Tuesday, 9 October 2018

The effect of cutting subsidies for after-hours doctors

The New Zealand Herald reported last week:
Parents who received free after-hours medical care for their children are now having to pay up to $61 at two Auckland clinics following funding cuts from district health boards...
The changes meant White Cross Glenfield's casual fee for under 13s after hours skyrocketed from free to $61.
At Three Kings Medical Centre, prices for care after 5pm had gone up to $50 for children aged between 6 to 12 - and $35 for under-6-year-olds.
This is what happens when you remove a subsidy - the price that consumers pay goes up. To see why, consider the market in the diagram below. The subsidy is paid to the supplier (the after-hours medical clinic), so we show it using the S-subsidy curve. The consumers (patients) pay the price where that curve meets the demand curve (PC), which from the article above could be as low as zero. The clinic receives that price (PC) from the patient, but then is topped up by the government subsidy, and receives an effective price of PP. The number of patients going to the clinic is Q1. If the subsidy is removed, the market shifts to equilibrium, where demand meets supply. The price for patients increases to P0, and the price received by clinics decreases to P0. The number of patients going to the clinic decreases to Q0.

The article notes that the subsidy hasn't been removed from all clinics. So, patients may simply go to some other clinic instead of the nearest one, if the nearest one is no longer subsidised. This was effectively what the DHB was trying to achieve:
Waitemata and Auckland City DHB announced a rejig to after-hours clinic funding in July in a bid to "reduce inequalities".
Presumably, that means that the DHB removed the subsidies from clinics in areas that are relatively more affluent (so that a higher proportion of the total subsidy goes to areas that are less affluent)? A more cynical view is that the DHB will benefit from some cost savings (which they may need!). The cost savings arise because fewer patients in total will go to after-hours clinics that are subsidised (if your illness isn't urgent or critical, maybe you choose not to go to the doctor, because the subsidised clinic is far away, and the unsubsidised clinic is now more expensive). The DHB also benefits from administration cost savings, because the DHB now has to deal with fewer clinics. The costs of the removed subsidy are borne by patients (their medical care is now more expensive, because it is unsubsidised, or because they have to travel further to get to a subsidised clinic) and the now-unsubsidised clinics (who receive a lower effective price from patients, and see fewer of them).

Another way of looking at who is made worse off by removing this subsidy is to consider economic welfare. Consumer (patient) surplus is the difference between what consumers are willing to pay for the service (shown by the demand curve) and the price they actually pay. In the diagram above, the consumer surplus is the triangle AEPC when there is a subsidy, but decreases to ABP0 when the subsidy is removed. Consumers (patients) are worse off without the subsidy.

Producer (clinic) surplus is the difference between the price that the producers receive and the producers' costs (shown by the supply curve). In the diagram above, the producer surplus is the triangle PPFG when there is a subsidy, but decreases to P0BG when the subsidy is removed. Producers (clinics) are worse off without the subsidy.

The taxpayer (the DHB) is the only party made better off without the subsidy. [*]

Finally, the loss of economic welfare is not the only cost of the removal of the subsidy. If patients are dissuaded from attending a clinic at all because of the higher cost, there could be real health losses that arise from the change in policy. It would be interesting to know how big an effect this has.


[*] I have ignored what happens to total economic welfare in this diagram and this analysis. Typically, if we draw a subsidy on a market and the subsidy moves the market away from the quantity where marginal social benefit is equal to marginal social cost (as in the diagram I have shown), total economic welfare decreases (the subsidy makes society worse off, on aggregate). However, health care has positive externalities that are also not represented in the diagram, and in the presence of positive externalities a subsidy can actually increase (rather than decrease) total economic welfare. I've opted to keep the diagram simple by ignoring positive externalities and the effect on total welfare.

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