Lecture: Role of Government Chapter 19 Outline

Rational for government intervention

• Incomplete Markets:
• E.g. Insurance companies don’t want to insure you for pre-existing diseases (cancer, AIDS).
• Can’t buy insurance.
• Policy Options:
• Could use mandates that make insurance companies cover these people.
• May need to subsidize drugs or care.
• Could provide care.

Rational for government intervention

• Merit Goods
• Use argument everyone should have access to health care.
• Why many developing countries have free access to medical care (even if can’t afford to provide it).
• Why you see universal health care systems.

Rational for government intervention

• Market Power
• Monopolies, oligopolies etc.
• Any industry where the supply or marginal cost curve is not flat (so are not price takers)
• E.g. Hospital, drug companies (patents), specialists,
• Often create market power by differentiating products. E.G specializing in different kinds of operations.
• Produce less and charge more than a competitive market.
• Due to economies of scale, production may be more efficient if you have a monopoly (natural monopoly)
• E.g. power sector, hospital, medical research

Rational for government intervention

• Policy options for market power
• Regulate
• May set maximum prices.
• Negotiate prices with drug companies and doctors.
• Mandate longer hospital stays (deliveries, started to only insure 1 night stays, it was mandated that woman could stay 2 nights.
• Public provision.

Government Involvement in US

• Support for hospitals
• Started under the Hill Burton Act in 1946
• Idea was to expand rural health facilities by providing matching grants to non-profit institutions.
• Requires states to survey its hospital needs and develop a statewide plan for construction of public hospitals.
• State, county and municipal hospitals account for 20 % of total hospital beds.