3 Discuss the view that direct provision by the government is the most effective policy to adopt in tackling the sources of market failure in the health care industry in Singapore. [25]

Suggested Answer and Marking Scheme:

Introduction:

Define market failure and briefly identify the different sources of market failure. - Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The

result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole.

- Markets can fail because of the presence of externalities, imperfect information, free-rider problem, factor immobility and equity reasons.

- These will be explained in greater depth with the discussion of market failure in the health care industry.

Body: Explain the nature of health care services and suggest which category of goods it belongs to (i.e. private / merit

goods) Identify and explain carefully the sources of market failure associated with the health care industry in Singapore.

For e.g. i) Presence of external marginal benefits - when the consumption of a good or service leads to benefits to

society that are greater than the benefits to the individual consuming the good or service. Example: vaccinations: when anyone receives a vaccine, everyone benefits b/c of the reduced likelihood of a disease spreading.

ii) Merit good situation – where the goods ore services are deemed desirable by governments, large positive externalities and under-consumed by society.

iii) Imperfect information - patients may be unaware of the benefits of health care resulting in difference between perceived PMB

and actual PMB. - information asymmetry: When the consumers or producers of a particular good or service, make their

decisions based on imperfect information or where the doctors have more information – doctors are agent but doctors may maximize their own interest, resulting in supplier –induced demand=> leading to escalating cost of healthcare. Patients choice is not dependent on price but mainly on doctors’ advice or perception.

iv) Equity issues - Efficiency is not everything. We are also concerned with what is fair. If we had a market distribution of health care, then only those who could afford to pay would be able to purchase it. Most people regard that as unacceptable. “Within most societies there exists, in some form or another, a concern that health care resources and benefits should be distributed in some fair or just way”

Having discussed the various sources of market failure, is it true then that direct provision by the government is the most effective policy to adopt in tackling the different sources of market failure in the health care industry in Singapore?- Make a stand on this and argue appropriately. You may need to offer alternative policy if you do not

agree with the view.

In practice the question is not a simple choice of which is the best policy? Using a combination of policies may be more effective to address the various sources of market failure in the health care industry.

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1. Direct Provision

The government directly provide healthcare services, either free-of-charge or at affordable rate. It can be provided through the public hospitals or community rehabilitation centers.

To make healthcare more accessible to people, the government operates mobile clinics and have polyclinics in major housing estates.

To help the sickly poor, the government has schemes like home nursing to attend to patients who are immobile.

In these cases, the government can ensure socially optimal level of healthcare provision and equity. Primary health care includes preventive health care and health education. Private practitioners provide 80% of primary health care services while government polyclinics provide

20%. However, public hospitals provide 80% of the more costly hospital care services with the remaining 20%

by private hospital care. The supplement health care services by the government increases supply and reduces the cost, thus

increase consumption of health care.

Evaluation: difficulty in determining the optimal amount of health care services to be provided by the government. Public provision at zero price can lead to wastage or excessive consumption beyond the socially

efficient level. Strain on government’s budget, opportunity cost incurred.

2. Subsidies to producers

Subsidies will shift the supply curve rightwards, making the good available at cheaper prices and hence increase consumption to the socially efficient level of output.

The government can give subsidies to health-care providers (subsidizing the training of doctors and other medical professional to increase the level of healthcare services and supplementing the conduct of health checks.

The healthcare system in Singapore comprises public and private health care. Good and affordable basic health care is available to Singaporeans through subsidized medical services at public hospitals and clinics.

Evaluation: Difficult to quantify external marginal benefit. May lead to wastage. May lead to higher taxes to cover government’s expenditure on subsidies.

3. Subsidies to consumers In Singapore, the level of subsidy given is given based on the income levels and system of co-payments

require individuals to bear the cost of increase healthcare. At the polyclinics, an average outpatient visit is subsidies about 50%,well within the means of every

Singaporeans. While Singapore citizens aged 65 and above, children up to 18 years of age and all school children are

given up to 75% concession in their consultation and treatment fees.. At the public hospitals, the subsidy depends on the wards chosen. Means testing (from Jan 09) –

subsidies are given out according to one’s income. This ensures equity. No subsidy for those who chose Class A and 20% for those who chose Class B.

Evaluation Whether the net economic welfare of the society can be maximized depends on the accuracy of

estimating the PMB and thus the exact amount of subsidies to be given to increase demand. The government needs to ensure a level of subsidy that encourages greater consumption, yet not

create a over-dependence by the people on the government.

4. Education – health promotion is also important.

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The Ministry of Health, through the Health Promotion Board, aims to help Singaporeans increase the quality and years of healthy life and prevent illnesses, disability and premature death.

Programmes such as the Community Health Screening, Aids Awareness, National Smoking Control Programme etc. aims to reach out to the population to increase awareness and reduce information asymmetry.

This can increase the demand for healthcare and shift the demand curve to the right.

Evaluation: Uncertainty as to the response to these campaigns. Government has to incur costs which have to be financed from taxes.

5. Funding schemes (compulsory saving): Singapore’s experience exemplifies an evolving public-private partnership in the health care financing and

provision. It is decided that while the government would continue to subsidise health care to bring prices down to an

affordable level, the people would have to share in the costs of the services they consume. The 3M system which forms the centerpiece of Singapore’s health care financing system was therefore

premised on the philosophy of shared responsibility and the economic principle that health care services should not be supplied freely on demand without reference to price.

Medisave Medisave, introduced in April 1984A national medical savings scheme which helps individuals put aside part of their income into their

Medisave accounts through CPFs, to meet future personal or immediate family’s hospitalization, day surgery and certain outpatient expenses.

Under the scheme, every employee contributes 6.5 to 9% (depending on age group) of his monthly salary to a personal Medisave account.

The savings can be withdrawn to pay the hospital bills of the account holder and his immediate family members.

Evaluation:Individuals’ own savings are used, reduce wastage by consumers, less strain on government’s

resources. Forces consumers to keep sufficient funds for merit goods. Revision of rates given aging economy should be conducted to reduce the possibility of perpetuating

market failure.

MedishieldMedishield is a co-payment scheme – means that individual still pays a small portion of expenses.Reduces cost of Medishield given large amount of Singaporeans involved.Private insures can participate through supplementary coverage. Greater competition -> higher efficiency and innovation , expands the insurance sector.

MedifundMedifund is an endowment fund set up by the government to help needy Singaporeans who are unable

to pay for their medical expenses.Medifund acts as a safety net for those who cannot afford the subsidized bill charges, despite Medisave

and Medishield coverage.

Evaluation:Reduce income inequalityStringent requirement necessary to prevent abuse.

Overall Evaluative comments:

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It is clear that to resolve the various sources of market failure, direct provision by the government alone may not be the most effective policy to adopt in the health care industry in Singapore.

It is agreed that health care markets fail to some degree and that there are equity considerations. But it does not automatically mean society is better off with some sort of government intervention? Government intervention also imposes costs and creates inefficiencies. For instance, management structures are often bureaucratic and inflexible, leading to outcomes which do not reflect consumer demand and which are wasteful.

As discussed, the policies used in Singapore attempt to address the issue of efficiency and equity. Singapore’s experience exemplifies an evolving public-private partnership in healthcare financing and provision.

For maximum effectiveness, these should be reviewed regularly to take into consideration the effect aging population, changes in composition of population and the impact on government resources and budget, funding by tax revenue requirement or the use of reserves.

Looking ahead, the challenges in the health care industry includes the need for cost containment on the domestic front to prevent market failure due to cost inefficiency.

Level Descriptor Marks

L3For an answer that provides a careful in-depth discussion of the various market failure associated with health care industry and sound analysis of the different policies adopted to tackle these sources of market failure.

15 -21

L2

For a adequate answer that provides explanation of the various market failure (at least 2) and description of the different forms of policies adopted by the Singapore government but lacks elaboration. Max. level 2 only if only one policy is discussed.

10-14

L1For an answer that provides a brief account of market failure in the health care industry and shows descriptive knowledge of health policies or an unexplained list of the types of government intervention.

1-9

Evaluation marks

E2For an evaluative comment based on analysis and supported with a strong conclusion.

3 - 4

E1 For a brief and weak evaluative comment. 1 - 2

4