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1. HEALTH CARE MARKET
Prabesh Ghimire
Health Economics
Health Economic and Health Financing

2. Review of Ideal market conditions
Many buyers and sellers
No barriers to entry and exit
Product homogeneity
Demand certainty: regular and predictable
Supply certainty
• Know the predictable quality of products, avoidable risks
• Customer’s ability to test the product before consumption
• Information symmetry (between buyers and sellers)
• No price discrimination
• Suppliers have profit motive
• Supply and demand are independently predetermined
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3. Health care market
Markets that meet all necessary conditions is ideal-
Perfect Market
In reality, there can be markets failure because necessary
conditions for perfect/free market are rarely met
Structure of health care market is not competitive
Many conditions of perfect competition in general
competitive market are not met in health care market
Market failure is obvious in health care market
• Interventions are required from outside (government)
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4. Forms of health care markets
Health care education market
• How many doctors, nurses and other professionals are
trained every year
• How many professionals are available to provide
service
• Prices can be viewed in terms of tuition and other costs
to individual receiving health professions’ education.
Health manpower market
• Determines labour prices (salaries and wages) paid to
professionals
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5. Forms of health care markets
Health Institutional market
• Determines prices for hospital stays, or stays in nursing
homes
Pharmaceutical
• Prices of medications are determined.
Because of the nature of product for sale and structure,
health care markets do not meet ideal perfect market
conditions
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6. CHARACTERISTICS
OF
HEALTH CARE MARKET
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7. Entry and exit
Health care market have barriers to entry and exit
Examples:
• Professional licensing
• National standards (for health institution establishment and
operations),
• long and expensive training,
• expensive investment requirements (hospitals are expensive to
build and maintain)
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8. Nature of competition
Oligopoly
• There might be a few hospitals in a city
Monopoly
• Only one hospital in a rural location
• A drug company with a patent is a monopoly with the
power to set prices.
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9. Product differentiation
Products are not homogenous
• The services of one physician are not identical to those of another
Consumers pay different prices for the same service
depending on their incomes or bargaining power.
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Price discrimination
Prabesh Ghimire

10. Information asymmetry
Between doctor and patient
• Doctors (suppliers) know more about illness and
treatments
• Patients depend on the doctor in their best interest
• Conflict of interest: doctor is supplier as well as in a
position to determine demand for health service.
• Demand and supply determined by same individual-
market failure
• Supplier induced demand>>doctor’s monopoly
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11. Information asymmetry
Between consumer and health care organization
(insurance company)
• Adverse selection
• Individuals in poor health have a greater incentive to
purchase health insurance- greater service utilization
• Set higher premium- to avoid losses
• Higher premium discourages healthy individuals and only
very ill buy insurance>>loss>> market failure
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12. Information asymmetry
Between consumer and health care organization
(insurance company)
• Moral hazard
• Insured frequently use health services that to adopt
precautions to remain healthy
• Inefficient use of resources
• Correction by co-payment and deductibles
• Applied even for those not overusing services
>>>>inefficiency
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13. Consumer sovereignty
Not in a position to make the best judgment about welfare
even if they have the ability and freedom to do so.
Lack necessary information about their illness or the
effective treatment
Consumers cannot accurately predict the result of
consuming health care
• Treatment regimen that worked previously might not work the same
way
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14. Externalities
Externalities are spillover effects of consumption or
production
Positive externalities occur when the actions of individual
result in spill-over that improves the well being of another
individual
• Immunization>> herd immunity
Negative externalities impose a cost on another individual
• Smoking>>second-hand smoke
Externalities lead to inefficiency>>market failure
Corrections: taxes, subsidies
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15. Profit
Objective of a producer is to maximize profit.
Producers seeking to maximize are forced to be efficient
• Reduce production costs so as to increase their profits.
In health care, not all firms are profit driven
• Firms do not always strive for efficiency
Profit motive condition of perfect market is contravened in
health car market
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16. Prabesh Ghimire 16

17. ROLES OF GOVERNMENT
IN
HEALTH CARE MARKET
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18. Roles of government
Government interventions are necessary to respond to
market failure in health
To address inefficiency in health care market
Some interventions:
• Taxes
• Subsidies
• Regulations
• Operating control
• Providing services directly
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19. Roles of government
Provide subsidies
• Subsidies on health commodities such as vaccines,
medical equipment….
• Subsidies on consumption
Taxation
• Makes the producer aware of the extra costs that they
impose on society so that they can arrive at optimum
quantities in their decision making
• Environmental taxes, Tobacco taxes
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20. Roles of government
Regulations
• Permissible limits: as in air pollution
• Environment Impact Assessment
• Food act, pesticide act
• Tobacco, alcohol law
Operating controls
• Control mechanisms to limit the activities of business
form
• Control on environment pollution
• Price control
• Protection of minority groups (safety nets)
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21. Roles of government
Providing health services directly
• Inclusion of individuals unable to pay for services
Addressing information asymmetries (supplier
induced demand)
• Monitoring and fraud detection
• Various means of contracting
Addressing adverse selection and moral hazards
• Adjusting premiums
• Co-payments and deductibles
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22. Roles of government
Regulation to natural monopoly
• Drinking water supply, salt are natural monopolies
• Government regulates price of these market
• Price regulation is to protect consumers.
• Price control can sometimes can lead to shortages or
surplus
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Queries & Discussion…
Prabesh Ghimire