Hi there. My name is Marco Varkevisser. I'm a professor of healthcare markets regulation at Erasmus University. In my work, I'm particularly interested in how to organize healthcare systems in such a way that the public interests, quality, accessibility, and affordability are guaranteed. I would like to start this video with an intriguing quote from the handbook of health economics about healthcare markets. "No other market of substantial importance violates two requirements of perfect competition so radically." With this important observation, the US health economists David Dranove and Mark Satterthwaite starts their contribution about the industrial organization of healthcare markets. Because of this violation, free markets in healthcare failed to produce good outcomes for society. Therefore as also explained in another video of this MOOC, government intervention is a necessity. But just like markets, governments are also far from perfect. Important causes of government failure are for example, political self-interest and lobbying, information failures, bureaucracy, and conflicting policy objectives. In this video, you will learn that market-based health system reform is therefore all about finding the right balance between competition and government intervention. To better understand this, let's have a closer look at the four conditions for perfect competition, and see how these are violated in healthcare markets. First, perfect competition requires that firms sell a standardized product. In a perfectly competitive market, products sold by one firm are assumed to be perfect substitutes for the products sold by all other firms. In healthcare, this is typically not the case. Healthcare is not homogeneous, but heterogeneous by nature. For example, quality healthcare is likely to differ substantially between providers. It does certainly matters to patients where they get their treatment. Second, perfect competition requires that firms are price takers. This condition is satisfied where there are so many individual firms that neither of them can affect the market price. Again, this is typically not true in healthcare markets. For example, due to mergers, large hospitals have strong bargaining power vis-a-vis health insurers when negotiating prices. At the same time, the insurers have at least some market power when setting their premium on the health insurance market. Third, perfect competition requires free entry and exit. In a perfectly competitive market, it is assumed that a new firm is able to immediately enter the market when it sees a profitable business opportunity, and when this opportunity eventually turns out to be less profitable than expected, leaving the market should be possible without incurring extra losses. In healthcare, however, entry is subject to many regulations including capacity constraints, and all kinds of quality standards. Additionally, entry may also require investments in highly specific equipment that cannot be easily sold in case of an exit. Think about building high-tech operating theaters as an example, and these so-called sunk costs then act as an entry barrier. Fourth, perfect competition requires that both firms and consumers have perfect information. Markets will only function perfectly when firms and consumers both possess all relevant information about the products being sold. However, in his famous article about the specific economic problems of medical care published in the American Economic Review in 1963, Kenneth Arrow explains that markets in healthcare suffer from serious information problems. The classic example is that the physician has superior knowledge about the patient's medical condition and the available treatment options. This information advantage provides the physician with opportunities to act as an imperfect agents of the patient, and this could lead to a so-called agency problem. For example, when physicians are being paid on a fee-for-service basis, they may exploit their information surplus by encouraging patients to consume more expensive care than is strictly necessary for solving their medical problem. In practice, very few markets if any at all fully satisfy these four conditions. As was already said in the beginning of this video, this is particularly true for healthcare markets. This does not mean however that competition is by definition harmful to health systems. On the contrary, competition in healthcare can still be helpful, but only when it is combined with adequate government regulation. As you will learn throughout this MOOC, the key challenge for market-based health system reform is how to navigate between market failure and government failure. As a start, the next video addresses the question whether competition among providers of healthcare is helpful or harmful. You will learn about some important lessons that should be taken into account when considering the introduction or strengthening of competition for healthcare provision.
