The visible hand in economics

Lifting the cap on GP rates

Posted on: September 28, 2007

People are making a big deal about the fact that National wants to lift the cap on GP (general practitioner) rates. Now I know pretty much nothing about health policy, especially not New Zealand health policy, but I can see some of the merit in getting rid of the cap.

Now before you kill me let me make my case. I agree that in the short run the lift of rates will be painful in areas that do not have competition for GPs. GPs aren’t all going to rush into Otorohanga (small but beautiful country town 😉 ) just because they hear that they can make some extra money there. Furthermore, there is a shortage of GPs, which means if we let them set prices they will have market power and they will set them above the market optimum. Beyond this people are also scared that if prices go up, poor people will not be able to afford health care, and in a society like NZ that is just not right. I agree that these points are highly relevant, but they are not the be all and end all of the argument.

We have a shortage of GPs. You increase the supply of GPs by increasing the return for people for getting trained and moving into that line of work. If we allow GPs to increase rates, then in the long run the supply of GPs will rise, and this is a good thing. Furthermore, if society is worried that poor people will not be able to afford doctors visits, why don’t we give them some sort of subsidy. If we subsidise the price for poor people, then poor people will be able to afford to see a GP, and GPs will still get their market rates.

Price controls are never a good policy. By keeping the price of visits to GPs artifically low we reduce the supply of GPs, by lowering the incentive of students to study and move into this type of work. By allowing market prices we can ensure efficiency. From there, subsidies and targeted assistance are the best ways to achieve our equity goals, not ad hoc price controls.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Add to Google
%d bloggers like this: