Wednesday, December 16, 2009

Reinventing the market for GPs

In his excellent 2002 book, Reinventing The Bazaar, the late John McMillan described how the workable platform for markets has five elements:
  1. Information flows smoothly
  2. Property rights are protected
  3. People can be trusted to live up to their promises
  4. Side effects on third parties are curtailed and
  5. And competition is fostered.

McMillan describes how these platforms aid the effective operation of markets. He also outlined situations in which suitable government intervention can help if the effectiveness of one or more of these platforms are absent. The market for health needs intervention on many many grounds but too often the cure is worse than the disease.

Three of the key pieces of information consumers need to help them are availability, price and quality. There are a huge number of examples of producers trying to conceal this information for their betterment.

The GP market in Ireland is one that has been traditionally characterised by a lack of information. This strategy is part of the practice and ethical guide that the Irish Medical Council issues to GPs. The 2004 edition of the guide required that new GPs could only use newspaper announcements (not advertisements) when opening a practice. All other forms of advertising was prohibited. All internet material must be "non-promotional" and the most suitable place to display prices was inside the practice. Price or product advertising was not allowed. (See sections 6 and  7, pages 20 and 21.)

According to The Competition Authority the effect of these restriction has been to
  • Create barriers which unnecessarily inhibited GPs becoming established.
  • Favour established GPs.
  • Reduce the incentives for innovation on the part of GPs
  • Discouraged price competition in the case of private patients.
  • Make it difficult for consumers to obtain information on the availability of medical services in their area.
If we just consider the effect of the ban on price advertising. A lack of price information means that the consumer must incur search costs to determine the information. It can be shown that in the presence of search costs the equilibrium price in an otherwise competitive market will be the monopoly price. This is the basis of the tourist trap model.

It is in GPs' interests to keep price information from consumers as it increases their profits. It may have been working as this graph from the report by The Competition Authority indicates. Click to enlarge.

Following the concerns raised by The Competition Authority the 2009 edition of the Medical Council guife for GPs removes the formal ban on price advertising and no longer states that prices can only be displayed in the practice (see Section 5.4 page 49).

Along with the recently introduced 50c prescription charge, this attempt to get information flowing more smoothly in the GP market sees increased attempts by government to harness market forces in the market for health rather than suppress them. This is smart.

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