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H2 Econs [Market Failure] Singapore's Healthcare System

Updated: Apr 11, 2020

Often lauded by the western media as the epitome of a success, Singapore's healthcare system is the envy of many countries that struggle to replicate our approach to address the market failure associate with the healthcare market.

1. Market Failure in the Healthcare Market: Externalities, Imperfect Information & Affordability Issues

The market for healthcare is another classic case of market failure. Consumers, ignoring the positive externalities associated with the consumption of healthcare services, tend to under consume relative to the socially optimal level of output. Positive externalities are spillover benefits to third parties (MEB), and manifests in the form of a healthier and more productive labor force and minimize the spread of infectious diseases (especially in the consumption of vaccination). However, consumers fail to account for these "extra" benefits when deciding to consume healthcare; for instance, consumers do not vaccinate to protect those around them, but rather consume solely by weighing their private costs and benefits of vaccinating. This typically leads to underconsumption, since society would prefer that that consumers are consuming more healthcare services (seeking treatment early for illnesses, vaccinating etc.)

Secondly, consumers do not always possess the information to make informed decisions regarding the consumption of healthcare services. In more formal terms, consumers tend to underconsume healthcare as they fail to take into account the true benefits of consuming healthcare services. For example, many consumers might feel that minor illnesses are not worth seeking medical help for. However, seeking early treatment for health ailments could be highly beneficial for consumers as they are more treatable, and the costs are lower.

Finally, consumers could face affordability issues. The free market only allocates goods and services to those who are both able and willing to pay. Even if low income consumers really require healthcare treatment, their lack of ability to pay means that they would not be able to get the necessary medication or treatment.

In all, market failure occurs because there is less healthcare consumption than society would like, leading to underconsumption (MSC < MSB) and a deadweight loss to society.

To combat the market failure, our government has adopted a three pronged approach to the provision of healthcare services.

2. Pillar 1: Direct Provision of Healthcare Services @ Subsidized Rates

The core foundation of keeping healthcare affordable and as widely available to as many consumers as possible is through the direct provision of healthcare services by the government. In Singapore, most hospitals are owned by the government under the Ministry of Health (MOH), which gives them considerable power in determining the output and price of healthcare services provided to Singaporeans. As the government is driven by the objective of maximizing society's welfare rather than turning a profit, they have an incentive to keep a tight control on the prices that hospitals and doctors can charge for healthcare services. Compared to a private model where hospitals and doctors would attempt to profit maximize, a direct provision model allows the government to aim for the socially optimal level of output and set a price that is affordable for consumers. In more technical terms, the government controls the supply (marginal private cost - MPC) curve and would attempt to set it where MPC = marginal private benefit (MPB) at the socially optimal level of output. This would restore allocative efficiency and eliminate the deadweight loss.

3. Pillar 2: Free Direct Provision of Vaccination + Compulsory Vaccination (Legislation)

A broad-based and comprehensive vaccination program is crucial to any successful healthcare system, as prevention is certainly better than cure. Vaccination can and will prevent excessive burden on the healthcare system that could come from an uncontrolled spread in preventable diseases. The free direct provision of vaccination is accomplished by setting price = 0, where all consumers who are willing to consume vaccination will be able to do so without regard for their ability to pay. Making vaccination free also allows the government to enforce compulsory vaccination on all children up to the age of two. While there is an argument that free vaccination could lead to an overconsumption of vaccines and indiscriminate use by consumers, the size of the deadweight loss and extent of market failure suggests that free provision is still likely to lead to a net improvement in society's welfare. Moreover, there are equity considerations; it is unfair that some consumers are able to obtain the vaccination for free while others are excluded and run the risk of infections.

4. Pillar 3: Moral Suasion and Advertising & Campaigns

Beyond making healthcare services and vaccinations available to as many consumers as possible, addressing healthcare issues preemptively is also important in ensuring the efficient allocation of resources in the healthcare market. The government has, in recent years, been aggressive in encouraging citizens to adopt healthy lifestyles, particularly in the war against diabetes. If citizens are more mindful of their health by adopting a more balanced diet and exercising frequently, this could reduce the overall demand for healthcare services. Thus lower income groups would not find themselves being unable to afford healthcare services, since they will not even require such services to begin with. Informational imperfection also becomes less of an issue, since consumers will require less healthcare services in the first place. While some positive externalities will remain, the extent of market failure overall will decline, since two of three underlying causes have been mitigated. This is clearly the cheapest and most effective long-term solution.

Another aspect that moral suasion is required is in convincing the elderly and lower income groups to take health issues more seriously and to seek treatment early. These groups of consumers are particularly susceptible to the imperfect information problem, and health issues could escalate before they succumb to seeking medical help.

5. Conclusion

Ultimately, some consumers would still fall through the cracks and underconsumption in the healthcare market is likely to persist. Convincing the elderly and lower income groups of the importance of a healthy lifestyle & seeking medical help when required is a long-term challenge. Nonetheless, with the comprehensive suite of solutions implemented by our government, it is little wonder that Singapore remains the envy of the world when it comes to healthcare systems.

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