Australian Politics and Policy - Senior, 2019a

Australian Politics and Policy
But even in countries ideologically committed to private mechanisms,
governments still become involved in at least partially funding health care. Table 1
shows how health care is funded in high-income ‘developed’ countries.
Whatever form insurance takes, those seeking health care usually have to
make some out-of-pocket outlays. Such payments may be in the form of a fixed
partial contribution (as with pharmaceuticals in Australia) or in the form of
payments that accumulate before the insurer, usually a government insurer, covers
all or a large part of further expenses. In high-income ‘developed’ countries,
including Australia, out-of-pocket expenses are generally around one-fifth of total
health care expenditure, although they can vary tremendously between different
services.
Market failures in health care
Government involvement in health care isn’t just about achieving some form of
equity through community rating. There are also ‘market failures’ in the provision
of health care. In the economists’ model of well-functioning competitive markets
there are many conditions to be satisfied, including easy and free exchange of
information between suppliers and customers, and the absence of monopolisation
or concentration of market power. Markets for clothes and fresh fruit come close
to the ideal competitive model, but health care is far removed from it in three
important ways.
First it is almost impossible for consumers to judge the quality of services on
offer.Althoughthereisnoshortageofwebsiteswithhealthadvice,inhealthcare
theconsumerisgenerallyinapositionwhereheorshemustplaceahighdegree
of trust in the professional judgement, education and expertise of the medical
practitioners or other health professionals providing services. Economists refer to
this as a situation of ‘information asymmetry’.
Second, there is the potential for service providers, particularly medical
specialists with highly specific skills, to exert a high degree of market power. We
expect medical specialists to be well qualified, with tough university admission
requirements and many years of rigorous training. This, in itself, makes for scarce
supply, and when the professional bodies themselves have some power over
accreditation they can restrict supply even further. Such supply limitations give
service providers the power to set high prices.
Similarly for pharmaceuticals there is an inbuilt degree of market power
enjoyed by large corporations. Bringing a new pharmaceutical to market involves
large outlays on science and discovery and on clinical trials, easily running into
hundreds of millions of dollars. In order to encourage firms to make such
investments, governments offer pharmaceutical firms patent protection – usually
in the order of 20 years. Without patent protection there would be little incentive
for development of new medicines, but with patent protection pharmaceutical
firmswouldbeabletousetheirmarketpowertochargeveryhighpricesfor
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