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Government-Business Relations - Report Example

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This report "Government-Business Relations" presents the government that has been forced to intervene in healthcare provision largely because the free market alone cannot effectively deliver the required results. A considerable proportion of about 50% of Australians has private health insurance…
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Extract of sample "Government-Business Relations"

Government-Business Relations- Health Insurance Companies and Free-Rider Resources Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 07, 09, 2010 Outline Introduction Free rider problem The Role of Interest Groups Positive externalities and how firms benefit Conclusion References Introduction The government has been forced to intervene in healthcare provision largely because the free market alone cannot effectively deliver the required results. A considerable proportion of about 50% of Australians have private health insurance. While maintaining Medicare as its safety net, the government is looking at ways of encouraging individuals to enroll for private health insurance in order to strike a balance between the public and private sector involvement in health care. Individuals and families who have enrolled for private health insurance benefit from the Federal Government 30% rebate. In 2005 a new rebate scheme allowed people aged between 65 to 69 to get a rebate of 35%, and those over the age of 70 and above to get 40% rebate. The government has provided tax rebates to these groups in an effort to encourage them to get insured. In the U.S. the working class benefit from tax exemptions on premiums paid out for health insurance while the self-employed get tax deduction from their income tax payable. Government also engages on other activities such as promotions to supplement the strategies above. HIC’s have been the biggest beneficiaries in this process; they are big winners, free riding on the positive externalities that the government has been perpetuating. Employer Sponsored Insurance (ESI) which is mandated by the government accounts for a significant proportion of the population that has insurance cover (EliseGould 2009). Even as the government tries to eliminate free riders’ in its system, HIC’s will continue to ‘ride free’ on governments efforts. According to Stevens (2003) if HIC’s are left to run in a free market, they are likely to drive themselves to oblivion. Free rider problem Health insurance business is one of the many industries that do not subscribe to the Adman’s Smith ‘invisible hand’ theory. The ‘invisible hand’ theory assumes that a free market should utilize scarce resources and provide people with what they need. The driving force here being profits that accompany provision of services or goods. In this case, the free market has remarkable abilities of developing almost perfect allocative and production efficiency. Health Insurance Companies (HICs) are however considered to be one of the industries that ‘reap where they did not sow’; hence the term ‘free rider’ (Galewitz 2009). According to the Institute of Research on the Economics of Taxation healthcare provision do not subscribe to the free market theory because it is classified under ‘public goods” only on humanitarian grounds (IRET 2006). Positive or negative externalities in provision of public goods may lead to ‘market failure’. Healthcare is a public good because it satisfies the following criteria; non rival consumption – consumption by one person does not diminish the value on others, excludability- providers cannot limit or control who will use the goods. Usually, for public goods one can enjoy consumption of the good without having to pay for it. Private firms shun provision of health care services because the government on humanitarian grounds are providing this service at relatively low cost without factoring the profit margin. The government chooses to pay or provide these services in order to achieve allocative efficiency of providing healthcare to all. In case of health care, one can choose to walk into a hospital and receive treatment from a government facility maintained by tax payers’ money without having to pay for it. Governments worldwide have adopted measures aimed at providing its citizens with universal health care on humanitarian ground. Many Australians benefit from Medicare and universal public healthcare insurance provided for by the government through progressive taxation on personal income and other income related levies. However, Australians have an option of taking private insurance which is promoted by the government. These measures end up profiting the HIC’s who do less to attract more people take-up their health care insurance. According to Robbins (2005), HIC’s in the United States have a tendency of charging higher premiums on non-group policies and therefore discouraging healthy individuals from taking insurance and thus what is left is unbalanced pool that is more risky to their business. The Role of Interest Groups Interest groups can have significant influence in the health care industry. These interest groups, in their supposed efforts of promoting public interest, either furthers or limits free riding phenomena currently exhibited by HICs. Among some of the interest groups includes, labour unions, political parties, non-governmental groups, minority interest groups, human rights groups, and industry interest groups. In an article published by IRET (2006), governments should be able to identify what constitute public goods. A public good normally demands the government to provide them because the private sector cannot adequately allocate them to the people. IRET (2006) concluded that private sector has the allocative and production capacity to manage the health care industry. However as stated by Jones (2003) in an article Health Care and The State, the government has an obligation to provide minimal health care to its citizens. According to Carpenter (2008), the Senate Finance Committee in the US considered introducing a penalty for ‘free-riders’. The labour unions, industry players and advocates for low- income workers received this with a lot of resistance. The proposal required companies that do not cover their employees to share on paying subsidies awarded to uncovered employees who choose to buy individual plans. It is clear in this case that the government is acting in public interest to ensure that employees (especially low income workers) who are not covered by the Employer Supported Insurance (ESI) get insure (Goodman 2001). Labour unions however think that such a plan would discourage hiring of low-income workers who are likely to benefit from such scheme. In such debates, the HICs emerge as ‘free riders’ who will eventually benefit from those who will take-up the cover. The greatest leverage for political candidates in the United States during the previous presidential elections was health care reforms. The debate on health care continued for two years until the passing of the health care bill recently. The process was supposedly complicated by interest groups in the house acting for HICs and other industry players. The realization of universal health care may prove elusive if the concerns of all these interest groups are to taken onboard. ‘Free riding’ is not good for the public. A competitive environment that allows HIC’s to develop products that attract people to buy insurance will in the long run be mutually beneficial to both the public and the insurer. HIC’s should be innovative in designing products that do not exclude people with pre-existing conditions from taking cover. The government has definite resources and can only be involved in the health insurance up to some certain level. The HIC’s should be able to supplement the government efforts. Positive externalities and how firms benefit According to IRET (2006), externalities occur when a party which is not part of an event/transaction is affected by that specific event or transaction. Externalities can be negative or positive. It this case the measures government put in place to encourage enrollment to private health care insurance are positive externalities to the HICs. There are several positive externalities that HICs benefits from. According to government estimates, the private health insurance sector expenditure in health care stood at less than 20% of the total expenditure. This is a disproportionate figure considering the percentage the government is putting in. HIC’s are therefore ‘free riding’ on government resources (DFAT 2010). According to a study carried out on health care insurance and taxation in the US, Burman et al, (2007) identified that tax subsidies came in various forms. The low-income groups and vulnerable groups like children and elderly people received direct tax subsidies from the government. Majority of the population who are under Employer Sponsored Insurance (ESI) receive tax exemptions from income and payroll taxes. The self-employed are allowed to deduct premiums from their income tax amount. These measures have targeted increasing the number of people who are covered. HIC’s have benefited from tax subsidies provided by government to individuals and employers. The proportion of people who have health insurance has increased as a result on this. Regulation on private health insurance provided by the Federal government ensures that nobody will be excluded from obtaining health insurance based on pre- existing conditions. The concept of community rating provides stability of premiums charged and allows the private health insurance to build a reasonable balanced pool of high and low risks clients. HICs however benefit from these because there is a potential of having a pool of policy holders that is relatively less risky. Conclusion HIC’s have been ‘free riders’ in health care provision since government took the central role of encouraging enrollment in private health insurance. HIC’s have to take their role in providing a competitive environment through innovative products that will attract people to enroll for private health insurance. The government should exercise caution when identifying what constitute “public goods” in order not to destabilize the delicate balance of the market forces. Too much involvement by the government may lead to poor services. Government may guarantee HIC’s a constant client base leading to lack of innovation since they don’t need to put any effort to get clients. The government will not entirely handle health care services on its own. As government provides subsidies and tax rebates to the high-income end, they should not forget that this cannot entirely handle the large proportion of the low income members of the society and the poor. As one researcher observed, the solution does not lie in providing subsidies especially to the low income earners. The government should increase income levels for this group so that they can afford to buy healthcare insurance. This will also eliminate ‘free riders’ who do not want to pay for their medical expenses even though they can afford because someone else (taxpayers) can pay for them. References Burman, L, Garrett, B, & Khitatrakun, S 2008, The Tax Code, Health Insurance Coverage, and Utilization. The Urban Institute and Tax Policy Center, 34(3), 345-374. Carpenter, E 2008, REFORM: Newt Gingrich on "Free Riders" and the Individual Mandate. Retrieved on 07/09//2010 from http://newamerica.net/blog/new-health-dialogue/2008/reform-newt-gingrich-free-riders-and-individual-mandate-4604. Depart of foreign Affairs and Trade (DFAT) 2010, Health care in Australia, viewed on 07 September 2010, EliseGould, J & Hertel-fernandez, A 2009, The Health Care free Ride Reform should help distribute responsibility for coverage more evenly between industries. Economic Policy Institute, 23 (9), 26-34. Galewitz, P 2009, “Free-Rider" Penalty for Employers Draws Ire from Advocates Yawns from Business. Kaiser Health News. Retrieved 07/09/2010 from http://www.kaiserhealthnews.org/Stories/2009/July/30/Rider.aspx. Goodman, JC 2001, Characteristics of an Ideal Health Care System. National Center for Policy Analysis, 35 (972), 386-396. Institute for Research on the Economics of Taxation (IRET) 1999, An Economic Analysis of the Public Provision of Goods and Services with Applications to Health Care and Education. Institute for Research on the Economics of Taxation, 70(1), 1-17. Jones, G 2003, The right to health care and the state. The Philosophy Quarterly. 132(7), 279-287. Robbins, D 2005, Handbook of public sector economics, Taylor & Francis, Sydney. Stevens, WS 2003, Health insurance: current issues and background, Nova Publishers, Melbourne. Read More
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