What the hospital pricing furore and electricity blackouts have in common

Hospitals are the latest target in the government’s obsession with finding fault with private health care providers and funders. Medical schemes, pharmaceutical companies, pharmacists and medical practitioners have all had their turn.

In her 26 February report to the National Assembly, Health Minister Manto Tshabalala- Msimang devoted her entire speech to private health care costs. The Minister said that at the September 2007 Private Healthcare Sector Indaba, which she convened, ‘everyone agreed that all was not well in the private healthcare sector and that government would indeed have to take regulatory measures to ensure that the sector was sustainable.’

If having a ‘sustainable’ private health sector means that it should have the ability to sustain itself, that is, to grow and prosper, then government should reconsider its methods for bringing this about. Many interventions that have been carried out to date have endangered the ‘sustainability’ of private health care provision rather than ensured it. We have seen many small pharmacies disappear because price controls forced them out of business, medical schemes were compelled to provide cost-raising cover that their members did not need or want and were prohibited from designing schemes that their members did want, and government jeopardised further investment in SA’s robust pharmaceutical industry by arbitrarily setting its prices.

Centuries of experience have shown that governments are incapable of better determining the prices of goods and services than consumers in purchasing or refraining from purchasing what is offered to them in open and competitive markets. Roman Emperor Diocletian (284-305 AD) attempted to counter his own and his predecessor’s debasement of their country’s currency by instituting price controls. This made matters infinitely worse for consumers. Instead of high-priced goods, Roman citizens were left with nothing to buy because merchants fled into the country with their goods. Government price fixing always has inescapable deleterious economic consequences: if prices are fixed too high there is surplus production; if they are fixed too low there are shortages.

SA has electricity blackouts because alternative electricity generating companies have been kept out of the market. Foreign generating companies were told that they could erect generating plants in the country but that government officials would fix the price at which they could sell their electricity and decide to whom it could be sold. Not surprisingly, they declined. SA now suffers a supply shortage and we will not be able to determine what the price of electricity ‘should‘ be until there is an open competitive private electricity market in the country, preferably with Eskom sold off piecemeal into private hands.

Similarly, government is preventing the building of new hospitals. There are approximately 28,000 beds in private hospitals and 103,000 in government hospitals. Economics tells us that if there is a shortage of private hospital beds, prices will tend to increase because of demand. However, we cannot be certain what prices in the existing hospitals ‘should be’ unless there is nothing to stop competitors from building more hospitals.

Anyone wishing to build a new hospital or clinic, or install high cost equipment such as a magnetic resonance imaging (MRI) scanner, is compelled by law to obtain prior approval (soon to be called a Certificate of Need) from the Department of Health. Decisions are reportedly made on the basis of the ‘need’ for such a facility or piece of equipment in the area where the applicants wish to erect or install it and the ‘equity’ or ‘inequity’ of the addition of the new services. Entrepreneurs will immediately recognise that there is no way of knowing for certain, in advance, whether there is a need for a facility in a specific place, whether it is a hospital, supermarket, or hair salon until after the event. They will also report that the only equity that enters into the picture is that of consumer, or in this case patient, satisfaction.

In formulating their pricing, hospitals have to take into account all risks they face, including inflation as well as unexpected new risks such as having to rapidly install adequate electricity generating capacity to keep their hospitals fully functional when Eskom switches off the power. However, in the final analysis prices are not determined by costs but by what consumers are prepared to pay in a competitive market. If consumers of hospitalisation, which in this case includes medical schemes acting on behalf of their members, can find better deals elsewhere, they will transfer their business to hospitals where the better deals are available.

What we have in SA, in both electricity and hospitals, is supply-side constraints created by restrictive government regulation that prevents entrepreneurs from meeting growing demand, which in an unrestricted market always translates into escalating prices. Higher prices are the signals that inform investors of the opportunities for profit in meeting increased demand. If government interferes with such signals, for instance by instituting price controls, or restricting entry, it deprives investors of the vital information that would otherwise motivate them to increase the supply, which in turn would have a dampening effect on price increases.

Government would also do well to take a hard look at, and remove, the compulsions and prohibitions in its regulatory regime that are causing cost escalations in the entire private health care market. It should concentrate more attention on improving the conditions in government hospitals and clinics, especially mechanisms that will provide the management and employees of these facilities with greater incentives to improve the service to patients. Such incentives could include devolving decision-making to the operational level and substantially transferring ownership of these facilities to the people that work in them and the people they serve.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 26 February 2008

Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE