A fast ageing population will put pressure on the governments budget. Health Minister Khaw Boon Wan said that the key to a sustainable healthcare system is to minimise market distortions and to allow healthcare to function as normally as other economic activities. Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Introduction:

Define market failure

Failure of the free market to allocated limited resources in the production of goods/services such that societys welfare is maximized and achieve social aims such as equity

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

State that there is market failure in the healthcare sector due to Presence of positive externalities in the

consumption of healthcare services Imperfect information of the full private benefits

of consuming healthcare services Oligopolistic market structure of the healthcare

sector

[Choose at least 2 out of 3 sources of market failure to develop in Body of answer.]

As a result of significant market failure in the healthcare sector, government intervention to correct this market failure is required.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Quantity 0

MPC = MSC

MPB

Y Z

A

C

B

MSB

Costs/Benefits

1st Source of Market Failure:

Negative Externalities

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

MPB of consuming healthcare services is the treatment of individuals illness and upkeeping of owns health

MEB of consuming healthcare is the spill-over benefits on 3rd parties. For example, 3rd parties benefit from an individual seeking treatment from common flu as it reduces the spread of sickness to the 3rd parties.

Other MEB also includes a healthier workforce and greater productivity that benefits the employers as individuals consume healthcare services.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

MSB = MPB + MEB MPC of consuming healthcare is the costs

associated in producing healthcare services, like doctors charges and prescription drugs fees.

MSC = MPC, assuming no negative externalities in the production of healthcare

Free market level of consumption is at MPC=MPB where individuals net private benefit is maximized

Allocative efficient level of consumption is at MSC=MSB where net social benefit is maximized.

Due to under-consumption of YZ units of healthcare, DWL is incurred. DWL represents the net social benefits forgone when YZ units of healthcare are not consumed.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

2nd Source of Market Failure:

- Imperfect information of the full private benefits of consuming healthcare services

Individuals may underestimate the full private benefits of certain healthcare services. For example, individuals tend to underestimate the private benefits of annual health screenings, thinking that they are in good physical condition.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

DD2 (with Perfect information) DD1 represents demand for healthcare services

when its private benefits are underestimated due to the lack of perfect information of private benefits of consuming healthcare. DD2 represents demand for healthcare services assuming the private benefits are fully appreciated by individuals.

Y is the level of healthcare consumed by individuals assuming imperfect information

Z is the level of healthcare consumed by individuals assuming perfect information. This is also the allocatively efficient level of healthcare consumption to be consumed by society.

Hence, there is under-consumption of YZ in the free market resulting in DWL of shaded triangle.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Quantity 0

MPC = MSC

DD1 (with Imperfect information)

Y Z

A

C

B

Costs/Benefits

DD2 (with perfect information)

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Oligopolistic market structure of the healthcare sector Healthcare sector could be dominated by a

few large firms due to high entry barriers High start-up cost due to need for specialized

equipment

Need for specialized labour such as doctors, nurses

Dominant firms in oligopolistic markets with significant market power could practice monopoly pricing where Qm < Qfm

P > MC, resulting in allocative inefficiency

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

*Note: In the next section of this answer, the following is required:

Identification of appropriate intervention methods

Cite Singapore-specific intervention programme relevant to intervention methods identified

Explain how the intervention works using economics framework

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

*Note: In the next section of this answer, the following is required:

Evaluate strengths/limitations of intervention methods

In terms of aging population and government budgetary pressures

In terms of distortion to the free market (in line with preamble)

In terms of sustainability of intervention (in line with preamble)

Should government pursue intervention more or less (to address requirement of question, . the extent to which the government should intervene.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

In-depth discussion of the extent to which the government should intervene in the healthcare market.

Subsidy

Singapore examples Class C and B hospital wards in Restructured

hospitals are subsidized

Polyclinic medical services are subsidized

Medifund subsidy is provided to low-income individuals

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Subsidy

How subsidy works? An Indirect Subsidy = MEB will bring

consumption to Z, eliminating DWL and achieving allocative efficient outcome

Subsidies also reduce inequity so that lower income individuals are more able to consume healthcare that they need/want.

Strengths Subsidies do not displace price mechanism.

Market remains responsive to forces of demand and supply.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Limitations Difficult to attach monetary value to MEB, that is

a healthier and more productive work force. If under-estimate MEB, under-consumption of

healthcare persists. Though DWL and extent of allocative inefficiency is reduced.

If over-estimate MEB, over-consumption of healthcare will occur. This results in DWL and allocative inefficiency.

Opportunity cost incurred in providing healthcare subsidy. Spending on public goods and other merit goods which improves societys welfare is forgone.

In view of aging population, subsidy on healthcare likely to increase. Hence, sustainability is an issue.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Should government provide more/less healthcare subsidies? To reduce subsidy expenditure, means-

testing subsidy should be implemented. Currently, means-testing for hospitalization subsidy is being practiced. 60% to 80% subsidy is provided for Class C ward.

More differentiated subsidies for different income groups should be considered. Means-tested subsidies should also be implemented for polyclinics.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Different levels of subsidies should be provided for different types of healthcare services. Preventative healthcare services which generate

significant MEB such as vaccinations should be heavily subsidized while curative healthcare services such as treatment non-infectious diseases should be subsidized to a lesser extent.

However, subsidies for lower income individuals should continue to be provided regardless of type of healthcare consumed as these subsidies are provided to reduce inequity

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Evaluative points:

Subsidies cannot form the core of government intervention policies. In Singapore, subsidy is one part of a multi-pronged healthcare intervention plan which includes Medisave a compulsory self-financing

healthcare programme, as well as

Medishield a healthcare insurance plan available to all Singapore citizens.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Direct Provision Singapore examples

Public hospitals and polyclinics

How direct provision works? The public hospitals and polyclinics seek to

provide socially optimal level of healthcare services at affordable prices. Profit-maximization is not the primary objective.

Strengths Ensures affordable h/c is made accessible to

all (eg polyclinics are located in neighborhoods)

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Limitations As profit maximization is not the primary

objective, provision of healthcare services might not be at lowest possible cost, resulting in productive inefficiency.

Given limited supply of doctors, nurses and medical professionals, public hospitals and polyclinics may face difficulties in trying to provide socially optimal level of healthcare services at affordable prices. Patients may have to endure long queues, and lower standards of healthcare services.

It is difficult to determine the socially optimal level of healthcare services, as this is dependent of the MEB of consuming healthcare services.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Should the government build more public hospitals and polyclinics? Government should not directly provide

all healthcare services as that would result in significant productive inefficiency.

At this time, public hospitals provide 80% of costly hospitalization services while private hospitals provide 20%. Polyclinics provide 20% of primary healthcare services while private clinics provide 80%. This mix of public-private healthcare providers is beneficial as

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

beneficial as It provides consumers with choices Private hospitals and clinics provide quality

benchmark for public hospitals and polyclinics Public hospitals and polyclinics (charging subsidized

rates) provide pricing benchmark for private hospitals and polyclinics.

[Note that benchmark does not mean, equal.

For example, it is unrealistic to expect private clinic quality at polyclinic pricing. Rather, the presence of polyclinics helps to influence/moderate private clinic charges, bearing in mind the difference in quality to be expected.]

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Conclusion & Overall Evaluation: In view of the aging population, the use of

subsidies as an intervention method should be targeted and specific. Subsidies for preventive healthcare that

generates significant positive externalities should continue while subsidies for healthcare services that generate little/positive externalities should be eliminated/reduced.

Subsidies for the lower income groups should continue for equity reasons. Given growing income inequality in Singapore, means-tested subsidies should be the norm so that no individual requiring healthcare services is denied access for financial reasons.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Conclusion & Overall Evaluation: Medisave contributions should be stepped up so

that individuals take up responsibility for financing their healthcare expenditure as much as possible. Extensive efforts to persuade individuals to take up medical insurance should also be made. Collectively, these measures will significantly ease the government in providing healthcare for its aging population.

A mix of public-private healthcare providers is optimal as it offers choices to consumers and also allows pricing and quality benchmarks to be set. This will contribute towards a healthcare sector that can provide quality healthcare at reasonable prices.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Examiners Comments:

Quite a number of students also lumped the analysis of market failure due to imperfect information and positive externalities.

Quite a number of candidates fail to define terms such as MPB and MEB clearly. In particular, examples given to explain positive externality are often not clear! One common example includes external benefit of h/c involves a more productive society. Candidates should avoid being so vague about the 3rd parties by harping on society. It is essential that they identify the 3rd parties clearly- i.e. employers that benefit from greater productivity of his firm from an individuals consumption of h/c.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

For the 2nd part of this question, candidates should expound on the measures to deal with the market failure above, and provide analysis and deep evaluation. To obtain the highest mark range, candidates should evaluate with respect to the Singapore context presented in the preamble - consider issues related to population ageing, budget pressure and sustainability of the Singapores h/c system.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

For instance, in evaluating subsidy, one common point of evaluation would be that imposition of subsidy exerts a great strain on governments budget. Better scripts would go on to comment on the sustainability of this measure. With ageing population, government expend on subsidy is expected to rise; government might resort to raising tax rates. With the workforce growing less than proportionately (or falling) with respect to the proportion of aged, candidates should note the difficulty in raising sufficient income tax revenue.

Students need to specify whether the subsidy is given to the producer or consumer. This must be clearly stated because the effects on the graph are different for both cases.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Students are to note that Medisave and Medishield are not examples of h/c subsidies. Medisave account is part of an individuals CPF account, which comprise of compulsory savings. Hospitalization charges can be partly paid through the patients Medisave account. Medishield is a medical insurance scheme that is tied to the Medisave account. The premiums for Medishield can be financed through the Medisave account. The purpose of Medisave and Medishield is to make sure that the majority of Singapore citizens are able to back their need/want for healthcare with the ability to pay.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

For education and campaign, examples should be provided. Again, evaluation on this lacked depth of thought for many scripts. Better evaluation discussed the possibility of a better-informed public who would gain from better health, and thus contribute to the long-run benefits of reducing the strain on governments budget to finance their health needs, resulting in a more sustainable h/c system in view of population ageing.

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25]

Candidates should discuss direct provision as a possible measure in order to gain a holistic discussion. They should provide examples (government hospitals, polyclinics) and discuss the case for more or less direct provision from the current level. The best scripts examined this part by comparing with the case for promoting greater competition (i.e. privatization, deregulation). These responses showed good awareness of the lack of profit motive of public hospitals and the tendency to become productive inefficiency which might result in possibly higher government expenditure to run them. Concurrently, allowing more private providers might spur greater productive efficiency and higher quality of services in a bid to compete for more profits.