The economics of separating medical diagnosis and pharmacy for medicine dispensing

----- Was the recent medical blunder due to human error or system failure? (Remember that different medical contractual arrangements associated with different transaction costs.)

More than 150 patients have been given the wrong medication by Doctor Ronald Li's (李世澧) clinic in Wong Tai Sin. The clinic gave out wrong drug to its patients instead of stomach medication. It followed that several elderly people died as they took the drug (diabetes drug). The Coroner's Court launched an investigation into the case.

The Health Secretary, York Chow, said the administration would encourage private doctors to allow a separate pharmacy to dispense drugs. As a matter of fact, all public hospitals and clinics employ pharmacists to dispense drugs, but private doctors hire unqualified personnel to do the job.

There was again call for separating medical diagnosis and drug dispensing after this medicine mix-up incidence. The pharmacists agree such act is a must and should be strictly enforced in the long term. They claim that the separation of prescriptions and dispensing will benefit patients as such practice would lead to better monitoring.

However, some just think the opposite way. As the drug stores have no patient records in addition to the pharmacists may not read the handwriting of the doctors' prescriptions, the separation act could even increase the risk of wrong drugs being dispensed. Therefore, should the separation be enforced, the winners will be the drug stores and the dispensaries but not necessarily the patients. As a result, separating prescriptions and dispensing could only lead to higher fees. They argue that it's just all right for doctors providing a one-stop service for patients.

1. Suppose such practice of separation is adopted, will there be any difference in a patient's total medical expense on both doctor's consultation and medicine assuming zero transaction cost : (i) if doctors are price-takers? (ii) if doctors are price-searchers?
Will there be any difference in total medcial expense if doctors can practise price-discrimination in the presence of transaction costs?

2. At present, most medical practitioners (doctors) in Hong Kong choose to provide one-stop service and charge each patient a lump-sum payment. Why?

3. Will separating drug dispensing prevent mistakes? What is your opinion?

Join the debate and elaborate your points in terms of economic reasoning!

(Make use the tools of economic concepts such as consumer sovereignty, market mechanism, price-taker's & price-searcher's markets, asymmetric information between the buyer and the seller, transaction costs, the optimal allocation of medical resources etc)

p.s. HKAL Exam Economics 2000 Paper I Q.9

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The problem of Longevity in Economics --- As inspired by Irving Fisher's Theories

Hong and Shanghai Banking Corporation Group has revealed the report of a global study of “The Future of Retirement” around the world in early May and found that:

“H.K. people put health before wealth for a happy retirement and they are worried about their financial arrangements for retirement as 66% are concerned they will outlive their money in retirement. 93% think quality of life is far more important than longevity. 45% want to never work for pay again in retirement. 86% are seriously worried about becoming ill in old age. Actually, the lack of preparation will jeopardize the dreams and plans for retirement.”

The above disclosure was extracted from the report.

Hong Kong people do not want to work as part of a retirement. It differs from outlook to retirement life as found in most other countries that they think to have some jobs in their retired ages.

Reference Link: http://www.hsbc.com.hk/hk/aboutus/press/content/05may11e.htm

However, there are some clues to explain this social phenomenon as inspired by the Interest Theory which was invented by the famous Economist in last century ---- Irving Fisher.

Reference Link: http://cepa.newschool.edu/het/profiles/fisher.htm

Irving Fisher made numerous contributions to marginalist economics, especially on the theory of capital and investment and his well-known Separation Theorem leading to wealth maximization. He has a famous dictum: "Interest is NOT a part of income, but the whole of income. " It is up to the individual rational decision on the retirement age.

“Wealth” or “Capitalized value” is the discounted value of the present and a series of future income returns acquired. And, the source of wealth in a society is the activity of those involved in the production of goods and services. “Income” or “income stream” is a flow of net returns (pecuniary or non- pecuniary) available in different periods of time.

When people create wealth (capital asset) it means people are giving up a certain amount of present consumption in order to obtain the expected future income stream. Therefore temporal trading (exchange over time) is possible. That is "present consumption can be exchanged for future consumption" and vice versa. No matter people prefer early availability or later consumption through the saving and investment or the loan market, he or she is maximizing the wealth as well as consumption (income) over time. It is the time for an individual to reap on his or her retirement. The amount of provident fund received on retirement may be considerable.
Assuming "risk-free" and the market interest rate is known, a stable income stream could be assured for the rest of the life of a retired person. It is the“ perpetual annuity” if income stream is expressed as a flow of constant net receipts for infinite years. The stable income return ---“annuity”is the flow of the potential consumption without reducing or trenching on wealth.

In real situation, people adopt the strategy of a portfolio combining equities (stocks) with fixed-income instruments (bonds, savings plans, etc.) to hedge against economic downturns. In order to minimum the risk, a good investment strategy would be to buy stocks of the reputable companies (the blue chips).

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Transaction Costs & the Contractual nature of the Firm

Let's take a very simple example to illustrate the concept of transaction costs.

Suppose I am working for a firm (E.g. a school) and I've run out of stationery. Surely I shall get my stationery by asking the office to get the supplies instead of going out to purchase, as my school has purchased and maintains an inventory of stationery. As a matter of course, the school (firm) will keep such supplies, without giving much concern to the cost of keeping such stationery.

For just a simple transaction, imagine that I was buying raw materials to manufacture the good and to provide my service. There is the extra effort of negotiating a price, preparing a contract, examining the products, and, potentially use the legal system to enforce the contract. So, it is better for the school(the firm) to own the supplies to avoid all the trouble.

That "trouble" is transaction costs, as Coase argued, should be added to the price of a good or service in order to measure the performance of the market operation relative to the non-market operative behaviour in firms as well as in weighing the costs and benefits of government regulation.

There are many types of transaction costs:

Search costs: buyers and sellers finding each other inside the disorganized market.

Information costs & measuring costs: for buyers, learning about the products and services of sellers and the basis for their cost, the listed price, and quality; for sellers, learning about the financial condition, and the willingness of the buyers to pay which may lead to a higher or lower setting price.

Bargaining costs: buyers and sellers setting the terms of a sale or contract for services, which might include meetings, phone calls, letters, faxes, E-mails, exchanges of data, entertainment expenses, and the legal costs of contract negotiations etc.

Policing costs: buyers and sellers taking steps to ensure that the goods and the terms of trade, which may have been ambiguous, are in fact translated into the real and fair transaction. This might include inspecting the goods and anything having to do with late delivery or payment, and etc and etc.

Enforcement costs: buyers and sellers ensuring that unsatisfied terms are remedied. This could range from mutual agreement written on a contract to the cost of litigation (making and defending claims in court).

Transaction costs range from the trivial cost to amounts greatly in excess of the transaction itself.

Coase published his findings in 1937 ---"Nature of the Firm". Ronald Coase thought they would be studied carefully. However, his fellow economists simply assume transaction costs don't exist.

Firms are created because the extra cost of organizing and maintaining them is cheaper than the transaction costs involved when individuals conduct exchange with each other using the market.
What functions should a firm perform internally? The answer is only those activities that cannot be performed more cheaply in the market or by another firm.

In fact, as Coase says, a firm will tend to expand to the point where "the costs of organizing an extra transaction within the firm becomes equal to the costs of carrying out the same transaction by means of an exchange on the open market." It the "bureaucracy" that increases as the size and complexity of the firm increases. Sometimes, bureaucracy may lead to the rise in transaction costs that far more exceed the amount of transaction costs being saved alternatively by using the market.

For some production activities, the market works quite well. However, for instance, for the large-scale operation of China Light and Power Company, which require coordination of the factor resources, organization of the firm is the only economical solution.

Should the electricity power generated by each household, what outcome would you imagine in terms of economic sense?

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