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Microeconomics – Research Paper

Topic: Effects of ageing population on the market for healthcare (in Singapore)

Content Page

Abstract 3

Introduction 4

Changing Demand and Supply of Healthcare Resources 5

Changing Demand for Healthcare 5

Changing Supply for Healthcare 7

Market Structures in the Healthcare Industry 9

Healthcare as an economic good that needs government intervention 10

Conclusion 12

References 13

Abstract

Over the years, healthcare has been a major concern in healthcare. The increase in demand for healthcare has caused for an increase in the supply. As over the years, the treatment for healthcare has become better as well. This means that newer equipment is being bough and hence a higher price to pay for the equipment, with better treatment comes higher cost. With an aging population, oligopolies which dominate the industries must cater to the needs of the demands and adjust themselves accordingly. Most oligopolies, such as hospitals, pharmaceutical companies, biotechnical companies, drug development companies and nursing homes produce and sell homogeneous products that has high barriers to entry. All these are the initial cash requirement which is an investment necessity for the research and development. Hence government intervention needs to be in place as without government intervention, market failure will occur due to the pricing being out of equilibrium. In a free market system, healthcare providers will be the price-setters who will decide the prices based on the market forces. As all companies are profit-driven, an economically inefficient system will be created and there will be a high quality healthcare where the demand is low as many people could not afford it. Government control of healthcare may not be as ideal as we think as being welfare driven; the quality of healthcare will drop drastically. A government intervention needs to be universal whereby both the quality of healthcare is high and it is accessible by all, and most importantly; being economically efficient.

Introduction

Health issues have always been a major concern for every country in the world. In the developed countries, the government plays a vital role in ensuring a guaranteed access to healthcare for the entire population through interventions such as funding and policies. As one of the leaders in the global healthcare system, Singapore has been successful in terms of ensuring economic efficiency while delivering high quality healthcare at affordable prices to its citizens over the decades. Utilizing a non-modified universal healthcare system, Singapore’s healthcare system is largely funded by individual contributions through compulsory savings known as Medisave, varying levels of subsidies determined through means testing, and price controls. Private healthcare still plays a role, but it takes a backseat to the public system.

Over the decade, Singapore’s population has grown by 25 per cent and Singaporeans are also ageing rapidly. By the year 2030, senior citizens (age 65 and above) are expected to comprise of about 20 per cent of the entire population. With a rising demand for healthcare from a growing and ageing population, Singapore’s healthcare system will need to shift towards managing the changing demand. This paper intends to address some of the key issues of the effects of ageing population on the market for healthcare.

The first section of this paper illustrates the demand and supply of resources in the past and how it has changed to suit the changing demands. The second section describes the types of market structures, particularly oligopolies that dominate the healthcare industry. The third section discusses healthcare as a basic human’s right, but yet it is also an economic good that needs government intervention in order to offer the most benefit to a society. Following which a conclusion will be drawn upon based on the findings and real-world data.

Changing Demand and Supply of Healthcare Resources

Changing Demand for Healthcare

The rising costs or expenditure in healthcare shows that demand for healthcare has risen in relative to the supply (Figure 1). The initial demand for healthcare is D1, and the supply of healthcare is S1. At market equilibrium, the price for that amount of demand and supply will be P1. With a rising demand for healthcare, the demand curve shifts outwards from D1 to D2. Assuming ceteris paribus, the increase demand has caused the price for healthcare to increase from P1 to P2.

The ageing of the population calls for increased demand in healthcare. Coupled with an increased longevity, national expenditure on healthcare will rise as well. According to the World Health Organization, Singapore has the fourth best life expectancy at 82 as of 2011, where women are expected to live to 85 and men to the age of 80. The aged will require long-term care expenditure in terms of more facilities such as hospital beds and more paid help in terms of home-based caregivers and nurses. In the Singapore Government’s Budget for 2012, the government announced a projected doubling in healthcare spending from the current SGD4 billion to about SGD8 billion a year, in the next five years.

In order for the demand to increase, consumers must both be willing to buy and have the ability to pay for it. With the rise in subsidies provided for by the government, the aged are now able to afford more healthcare services. The Singapore healthcare financing system is aimed at helping to keep healthcare affordable, commonly known as the ‘3M approach’ – MediSave, MediShield and MediFund. More recently, the introduction of the Pioneer Generation Package this year is targeted at the aged, benefiting about 450,000 Singaporeans through further subsidized primary care, dental care and health screening.

Changing Supply for Healthcare

Healthcare costs or expenditure of healthcare may rise without a change in demand, but instead be forced to rise due to a leftward shift of the supply curve (Figure 2). This shift may be caused by a rise in cost of supply healthcare services.

When technologies improve, healthcare services may become more costly due to the monetary investment needed to fund the research and development process. Also, other resources such as the cost of supplying treatment and prescription drugs have contributed to the rising cost of healthcare. On average, the cost of developing a new drug by a major pharmaceutical company cost at least $4 billion and the cost may rise to a staggering $11 billion. Some of the contributing reasons to this huge cost lie in government restrictions such as drug testing, as well as patents.

The supply of healthcare providers has been stagnant over the decades, partly due to the long working hours and psychological stress faced as part of the job-scope. In response to the increasing demand for healthcare, the Singapore government has invested heavily to nurture a pool of healthcare providers including doctors and nurses. As one of the main strategies in the Healthcare 2020 Masterplan, the Ministry of Health (MOH) aims to expand the capacity of the healthcare system in terms of infrastructure and manpower, through initiatives such as increasing the annual intake at the NUS Yong Loo Lin School of Medicine and the opening of the Duke-NUS Graduate Medical School in 2007.

Market Structures in the Healthcare Industry

As the demand and supply of healthcare resources change with the rising ageing population, the markets providing these resources will have to adjust themselves accordingly as well. The healthcare system is dominated by oligopolies, which refers to an industry with a few large firms that produce and sell either homogeneous or differentiated products, and it has high barriers to entry. Examples will include the hospitals, pharmaceutical companies, biotechnical companies, drug development companies and nursing homes.

The barriers to entry in the healthcare industry are generally the initial cash investment necessary for research and development, regulatory requirements and government controls. These barriers enable oligopolies to earn supernormal profits in the short run, and also in the long run due to fewer competitors. In Figure 3, at output Q1, the average revenue (AR) is greater than average cost (AC), reflecting the shaded area as the supernormal profits earned. Also, the demand curve for healthcare is likely to be relatively inelastic due to healthcare being regarded as a need. This makes the price of healthcare to be less responsive to the changes in the economy.

Figure 3

An example of a barrier to entry would be the government setting a limit on the supply of health professionals by allowing only those who have qualified the required education, licensing and experience to practice the various health professions. This protects the quality of healthcare supplied to the population, as well as to regulate competition within the industry.

Healthcare as an economic good that needs government intervention

Without government intervention, market failure will occur due to the pricing being out of equilibrium. In Figure 4, point A shows people who are willing to buy but unable to afford healthcare at the given price (Pe). Point B shows those who are willing and able to pay for healthcare at the given price (Pe) but there is a lack in quantity. Assuming ceteris paribus, a shift in either the demand curve caused by increased demand (Figure 1) or in the supply curve due to shortage (Figure 2) will cause the price to increase.

Figure 4

In a free market system, healthcare providers will be the price-setters who will decide the prices based on the market forces. Being profit-driven, an economically inefficient system will be created, where there will be high quality healthcare in exchange for the decrease in accessibility to affordable healthcare. On the other hand, full governmental control of the healthcare system is not ideal as well. Being welfare-driven, it will guarantee access by all but the quality of healthcare will drop drastically. As such, government intervention in a universal healthcare system is needed to ensure a high quality healthcare system that is accessible by all. And more importantly, it will be economically efficient.

Conclusion

In conclusion, healthcare is an economic good as it fits the definition of willing and the ability of being able to buy and sell in basic economics. However, people see it as basic human’s right, thus forcing the government to take responsibility by intervening the market in order to meet the high demand of healthcare required by the companies as well as making it affordable for the people. As such, the government has to exercise a balance between both the private and public interventions such as what the government in Singapore is doing by providing grants and medical basic medical care for the people to allow for economic efficiency.

(2014). Age Invaders. The Economist.

Sanjay Basu, J. A. (2012, June 19). Comparative Performance of Private and Public Healthcare Systems in Low- and Middle-Income Countries: A Systematic Review. Retrieved from http://www.plosmedicine.org/: http://www.plosmedicine.org/article/info%3Adoi%2F10.1371%2Fjournal.pmed.1001244

William Boyes, M. M. (2012). microeconomics 9th edition.

CITE THESE SOURCES (Apple and Windows different citation la)

http://www.huffingtonpost.com/2013/08/29/most-efficient-healthcare_n_3825477.html

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