Why it makes economic sense to make rapid antigen tests free

It is official, the Prime Minister is done with picking up the bill and we have entered the stage of the pandemic where there is no longer such a thing as a free lunch. The Minister for Health has argued that placing a price on rapid antigen tests, will help ensure the more judicious use of scarce health resources. And for anyone that has tried to source a RAT in recent days, they are now scarcer than an Xbox before Christmas.

So, isn’t the government’s approach to make people pay for RATs the right one – using the principles of Economics 101 to ensure only those that really need a test will take one? Unfortunately, this is not a job for Economics 101 but Health Economics 101, and there things get a little more complicated.

Prime Minister Scott Morrison.

Prime Minister Scott Morrison.Credit:Alex Ellinghausen

Economics 101 tells us that when demand outstrips supply, price goes up – lifting supply and reducing demand – leading to the ‘optimal’ allocation of scarce RATs. The people that ‘value’ the RAT the most will get the tests. But Health Economics 101, which takes into account the unique nature of health care, tells us something quite different – that allowing price to clear the market can lead to something far from the ‘optimal’ allocation.

First, of course, is the issue of equity. For Australians on very low incomes, the $15 per test makes them too expensive to access. But any price is more likely to deter someone on a lower income from purchasing a test, even though they are more likely to become sick and die from COVID-19.

In 2020 we saw people in the lowest socio-economic group dying from COVID-19 at four times the rate of people in the higher socio-economic group. Having a price on RAT tests will lead to poorer health outcomes for people on lower incomes.

The second is the fact that the whole community benefits when an individual buys and takes a test. But as individuals we find it hard to properly account for these community-wide benefits when making decisions about how much we are willing to pay for a good or service – meaning we buy less tests than is ‘optimal’. Put simply, we are better able to calculate our own personal benefits from taking a test than the community-wide benefits. But in a pandemic, it is the community-wide impacts that really matter.

As we face this public health challenge, Doherty modelling shows that testing and isolation of positive cases will help slow the spread and protect our health system from being overwhelmed. It will also reduce health care costs and the economic fallout from the current outbreak. In a pandemic, it is the experts that should determine what is an ‘optimal’ allocation not individuals that struggle to adequately account for these broader social benefits in how much they are willing to pay for a test.

Third is the issue of uncertainty inherent in healthcare. None of us buys a RAT because we enjoy stuffing a stick up our nose, swirling it in a test tube and then waiting 10 minutes to see if we get one line or two. Unlike other goods where the market works well, we get no value out of the test itself, but only the good health we hope it will bring for us and our community.

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