Where are all the Physicans? Private vs. Public Health Care.

The purpose of this paper is to examine the interplay between public and private health care. We consider a situation where public and private health care are perfect substitutes, and the government sets the wage in the public sector and the subsidy to (or taxation on) the private sector. Each physician decides how much to work in each of the sectors, and earns revenues from wage income in the public sector and patients'payments in the private sector. We find that the scope for public health care is limited if each physician does not have a genuine interest in working in the public health sector. Competition between physicians triggers a shift in production from public to private health care, and an increase in total production. The production is higher in the public sector and lower in the private sector than in the first best outcome. The endogenous nature of labour supply may have counter-intuitive effects. For example, a cost reduction in private sector may lead to a higher wage in the public sector.