs of their choices, instead offloading those costs onto the taxpayer. Some have also argued that corruption is inherent in government provision of services, from which flow further claims of inefficiency and reduced overall investment (Gupta, Davoodi & Tiongson, 2001).

Why the Opposition Arguments Fall Short

The opponents' claims rest on only the most rudimentary understanding of economic concepts. The corruption argument, in particular, does not hold up to scrutiny. The implication that public officials are more susceptible to corruption than private interests reverses reality. While there is doubtless some public corruption — the U.S. ranks 17th on the Corruption Perceptions Index (TI, 2014) — private enterprise always places the profit motive ahead of other considerations. What is corruption if not a manifestation of the profit motive? Where there is no profit motive distorting behavior, there is no pursuit of profit at the expense of duty of care, which inherently implies that public provision of services should be superior in this regard.

More significant is the issue of allocative efficiency, because that argument is rooted in genuine economic thought. Allocative efficiency occurs under conditions of perfect competition, or something close to it, but the actual economic condition of health care is far from perfect. In economic terms, perfect competition is a state in which providers are undifferentiated and buyers have perfect information. Under such conditions, there is no opportunity for abnormal profit and thus perfect allocative efficiency results. There are few, if any, truly perfect markets in the real world — it is a concept more at home in the theoretical world of economic study. Relatively free markets can approach this condition, and firms earn modest profits when they are able to differentiate their goods. Health care, however, falls dramatically short of these conditions.

Market Failure in Health Care: Price Elasticity and Information Asymmetry

In health care, market conditions actively encourage extensive profit-taking — and that is precisely what occurs. The first reason is that there is very low price elasticity of demand for health care. Because health care is central to life and quality of life, people are generally willing to pay whatever is necessary to become healthy again when the opportunity exists. This low elasticity alone can be leveraged by firms to maximize profits.

The second factor is substantial information asymmetry, a characteristic that places economic advantage with those who hold the higher level of information. Health care professionals and managers possess expert knowledge derived from years of training, while consumers have very limited knowledge of what health care procedures involve, whether those procedures are necessary, or what a reasonable cost might be. This asymmetry is further compounded by the barriers between the end user and the provider — namely, insurance companies and employers. Insurance companies take a profit margin, and employers exhibit low price elasticity of demand despite their apparent bargaining power. It would be unusual for a company to actively bargain with a health care provider through its insurer over a bill. This has led to concerns that insurance companies are not contributing sufficiently to cost control — they function as price takers not because their margins are large (they are not) but because they can pass costs along to an inelastic consumer base (Besley & Gouveia, n.d.).

Thus, there are few effective controls to curtail market abuses. Compounding this, market abuse in health care occurs with the tacit consent of government — the FDA grants monopoly conditions on new drugs and medical devices, knowing full well that the companies involved will seek to maximize their profits. Profit-maximizing behavior in other industries is checked by buyer information or higher price elasticity of demand, but both of these moderating forces are strongly in favor of the health care industry rather than the consumer.