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The two main theories that describe the motivation behind government intervention in healthcare market are the special interest group theory and the public interest theory. In special interest group theory, special interest groups realize wealth transfers in resources that are…
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Management   Question a) Comparing and Contrasting the Public and Special Interest Theories That Describe the Motivation behind Government Intervention in the Health Care Market
The two main theories that describe the motivation behind government intervention in healthcare market are the special interest group theory and the public interest theory. In special interest group theory, special interest groups realize wealth transfers in resources that are scarce. This situation results into the public being compelled to pick-up the expenses stemming from the inefficiencies stemming from this model. Basically, to actualize and consolidate their profits, these special interest groups clamor to keep the system in a manner that will benefit pharmaceutical and insurance companies, as well as healthcare institutions.
On the other hand, public interest theory asserts the need to keep prices at reasonable rates so that more people can access healthcare services; and that more readily and cheaply. As such, the government should intervene to ensure that the best interests of the society are served. In this light, there is the push to have the government inject and nurture competition, liberalize information, assuage externalities and to address market failures (Sirgy, Dong-Jin & Yu, 2011).
(b) Personal Choice of a Theory as the Most Accurate
Public interest theory is the most plausible and tenable of the two, since healthcare market primarily discharges public or social goods. Healthcare is too sacrosanct to be given an economic laissez faire. Likewise, it is very inappropriate and unfortunate to create a situation in the healthcare system where the public bears the burden of operational inefficiencies as players in the business (pharmaceutical and insurance companies, and healthcare institutions) rake profits. If the system that is envisioned by the special interest theory must be adopted or tolerated, healthcare systems must be exempted from such contriving.
Question 2: Imperfect Information in Health Care and How It Impacts the Efficiency of the Market
Imperfect information refers to a situation where the client or the seller does not have partial or full information that may affect their decisions. For instance, in a perfectly competitive market, though healthcare services insurers are entitled to full information pertinent to clients’ health status so that they can subsequently exact premiums in light of the expected costs, some clients will reserve themselves from detailing all the crucial information. Again, these clients may deliberately or inadvertently give inaccurate details. Most of the time however, clients will knowingly withhold information or give incorrect details to escape higher insurance premiums. The import of this development is that it often paves way for market failure, since the giver of the inaccurate or incomplete detail has a competitive edge (Wilson, 2011).
Another way in which imperfect information negatively impacts efficiency in the market is by encouraging moral hazards. A moral hazard occurs when people are allowed to purchase an insurance cover for an adverse circumstance, but the client’s behavior is difficult to monitor. This later compels the insurance provider to make information, merely on estimates, instead of facts. The situation festers when the insurance company has to give flat-rate levels of compensation, besides factoring in this imperfect information.
Conversely, imperfect information negatively impacts efficiency in healthcare market through adverse selection. This happens when imperfect information compels insurers to make a given price quotation, while intending to diffuse costs by spreading them over other stakeholders. Alternatively, these insurers may resort to using their profits which they had accrued from low-risk clients, to diffuse losses that have been incurred from high-risk clients. This may lead to instability in premium rates in the healthcare market.
Sirgy, M., Dong-Jin, L. & Yu, G. (2011). Consumer sovereignty in healthcare: Fact or fiction? Journal of Business Ethics, 101 (3): 459-474.
Wilson, L. (2011). Safety net for needy. Healthcare leaders want providers to put focus on primary care. Modern Healthcare, 41 (32): 22-3. Read More
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