Market Failure in Public Health

Market failure in public health occurs when private exchange does not allocate healthcare in the quantity or manner that maximises social welfare. It can affect innovation, availability, affordability and appropriate use because of information asymmetry, uncertainty, market power, externalities and unequal purchasing power. In medical-device markets, these failures can enable excessive mark-ups between procurement cost and the price charged to patients.

Information, uncertainty and weak consumer choice

Healthcare transactions are characterised by uncertainty and information asymmetry, weakening ordinary consumer choice.

• Patients often cannot judge the diagnosis, necessity, quality or substitutes for a medicine or device; providers can influence demand while advising or treating them.
• Urgency and lifesaving need make demand less responsive to price and impede comparison shopping, allowing high mark-ups without reducing medical need.
• For devices, the doctor or hospital may select the product while the patient pays, and opaque procurement prices make the mark-up difficult to assess.
• Insurance markets face adverse selection; coverage can generate moral hazard when users bear only part of the treatment cost.

Market power, mark-ups and social effects

Limited competition can permit prices to remain well above costs, while public-health benefits may remain underprovided.

• Patent exclusivity encourages research and development but temporarily restricts competition; limited substitutes or concentrated supply can consequently create market power.
• Device differentiation, compatibility requirements, consumables and servicing can create switching costs. Distribution layers and restricted price comparison can further widen the gap between procurement and patient prices.
• Vaccination produces positive externalities because reduced transmission benefits others, making its social marginal benefit greater than its private marginal benefit.
• Disease surveillance, health information and epidemic control provide collective benefits that individual purchasers cannot fully capture or finance.

Public policy responses

Policy must improve competition and information while protecting access, quality and innovation.

• Tax financing, subsidies, free provision, insurance and collective procurement can lower user costs and move consumption towards the socially efficient level.
• Price transparency, competitive procurement, quality standards and consumer protection can reduce device mark-ups; price ceilings may be justified where competition remains ineffective.
• In India, the National List of Essential Medicines identifies medicines considered essential for priority healthcare needs, while the Drugs (Prices Control) Order, 2013 provides for ceiling prices of scheduled formulations administered by the National Pharmaceutical Pricing Authority.
• Intervention must consider effectiveness, safety, cost and distributional effects because lower prices alone may not ensure access or appropriate use.