Economics 101: Privatising health care comes with regulatory challenges

formulating health policies may be one of the greatest challenges any country can have. Alex Atack for The National

Health care in the GCC has traditionally been dominated by public treatment facilities. Demographic changes are driving an expected annual growth rate of 12 per cent in the industry for the period 2015-20.

Falling oil prices – combined with a desire to leverage the potentially efficiency-enhancing properties of market competition – have made all GCC governments target a larger private sector role for health care as part of their economic visions.

What regulatory challenges are authorities likely to face as the role of market forces expand?

Buying a pen or haircut are activities where a citizen typically feels no need for government oversight, but health care is unique, and most consumers feel a strong urge for the authorities to provide paternalistic regulation for everything from visits to the doctor to complex surgeries.

What makes health care different to pens and shaves is that the seller – the clinician – is much better informed than the buyer about the quality of the service being rendered. This is known as the asymmetric information problem. In medical care, it is exacerbated by two issues.

First, the information asymmetry is present not only at the time of purchase. It may extend years beyond service delivery, because some treatments can only be evaluated by someone possessing the expertise associated with years of medical training. This might help explain why insurers have said that dentists in the UAE routinely offer patients expensive, unnecessary treatments.

Second, post-treatment unconsciousness or death may prevent the buyer from ever holding the seller accountable for poor quality.

These conditions constitute sensible grounds for strict government regulation: public officials equipped with the expertise to detect malfeasance, and the power to punish those who engage in it. For example, in September 2016, the UAE government passed a medical liability law specifying procedures for lodging complaints against healthcare providers, for the assessment of liability, and the determination of punishment and compensation, in an effort to eliminate unscrupulous clinical practices.

However, regulation raises its own challenges, most notably the problem of “regulatory capture”, wherein regulators tacitly start to serve the interests of the sellers they are regulating (doctors, in the case of health care), rather than serving the interests of consumers. This occurs because when the government tries to employ people “equipped with the expertise to detect malfeasance”, the most sensible place to start looking is existing sellers of the service.

The presence of preexisting relationships between prospective regulators and the-soon-to-be-regulated creates a conflict of interest that can be impossible to eliminate.

United States financial sector regulation has long struggled with this problem, especially during and after the global financial crisis. In the case of health care, where the Hippocratic oath taken by physicians helps to raise moral standards, regulatory capture may still arise as the accidental consequence of friendships and unconscious affinity for former colleagues.

One decentralised alternative to government regulation is online reviews, which in western countries have become increasingly popular ways of evaluating many service providers, including physicians.

Should the GCC governments lean on such mechanisms as they seek to enlarge the role of private sector health care?

Online reviews also have an Achilles heel, which is that they are open to manipulation. A recent study by economists Dina Mayzlin, Yaniv Dover and Judith Chevalier, focused on online reviews of hotels on the websites Expedia and TripAdvisor – resources relied upon by many GCC citizens. They found extensive evidence of systematic ratings fraud, whereby managers would fabricate positive reviews of their own hotels, and negative reviews of those operated by rivals.

An analogous risk manifestly exists in health care. While there are countermeasures based on analysing the textual content of reviews, those with knowledge of the algorithms can nullify their effectiveness.

Winston Churchill once remarked: “Healthy citizens are the greatest asset any country can have.”

As policymakers from the US to the GCC are discovering, formulating health policies may be one of the greatest challenges any country can have too.

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