NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, February 9, 2015

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?