Why the public health system is experiencing a ‘market failure’
Oddly enough, the “middle class” in India has seldom belonged to the middle of income distribution. With limited resources at their disposal, they have never been the engine of public health demand; and therefore they have been largely apathetic to it. Well, until the coronavirus hits. Suddenly, the middle class is more interested than ever in the state of the public health system and regularly complains about the poor quality of public hospitals, crowded hospital services and even the quality of public hospitals. Dal-chawal be served to patients. For once, they seem moved by the glaring inadequacies of public services in the same way as those who usually depend on them.
The reasons may be hidden in what economists broadly call a ‘market failure’, brought on by Covid-19. A lasting effect of the current crisis may well be a push to rekindle widespread political and social discourse on the fragile public health sector in India.
Efficient market behavior
To understand the origin of market failure, it is helpful to look at the dynamics of disease transmission. The growth rate in the number of Covid-19 cases is exponential, which means that the number of cases is increasing at a rate proportional to the current numbers. An infected person ends up directly infecting around 2 to 2.5 people, each of whom ends up adding the same factor of infected people on average. This exponential growth has important consequences for the efficiency of the market.
The notion of an “efficient market” can be traced back to Adam Smith, who influenced the modern economy in more fundamental ways than just one. Smith asserted that if individuals in society pursue their narrow self-interest, then the welfare of society will be maximized. “In this (maximization of self-interest) he (the individual) is led by an invisible hand to promote an end that was not part of his intention. By pursuing his own interest, he has often promoted that of the company more effectively than when he really intends to promote it.
The idea that an invisible hand aggregates individual behavior to maximize the welfare of society has since been formalized by eminent economists such as Kenneth Arrow and Gérard Debreu, as the first welfare theorem of the economy. and has since laid the intellectual foundation of let it go and the way our economic system is currently organized. As an example, suppose someone is sick, goes to the hospital, pays a fee, and gets treatment. For that person, the benefit of healing is somewhat equal to the cost of treatment. Trading in the market is unimpeded as long as patients are willing to pay what hospitals are willing to receive.
While Smith and Arrow were well aware, insufficient attention is paid to the conditions under which the link between maximizing individual self-interest and maximizing social well-being breaks down. The presence of an externality is one of these conditions. Imagine that the person in question has been affected by a coronavirus and has mild symptoms. The benefit of their treatment is not only for them, but also for a large number of people, who could have been infected due to the exponential growth trajectory of the disease. Give a monetary value to this benefit and it is clear that the cost that they will be willing to pay is much less than the total benefit of their treatment.
This additional benefit for a third party (or third parties) creates a wedge between the willingness to pay and the amount requested. Joseph Stiglitz in his Nobel Prize lecture pointed out that the reason for such a market failure is that “the (invisible) hand … is just not there – or at least if it is there, it is paralyzed.
Positive externalities like the one above can encourage people not to go through the hurdle of testing, self-quarantining, maintaining social distancing, etc., because the cost is private, but the cost is private. benefit is social. On the other hand, a negative externality caused by contagion may prevent private healthcare from serving Covid-19 patients. The benefit that a private hospital receives is the treatment fees paid by the patient, while the cost of treating the patient can be unusually high.
Think of a situation where healthcare workers are infected while treating Covid-19 patients, who then need to be treated and cared for. More importantly, the fear of being infected with the disease or the stigma associated with it will almost certainly lead to a mass exodus of patients with another disease. Therefore, the negative externality of Covid-19 treatment, on the one hand, increases the cost of treatment; and on the other hand, it leads to loss of activity.
Given this reasoning, it is not surprising that private healthcare providers on the whole maintained considerable social distancing from Covid-19 patients. Out of 530 laboratories currently testing for the coronavirus, less than 30% are private and the negative externality effects are less in laboratories than in hospitals. The vast majority of hospitals currently treating patients with Covid-19 are public. In fact, private hospitals have been found to insist that all patients, even emergency patients, be tested for Covid-19 before being admitted to hospitals, which goes against current guidelines. of the ICMR. On some occasions, and according to some routine accounts, private hospitals have turned away even seriously ill patients.
Public health expenditure
With economic forces driven by externalities that make non-participation a logical thing for private institutions to do, it is imperative that government intervene. public health infrastructure becomes apparent.
In fact, public spending on health is perhaps the most important predictor of success to date, when it comes to the fight against Covid-19. Kerala and Andhra Pradesh have per capita health expenditure of ₹ 2,060 and ₹ 1,498, respectively, while West Bengal is sandwiched between Uttar Pradesh and Bihar at ₹ 868. No coincidence, despite a large portion of the aging population, Kerala and Andhra Pradesh have been relatively successful in containing the spread of the coronavirus. Internationally, some of the best success stories have come from countries with a strong wall of public health infrastructure, such as Germany, Denmark, Norway and Vietnam.
The finance minister only recently announced an increase in planned public health spending. However, it is not clear whether this increase is a temporary measure linked to the Covid-19 epidemic or a more permanent measure aimed at sustainably improving the country’s public health infrastructure. While there is a need to immediately increase spending related to Covid-19, public health spending should not be cut even after the crisis has subsided.
We might remind the Minister of Finance of the huge positive externality of public investment in health (and education), forcing the government to step in and resuscitate failed markets. Until then, the middle class can only worry about inadequate public health infrastructure.
Banerjee is Associate Professor of Economics and Majumdar is Associate Researcher at IIM-Bangalore