Factors Influencing the Supply of Health Care

For determining the behaviour of supply of any service, the production function approach is most commonly used. The production function describes the relationship between the output of a good or service (endogenous or dependent variable) and the resources used to produce it (exogenous or independent variables). Translating the application of this approach to medical field, the implicit argument behind the approach is that given the quality and quantity of inputs, the cost and/or quantity of health care provided (or required) can be determined. An additional factor considered relates to the effect of substitutability of one factor or resource with the other. While perfect substitutability (though rare and hence inconceivable) is assumed in simplified applications, possible variation in such an ideal situation needs to be noted. In the case of health care, for instance, while general practitioners can substitute each other without any major difference in output, specialists cannot be so substituted (e.g. an oncologist can not substitute a cardiologist or vice versa).

Technical change is an important factor considered in the production function framework. This is a major factor in bringing about an improvement (i.e. either increased output with same input or same output with lesser inputs) in any production process. In medical care this means that illness that could not be formerly treated can now be cared/cured with greater success. Like in any other system, in the case of health care also, it is necessary to combine information on the productivity of inputs with information on their relative prices. In the long run, when the inputs in the production function can be varied, the supply schedule will become more elastic i.e., it will require less of an increase in cost to increase the supply.

Though the principles of economics prescribe the theoretical perspective of production function which is applicable universally, it is not easy to apply in case of medical markets. The assumptions of substitutability in the case of inputs to produce a given output does not hold true all the time. In the field of health, a great deal of emphasis is placed on the use of ratios of skilled manpower to the population. If there is substitution between skilled and other type of manpower to provide medical services, the use of such simple ratios is inappropriate. Further, in most cases, economically efficient combinations of inputs are not used as the input combinations used are based on the marginal productivity of inputs without any regard to their relative prices. This amounts to saying that in medical field, it is difficult to provide for the elasticity of substitution in factors of production. This also means that in the health field, policy makers may have goals other than cost minimisation or output
maximisation.

The relative prices of inputs used in production may also be distorted. For instance, in the public good sector, government renders the subsidy or concession to production/ supply of health care. While in a strict sense it amounts to disturbing the principles of competitive market structures, equity considerations would require the adoption of such policies. Such policies would enable the providing of many health services in government hospitals with far lower cost than charged by private service providers for comparable services. Efficiency is thus a major criteria for evaluating the health care market. If the markets within the health sector are competitive and efficient then, theoretically, the cost of health care stabilises at an optimum level. However, the economic efficiency of supply side of the medical care could be different due to imperfect market features. This, therefore, has important policy implications for the sector. In a longer time frame, when the market features get more established, supply of medical care would tend to become more inelastic. It would then permit the redistribution of programmes more efficiently to cater to the demand.