Market Failure

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Market Failure in Healthcare Part 1: Market Failure in Theory

Market Failure in Theory

All 3 main political parties in England are publicly signed up to a single payer (ie tax funded) system of funding the NHS. There is major evidence to support this model of healthcare funding including the Guillebaud report (1953), the Commons expenditure committee report (1973), and the Wanless review (2001). In fact, Wanless identified a £267 billion NHS underspend between 1972-1998. One of his conclusions was as follows: “The surprise may be that the gap in many measured outcomes is not bigger, given the size of the cumulative spending gap".

All 3 political parties also support the idea of a market based system of healthcare delivery based on a purchaser provider split internal market. The key levers of the current NHS market (mainly introduced by New Labour) are the mutually reinforcing policies of: 1. Purchaser-Provider split between primary care (PCTs) and secondary care (introduced by Thatcher’s Working for Patients White Paper) 2. Patient choice to promote competition between providers 3. Plurality of providers - Foundation Trusts, Any Willing/Qualified Provider Policy (AQP) - Private companies (eg Independent Sector Treatment Centres), “Third sector” non-profit organizations 4. Payment by Results (PbR) using a tariff system

“PbR is the reform which makes everything else possible” Timmins BMJ 2005 5. Patient held budgets

The market will be expanded under the proposed new legislation in the Health and Social Care Bill to an even more full blooded system, with over a third of the bill legislating for a new regulated external economic market.

So what is a market system?
The economist Roger Bootle eloquently described what a market system is, in his book The Trouble With Markets. Saving Capitalism from Itself: “The essence of the market system is that free “agents” try to maximize their own “utility”, or wellbeing, by comparing the market prices for goods and services with what they are worth to them. Buyers buy when their own expected utility is greater than the price; sellers sell when the price is greater than their costs. Provided that prices are free to move, they will adjust to the competing forces of supply and demand. When demand exceeds supply, prices will be forced up. When supply exceeds demand, they will be forced down. The price changes send signals to producers to bring the amount of the different goods and services that are produced into line with what people want, and to consumers to bring what they want into line with what it is possible to produce, given the constraints imposed by limited resources and existing technology. In essence, this signaling mechanism enables the market system to wring the most out of any economic situation – not the best of all worlds, but the best possible result in the circumstances. This mechanism has two drivers; self interest and competition. Self interest drives “economic agents” to try and gain the most they can from any situation, and competition works to constrain how much they actually get. The success of the market mechanism depends on a continual interplay between these forces. Firms try to use any technological advance or economic change as a way of boosting their profits; the chance of doing this acts as a spur to seek improvements in efficiency and advances in technology. But as competition subsequently eats away any advantage they are temporarily able to acquire, the benefits are spread throughout society through lower prices”.

Market systems have brought great prosperity to the world and lifted millions of people out of poverty, but markets don’t work well in all situations, especially where there is significant information asymmetry between buyers and sellers, and imperfect competition. Healthcare is a particular area where market failure is a problem. In fact, market failure is an inherent problem...
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