Sunday, January 13, 2013

Very Quick Thoughts on (Chinese) Healthcare

The problems consumers face in the Chinese health care system may suggest that the information asymmetries and uncertainties in the provision of health care are much more difficult that we think.

In China, a significant issue that I hear complaints about is that there never is enough capacity. Hospitals are crowded, and it's hard to get adequate care. Instead, doctors spend minimal time with the patient, medicate them to the maximal extent, and then send the patient on his way.

Even when you do get medicines, there's no guarantee that they are the best value for the patient. Many Chinese doctors get commission from companies based on the prescriptions they push forward to their patients, and are thus incentivized to recommend the more expensive imported medicines.

Why does this persist? I suspect it is a combination of both government failure and market failures.

Let us start with the market failures. First, it seems clear that the market is not competitive. Otherwise, perhaps more hospitals could be built to help mitigate the overcapacity. But the most obvious solution -- encouraging more entry by lowering regulatory barriers -- may not be the most effective. In such a world, there would be two tiers of health care, the first being the traditional system that we have now, the second being the new deregulated system.

In the second system, I fear that it may become dominated with fraudulent medicines and unscrupulous doctors. In China, it's already a common frustration that goods that you buy never seem to be real, and whenever there is a profit opportunity, fake goods appear. At best, this wastes money. At worst, this wastes lives. As a result, I have a hard time imagining that deregulation would go off without a hitch.

I also doubt word of mouth would do much to solve these information problems in the second tier. It's hard to tell the differences between charlatans, and as such it would be much easier for consumers (who are predominantly old) to group the entire second tier collectively as ineffective. The difficulty consumers face in evaluating the quality of care also makes it harder for the market to converge on a fraud-free equilibrium. Moreover, if consumers need relatively limited amounts of healthcare, then it's hard for them to learn from experience.

As such, while deregulating the provision of health care in this way could improve health care by giving much more choice to consumers, it does not seem sufficient. The lack of competition seems to be the result of these information asymmetries, and to address the lack of competition you have to first address the problems in getting information.

Yet this story of market failures may instead be a story of government failures. In the case of overmedication, the government does have laws on the book in order to mitigate it. Their solution is to control the prices of individual drugs as well as limit the total monetary value of drugs that a doctor can prescribe in a single visit. However, doctors then respond to this by reducing the length of prescriptions, and then having patients come to the hospital more often. This contributes to the capacity issue because patients are forced to come to the hospital more often.

Also, because prices are controlled, patients have to "walk the back door" (走后门) and pay additional bribes to doctors to get care. This exacerbates the imported drug problem, because if doctors cannot earn as much money through conventional means, it is natural that they find ways to work around the system to make the money.

Price controls are also problematic because they make investing in new medicines very risky. Even if a given company can create a drug, it's always uncertain how the government will regulate it.

Based on these competing narratives, I draw two broad conclusions.

First, crude price regulation is rarely an answer. In such a world, it's too easy for people to work outside the system (in the case of bribes) or for doctors to subtly change their work inside the system (in the case of overmedication). Instead, if regulation is to work, it needs to address reasons, like asymmetric information, why health care provision hasn't been working like in a regular market.

Second, consumer choice is insufficient. As healthcare consumption becomes dominated more and more by the elderly, it strikes me as very odd that the most feeble in society are now tasked with identifying the best form of healthcare in an environment that is growing increasingly complex. There is just too much uncertainty, both ex-ante and ex-post, about the quality of care, for the standard word of mouth and experienced buyer mechanisms to work.

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