Efficiency The best possible standard of health care could only be achieved by devoting all of the economys resources

to it. Not a good idea as no other commodities would be produced. There an efficient level of production of a commodity was defined as where the difference between benefits and cost is at is greatest, that is where the marginal social benefit from a production of the commodity equals its marginal social cost. Is applied to any problem of allocating resources. The difficulties in measuring benefits do not invalidate the definition of an efficient level of health care as one that maximises the difference between benefits and cost. Equity There is agreement amongst most people that the health care system should be fair or equitable. The equitable allocation of a commodity, -one in terms of a minimum standard, everyone should have at least a minimum quantity of the commodity concerned. - one in terms that of full equity , everyone should consume the commodity equally, some believe a minimum standard of treatment for those in need, - one in terms of full equality. Others say that organisation of health care is that it should promote equality of access. The costs or sacrifices that people have had to make to get medical care.

The market system and health care In the UK the market system is used to allocate a wide range of basic necessities including clothing and food, it is not employed in the allocation of health care. If health care was a free market it will be efficient. But many argue that the outcome of the market allocation in health care will not be efficient. It claims that health care possess certain characteristics that render market allocation inefficiently. Inefficiency in markets in health care arises because of uncertainty of demand, imperfect consumer information and externalities. Moreover it is argued efficiency is not societys only objective, there are others such as equity, whose requirement are generally violated in the market.

Uncertainty of Demand One of the features of health care is that the demand for it is likely to occur unexpectedly. Within the market system there is a mechanism for coping with the problem of uncertainty = insurance.

Moral hazard is the phenomenon that once a person is insured against an eventuality their actions may make it more likely to occur. If a person is fully covered by insurance the incentives to both patient and doctor to economise on treatment is virtually eliminated. Adverse selection arises when insurance companies find it difficult to distinguish between good and bad risk individuals. The bad risk individual are more likely to demand insurance than the good risk. The existence of moral hazard and adverse selection will mean the insurance market will be more limited if the insurance companies had full information about the action of the buyers. As a result certain people will not be able to buy insurance and will not have cover against the cost of medical care.

Imperfect Information Health care is considered to be different from other commodities because there is an imbalance between the knowledge of the supplier of the treatment (the doctor) and that of the consumer. For many other commodities, consumers have a fair idea of what constitutes quality. Even, if they do not, provided that the commodity is bought repeatedly, they can acquire knowledge of quality from their use of the good and employ this information. The claim that an unregulated market in health care provides an incentive to doctors and hospitals to provide good services through competition becomes of doubtful validity. If consumers do not know the difference between good treatment and bad treatment, then they are unlikely to shop around for better services. Instead they will seek to build a long term relationship with the supplier, to establish a relationship of trust. Given this consumers will not shop around whenever they get ill, but will seek care from the supplier with whom they have built up a long tern relationship. Much of the information is technically complex. Mistaken choice is costlier and less reversible with other goods.

Rational choice requires simultaneous knowledge both of price and nature of good. Because of imperfect information and unequal power, consumers will choose inefficiently.

Monopoly Because of imbalance of information doctors can operate as a monopoly, raising prices without fearing a substantial loss of customers. Information imbalance between suppliers and demander of care can lead to supplier induced demand. In a system in which doctors are paid for each service they supply, the incentives are to provide more rather than less.

Externalities A feature of health care that may create problems for market allocation is that it has external benefits. The consumption of a commodity is said to create an externality when a third part who is not involved in the decision to consume it is none the less affected by it, but receives no compensation of benefit. If the effect is adverse it is described as an external cost, if it is beneficial, it is described as an external benefits. Social benefits (or cost) = Private benefits (or cost) + external benefits. The greater the size of the externality, the greater the divergence between social and private costs or benefits. If these externalities exist to any significant extent, the market can no longer be relied on to operate efficiency. In the presence of externalities, without some government intervention, the market cannot be relied on always to produce the most efficient solution. When there are external benefits, the market demand curve and the marginal social benefit curve are no longer identical. The result is that the quantity provided under a market system will not necessarily be at social efficient level. So the existence of externalities can prevent the market from operating efficiently. The degree of inefficiency will depend on the size of the extenality.

In practise it is very difficult to establish either the extent of these externalities. It is therefore difficult to know how much intervention is justified in the grounds of externalities.

Regulation Often the government lacks the specialised information necessary to carry out these functions effectively and so the responsibility for regulation is delegated to professional bodies within the health service itself. Through self regulation. Provision Health care is provided by the state. In the UK the government owns most of the country hospitals through the NHS. Taxes and subsidies The NHS combines direct public provision with extensive subsidisation of the cost of medical care. Thus regulation is an attempt to deal with the problem of monopoly. Thus subsidisation with externalities and equity concerns, direct provision with power of providers. But although market failures exist, government intervention does not improve the situation. The system of incentive created by intervention may also lead to inefficiencies and inequities. If the price of health care is subsidized, consumption will increase via both income and subsitition effect. With an income subsidy only the income effect operates, so a larger subsidy is generally needed to give a about a given increase in consumption Regulation. It may mean that regulatory agencies operate more to serve the interest of those they are supposed to be regulation than to protect those of the consumers. Regulation may also set up incentives which reduce efficiency.

Provision If the government proves health care for a large enough proportion of the population, it becomes the dominant or sole buyer of doctors and other inputs. It becomes a monoponist. It can use this power to counteract the monopoly power of suppliers, both to reduce price charged. Lack of competition allows inefficiency to develop in production.

Subsidy If prices are reduced too much, subsidisation may result in either over consumption or to excess demand. In the NHS two forms of rationing devices are used, it is queue and waiting list.

Quasi-Markets The idea of reforms introduced in 1989 for the NHS is to create an internal or quasi markets. Under these reforms, the provider and purchaser functions of the hospitals are to be separated and a market will be created on the supply side. Providers both public and private, are to compete for the budgets of publicly financed purchasers.

Notes from AE The mandate of the NHS is to provide health care services according to need, free at the point of delivery. It was and continues to be funded from central government tax revenue via the consolidated fund. 80% comes from tax revenue, 14% from National insurance contribution, 4% from receipts. A high income elasticity of demand for health care services. Because of an ageing population, increased deprivation/economic recession, advances in medical technology, higher expectations.

Supply and cost factors

In health care the uk is lagging behind the rest of developed world. Recent figures by respected authorities like OECD and IMF have shown that the NHS performs poorly against other when it comes to making people better and on a measures of efficiency and value for money. They are recommended that we introduce competition to improve quality while lowering cost. Evidence from other countries such as Germany and Spain is that health care markets can be managed in a way that does not compromise on fairness. From costing 11billion (3.5% of GDP) in 1949 to 102billion (7.3%) in 2007. The NHS has allocated 164billion for PCT for 2009/11. As 80% of nhs budgets goes to PCT. The NHS already buys health care from the private and voluntary sector, with the volume of that range growing over the past decade under labour. The NHS bought more than 4billion of care from the private sector, about 5% of the cash currently spent on PCT. Whether the private sector might undercut the nhs price on hip replacement. Choice, competition and creation of a regulated market Modernising NHS is a necessity, not an option, in order to meet rising need in the future we need to make change. These new GP consortium which will be compulsory by april 2013, will be in charge of purchasing care to the value 70billion. The nhs will cease to be an organisation with a management structure. Instead it will be a market of compelling health service providers. Andrew lansley believes that GPs are best qualified to spend health budgets, we need a health care system where the management of the care of patients is combined with an understanding of how resources are used. The BMA have stated concerns over the use of deregulated tariffs in the NHS, because this system brings with it price competition, which can risk basing decisions on price rather than on clinical needs. Hospitals may drop services that are unprofitable and these would be anomalies such as conflict of interest in GP both commissioning care and providing it. GPs do not work for the NHS, they are independent contractors. It is assumed they will prefer to pay private companies for health services rather than publicly owned institutions. Hospitals would feel under pressure to improve the quality, if they knew they wouldnt be a monopoly. The threat of competition is normally only a strong spur to efficiency for an institution that fears it would be allowed to go bust when it loses business.

As we saw from the recent banking crisis, competition between institutions that dont fear theyll be permitted by government to fail can lead to those institutions taking crazy risks. Health will account for almost a third of government spending by 2015 according to IFS. For the financial year 2010-2011 the NHS managed to make a saving of 1.5billion, due to help from financial advisors. This will help for the saving of 20billion by 2015. Already non-urgent treatments are being cut by primary care trust. Under the reforms there will be reduction in funding for places like Manchester and Tower hamlets, were there will be an increase in funding in wealthier areas such as Surrey and Hampshire of 2.9-4.2%. Already leading to a postcode lottery. Recently the health secretary has announced that from next April, NHS services worth 1billion will be opened up to competitive bids from the private sector. Change from any willing provider to any qualified provider The cost of reforms will cost 1.49billion. Competition means more providers, which means more contracts have to be placed which means a higher transactional cost. The allegiance of private companies will be to their shareholders not to the users of the service. We have already spent 1billion on redundancy payment. The proposal will take responsibility for population health away from the NHS and to hand it to local authorities for the first time since 1970s. 59% of PCT have not achieved the efficiency saving of 4% this year.