After exploring separately in chapters 6 and 7 the demand and supply sides in terms of financing, benefits, ownership and structure of insurance, and delivery of care, it is time to examine the interaction between them. Let us begin by thinking over the problem of prices, because they play an exceptionally important role as incentives on both the demand and supply sides and affect the allocation decisions in the political sphere. What costs should be included in prices? Where markets do not determine prices, how should administered prices be set? Discussion will then turn to broader issues of hard budget constraints and payment-system design (i.e. financial discipline, who bears risk, and to what extent prices are bundled together) and compensation for medical professionals (i.e. the level and dispersion of doctors' pay). After discussing the idea of sector neutrality (initially raised in chapter 6), the chapter concludes by describing how the proposed reforms answer the question of who decides about development of a nation's health sector.

Reasonable prices

In considering how reasonable prices should mediate between supply and demand in the health sector, particularly the issues of administrative versus market-based prices, the policy discussion has reached a point that is reminiscent of the debates about economic reform under socialism. The classic study by Hayek (1935) took the following line of thought. There can be no rational calculation conducive to efficiency unless there are prices that express relative scarcities. Such prices can be developed only by the market.