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The unpredictability of health troubles that can serve as a financial shock to poor patients is another argument against free market healthcare. Photo: Indranil Bhoumik/Mint
The unpredictability of health troubles that can serve as a financial shock to poor patients is another argument against free market healthcare. Photo: Indranil Bhoumik/Mint

India needs free market healthcare

Genuine competition is the only way to lower prices and improve healthcare affordability

Healthcare is such an emotional issue that basic economics is often taken for a ride. This explains quite well India’s intention—following the release of the National Health Policy 2015 late last year—to move towards providing healthcare as a fundamental right through a universal public healthcare system.

With many other services in the market, it is well recognized that competition is good for the consumer. High prices may be a temporary pain for the poor who can’t afford a particular service, but high profits act as a strong incentive for competitors to enter the market. The result is greater competition and cost-saving innovation that eventually leads to higher supply, better products and lower prices for all.

Such competitive mechanism fuelled the telecom revolution in India that made telecommunication that was initially available only to the rich to become affordable to Indians even in the lower rungs of the economy. It was not government legislation guaranteeing mobile phones as a fundamental right that made this happen, but pure market competition driven by the greed of private businessmen for profits.

Yet healthcare is considered too sensitive a matter to be left to the whims of the market. This explains quite clearly why access to healthcare still remains a luxury to most people in India, even as access to telecommunication has become widespread. When a service is deemed too important to be left to market forces, the lack of competition to provide the service leads to low supply and high price.

High price, in other words, is merely a reflection of the underlying scarcity in the availability of healthcare. Often, however, it is argued that the healthcare market is vastly different from the market for other services. For one, it is believed that asymmetric information between patients and doctors could lead doctors to exploit patients. This, however, is nothing unique to the healthcare market.

Imperfect information pervades any economy based on division of labor. The producer of a service, with vastly greater expertise in his domain, is likely to know better than the consumer. The relevant question to ask is if market competition exaggerates information asymmetry or minimizes it. Further, what incentive and knowledge do healthcare regulators possess to do better than the market?

The market responds in various ways to the problem of asymmetric information—screening techniques used by patients, advertising, brand differentiation, private standards and certifications to better inform patients etc. Financial credit rating agencies are the most common example of private provision of information services, wherein investors outsource their information requirements to a third party.

The failure of ratings agencies following the cartelization of the rating industry, thanks to entry barriers blocking hundreds of competitors, is well known. Expect similar results when government healthcare regulators are granted monopoly over the market for medical information services.

The unpredictability of health troubles that can serve as a financial shock to poor patients is another argument against free market healthcare. Yet insurance in its various forms is a market product designed to deal exactly with such uncertainties. However, it is not uncertainty per se but affordability that often comes to the minds of many when talking about healthcare—adding more reason to tear down anti-competitive barriers that keep the price of healthcare high.

Increased public funding is now seen as a panacea to the ills of the current system. But it is likely to create one that is irresponsive to patient demands and kill competition. Singapore’s healthcare system, although far from being laissez faire, helps show that public funding and regulation in the US and Europe is inefficient. Despite spending far lesser on healthcare, Singapore has much better health outcomes.

While Singapore spends lesser than 5% of its gross domestic product (GDP) on healthcare, the US spends about 18% of its GDP. Yet Singapore has a far lesser infant mortality rate, higher life expectancy and employs far lesser doctors and care givers as compared to the US healthcare system.

The reason lies in the fact that, as against public funding being dominant in the west, out-of-pocket spending by patients is far higher in Singapore. Thus, the system is more responsive to the demands of patients. It serves well to remember that competition is the only way to cheaper and better healthcare.

Natural Order runs every Monday, with a libertarian take on the world of economics and finance.

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