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Invisible Hand and Role of Governments

In this InDepth Analysis, Alexander S. Preker discusses the role of goverments and the private sector in the healthcare industry.

In the current context of financial crisis and economic recession brought on by excesses and lack of regulatory oversight, it is easy to forget that many countries have large inefficient public sector that are producing goods and services that could be bought from non-governmental providers.

These countries could benefit from greater not less private sector participation in both factor markets (production of inputs) and product markets (provision of services).

In other words, both goverments and the private providers play an important role in a functioning market economy and a pluralistic health sector, while too much of either is likely to lead to problems.

This is not a new topic. Since the beginning of written history, the pendulum has swung back and forth between a minimalist approach to state involvement in the health sector and varying degrees of a greater role by governments, both in the economy in general and more particularly in the health sector.

As early as the second millennium B.C., the papyri, give fascinating evidence that Imhotep, archetypal physician, priest and court official in ancient Egypt, introduced a system of publicly provided health care with healers who were paid by the community.

This early experiment in organized health care did not survive the test of time. The Code of Hammurabi (1792-1750 BC) laid down, inter alia, a system of direct fee-for-service payment based on the nature of services rendered and the ability of the patient to pay.

For the next three thousand years, involvement of the state in health care revolved mainly around enforcing the rules of compensation for personal injury and protection of the self-governing medical guild.

At best, the financing, organization and provision of health care were limited to the royal courts of kings, emperors and other nobility who typically had physicians for their personal use. while the masses got by with local healers, midwives, natural remedies, apothecaries and quacks.

... From Heavy Handed State Involvement

Unlike this predominant historical role of the private sector in health care, during the 20th Century, governments of most countries became central to health policy, often engaging in both the financing and provision of a wide range of care.

Today, most OECD countries have achieved universal access to health care through a mix of public and private financing arrangements and providers. 

The UK national National Health Service is at one extreme.  The Swiss Private Health Insurance system is at the other extreme.  The thing they have in common however is that everyone has access to healthcare without the risk of a catastrophic financial burden.

Proponents of such involvement by the public sector in health care have argued their case on both philosophical and technical grounds.

In most societies, care for the sick and disabled is considered an expression of humanitarian and philosophical aspirations.

But one does not have to resort to moral principles or arguments about the welfare state to warrant collective intervention in health.

The past 100 years are rich with examples of how the private sector and market forces alone fail to secure efficiency and equity in the health sector.

Economic theory provides ample justification for such an engagement on theoretical and practical grounds to secure efficient and equitable health care for the population.

During the past 50 years, largely inspired by western welfare state experiences such as the British NHS and the problems of market failure, many low- and middle-income countries established state-funded health care systems with services produced by a vertically integrated public bureaucracy.

… Back to Neo-Liberalism of the 1990's

During the 1980s and 1990s, the pendulum began to swing back in the opposite direction.

During the Regan and Thatcher eras, the world witnessed a growing willingness to experiment with market approaches in the social sectors (health, education and social protection).

This was true even in countries such as Great Britain, New Zealand, and Australia that historically had been the bastions of the welfare state.

As in the case of the rise in state involvement in the health care, this cooling towards state involvement in health care and enthusiasm for private solutions during the 1990s was been motivated by both ideological and technical arguments.

The political imperative that accompanied liberalization in many former socialist states and the economic shocks in East Asia and Latin America certainly contributed to a global sense of urgency to reform inefficient and bloated bureaucracies, and to establish smaller governments with greater accountability.

But it would be too easy to blame ideology and economic crises for the recent surge in attempts to reform health care systems by exposing public services to competitive market forces, downsizing the public sector, and increasing private sector participation.

In reality, the welfare state approach failed to address many of the health needs of populations across the world.

Hence the dilemma that policymakers face throughout the world today: although state involvement in the health sector is clearly needed, it is typically fraught with public sector production failure.

Towards a New Stewardship Role of the State...

Governments everywhere are, therefore, reassessing when, where, how, and to what degree to intervene or to leave things to the market forces created by demand from patients.  This debate has been central to the 2008 Presidential health proposals.

What are the policy options available to government in improving efficiency or equity; They range from the minimal provision of information to indirect involvement through regulation and contracting, to more direct involvement thorough public subsidies and public production of services.

Governments should exercise their oversight function in securing equity, efficiency, and quality objectives. They can do this through more effective policy making, regulation, contracting, and providing subsidies for those who cannot afford to pay for health care themselves.

At the same time, a strong case can be made for greater private sector participation in financing, provision of health services, and production of inputs - pharmaceuticals, medical equipment, consumables, R&D, and training of human resources.

This type of balance in public and private roles in the health sector would lead to a more effective policy oversight by governments, greater consumer responsiveness and investment opportunities that would attract an increase in private capital flows to the health sector.

Had these principles been applied to the financial sector the current crisis might have been avoided and everyone living in the US would already have access to needed healthcare.

One risk of the current global financial and economic crisis is that the world will turn back to a blind faith in the omnipotence of governments which would be no more likely to succeed than a continuation of a naive belief in the "invincible hand".

Contact details

Alexander S. Preker

Health Investment & Financing
14 Wall Street, 20th Floor
New York, NY
United States of America

Office: 1 (212) 348-1866
Cell: 1 (202) 667-8286
Fax: 1 (212) 348-2866


Future of HealthCare

Barak Obama on the US

Gordon Brown on the British NHS

States without Boarders in Europe


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