Why pricing of medical costs defy economic laws

Economics has slowly shed its exotic love affair with equations and graphs. It has come to terms with reality. In no better place than health. How do we price medical services -  from consulting to pharmacy?

Any economist will quickly suggest it’s about supply and demand. How many citizens are seeking medical services? How many medical services suppliers are there, from doctors to pharmacists (add herbalists)? 

That interplay between supply and demand will determine the cost from consultation to drugs. You are likely to pay more to see a neurosurgeon than a general practitioner. Specialists charge more because there are fewer of them. Government and medical boards regulate the professions to protect the public from quacks. But that also restricts supply and, by extension, raises the price.

The demand keeps going up as the population grows and ailments evolve, from “traditional” diseases like diarrhoea or coughing to modern diseases like diabetes and hypertension. That mismatch between the supply of medical personnel plus drugs and the demand for cure raises the costs further.   Add the fact that building hospitals and their brand takes time.

Only a few hospitals are well known, which makes it easy for them to charge more. Well-known doctors also charge a premium. And building a hospital is costly, with all the machines, hiring doctors, and supporting staff like nurses. 

Technology has added to the cost of medical services. Think of Magnetic Resonance Imaging (MRI), and all other gadgets used in diagnosis, surgery, implants and drugs.  That brings in pharmacists. Developing new drugs is expensive, from clinical trials to marketing. Regulators restrict who can be a pharmacist and what drugs can be dispensed.

Use of patents further reduces the supply of drugs, which goes up once a patent expires, and generics get to the market. Lots of drugs are also imported, adding to their costs.Supply, demand and regulators determine the price you pay for medical services.  That makes it a profitable market. Noticed the rising number of clinics, hospitals, and herbalists? 

The fight over Nairobi Hospital is not about patients; it’s about the money from the facility. 

But it’s more than that. One reason medical services are so expensive is that you rarely bargain! It’s stigmatised; imagine bargaining outside an ICU or mortuary. Do you bargain with your doctor or pharmacist? You fear getting substandard services or drugs. That makes it hard to find the best price. With our scant knowledge of medical services and procedures, the price is set for us.  

And we often get the price after the services, making it hard to bargain. The information asymmetry makes it possible to perform extra tests and make more money. Medics will quickly add that they are ethical and took Hippocrates oath. But the invisible hand of the market often hold sway over the oath.

Market segmentation adds to the cost of medical services. Segmentation is based on income, regions (urban-rural) and insured vs uninsured. 

Where do we go from here? Why are the doctors’ fees or consultations not going down with lots of unemployed doctors? Regulation. How did we oversupply doctors? The profession is lucrative both financially and in prestige. 

Why has insurance like the Social Health Authority, not reduced the cost? Fraud, over control and vested interests. Maybe it’s time we let the market do its work in the medical services.  What do you think?