Reasons for Inefficiency in Healthcare - Term Paper Example

? An Economist’s Account of the Existence of ‘Moral Hazard’ in the Healthcare Sector, And the Mechanisms Necessary to Tackle Its Consequences University: Course: Tutor: Date: Introduction The issue of moral hazard has been contentious for a long time. Researchers and scholars have been involved in numerous researches in the effort to assess the situation and come up with possible solutions. In essence, according to Sexton (2010), inefficiency in health care relates to excess utilization of insurance-based systems and tax-financed systems. However, it is argued that the existence of the excessive utilization of these systems is due to the absence of a financial barrier to control the demand, and presence of financial arrangements on the supply side, which enables providers to supply wasteful amounts. Generally, unregulated, competitive markets result in private health insurance, which contributes to the concept of more insurance, which helps reduce health risks, but at the same time, increases demand and cost. In this regard, Nyman (2003) argued that most economists view the idea of controlling the supply side as a possible way of alleviating this problem. With such deliberations, it has been difficult for both the policy makers and economists to measure the level of demand and supply considered ideal in the market. In light with this, initiatives have been formulated in order to counteract moral hazard. Consumer moral hazards counter policies In order for policies to respond to consumer moral hazards, various issues have to be put into consideration without necessarily focusing on financial ones. The use of primary-care doctors as the gateway to preventing overuse of hospital services has been endorsed by many high income countries (Culyer and Newhouse 2000). On the other hand, the same modality has been endorsed by lower income countries by way of using bare-foot doctors. Nevertheless, numerous measures have been designed to counteract consumer moral hazards. Co-payments Co-payments have been utilized by a number of countries to exert some financial burden on the consumer in order to discourage unnecessary use of health care. This involves several schemes, which differ on the basis of the financial arrangement (Sexton 2010). Nevertheless, individual scheme is composed of flat rate change for each unit of service, a deductable akin to excess, and co-insurance. One of the most notable contributions of co-payments comes from the famous health insurance implement (HIE). In this particular experiment, families that participated in the experiment were randomly assigned one of the different free-for-service insurance plans. The free for service plans involved different levels of cost sharing. Covered expenses included most medical services. Another set of the plan involved free access to inpatient services. The outcome of the experiment indicated that utilization responds to amounts paid out of pocket. Per capita total expenses on the free recorded 45 percent higher than those on the plan with a 95 percent co-insurance, however, spending rates on the rest of plans was on average. On the other hand, outpatient expenses on the provided free plan recorded an increase of 67 percent higher than those on the 95 percent co-insurance plan. The findings from this experiment indicated that an increase in the user price will lead to a decrease in demand. In this regard, it is apparent that implementing charges would lead to doctors concentrating more on those who can afford to pay (Sexton 2010). However, the implication is that those more in need tends to have less access to services. This becomes the problem of the approach advocated by RAND study. This is arguably true because in aggravate, the figure of those more in need of service and able to pay is replaced by those less in need and unable to pay. The other important issue of concern is whether the response of demand for health care to adjustment in its prices is the same or different for several groups in society (Nyman 2003). It is also necessary to assess whether reductions in demand are for care for people’s health status. The results of the HIE on effects of different charges on poor and non-poor indicated that there was a reduction in the use of services from 7 to 6 percent for the whole populace, but a bigger reduction rate of 18 percent recorded for the poor. However, this approach has not been viewed as most effective in some countries. For example, in Sweden, the existence of user fee is not very contentious since before the health care was socialized, patients used to pay for larger health services from their pockets. In Taiwan, even after universal health insurance was introduced, and user charges dropped, use of physician services increased. Application of user fees in low and middle income countries It is apparent that health care financing exclusively relies on the revenue from governmental taxation. However, this form of financing has become unsustainable due to inevitable economic constrains, which is also marked by low or stagnant growth of the health care sector. In particular, many low income countries have third party financing covers, which cover only health care costs of a given or small part of the populace. For this reason, many governments have attempted to raise supplementary funds for the health care sector by introducing user charges (Sexton 2010). A good example of this concept is the 29 African countries that designed a national system of user fees. This is a cost sharing scheme started by African ministers of health in 1987. This scheme focuses on inclusion of every member of a community in the participation of payment of something towards health care. The rationale for this system is to improve health services. With such deliberations, it is true to argue that low income countries have embraced the concept of user fee. However, a major concern has been how this concept affects developing countries. In essence, user fee has two roles. Firstly, they generate revenue, which translates to self sustaining health programs (Nyman 2003). Nevertheless, the extent to which this can be realized depends on price elasticity and demand, and also largely on the transactions costs of collecting user fees. User fee also plays a role of rationing health services especially due to the fact that imposing a charge on services would tend to divert away potential patients who might not be able to pay or even those who chose not to pay. In fact, studies have documented that the imposition of user fee reduces the rates of health service visits. An example of this is a study of the effect of a price raise in health facilities, in Zaire where de Bethune and colleague noted a decrease in utilization after there was a sudden increase in prices. A similar observation was made by Waddington and Enyimayew (1990), whereby three years after use fees were introduced in Ghana, a substantial drop had not been reversed. However, other studies have noted that the attendance of public services tends to increase with cost recovery especially when accompanied by a notable improvement in the availability of drugs including other measures such as more competent and motivated staff that aims at providing improved health services. Nonetheless, there is little evidence of governments re-investing revenue from user fee into health care system. It has, however, been argued that another benefit of participation by users in the financial matters is that a more efficient health system can be enhanced by communicating to patients price signals including several incentives that guarantee a more rational use of health services (Culyer and Newhouse 2000). However, implications of such a policy involve issues related to demand health care by the poor, who are argued to be more price sensitive than the rich. All in all, the evidence of the consequences of user fees has not been elucidated. Some literatures have indicated that the introduction of cost recovery, for example, through the introduction of drug fee in some countries has not been on the record for having any detrimental effects on the poor. In Mauritania, for example, it is documented that the initial effects of cost recovery through the introduction of user fee had improvements in all levels of utilization, which was seen as a result of improvement of quality of health care (Sexton 2010). However, this has been attributed to supply of essential drugs and other impacting factors such as motivated staff, which helps promote effectiveness of the health care system. On the contrary, some other literatures have indicated that the introduction of user fee has contributed to reduction in the demand for health services by the poor (Nyman 2003). An example of this scenario is a study of the effects of introduction of user charges on the demand of health services in a district health care system, in Kenya. The study revealed that attendance dropped by 50 percent during the cost sharing period, especially in public hospitals. Due to this drop, the government was first forced to suspend the user fee. Surprisingly, after the government suspended the user fee, the level of attendance increased by 41 percent after 7 months. In fact, it was also noted that this suspension led to more patients moving from private providers to public health facilities. Medical savings accounts as a consumer policy Medical savings accounts are argued to be one of the policies used to counter consumer moral hazards through putting more control on health care spending into the full control of individual patients. This is achieved by ensuring that patients are enabled to purchase health services directly through funds accumulated in their accounts. It is argued that when individual consumers take account of the financial consequences of their actions, costs are controllable as well as services being more likely to be provided according to consumer preferences (Nelson 2005). In fact, it is argued that consumers have the option of paying for services at point of consumption and that they are more likely to have an opportunity to invest more in their health knowledge (Sexton 2010). Among the key knowledge tactics for consumers is knowledge of what appropriate care to receive as well as how well they can use resources. However, this policy is believed to be ineffective because many users could not be conversant with medical complexities. Nonetheless, it is believed that this policy has more advantages than disadvantages. Another notable advantage is that this service enables flexibility in terms of users using the money in their accounts to seek alternative medicine and other, broader wellness and health. This is argued to allow users to take care of minor medical expenses while, at the same time, the policy guarantees them security in case of serious medical conditions. Fixed periodic per capita payment as a counter policy This form of policy involves pre-payments done by patients directly to a provider of comprehensive health care. Nyman (2003) argued that the good thing about this policy is that consumers receive a fixed premium especially from their employers. This policy is argued to be cost conscious. However, although the policy is argued to decrease hospitalization, it is unclear if the total cost is lowered. It is also apparent that this kind of policy is appealing to some individuals, but not everyone. Even with those that find this policy appropriate, they experience increased barriers to accessing providers, and it is alleged that they receive less specialized care. Preferred provider organisations as a counter policy This kind of policy involves preferred provider organisations contract with lower costs doctors and health clinics to offer services to company employees at a lower cost. However, studies have pointed out that this kind of policy tends to deter users from inpatient admissions. In this regard, some studies have indicated that this may lead to increase in outpatient expenditures. Although diagnostic costs are lower, drugs costs are higher. It is also believed that this policy marks up government costs as a result of higher utilization expenses (Sexton 2010). Another issue of concern is the intended reduction of frequency of visits to hospitals. Although this is one of aims of this policy, it is reported that users of this policy tend to increase their number of visits, but this is highly attributed to doctor’s inducement in order to offset discounts. Provider moral hazards counter policies It is argued that provider moral hazard may come either in the form of identifiable actors in the health care system or within institutions. Moral hazards on the side of doctors happen on the supply side, government agent or a third party. It is argued that doctors will have few incentives when a third party bears costs of care. In most cases, the doctor is placed in a very unusual position of being both a demander and a supplier of a service. Such incidences lead to overutilization of services. Since the doctors has no financial burden for services they offer, this means that they may offer excessive services, whereby every additional service means additional income for the doctor. This results in overuse of the free services (Culyer and Newhouse 2000). Payment methods for doctors as a counter policy Several methods have been designed to remunerate doctors. These methods include FFS remuneration, reorganization of allowances, salaries, capitation payments for primary care, private practice, and charges to users for a part or full cost of care. There is also another non financial regulation includes government regulation regarding what doctors are required to do and what they need not to do (Sexton 2010). However, this could have financial implications to doctors, especially if the regulation stipulates that if a doctor fails to behave appropriately, they are subjected to some financial penalties. Some governments like Australia and UK have used this policy to control the limit of drugs that doctors can prescribe. It is also within this policy that pricing regulator, who in most cases is the government, fully funds drugs classified as least cost drug while the most expensive drug is subsidized, the extra cost being met by the user. Focusing on salaries, studies have revealed that salaried systems tend to make health care planning effective and easier. It is believed that when doctor salaries are known in advance, there is a high likelihood that performance could be improved (Culyer and Newhouse 2000). However, this policy has been put on record for alleged disadvantages in that doctors may have little incentive to compete for patients. In fact, it is argued that they may have more incentive to please supervisors instead of prioritising the needs of the patient. It is also argued that primary care may suffer a blow after doctors may feel they lack financial stake and decide to move to other localities. Additionally, it is argued that fixed salaries may demotivate doctors who have reached promotion stage. Nevertheless, merit rewards, which could be linked to some performance index, could be used to overcome such challenges (Nelson 2005). It is also ideal to consider special payments for good practice option. This method of reward involves the provision of capitation fees, some allowances, and additional merit allowances to hospital doctors. However, there is a significant challenge in measuring doctor’s performance. All in all, studies have indicated that doctors tend to respond to incentives in an attempt to earn bonuses or rewards. Counter policies in the hospital sector Since financial incentives operate on different actors in the health system, it is necessary to review contribution or effects of various methods of financing on how hospitals behave. It is worth noting that both in public and private health care systems, variations in methods of financing are common. However, theoretical literatures have argued that it is difficult to predict how hospitals would react to different methods of hospital reimbursement. In this regard, it is believed that hospitals would, according to the classic model of economic behavior, act as profit making firms. Under this behavior, hospitals would not work out control over a given market behavior, unless on their own cost structure. According to this model, firms are forced to compete on the basis of prices. This is arguably true because consumers tend to search for firms that offer lower prices. With such deliberations, it is apparent that hospitals would be allocated resources depending on consumer preferences. However, as much as this model would seem to work out, this is not the case in health care sector. This is so because according to Culyer and Newhouse (2000), consumers in the health care sector rely on the advice provided by the provider, who in this case is the supplier of the care. Since hospitals are not profit making organisations, it is believed that they tend to exercise prudence in their activities. It is also difficult to determine or analyse hospital behaviors due to variation in responsibilities between the administration and doctors. In fact, in some countries, doctors are not employed by hospitals, therefore, in most cases, they make decisions on what services are necessary to users. To overcome such challenges, a system of retrospective reimbursement at full cost ensures hospitals receive full payment for expenditures incurred in the previous year (Nelson 2005). However, such a system is argued to encourage overstay in hospitals with patients being subjected to several tests and care of unverified value. Another system is prospective reimbursement. This involves hospitals contracting with financial intermediaries to offer services with a predefined budget. Conclusion Inefficiency in health care relates to excess utilization of insurance-based systems and tax-financed systems. The existence of the excessive utilization of these systems is due to the absence of financial control units. Co-payments have been used by a number of countries to exert some financial burden on the consumer in order to discourage unnecessary use of health care. Low income countries have embraced the concept of user fee. This helps in rationing health services. Studies have documented that the imposition of user fee reduces the rates of health service visits. Through medical savings accounts, consumers are able to control costs and services. Users can use the money in their accounts to seek alternative medicine. However, many users could not be conversant with medical complexities. Fixed periodic per capita payment is also argued to be cost conscious and also helps to reduce hospitalization rates. Preferred provider organisations enable employees to receive services at a lower cost. In provider moral hazard, several methods have been designed to remunerate doctors. Salaried systems tend to make health care planning effective and easier Government regulation is also considered ideal to counter provider moral hazard. Bibliography: Culyer, A. J. and Newhouse, J. P. (2000). Handbook of health economics. Amsterdam; Oxford: Elsevier. Nelson, R. R., 2005. The limits of market organization. New York Russell Sage Foundation. Nyman, A. J., 2003. The theory of demand for health insurance. Stanford, Calif. Stanford Economics and Finance. Sexton, R. L., 2010. Exploring economics. Mason, OH: Cengage. Read More