How to Make Medical Services More Affordable

The simple answer to the question, “how to make medical services more affordable?”, is to remove all government-imposed barriers to entry in the medical services area. This should be a no-brainer but unfortunately it isn’t. Not just in medical services, but in every kind of human enterprise, all government-imposed barriers to entry should be discarded.

Let’s invoke a general principle, or a law if you will, of economics. All price controls are pernicious. Mandating price ceiling is bad, as are price floors. Nothing good can ever come out of it. Why? Because they create barriers to entry and exit. They impede the functioning of a free market. Just to be sure what we mean by a “free market”, it’s one in which there are no barriers to entry or exit. In free markets, all voluntary trades are mutually beneficial. In technical terms, Pareto optimal outcomes obtain in free markets. What’s Pareto optimality? It’s a situation such that you cannot make anyone better off though any intervention without making at least one person worse off.

Consider price floors such as minimum wage laws. Suppose the minimum wage is set at $15 per hour. If Joe agrees to pay Jim $10 for an hour of work, and Jim agrees to that trade, clearly the minimum wage law will prevent that mutually beneficial trade, and thus not be Pareto optimal. Why? Because you could remove the minimum wage law, and both Joe and Jim would be made better off without making anyone worse off. A minimum wage law is an example of a barrier to entry: Joe wants to enter the market as a buyer (of one hour of work), and Jim wants to enter the market as a seller (of one hour of work). Both are frustrated in their attempt to become better off. Minimum wage laws are an example of a stupid law — it hurts people, without any commensurate gains to anyone.

There are too many stupid laws. We should really distinguish between natural laws (such as the law of demand or the law of gravity) and legislation (laws that are passed by some bunch of humans). The former kind cannot be disobeyed, while disobeying the latter kind can often be beneficial to society. Laws against arbitrage are an example of stupid legislation.

Alright, now to the issue at hand — medical services. Remove all licensing requirements for providers of medical services. There should be a free market for medical services. Anyone who wants to sell medical services should be free to do so, and everyone should be able to buy medical services from whomever they wish. There should be no degree requirements.

What’s so wrong with requiring degrees for practicing medicine? Wouldn’t people get better medical advice if doctors were duly trained and certified by recognized bodies? The answer would seem to be an unqualified yes. But that’s wrong. Some people would get better medical services but — and here’s the problem — many people will be worse off. Many people would get no services at all.

Here’s an analogy. Take food services. We would agree that chefs duly trained in good schools that are certified by the government, and employed in government licensed restaurants are likely to produce good food. But that food will also be expensive. Many poor will not be able to afford that food. Licenses and certifications, in that case, are bad for those who cannot afford high quality stuff. The range of restaurants in a free market will meet the demand for a range of quality of food — the restaurants at fancy five-star hotels can charge $100 a plate, and the street-food seller $1 a plate, and others prices in between. By prohibiting the selling of low priced foods (which may not meet the discriminating palates of the rich), no favor is being done to the poor.

So here’s my recommendation for India. Don’t require a MBBS degree for medical services. Establish various kinds of medical training institutions. These should be run by the private sector. The simplest and cheapest would churn out “Trained medical person–Grade 1” in less than a year. Every year of additional training, a person moves up one grade. One can stop at any grade, and ply one’s trade wherever.

But a person does not have to get any training at all. Even untrained people should be free to provide medical services, or electrical services, or hair dressing, or what have you.

Demanding that only those with MBBS and MD degrees from government-approved institutions is a racket that hurts the poor. It’s a racket that erects a barrier to entry, and only benefits the medical profession, at the cost of health care for the poor. It’s like demanding that only BMW-and-above quality cars should be sold and allowed to be used as passenger vehicles. No three-wheelers and cheaper cars allowed — for safety reasons. That would force the poor to walk. That would also be great for the owners of BMWs etc because the roads will be less crowded. In fact, I know people in Mumbai who own fancy cars and who believe that 3-wheelers should  be banned since there are too many of them on the road.

OK, that’s my answer to a question asked in one of my “Ask me Anything” posts. Be well, agitate to get all licensing laws overturned, and keep in touch.

PS: What’s the relevance of that image at the top? Not relevant but if you click on the image, you will learn about Wolfgang Pauli, and it’s good for you to know that. 

Author: Atanu Dey

Economist.

27 thoughts on “How to Make Medical Services More Affordable”

  1. Your level of faith in “the private sector” of India is surprising. Fundamentally people are people, “public” vs “private” are monikers. Fundamentally, Indians are uneducated, untrained, umemployable, unproductive, and incapable of pulling their own weight. A vanishing fraction of Indians pull the enormous groaning weight and liability of the nation. Fundamentally, the number of trained X per Indian capita is abysmal, where X can be most useful professions in modern civilization: school teachers, architects, engineers, doctors, nurses, bankers, lawyers, trash recyclers, industrialists, factory workers, pretty much any modern useful work designation. Deciding who wields what form of power over vanishing expertise in every discipline is a fool’s errand. Before India can increase school teachers by 5 percent, the population grows by 10 percent. It is impossible to scale out any reform within a deadline that can vie with, leave alone overtake, population growth. If your kitchen is flooding, sure you have to bail the water out and mop up, but first, plug the damn leak or turn off the mains. This simple wisdom has escaped the subcontinent.

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    1. Cul de sac:

      Your level of faith in “the private sector” of India is surprising.

      Why is it surprising? And why the scare quotes around “the private sector”? There’s nothing scary about the private sector. It is just that portion of the economy in which privately held corporations and individuals conduct exchanges. The private sector is the one that creates the wealth that the government consumes and mostly wastes. Reducing the size and scope of government is a necessary first step toward prosperity. This is lost on most Indians and that keeps Indians poor. I have immense faith in people if they are allowed the freedom to live their lives as they wish (provided they respect the equal right of others to live as they wish.)

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      1. I am not trying to scare anyone of “private”, and I agree that “public” has not worked well. But “private” will work to the extent that people can pay. And Indians cannot pay because they are very unproductive. All your proposal will do is to legalize the current standards of medical treatment by unregistered and possibly illegal medical service providers. While that is nothing to sneeze at, in the sense of bringing reality in line with documentation — a big step-up for India — privatization in India will be incapable of scaling out good healthcare to people that cannot pay, and will be incapable of training more providers per capita because demand is not enough; demand without ability to pay is not demand by definition. Of course our politicians, celebrities and tycoons will take the first flight to Georgetown and Lineberger on the first suspicion of cancer while chanting “Make in India”.

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        1. cul de sac:

          But “private” will work to the extent that people can pay. And Indians cannot pay because they are very unproductive.

          So what makes them unproductive? The government controls over economic activities. That’s what I mean that all licensing has to be abolished.

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        2. cul de sac:

          privatization in India will be incapable of scaling out good healthcare to people that cannot pay, and will be incapable of training more providers per capita because demand is not enough; demand without ability to pay is not demand by definition.

          What’s the alternative to “privatization”? The government provision of medical services? How will that work?

          My point was that people figure out ways and means of getting things done the best they can under the circumstances they face. The govt should just butt out because by butting in, the government makes a bad situation fatal.

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      2. AD wrote: “So what makes them unproductive? The government controls over economic activities.”
        Hardly. As a student of Economics you know about threshold effects and virtuous and vicious cycles. Like all other useful skills, per capita capability of educating our next generation in India is abysmal. Whether the government stupidly controls boards and accreditation has nothing to do with this — too large a fraction of the previous generation is just too dumb to impart barely sufficient skills for a modern civilization to the next generation. Subsidy farming with dwindling land sizes and still burgeoning population is all we have. Generation by generation Indians are becoming worse nourished and less intelligent (yes, learning disability statistics are alarming). Demand outstripping supply for almost all services makes anything productive an ordeal. Tried to move a bank account between cities lately? Tried to get Aadhaar data rectified? Ever sampled an engineering college outside the top 10 or so? Even during UPA1 and UPA2’s disastrous “image selling” campaigns, economists close to the soil like us warned that major illusion-mongering is in effect and the FDI-fired glitz will fizzle out after the honeymoon. That is now coming to pass. Whoever the next government is, will inherit the cinders of a wannabe world power where 15% or more will be de facto unemployed and 40% is unemployable, within 2030. Regular uprisings from dwindling living standards will be brought down brutally by a police state. Once productivity is reflected in exchange rates, India will be gradually priced out of world petroleum market. The writing is all on the wall.

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  3. In India people avail all kinds of medical services, besides allopathy we have Homeopathiy, Ayurveda, Unani, etc etc. Rural India has innumerable quacks, they actually render service to the poor. Now government of India is training health workers in less than a year ‘s time.
    So In India people have a choice. I have seen very educated people choosing “neem hakims” , if it works it’s ok.

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    1. Indeed it is true that all kinds of medicines are in use in India. That’s the good news. My gripe is against the state-imposed licensing requirements for providing medical services. That has to be stopped, and soon.

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  4. People are practising irrespective of the restrictions.
    What do you think Hakims and Vaidyas do?
    A doctor nearby my house doesn’t have an MBBS degree, and yet he operates a clinic.

    On a related question, how do you answer to Democrats in your country who argue that public healthcare system of Canada is more efficient than the largely private system of the US?

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  5. Moreover, I think that in the short run, placing restrictions may have adverse impact, but in the long run, people get used to the fact.
    To give an illustration, in the earlier days of industrial revolution, people used to work 16 hours a day.
    But after labor laws came, labor hours were restricted to 8. Productivity may have fell initially, but then people got used to the fact and ever since, we have seen incomes only rising.
    Same with laws requiring compulsory labelling of ingredients and nutritional value of packaged food. When it was introduced, it may have caused a fall in supply of products, but in the long run, everyone got used to the norm.

    People adapt.

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      1. Hi Keshav,

        This is in response to your 2nd may comment starting with “Its like saying women are free to wear full body Burqa…”. For some strange reason, wordpress has not included a reply-link to that comment of yours.

        I completely lost you on your reply. I found myself questioning or opposing too many sentences. Sample this:

        Keshav: Its like saying women are free to wear full body Burqa. We know that they’re not free to do so.
        Sambaran: Why not?

        Keshav: Similarly, saying laborer is free to work for 20 hours a day is simply not the case. He is compelled to do work for this long due to family pressures or in order to make a living.
        Sambaran: And you want to solve this by legislation?! 8 hours max?! To me, this is injustice of highest order against the employer. As immoral as murder, I must say.

        Keshav: If no laborer with an average income is allowed to work for more than 8 hours in a particular firm, all firms automatically face scarcity of supply of labor, and in that case they’re compelled to not exploit the laborer.
        Sambaran: I do not agree at all.

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    2. If people voluntarily agree to work 20 hours a day, they should be allowed to do so. I believe labeling of ingredients/nutritional value should NOT be legally enforced. I believe RERA was a completely unnecessary law and the enthusiastic support it won among ‘literate’ classes is symptomatic of the fundamental socialist (read ‘I wont take any responsibility’) tendency we have.

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      1. Its like saying women are free to wear full body Burqa. We know that they’re not free to do so. Similarly, saying laborer is free to work for 20 hours a day is simply not the case. He is compelled to do work for this long due to family pressures or in order to make a living.

        If no laborer with an average income is allowed to work for more than 8 hours in a particular firm, all firms automatically face scarcity of supply of labor, and in that case they’re compelled to not exploit the laborer.
        Its a complete delusion to think that more working hours is demanded by the employer because that’s how he is able to give the laborer the wage that he asks. While this maybe true in some cases, I know of many workers who are made to do personal works of the employers after working hours. They’re made to do works which are not in their job profile. That’s why this is called as slavery. You can say that they’re free not to do so, but then free to choose involves freedom to choose not to choose and the workers don’t have that option.

        If I tell you that you can either starve or work for pittance like animals for 20 hours, that’s not freedom. We simply don’t take this as a legitimate constraint, that workers shouldn’t be treated like cattle. This constraint is as important as any other legitimate constraint.

        Also, I hear everytime about opportunity costs, but never is the logic of opportunity cost applied to profits. The opportunity cost of profit is decent wage to laborer. Its not always that if profit is shared, the firm will be compelled to raise the price of product. That assumes that the profiteer will not budge and the burden should be borne by laborer. I mean just think about it. I employ 3 workers to produce a total output of 10,000 units in a month with product price ₹20. The cost of raw material and depreciation and miscellaneous bills sum upto ₹20,000. I pay each of the 3 workers ₹7000 p.m. to work for 16 hours a day. That leaves the profit of ₹1.66 lac a month. Now, argument of the early lassiez faire economist goes that profit is the reward of risk. Its a reward of their decision of employing capital. Others are free to do what they want. Why don’t they set up an enterprise like that themselves? Well, in situation of concentration of capital, do you expect the laborers ever to save anything out of ₹7000 p.m. and build a business like that? Will anyone give loans to these laborers? Are they really free? Can’t the entrepreneur bear to give the laborer something more out of his own profits?

        Now, I know that the above example ignores many other factors and dynamics of a market. But my point above was not to justify government intervention to ‘force’ businessman to offer wages out of profits. I know that government intervention has its side effects.

        But what pains me is that nowadays taking away disproportionate profits is justified ethically even if others starve and live a life of material misery and abject poverty. Nowadays, freedom to spend the way we like is ethically justified. I am not saying that government should decide who gets what, but at least sympathy should be in our social ethic. We shouldn’t celebrate those who don’t care for the poor by saying that “Who are we to pass judgement on what others do with their money.” In a society where there is abject poverty and voluntary charity is not sufficient to provide for basic needs of the poor, I will anyday advocate ‘theft’ by taxation, which Atanu thinks is morally appalling.

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    3. This is simply mistaken. You are putting the effect before the cause, the cart before the horse. Productivity increases led to shorter work hours. Legislation had nothing to do with it. Similarly, wages don’t rise because of wage legislation. Wages rise because of productivity increases. It’s arithmetic, not politics.

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      1. Actually, the big argument against taxation and representation in India is that the vast majority of voters do not pay taxes, but thus wield wealth-usurping power over taxpayers. To a smaller but still very significant extent, taxpayers shun voting, because, I mean really, choose from among this pile of shit? Anyone forking over 30% of their earnings deserved better choice than dumbf**s at best and felony convicted lechers at worst. So taxation in India is much much more of an immoral coercive act than in most democracies of the world. That fault line is worse than San Andreas and Hayward combined. Indians should demand no representation without taxation!

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  6. Atanu, thanks for this post.
    I fully agree with you on your prescription of our ailing medical system.
    I do not see ANY SINGLE country on this planet that got its medical policy right. Even the great USA fed it up. UK fed it up in a very different way.
    In your opinion, which country on this planet got its medical policy closest to the approach you mentioned in this post? Is US system the lesser of all evils?

    Once again, thanks for this post. On a slightly different note, what makes you spend so much of your time and effort in writing this blog, responding to comments, doing AMAs? Is it your passion? Do you connect with your fundamental purpose by this effort? Whatever your reason might be, I am so glad that you are doing THESE.

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    1. I put asterisk signs in my comment to use the f-word. Thankfully, the world disallowed me to be rude in public. It took the asterisks as some sort of formatting cue and made the letters bold. I hope my comment is still understandable.

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    2. Why do I write this blog? Because when I write, I often realize that I know something that I had not realized I knew. Writing is a process of discovery. Writing also makes me reflect on what’s important. I like it when my writing is of some use to others.

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      1. Atanu, Thanks for your reply. One part of my question still remains:
        In your opinion, which country on this planet got its medical policy closest to the approach you mentioned in this post? Is US system the lesser of all evils?

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        1. No country is anywhere close to what I recommend — the complete abolition of all entry barriers in the provision of medical services. The US and Indian systems cannot be compared for the plain reason that the US is immensely rich and India is desperately poor. The US can afford to have a very inefficient health-care system but India cannot. The last thing that India should do is to emulate all the wasteful excesses that the US does. If the Indian policy makers had any decency, they would remover the barriers to entry. But then the bureaucrats and politicians will let go of their death-grip on the Indian economy one day after the end of the universe.

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