Public versus private health care in a national health service

Abstract

This paper studies the interplay between public and private health care in a National Health Service. We consider a two-stage game, where at stage one a Health Authority sets the public sector wage and a subsidy to (or tax on) private provision. At stage two the physicians decide how much to work in the public and the private sector. We characterise different equilibria depending on whether physicians coordinate labour supply or not, the physicians’ job preferences, and the cost efficiency of private relative to public provision. We find that private provision tends to crowd out the NHS if physicians are sufficiently indifferent about where to work or the private sector is sufficiently cost efficient. Competition between physicians triggers a shift from public provision towards private provision, and an increase in the total amount of health care provided. The endogenous nature of labour supply may have counter-intuitive effects. For example, a cost reduction in the private sector is followed by a higher wage in the public sector.