Pandemic and Health Care Equilibrium

There is an interesting series of tweets here on the market structure of healthcare industry and its dynamics during the outbreak of pandemics. Composed by a senior official in Ayushman Bharat, it covers wide intricacies in the healthcare industry linked up to the market forces of demand and supply and the subsequent equilibrium. As the equilibrium is disrupted the networks across the multiple players too get disrupted before arriving at the new equilibrium.

Healthcare industry is multiplayer and multi-sided market. Therefore the forces of demand and supply too gets interlinked with each of sides in the market. An analysis of the equilibrium in markets is available here.  The critical player in the market is the patient. The doctors and the hospitals are the second players in the market. The medical workforce including nurses, paramedics etc. are the next layer in the market. The pharmaceutical industry and diagnostics sector are another set of players. The government at multiple levels act as the institutional players in the market. There is also the presence of preventive medicine acting as another player. The demand for hospitals is contingent on the health conditions in the society. The demand for doctors and support staff thus is linked to the demand for hospitals and in turn determines the supply of inputs for hospitals. The demand for diagnostics and pharmaceutical industry is again linked to the demand for hospitals. As the number of patients increase, there is an increased demand for doctors and medical staff and in turn for health care leading to demand for hospitals. The medicines recommended lead to demand for pharmaceutical firms. The diagnostic tests recommended lead to the demand for diagnostic laboratories. Similarly the absence of the pharmaceutical industry and diagnostics industry impedes the provision of health care.

Health care is a public good. In the conventional markets, the price effect restores to the equilibrium the existence of imbalances between demand and supply. In the healthcare sector, the price effect will not function. A patient turned away from treatment for the inability to pay the money leads to a market failure. Thus the government has to step in to create provision for healthcare goods for those who cannot afford to pay. Incidentally, the hospital structure is linked to the price discrimination essentially of self-selection. The self-selection might not work leading to segment based selection thus forcing the government to intervene. The insurance sector too suffers from limitations in countries like India in absence of government interventions (A note of group based discrimination available here).

In a scenario of pandemic, the equilibrium breaks down. However, most occasions the pandemic is confined to relatively smaller areas thus allowing other medical workforce and industry to help assist the ones where it is in scarcity. The US healthcare industry functions on a similar paradigm. Usually, all the fifty states do not get affected at once. The other states pitch in their resources thus alleviating the epidemic. Similarly all the world over, there hardly exists few cases wherein the spread of the pandemic is global. Perhaps since the Spanish Flu of 1918, the world would have hardly seen any other pandemic that has created such a havoc at least in the socio-economic disruption, the Wuhan virus has created. Therefore, it is becoming difficult for countries to aid each other in times of crisis. Some reports suggest even countries seeking to capture and ‘steal’ aid or supplies meant for other countries. Exports of active pharmaceutical ingredients and other medical equipment is virtually banned. Thus the entire industry is disrupted.

The patients increase in exponential terms. Every marginal patient increases the probability of others catching the virus thus increasing the patient numbers even higher. As more number of patients flow in relative to the anticipated demand, there is a shortage of beds and other intensive care facilities. The hospitals would not have built in the redundancy to cater to extraordinary situations. Similarly, the test kits would not be available. In fact, the first part would have to decode the genetic sequence of the pathogen. This would take time implying a negative lead time. Once identified, the tests have to be designed and made available requiring considerable lead time. This in itself leads to a situation of many deaths before identification of the disease and diagnostic measures. Even when designed, the tests would not be available and needs a significant lead time for production leading to scarcity. Medicines, irrespective of the trial and error method followed might not be available in immediate terms. There is a shortage of medicines.

While the demand for medical goods and services have increased, the supply of the same lags behind. Even a lead time of a week or a fortnight might lead to high degree of damage to life and livelihood. Doctors might not be in a position to treat the patients since they might not have the protective equipment like masks, goggles, protective suits etc. The demand for these goods increase with supply lagging behind. Further as doctors and support staff treat patients, the high stress leads to a drop in productivity with little replacement. The doctors represent an inelastic input thus not easily replicable. Similar is the case with the support staff. Further the lack of protective equipment and possible risk of catching the virus can throw the medical system off balance. The doctors infected and out of action would put pressure on the health system reducing the supply of medical work force creating vicious cycle of the pandemic.

In short, increase in patients lead to increase in demand for doctors, support staff and health care facilities. Given the expected demand, they are not able to meet the excess demand. This in turn puts pressure on the hospital facilities, doctors and support medical staff leading to stress, lower productivity and thus diminishing returns. The risk of catching the contagion and inflexibility of inputs adds to the vicious cycle. The demand for diagnostics increases with additional pressure on labs which in turn influence the treatment processes. The pharmaceutical companies and firms engaged in the production protective and other medical equipment too face pressure. Yet the pandemic spread in society leads to possible infections among the workers thus causing a sharp decline in workforce.  This in turns impacts the production and thus again impacts the treatment process creating a spiral in the course of treatment and post treatment convalescence.

The medical industry as also the government would simply be caught unawares in the situation. Even the best of the medical systems face stress as evident from experiences in US and Europe. There is a significant lead time to restore the system back into equilibrium forcing the economies and administrators to find ways to reduce the speed of the spread or in medical jargon flattening the curve. What would be the optimum point of flattening the curve is something uncertain given the multiplicative and systemic nature of the pandemic.