Chapter 13 - Government regulation and intervention (Part 1). This chapter presents the following content: Introduction, criteria for perfect competition, types of government intervention, public goods, externalities, smokers also impose health care costs on nonsmokers,...
Government Regulation and Intervention Part Vivian Ho Health Economics This material draws heavily from Santerre & Neun: Health Economics, Theories Insights and Industry Studies, Southwestern Cengate 2010 Introduction Causes and consequences of government intervention in health care Types of government intervention Case studies – Cigarette taxes – Price ceilings on health care services – Hospital antitrust litigation Criteria for perfect competition All firms and consumers are price takers Consumers and firms have perfect information All firms produce an identical product Firms can freely enter an exit an industry Market imperfections may lead to inefficient or inequitable distribution of resources Imperfect consumer information Monopoly Externalities Government intervenes to restore efficiency and/or equity • “Public interest theory.” An opposing theory: The amount and types of government intervention are determined by supply and demand Vote-maximizing politicians “supply” legislation Wealth maximizing special interest groups are the buyers Successful politicians stay in office by satisfying special interest groups “Special interest group theory” Examples: Extended patent protection for brand name drugs Rejection of national health insurance in favor of private insurance companies Special interest group theory claims that special interest groups gain at the expense of the general public Consumers are diverse, fragmented, more costly for them to organize Inefficient, inequitable resource allocation by government Which theory you believe? C-B analysis is needed to identify winners and losers Types of Government Intervention Provide public goods Fund medical research Correct for externalities Tax cigarettes, pollution Impose regulations Enforce antitrust laws Sponsor redistribution programs Operate public enterprises FDA Bar hospital mergers Medicare and Medicaid VA hospitals Public Goods >1 individual simultaneously receives benefits from the good i.e., no rivalry in consumption Costly to exclude nonpayers from consumption of the good Private firms unwilling to produce and sell public goods Are most medical services public goods? Externalities Definition: An unpriced byproduct of production or consumption that adversely affects another party not directly involved in the market transaction Cigarette smoking Pollution Medical treatment for cyclists who don’t wear helmets Drunk drivers Section 2: Every person who shall monopolize, or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be guilty of a misdemeanor The Act prohibits anticompetitive business practices that promote inefficiency and inequity in the marketplace, such as: Price fixing - when business rivals enter a collusive agreement to refrain from price competition; fix the price of a good or service Hospitals in a given city cannot jointly establish the price of various hospital services Boycott - agreement among competitors not to deal with a supplier or a customer Physicians in an area can’t collectively agree to deny services to a particular managed care organization Market allocation - when competitors agree to compete with one another in specific market area Hospitals in the same city can’t collectively set geographic service boundaries Price fixing, boycotting, and market allocations are illegal per se The plaintiff must only prove these actions took place for the defendant to be in violation of the Act In contrast, rule of reason doctrine is used to evaluate horizontal mergers under the Act While horizontal mergers may force price above the competitive level, they may also create benefits which could be passed on to the customer Redistribution The government often taxes one group and uses the revenues to subsidize another Why? Interdependent utility functions Donors get utility from increasing the welfare of recipients Why is the government involved? “free rider” problem Two notions of equity in redistribution programs Vertical equity “Unequals should be treated unequally.” People who earn more should pay higher taxes Horizontal equity “Equals should be treated equally.” Two persons with the same income level should pay the same in net taxes Vertical equity in practice How much more in taxes should higher income people pay? Suppose high income households pay $4,000 in taxes on average, and low income households pay $2,000 Is this equitable? If the high income household makes $100,000, they pay a 4% tax If the low income household makes $10,000, they pay a 20% tax The notion of equity in taxation depends not just on total tax revenues, but on income levels and tax rates as well In practice, vertical equity is achieved when the net tax system is sufficiently progressive Taxes as a fraction of income rise with income Federal income tax system Other forms of redistribution Proportional The fraction of income going to taxes is constant as income rises The Medicare tax is a fixed % of payroll income Regressive The fraction of income going to taxes falls as income rises Sales tax Implementing redistribution Supply-side subsidies Government funding aimed at reducing the costs of producing a consumer good or service Subsidy to a public hospital Tuition for nurses or doctors Potentially violates notion of vertical equity if all persons have equal access to the subsidized product Demand-side subsidies - government funding for consumers In-kind: vouchers or reimbursements for specific services Food stamps, Medicare, Medicaid Cash: government-provided income that people can use at their own discretion AFDC, Supplemental Security Income Keep in mind: It is difficult to guarantee horizontal equity with multiple programs in operation Consumer Groups Accuse U.S of Negligence on Food Safety – The New York Times, October 15, 2002 Back to the Start Does government intervention correct for market imperfections, or is it ruled by special interest groups? A Final Caveat Market failure is a necessary, but not sufficient condition for government intervention It may cost the government $10m to correct a problem in the marketplace, which imposes $8m in damages While markets may fail and impose societal costs, the costs of government intervention may be greater ...Introduction Causes and consequences of government intervention in health care Types of government intervention Case studies – Cigarette taxes – Price ceilings on health care services – Hospital... Externalities Government intervenes to restore efficiency and/ or equity • “Public interest theory.” An opposing theory: The amount and types of government intervention are determined by supply and demand... Inefficient, inequitable resource allocation by government Which theory you believe? C-B analysis is needed to identify winners and losers Types of Government Intervention Provide public goods Fund