Thursday, June 8, 2017

Affordable Healthcare?

Since coming to power in 2014 one of the aims of the Narendra Modi government’s welfare state is to make healthcare more affordable in India by, mainly, trying to curb prices of drugs used to treat critical ailments such as cancer, HIV/AIDS and diabetes. In their efforts to do so they have declared some 350 drugs as essential drugs and imposed a price ceiling on them. Not only this, in February this year they also cut the price of some heart stents by 75 percent. Now a letter from Modi government’s drug price regulatory bureaucracy The National Pharmaceutical Pricing Authority (NPPA) shows that they intend to add four more medical devices to a list of products eligible for price controls to reduce costs to patients.

Making healthcare affordable is a noble objective, but the real question is whether the method of using government price control measure will achieve this objective? Only sound economic theory can shed light on this issue.

Economic science tells us that, any market, whether that be apple or healthcare, requires freely functioning price and profit & loss system for efficient (and just) allocation of given scarce of resources. For example, in a freely functioning market, if at a given time the price of heart stent is very high then that will attract new sellers from outside who will now enter that market because they see possibility of making high profit; as these new sellers enter the market with their fresh supply of heart stents, the supply of stent goes up in turn lowering its price. Similarly, if the price is too low, it will result in sellers exiting this market until the time when the losses disappear. The same will happen in any freely functioning market when the price and profit & loss system is working without any impediments.

Now, what happens when the government doesn’t allow the price and profit & loss system to work freely by imposing its price control measures? Four things will follow immediately after the imposition of the price control measure. Because we are here discussing the method of price ceiling – price ceiling means the government doesn’t allow the producers/sellers to charge higher prices than the price stipulated by the government – imposed on the healthcare market, I will only discuss the case of price ceiling (other form of price control is price floor where government stipulates to producers/employers to pay prices higher than the stipulated amount e.g., the minimum wage law).
  1. Immediate shortages: the first consequence of price ceiling measure will be an immediate shortage of the product on which the measure is imposed. In our case these products are the heart stent, possible four more medical devices as well as those 350 essential drugs. The shortage will occur because now at a new given lower prices production of these items will become uneconomical and a loss making enterprise. A simple example will help here. Suppose a medical company X is making 10 heart stent at total cost of 1000 rupees per stent (100 rupees per stent); it is selling 1 stent at a price of 120 rupees so its profit is 200 rupees (10 stent sold at price of 120 rupees means 1200 (120×10) rupees revenue; profit = total revenue – total cost so here 1200 – 1000 = 200 rupees). Now the government imposes a price ceiling of 80 rupees per stent. At this government controlled price now our company X can not make any profit; in fact, it is now making a loss of 200 rupees. Remember, the government can easily impose a price ceiling, but the company cannot easily and immediately bring down its production cost. Because no company in a competitive market can survive without making profit, company X will lower its production to lower losses. This in turn will create shortage of stent in the market. And we all know that this shortage of stent will make it even more unaffordable to the very patient for whom the government wanted affordable healthcare! A short supply of stent means it is not available for all patients.
  2. Lower supply in the long run: In the long run it is possible that many or almost all producers of medical equipment exit the market because there is no chance of lowering losses or making profit! If that happens then the heart stent, and all other price controlled devices and drugs, will totally disappear from the market putting lives of millions of patients at risk!
  3. Non price rationing: One of the chief aims of the price system is to allocate scarce resource efficiently between various competing demands of that resource. When price system couldn’t do that work because of price control measure, the market participants will start to ration that resource by other non-price means e.g., as it is happening in the case of heart stent the sellers are now charging higher price of other equipment accompanying heart stent as reported by the news report cited above: It has been found that after the price control of cardiac stents several hospitals have increased the various ‘procedure charges’ in order to compensate for their losses … In some cases the cost of balloons and catheters have been charged at (a) much higher level than the cost of (the) stent itself! This totally defeats the whole purpose of government making healthcare affordable!
  4. Drop in quality: Not only the above dire consequences will follow the policy of price control on medical devices and essential drugs, but in the longer run the quality of these devices as well as drugs will also deteriorate. Producers will lower the quality of these products to lower their cost to compensate for the drop in price and revenue due to government’s price control measure. Instead of using high grade material to manufacture their products now they will use cheap material. This lower quality means these devices will not work as well as they would have if their quality didn’t deteriorate because of price control measure. Again, this lower quality devices and drugs will defeat the whole purpose of providing healthcare to patients!
All in all, as we have seen above, the price control measure of Modi government on the healthcare industry will only lower the health standards of the Indians. Instead of making healthcare affordable, it will make it unaffordable and inefficient.

If the Modi government is serious for making healthcare affordable and efficient for the Indians then they must immediately remove these price control as well as all other regulatory measures which are stifling competition in the healthcare market. Only market competition can lower the prices of healthcare devices and drugs as well as improve their quality. Healthcare companies competing for every rupee note of consumers will do everything possible to make their goods and service affordable and efficient. The price control measure of the Modi government is only going to kill more Indians.

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