To understand why health care services are expensive in some countries of the world and cheaper in others, we must look into the economics of health industry. Health care is also a market. It means that it depends on supply and demand factors that help determine the price of health care services and quantity of health care services prevalent in any country. This implies that if in any country demand of health care services is exceeding the available health care services, the price will be higher and vice versa.
But this is not all this simple. Factors other than supply and demand are also involved in the health care industry. To analyse the inefficiencies in the health care market, we must understand such factors.
Demand Side of Health
Health care industry cannot be explained by laws of demand only as it depends on following:
- Health care services have characteristics of a public good. Government or non-profit organisations usually provide health care services and thus are not worried about restricting their supply to make profits
- Health insurance policies alter the price faced by the person demanding health care. This is a case of a subsidised price where a consumer may ask more of it than his purchasing power.
- Health care demand is inelastic. People usually are willing to buy health care services at any cost.
- Spending on health care services is an investment in yourself. If you spend on your health today, you are securing your future.
- Healthcare market does not work around the law of demand which entails that a consumer will continue to buy a product until his marginal cost is equal to the price of next unit. In health care industry there are many information problems. People do not usually go into the details of what the treatment would cost them regarding value and money.
- There are information problems too in the health care market. Individuals cannot decide for their health condition themselves. Thus they trust doctors about it. They try to make informed choices by trusting medical practitioners and doctors for treatment.
Supply Side of Health
Factors affecting Supply side of the health industry includes:
- Proper education and licensing terms for doctors make a barrier to entry in the health care market for everyone limiting competition in the market and increasing market power.
- Doctors do not work solely for profits. There are moral grounds like Hippocratic oath that make them keep working
- Health care industry includes workers other than doctors like nurses, administrative staff, technicians, etc. The wages of each also varies within the same industry.
- Healthcare supply is done on nonprofit motifs or as a public good
- Technological advancement in the health industry is fast paced that affect the price and cost of the health services
All these factors need to be considered to determine the price and quantity of the health care services.