Not Insurance - It's "Pass the Buck"
You Call This Health Insurance?
What the insurance companies have done is to reverse the business
- Gerry Spence
by Arnold Kling
Even though most health care and most health insurance were provided privately,
- John C Goodman, "Health Insurance", from the Concise Encyclopedia of Economics
One of the most serious impediments to rational debate on health care is the misuse of the term "health insurance." What we call health "insurance" in this country was never designed to insure the consumer. Instead, its purpose is to insure steady, reliable incomes for health care providers. True health insurance is the economist's equivalent of a unicorn - we can describe it, but none of us has actually seen it.
What Blue Cross and Blue Shield pioneered was a "split-the-cheque" approach to health care. An equivalent plan for restaurant meals would be that instead of paying for your meal, you would pay an annual premium to "Blue Eats," which would in turn reimburse restaurants for their costs, plus a profit margin. Every individual member of "Blue Eats" would have an incentive to eat out a lot and order the most expensive items on the menu, because the cost is shared among all of the members of "Blue Eats." "Blue Eats" would be a great marketing ploy by restaurants, because it would get people to eat out more and spend more at restaurants. Similarly, John C Goodman argues that what we call "health insurance" originated as a marketing ploy by physicians and hospitals. It worked really well, too.
Joan, a friend of mine who teaches in the Prince George's County, Maryland public schools, was bragging to me about her health care plan. Evidently, one of the options that she has is to pay a small fee - I believe she said $15 a year - to obtain coverage for eyeglass prescriptions. This coverage allows each person in her family to obtain new eyeglasses once a year at relatively little cost. If you were to ask Joan where the money comes from to pay for her eyeglasses, she would answer "The insurance company," as if the company that administers the benefit program is some sort of Fairy Godmother handing out cheques. In reality, the money for Joan's family's eyeglasses comes from one or more of the following sources:
Joan is not splitting the cheque. She is passing the buck. Someone else is bearing the cost, which makes Joan a winner.
Still, pass-the-buck is like split-the-cheque in that Joan is not the biggest beneficiary of the eyeglass coverage in her health plan. She is not the one who would fight tooth and nail if an attempt were made to curtail coverage. The big winners are the eyeglass shops in the area, who enjoy increased demand for their products and services. The coverage that pleasantly surprises Joan ultimately represents a marketing ploy on the part of the eyeglass industry.
One of the most important things to understand about insurance is that it is necessarily related to the concept of risk. A pool of people get together and share the risk of a rare event that affects one person at a time. Insurance is only possible when the event that triggers a claim is highly improbable. The more likely the event is to occur, the less insurable it becomes. The table below indicates medical expenses that are insurable (because they are improbable or uncommon) versus uninsurable.
Events in the right-hand column can be covered by 3rd-party payments, and you can call that "insurance," but it isn't. It is some variation on "split the cheque" or "pass the buck." For example, an insurance company's coverage of prenatal and postnatal care for a healthy, normal infant is at best a "split the cheque" system among a pool of young families, and at worst a "pass the buck" system that takes from the non-child-bearing and gives to the child-bearing. If it is a pool of young families all having children, then what the insurance company gives in benefits it will take away in premiums. Nobody is any better off.
On the other hand, insurance coverage of the relatively rare event of a deformed infant makes a real difference in people's lives. The unlucky family gets its expenses covered, while the lucky families have paid premiums and not received any payments. That is true insurance.
Medicare is primarily a "pass the buck" program. Those between the ages of 65 and 80, with predictably high medical expenses, are covered by the taxes on the working population. It is really only possible to provide insurance for those who live past 90, because it is unusual to live that long (although it is getting to be less unusual as health and medical care improve). Note that I am not saying that pre-existing conditions per se are common. However, it is common for a pre-existing condition to lead to large medical expenses, which is what makes pre-existing conditions uninsurable.
To understand the point about insurable versus uninsurable events, consider long-term care insurance. This insurance provides for personal care for someone who becomes incapacitated. The premiums for long-term care insurance are much more affordable the younger you are. As you get older, the premiums rise, and people often cancel their policies. Does the fact that people buy long-term care insurance when they are, say, 55, and cancel the policies when they are, say, 75, mean that the long-term care insurance is a scam? Not according to the economics of insurance (it may be a scam for some other reason, such as fraud). It is true that you are more likely to need long-term care when you are past 75. However, you are more likely to need long-term care insurance when you are 55. Remember, insurance only works when something occurs rarely. It is rare for someone aged 55 to need to go into a nursing home. It is not nearly so rare for someone over 75 to need to go into a nursing home.
To deal with the prospect of requiring long-term care after the age of 75, the only choice you have is to save up for it. If we do not save for our own long-term health care, then someone else will have to pay for it. We cannot insure against it, because it is too close to a sure thing. The reason people tend to cancel their long-term care policies as they get older is that the actuarily fair premiums are so high that at some point it just makes more sense to save up for the inevitable long-term care rather than to buy "insurance."
From an insurance standpoint, it may make sense to buy long-term care insurance when you are 55 and to renew your policy for 5 or 10 years, to guard against the risk that you will be one of the unlucky people who becomes incapacitated relatively early. However, in addition to the insurance, you still have to set aside savings for the more likely scenario, which is that you remain non-institutionalised through age 75 but require long-term care some time after that. For insurance to work, your expenses have to be unpredictable, so that you contribute to the insurance fund most of the time. With predictable expenses, you would always be drawing from the insurance fund and never contributing to it, so that insurance is not possible. The only way to pay for predictable medical expenses is out of savings.
Insurance is possible when there are unpredictable expenses, not when there are predictable expenses. Again, there are plenty of ways that our society can arrange for other people to pay for your predictable expenses, but those arrangements are "split the cheque" or "pass the buck." They are not insurance.
(Correction 29 September: A reader forwarded me this link: NAIC shoppers guide. Contrary to what my article originally suggested, many long-term care policies have premiums that do *not* increase with age. In my view, this makes it more likely that a consumer will be able to afford the premiums as the consumer gets older, and it makes more sense to hang onto such a policy. On the other hand, this makes the premiums more expensive than they would be on policies that work more like "term" insurance, where the premiums adjust with age. The true cost of long-term care insurance does rise with age. If your premiums do not rise over time, that means that the higher cost is built in to premiums at the front end. - AK)
The unicorn that economists would call health insurance would focus on insurable events. Each type of event might be covered by different forms of insurance. Being first diagnosed with an expensive disease would be an insurable event. It would trigger a large payment, but that payment would not be reimbursement for expenses incurred. Instead, it would be a share (preferably a large share) of the entire expected lifetime costs associated with that disease.
Reaching the age of 65 would not be an insurable event, so that Medicare would not kick in at that age. Instead, reaching age 80 or 85 might be the insurable event. For your own predictable medical expenses in the 65 - 80 age range, instead of a system that taxes the young to pay for the old, during your working life you would save up for those expenses. The transition from the current system to my proposed system would be gradual (see Phase Out Medicare).
Giving birth to an at-risk or deformed infant would be an insurable event. Perhaps all pregnant mothers would automatically sign up for insurance, creating a pool of premiums to fund the reimbursement of the unlucky families. Becoming incapacitated at a young age would be an insurable event. Young people should be encouraged to purchase disability insurance.
What economists consider real health insurance is different from what people want. Doctors and other medical suppliers want the old Blue Cross/Blue Shield type plans, which help boost supplier incomes. Young people want to avoid paying premiums for insurance, but still get bailed out when they get hit with bad luck. The AARP wants to lock today's working population into the existing Medicare system, which is a prescription for a train wreck. Everybody wants a Fairy Godmother to pay their health care expenses for them, but no one wants to be the one that ends up having to pay for the Fairy Godmother.
In the political market place, it will pay to promise people what they want. As an economist, I have the unfortunate duty of explaining that what people want is not what they can have. Should they reach that level of understanding, they may begin to appreciate the merits of true health insurance.
Source: techcentralstation.com 28 September 2004
Insurance: After that Huge Lunch, Everyone Decides to Split the Check
What Can You Do When You Only Had Pie and Coffee?
There are several issues currently facing the insurance industry, but perhaps the largest and most interesting is the problem of DNA testing as it relates to health insurers.
DNA testing has the potential to completely destroy the health insurance industry. Why? Because of the basic nature of insurance – it is a tool to spread risk (that is, uncertain costs) among a large pool of people. Individuals trade the very small risk of incurring a very large cost (as might occur if one’s house burns down) for the certainty of an ongoing small cost (an annual insurance premium). This reduction in risk is a service the insurance company offers and for this it is compensated. Since an insurance company insures a large pool of people, it knows statistically the number of fires to expect in any given year – although, of course, it does not know who among its clients will be the victims. It tailors premiums to just cover expected payouts (plus a modest fee for service). The net result is to spread the cost of the small number of fires which will occur across the large pool of those at risk. This is analogous to a group of businessmen splitting the check evenly after an expensive lunch.
As things stand, health insurance is much like fire insurance. A young, fit, recent college graduate has no idea when (or even if) he will be diagnosed with cancer. His uncertainty creates a risk that he is willing to pay an insurance company to remove. Lump several thousand individuals together into a pool and a small handful will be expected to be diagnosed with cancer in any given year. Combined premiums cover these payouts, and everyone is happy. Again, this is like businessmen splitting a check. It’s no fairer than a system where, for example, they rolled dice to see who would cover the entire tab (over the long run, each businessman would pay roughly the same amount for lunch), but it allows each one to more accurately predict his costs on any given day, and stops each from having to carry a wad of cash to lunch in case he loses the roll.
But what if people could easily obtain very accurate knowledge of when they would likely suffer from various serious ailments? Many diseases have a genetic component (including many forms of cancer). If someone gets DNA tested and finds he is almost guaranteed to get cancer within the next decade, he would – of course – immediately purchase insurance – not to remove a risk, because there is no longer a risk, but to protect his family by getting others to help pay for his now-certain treatment. Equally, if someone else gets the same test and finds he is almost guaranteed not to get cancer, he would – naturally – avoid insurance. Again, he no longer has need of the risk-removal service insurers offer, because he has very little risk. Buying insurance would simply be signing himself up to help cover someone else’s medical costs - no doubt a worthy act of charity, but why, then, get an insurance company involved? It would be simpler to donate money directly to the Red Cross!
Returning to the business lunch analogy, it is a bit like some people wishing to split the check evenly after they dined on filet mignon while some at the table ordered only a croissant and coffee. While the gourmands are eager for the “convenience” of splitting the bill evenly, the other diners would need to be coerced to agree.
DNA testing could mean the death of health insurance - there would less risk to spread. Insurance offers a valuable service when a pool of people are insured against a calamity that only a fraction of the total will suffer in any given year. But there is little service to be offered when virtually 100% of the pool will suffer it! Premiums would equal the cost of the medical treatment - indeed, once the administration costs of the insurance company are added, they would exceed it. No one would need to purchase health insurance.
Nor could this issue be avoided by, for example, giving the results of the DNA tests only to insurance companies. If only the insurer knows who would get cancer, it would only offer insurance to those people least likely to – and refuse to insure those most likely. For a consumer, being offered health insurance would be an unambiguous message that the DNA test results the insurer possessed indicated a clean bill of health – only the gullible would sign up for full health coverage if it was offered. The more accurate the DNA tests, the more completely health insurance is damaged – and this takes place regardless of who gets to see the results.
Alternatively, then, everyone in the US with a social security number could be placed into an insurance pool. Insurance companies would then bid on a number of clients at a set per-client charge. The lowest bidders would be randomly apportioned clients from the pool until everyone was assigned. (Insurance companies could get re-insurance policies for themselves to cover catastrophic situations or if they happen to draw an especially bad lot.) Thereafter, client visits to general practitioners would be made at a nominal fixed rate. This would suffice for many people. To see a specialist would entail a doubled fee (and if one wished to skip the general practitioner visit, then the fee would be trebled.)
This is, of course, no longer insurance, but simply a way of spreading costs evenly to try and make society work better. There is perhaps no way to save health insurance. It will likely be dead within a decade – perhaps the answer is a reformed, expanded Medicare-type socialized coverage to take its place (particularly for the poorest)?
Major issues facing insurance companies today are increased costs and the possibility of widespread DNA testing - which would allow the best insurance risks to realize that they probably don’t need much insurance and let the worst risks know they need a lot.
According to the US Department of Health and Human Services, health care spending in 2003 made up 15.3% of GDP, while in 1960 it was only 5%. It is projected to rise to 18.7% by 2013. In contrast, Germany’s 2003 health care spending was 10.7% and France’s was a mere 9.5%. In 1960, US health care spending averaged $141 per person. By 1998, that amount had leaped to $4,094. In 2005 it is projected to exceed $6,500.
Why so much? One of the more important reasons is better technology – which, according to various studies, accounts for 30 - 40% of the increase (though better technology has not put the US at the forefront of life expectancy - both the French and the Germans have lower infant mortality and higher life expectancy than Americans).
Another cause of higher costs is huge malpractice suit rewards which raise malpractice insurance premiums and hence health care costs for the consumer. Still other factors are increasing obesity rates and the number of Americans taking prescription drugs regularly.
Prescription costs have increased 12 - 15% per year over the past 5 years; further, in a survey conducted by the Kaiser Family Foundation in September 2000, an incredible 91% of Americans reported having taken a prescription drug in the previous year; 54% said they take them regularly. On average, Americans use 2 - 10 prescriptions per year. In fact, from 1992 to 1998 prescriptions increased by 40% while the population increased by only 6%. Further, utilization of prescriptions has been noticeably increased by pharmaceutical company advertising which is directed toward consumers - if consumers are told about new drugs and therapies, they then demand from their doctors access to the latest, most innovative treatments available.
Demographic changes such as aging also increase prescription rates - people over the age of 75 use 11 prescriptions per year compared to two for those in their 20s and 30s. As well, prescriptions for drugs such as Ritalin and Paxil have skyrocketed. Methylphenidate (Ritalin) prescriptions rose dramatically in the early 1990s then leveled off at about 11 million per year. (According to the United Nations, the US produces and consumes 85% of the world's methylphenidate.) In comparison, amphetamine prescriptions (primarily Adderall) increased from 1.3 million in 1996 to nearly 6 million in 1999 – today, one in eight elementary school children has a prescription for stimulants. Last year doctors wrote 20 million prescriptions for ADHD medications alone. Further, since 1988, when Prozac (fluoxetine), the first SSRI antidepressant, was introduced to the US market, nearly 68 million Americans have taken at least one SSRI.
Health insurance companies use the term "adverse selection" to describe the tendency for less robust people to be more eager to secure health insurance. Insurance companies say that because a person often has secret knowledge of ill health or bad habits, this asymmetry of information leads to significant adverse selection and higher costs for everyone. (But if everyone had health insurance, then adverse selection would not be a problem.)
Health care reform is high on everyone’s political fix-it list. Everyone wants to get lucky – to receive more in health care benefits than they pay in premiums (or, alternatively, to enjoy a lifetime of perfect health without expending too much effort.) Everyone wants to benefit from the latest miracle cure or miracle drug – without having to foot the bill for someone else to benefit.
Undoubtedly, if there were an easy solution to health care costs spiralling out of control, it would already have been implemented by now. No solution is perfect.
One of the reasons Canada is able to offer prescriptions at a fraction of US cost is that their National Health Service caps spending. In a way, that means American R&D subsidizes Canadian prescriptions. Spending caps reduce quality – but the only way to get everyone covered is to lower the ceiling for everyone, even the upper 20% that could afford to pay for the best. Otherwise, all the best doctors will want to treat only the rich who can pay more – and everyone else will have to wait in line for more years than they have left.
Unfortunately, there is no free lunch.
A national health system that is "free" (actually, paid for by all through taxes) ends up with people trading their “free” prescriptions for cigarettes. But I’d like to add that something similar happens when employers provide employees with low-cost insurance. Our family’s insurance costs $30 extra per month for vision coverage. This includes annual vision tests and one pair of glasses per year. Three family members wear glasses, so we come out slightly ahead – but only if each person’s glasses are replaced yearly (whether that’s needed or not). Without insurance, we would, when appropriate, wear those same glasses for another year thereby paying slightly less, saving ourselves money – but only if the doctor charged us the same “special” rate that the insurance company gets. However, he doesn’t – without insurance, we are charged considerably more.
If an insurance company pays for prenatal and postnatal care for normal infants, then that is a "pass the buck" system that takes from the non-child-bearing and gives to the child-bearing. If a pool of young families all have children, then what the insurance company gives in benefits it takes in premiums. Nobody is any better off. Insurance companies are not your benefactors! It is a zero sum game – if you come out ahead, someone has had to make up that difference by paying in more than he got.
by Dan Smoot
Reprinted in 2000 from The Freeman, April, 1960, with the permission of the Foundation for Economic Education, Irvington-on-Hudson, NY 10533
IN 1884, Prince Otto von Bismarck, Chancellor of Germany, instituted the first modern program of socialised medicine. It was called compulsory national health insurance. Bismarck hated communism. His motive in introducing socialised medicine in Germany was to buy the loyalty of the German masses as a means of keeping them from becoming communists. Bismarck adopted "nationalistic socialism to end international socialism" - to use his own words. To use other words, Bismarck was the first leader of a great nation to fight communism by adopting communism.
The German citizens paid more for their national compulsory health insurance than they had paid for private insurance before Bismarck came along-and they got less in return. Bismarck's scheme failed miserably to provide better medical care for the people of Germany; but it did become an important feature of the German militaristic state; it helped pave the way for Hitler a generation later; and it furnished a pattern with which practically every other nation in the West - including America - has experimented.
England first started experimenting with socialised medicine in 1911. The experiments were a failure, as they always have been everywhere. But government never retrenches. When government seizes power and money from the people in order to promote their welfare and then makes matters worse for them, government always argues that it didn't have enough power and money to do enough promoting.
In England, for example, when Lloyd George's rather moderate experiment in the Bismarckian type of national health insurance was abandoned, the nation went all the way into communized medicine. The National Health Program which became the law of England in July 1948 is modelled on the Soviet system created by Lenin.
In less than two years, there were more than half a million people on the waiting lists for hospitalisation, while some 40,000 hospital beds were out of service because of a nurse shortage. The hospital shortage in Britain has become so acute that many mentally deficient and helpless, aged people are unable to secure institutional care. The only effective means of easing the shortage is to deny hospital admission to the old and chronically ill who cannot be discharged once they are admitted.
In industrial centres, some British doctors have as many as 4,000 registered patients each. Such doctors can give each patient only 3 minutes per call - 3 minutes overall, for consultation, diagnosis, prescription, filling out official forms, and maintaining proper records for governmental inspectors. 12% of all British taxes go into the national health program. Thus the wretchedly inadequate "free" medical services in Britain actually cost the average Englishman considerably more than an American pays for the most expensive private health insurance and hospitalisation. [NOTE: this was written before Medicare was enacted in 1965 - Ed.]
Over and above what the British themselves have put into socialised medicine, one must consider also the billions of dollars which America has pumped into the British economy as loans and outright gifts. And still the thing is a failure. Why?
Whenever government enters a field of private activity, that field becomes a political battleground. Whenever you mix politics with medicine, doctoring becomes a political instead of a medical activity.
"Something for Nothing"
But the primary reasons for the inevitable failure of socialised medicine can be found in the patients themselves. When people are forced to pay for something, whether they want it or not, they are inclined to use as much of it as they can in order to get their money's worth.
There are endless stories about Englishmen who trade their government-issued eyeglasses, wigs, and even false teeth, for beer. There are housewives who trade government-issued medicine for perfume and cigarettes. And there are some who pick up extra money by selling the gold fillings out of their teeth-getting them replaced by government dentists and then selling them again.
Malingerers are people who pretend to be sick in order to get sick pay, social security benefits, free hospitalisation, or a rest at government expense. Hypochondriacs are people who think they are sick, but aren't. There are countless thousands of such people. No system has ever been devised for definitely identifying them, for weeding out the unnecessary or unreasonable or dishonest demands made upon the medical care services-no system, that is, except the one existing in a free society where a person must pay his own doctor bill or is controlled by provisions of an insurance policy which he himself has bought.
No compulsory health insurance program has found a means to discourage racketeers or petty complainers who make useless trips to the doctor and monopolise professional time that should be spent on people really needing care.
Pamphlet No. 1075, August, 2000
aapsonline.org/brochures Association of American Physicians and Surgeons,
Incorporated. A Voice for Private Physicians Since 1943
Is the insurance grass greener somewhere else? (Note: This article has been condensed by about 30% because it was so long. If you want more detail, go to the source article. Also Note: This is actually "19 Myths" - myth 14 is missing here and was also missing in the original for unexplained reasons - perhaps oversight.
20 Myths About National Health Insurance
Everyone should have health insurance? I say everyone should have health care. I'm not selling insurance.
- Dennis Kucinich
by John C Goodman and Gerald L Musgrave
In virtually every country with national health insurance, politicians, health ministers and other government officials are searching for ways to reform their health care systems. Increasingly, the reforms being adopted seek to replace socialism in medicine with privatisation, competition and market incentives.
As other countries struggle to reform their health care systems, they often look to the US for guidance. Yet, many in this country are encouraging us to copy the health care system of some other country. Unfortunately, the advocates of national health insurance have painted a rosy picture of how it works elsewhere - often ignoring many problems and failures. National health insurance promises to make medical care a right and to grant all citizens equal access to it. Yet in those countries which have adopted national health insurance people are often denied access to modern medical technology, and the distribution of health care resources is far from equal. The special victims of national health insurance are the poor, the elderly, members of minority groups and residents of rural areas.
This report does not focus on minor blemishes or easily correctable problems in the health care systems of other countries. Instead, it seeks an understanding of fundamental principles - by identifying common patterns that tend to emerge in all countries with national health insurance and explaining why those patterns emerge inevitably from the politics of medicine.
20 Myths About National Health Insurance
As the US wrestles with the problems of its health care system, it is tempting to look elsewhere for solutions. In general, countries with national health insurance spend less per person (and less as a percent of national income) on health care than does the US. Those unfamiliar with other systems assume that the US can control health care costs through national health insurance without any loss of benefits or deterioration of quality. In what follows, we briefly discuss this and other common myths about national health insurance.
Myth No. 1: Countries with national health insurance have been more successful than the US in controlling health care costs.
The US spends more on health care than any other country in the world, both in dollars per person and as a percent of gross national product (GNP). Does this mean that the US, with a predominantly private system, is less able to control health care spending than are developed countries with national health insurance schemes? International comparisons of health care spending are difficult, not least because of differences in measuring techniques. Almost without exception, countries with more income spend more on health care. In fact, health economists have discovered that 90% of the variation in health care spending among developed countries is based on income alone.9 As people have more income, they spend more on health care, whether their spending takes place through the market, the political system or quasi-public institutions. In 1987, the US spent $2,004 per person on health care, whereas Canada spent only $1,520. Some people argue that if the US adopted Canada's health care system, it could cut health care spending by 25%.
Canada has been no more successful than the US in controlling health care spending.12
Because of historical and cultural differences between the two countries, the need for health care spending is often higher in the US than in Canada. For example, the US has a much higher violent crime rate, heavier illegal drug use and a greater incidence of AIDS - all of which generate more health care spending. According to Leroy Schwartz (Health Policy International):14
The US also has health care costs related to war injuries (including those of Vietnam veterans), which Canada does not have. And US teenage women have almost 2½ times the pregnancy rate of teenagers in Canada, twice the birthrate, about three times the abortion rate and more than twice the miscarriage rate. Because teenage mothers are more likely to have premature babies and other complications, these differences cause higher health care spending in the US. Real cost of US health care may actually be lower than Canada's. Large HMOs in the United States have lower costs per person than Canada has:
Many believe that countries with national health insurance have an "advantage" the US does not. In those countries the government can, in principle, limit health care dollars and tell hospital managers to ration the money they are given. But that power is more apparent than real, and politicians who exercise it risk being replaced by their competitors. In the political systems of other countries, as in the US, there is unrelenting pressure to spend more on health care.
Myth No. 2: Although the United States spends more on health care per capita than countries with national health insurance, Americans do not get better health care.
This myth is often supported by reference to two facts: life expectancy is not much different among the developed countries and the US infant mortality rate is one of the highest among developed countries.
General population mortality rates tell us almost nothing about the efficacy of health care systems because there is almost no relationship between health care and general mortality. General mortality rates are far more closely related to socioeconomic factors and lifestyle. For example, in Sweden, there are striking differences in health outcomes between Stockholm and Hollard, a rural, agricultural area in the nation's south:17
In Norway, people in the urban areas of Oslo and Akershus have the most contacts with physicians. But infant mortality in those areas is still higher than in, say, Hordaland in western Norway.18 In virtually every country, there is a positive relationship between income and health status and between social class and health. Lifestyle also appears to matter. For example, in Norway, children born to unmarried women between 1971 to 1980 had a 40 - 55% higher (perinatal) mortality rate than children born to married women.19 A population's general mortality is affected by many factors over which doctors and hospitals have little control but for those diseases and injuries modern medicine can affect, it matters where a patient lives. For premature babies, for children born with spina bifida or for people who have cancer, a brain tumour, heart disease or chronic renal failure - the chances of survival are best in the US. Doctors in British Columbia have taken out full-page newspaper advertisements warning that their patients' lives are endangered by government's refusal to purchase lifesaving medical technology. Consider what the shortage of diagnostic equipment means for patients:20
In an extensive study of Britain's National Health Service (NHS), Brookings Institution economists estimated the number of British patients denied treatment each year, based on US levels of treatment. Most of the patients suffered from life-threatening diseases and the denial of treatment meant certain death.
There is considerable evidence that cost-effectiveness is not what drives the bias of other governments against modern medical technology:22
It would be a mistake, however, to think of the current US health care system as ideal. In 1970, before a dialysis benefit was extended to the entire population under Medicare, the US treatment rate for patients with renal failure was on a par with Britain's and less than half that of Sweden and Denmark. Only after Medicare provided a virtual blank cheque did the US treatment rate soar.23
In the United States we pay more for health care. We also get more. And what we get may save our lives. But increasingly, our health care system is acquiring the characteristics of the health care systems of other countries, in which access to medical technology is determined by rationing and politics.26
Myth No. 3: In countries with national health insurance, people have a "right" to health care.
Virtually every government which has established a system of national health insurance has proclaimed health care to be a basic human "right." Yet far from guaranteeing that right, most national health systems routinely deny care to those who need it. Not only do citizens have no enforceable right to any particular medical service, they don't even have a right to a place in line when health care is rationed. The 100th person waiting for heart surgery is not "entitled" to the one hundredth surgery, for example. Other patients can, and do, jump the queue for any number of reasons.
By US standards, one of the cruelest aspects of government-run health care systems is the degree to which these systems engage in non-price rationing. Take the health care systems of Britain and New Zealand, for example. In both countries, hospital services are completely paid by government. Both also have long waiting lists for hospital surgery:
On the surface, the number of people waiting may seem small relative to the total population - ranging from 1% in Canada to almost 2% in Britain. However, considering that only 16% of the people enter a hospital each year in developed countries30 and that only about 4% require most of the serious (and expensive) procedures,31 these numbers are quite high.32 In New Zealand, for example, there is one person waiting for surgery for every 3 surgeries performed each year.33
In Britain and New Zealand, elderly patients in need of a hip replacement can wait in pain for years, and those awaiting heart surgery often are at risk of their lives. Perhaps because Canada has had a national health care program for only half as long, the rationing problems are not as great as they are in Britain and New Zealand, although all 3 countries have similar cultures. But because the demand for health care has proved insatiable, and because Canadian provincial governments severely limit hospital budgets, the waiting lines for surgery and diagnostic tests are growing.
Myth No. 4: Countries with national health insurance hold down costs by operating more efficient health care systems.
By and large, countries that have slowed the growth of health care spending have done so by denying services, not by using resources efficiently.
In Canada, hospitalised chronic patients are known as "bed blockers," and they are apparently blocking beds with the approval of hospital administrators - who may believe that such patients, because they use mostly the "hotel" services of the hospital, are less draining to limited hospital budgets.41 One widely used measure of hospital efficiency is average length of stay. In general, the more efficient the hospital, the more quickly it will admit and discharge patients. By this standard, US hospitals are far in front of most of their international rivals.42
Myth No. 5: In countries with national health insurance, all people have equal access to health care.
Britain's ministers of health have long assured Britons that they were leaving no stone unturned in a relentless quest to root out and eliminate inequalities in health care. But, although an unofficial government campaign tried to suppress it, an official task force report (the Black report) concluded that there was little evidence of more equal access to health care in Britain in 1980 than when the NHS was started in 1948.48 Virtually every scholarly study of the issue has pointed to a similar conclusion.49 For example:
Other studies have documented widespread inequalities in health care in Sweden,52 Canada,53 New Zealand54 and elsewhere. For example, New Zealand's health care system is virtually identical to Britain's and the goal of equal access to health care ranks just as high.
Canada is another country that puts a high premium on equality of access to medical care, if the official rhetoric is to be believed.
Vancouver residents also enjoy about 50% more GP services.
When health care is rationed, the poor are pushed to the rear of the waiting line. In general, low-income people in almost every country see physicians less often, spend less time with them, enter the hospital less often and spend less time there. Interestingly, among the patients who jump the queue in Canada are Americans who pay out-of-pocket for care. US patients add to hospital revenues, so hospital administrators value them. Since Canadians cannot legally pay for care at a national health insurance hospital, the typical Canadian patient must wait in line.58
How does access to health care for low-income people in the US compare with access in countries with national health insurance? Our poorest citizens - those on Medicaid - probably have more access to better health care than low-income citizens in any other country. Being on Medicaid usually means access to all the technology of the US health care system; such technology is more available in the US, and Medicaid will usually pay for it.
Myth No. 6: Countries with national health insurance make health care available on the basis of need rather than ability to pay.
Most people in Britain, Canada and other countries that ration health care believe that the wealthy, the powerful and the sophisticated move to the head of the rationing lines. Because government officials have little interest in verifying this fact, few formal studies exist. There is considerable evidence, however, that in the face of health care rationing those who can pay find other ways to obtain health care. In response to severe rationing by waiting, both Britain and New Zealand have a growing market in private health insurance - where citizens willingly pay for coverage for private surgery, although they are theoretically entitled to "free" surgery in public hospitals. As a result, the privately insured pay for health care twice - through taxes and through insurance premiums.
Since Canada does not allow private health insurance, if Canadians go to the less than 1% of private physicians or less than 5% of private hospitals, they must pay the full bill out-of-pocket.63 Canadian citizens are increasingly entering the US to get health care they cannot get at home. In some cases, the Canadian province pays the bill. In other cases, patients spend their own money.65 In either event, patients must bear the costs of travel. For example:
In general, the Ontario government will pay 75% of standard US hospital charges and the same physician's fee it would have paid had the service been provided in Ontario.
Myth No. 7: Countries with national health insurance maintain a high quality of health care.
Here is one doctor's report of what conditions are like in Quebec:
Canadian press has produced scores of similar stories of people dying while waiting for treatment, including many children.
Myth No. 8: Countries with national health insurance eliminate unnecessary medical care.
A frequent criticism of the US health care system is that it is wasteful because a considerable number of procedures are "unnecessary." For example, Dr Robert Brook of the Rand Corporation maintains that "perhaps 1/4 of hospital days and 2/5 of medications could be done without."87 One source of evidence for unnecessary medical care is a series of studies that show wide variations in the rate of treatment among different US communities, with no apparent justification. Another major study, conducted by the Rand Corporation, concluded that 40% of medical procedures were "inappropriate" or "questionable."88 In Britain and Canada there are also widespread differences in the referral (to specialists) rates of general practitioners and in their prescribing habits. There is no common pattern except that British rates are generally lower - as they are for almost all types of surgery. Doctors frequently do not agree on what should be done and there is often is no objective, "right" answer. Medicine, it seems, is often more art than science.
Myth No. 9: National health insurance would reduce the administrative costs of the US health care system.
The administrative costs of any production system can be reduced by firing all of the administrators and abolishing all reporting requirements. But most systems would perform far less efficiently as a result. The real goal is not to get administrative costs as low as possible but to make the system as a whole perform as efficiently as possible. The costs of rationing by waiting and the waste of resources caused by perverse incentives are costs of administering the Canadian system. One can not legitimately calculate administrative savings in the system without including the adverse effects on patients.
A different approach is used in Singapore, where people are required to deposit 6% of their salaries each year in personal medical savings accounts, called Medisave accounts. When Singapore residents are hospitalised, they pay the bills from their Medisave funds and avoid many of the administrative burdens of health insurance.97 If the US government gave as much tax encouragement to self-insurance through Medisave accounts as it now gives to 3rd-party insurance for the employers and employees of large companies, the administrative costs of US health care could be cut in half.
Making medical care free greatly increases the amount consumed - even though the additional consumption has little impact on the patients' health. The additional cost of making health care free for everyone more than offsets even the most optimistic estimate of administrative savings.
We used the GAO method to estimate the potential reduction in administrative costs under a system of Medisave accounts and health care debit cards, and the Rand Corporation's method to estimate the likely reduction in health care spending if people had high-deductible health insurance. A generalised system under which everyone (including Medicaid and Medicare patients) has 3rd-party catastrophic insurance and uses health care debit cards to draw on individual Medisave accounts for small medical bills would show:
Myth No. 10: National health insurance would benefit America's elderly.
If the experience of other countries is any guide, the elderly have the most to lose. In general, when lifesaving care is rationed, the young get preferential treatment. Take chronic kidney failure, for example:103
The more limited the resources, the worse the degree of discrimination against the elderly. For example, for the population as a whole the treatment rates in Germany, France and Italy were 50% higher than in Britain. As a result, elderly patients in the first 3 countries had a much better chance of getting treatment.
These observations are also consistent with more recent evidence on access to heart surgery:104
Myth No. 11: National health insurance would benefit racial minorities.
Critics of the US health care system often point to the disadvantages faced by minorities. On the average, African-Americans and Hispanic-Americans are less likely to have health insurance, see a physician or enter a hospital. But is national health insurance the answer? There have been very few studies of how racial minorities fare under national health insurance in other countries. In a recent study of the Inuits and Crees of northern Quebec, both groups had much less access to health care than Caucasians in southern Quebec and in other areas of Canada - despite their much greater health needs. For example:111
About 45% of the aboriginal people of Ontario live in the rural, northern part of the state. And, as in the case of Quebec, the northern counties are underserved:113
When national health insurance was adopted in 1969, Ontario also adopted a programme to encourage physicians to move to rural areas - one of the longest running programmes of its kind in the world. Yet a recent study concluded that "while some change has been made, northern Ontario is as underserviced compared to the rest of the province as it was in 1956."114
New Zealand also has both a significant minority population (the Maori) and a comprehensive system of socialised medicine. One study reported that:115
There is also evidence that the Maoris get significantly less health care - especially in relationship to the need for it - than other New Zealanders. For example:116
Myth No. 12: National health insurance would benefit residents of rural areas.<[>A study of Norway's health care system concluded that regional differences in waiting times constitute the most serious inequity in access to health care - more serious, for example, than the distribution of physicians or hospital beds.117 What is true of Norway is probably also true of other developed countries. For example:118
These differences are greater than the regional differences in health care spending per person or other measures of health inputs. For one thing, it often means that care is given to patients who are available when an opening appears in the surgery schedule. Urban patients who live close by thus have an advantage over rural patients who may have to travel considerable distances, requiring both time and inconvenience. For another thing, success in obtaining care often depends on the politics of bureaucracy. A patient who is represented by a physician in a rural area will tend to be at a disadvantage vis-à-vis a patient represented by a physician who lives nearby and is a colleague of the hospital staff. Urban patients also have access to political and personal relationships that may be important in dealing with bureaucratic obstacles - opportunities not generally available to rural patients.
Myth No. 13: National health insurance would be good for members of organized labour.
Many leaders of America's largest labour unions advocate national health insurance, believing that they can turn over employee health care costs to the taxpayer. What they forget is that union members also pay taxes. Under national health insurance, the employees of the nation's largest companies would pay more in national health insurance taxes than they currently pay for private health insurance. For example, in manufacturing they would pay 50% more.133
A national health insurance program similar to Canada's would require at least $339 billion in new taxes:134
These are the tax rates needed to pay for national health insurance for workers and their families. If new health benefits were created for the elderly or for low-income people now covered by Medicaid, tax rates would be even higher. These estimates also assume health care costs remain at their current level. Any rise in health care spending - which is virtually inevitable - would require even more tax revenue.
Despite the fact that 1/3 of our federal budget goes to defense spending, a burden not equalled by our trading partners, taxes are lower in the US than in most developed countries. Only Japan currently has a tax burden as low. Were we to adopt a programme of national health insurance, the US tax burden would approach that of Britain and Germany. That additional burden would have a major impact on our ability to compete.
Myth No. 15: Under national health insurance, health care dollars are allocated so that they have the greatest impact on health.
Of all the characteristics of foreign health care systems, the one that strikes American observers as the most bizarre is the way in which limited resources are allocated among competing needs. Foreign governments do not merely deny lifesaving medical technology to patients under national insurance schemes. They also take millions of dollars that could be spent to save lives and cure diseases and spend them to provide services to people who are not seriously ill. Often, these services have little if anything to do with health care.
Take the British ambulance service, for example:138
While as many as 9,000 people die each year from lack of treatment for kidney failure, the NHS provides an array of comforts for the many chronically ill people whose kidneys are in good working order:
While tens of thousands of people classified by their physicians as being in "urgent need" of surgery wait for hospital beds, the NHS spends millions on items that have only marginal effects on health:
If the NHS did nothing more than charge patients the full costs of their sleeping pills and tranquilisers, enough money would be freed to treat 10,000 to 15,000 additional cancer patients each year and save the lives of an additional 3,000 kidney patients. Yet such options are not seriously considered.
In general, Canadians have little trouble seeing a GP. But specialist services and sophisticated equipment are increasingly rationed.
Myth No. 16: When health care is free, total health costs are lower because preventive health services are more widely available.
A common argument for national health insurance is that "free" health care saves money by encouraging preventive services, which allow doctors to catch conditions in their early stages - before they develop into more costly-to-treat diseases. The argument is wrong for two reasons.
Careful studies show that, in general, preventive medicine raises rather than lowers overall health care costs. Preventive medicine is "economical" only when special at-risk groups are targeted. Giving preventive services to the entire population usually costs more than any savings from early detection of disease.144 This does not mean that preventive care is undesirable. Diagnostic tests which show that no disease is present benefit patients by relieving anxiety and creating reassurance of health. Preventive care is like a consumer good which creates benefits in return for a cost. It is not like an investment good which promises a positive economic rate of return.
Because the services of GPs are "free" to Britons, an inordinate number of their visits are for trivial complaints. In order to handle the case load, British doctors have responded by spending less time with each patient. At half the age of the British system, Canadian national health insurance does a better job - but suffers from similar problems. Although Canadians see their physicians more often than Americans do, a Canadian is not entitled to a routine cholesterol check, unless some other condition warrants it.149
Myth No. 17: The defects of national health insurance schemes in other countries could be remedied by a few reforms.
The characteristics described above are not accidental by-products of government-run health care systems. They are the natural and inevitable consequences of politicizing medical practice. Why are low-income and elderly patients so frequently discriminated against under national health insurance? Because such insurance is always and everywhere a middle-class phenomenon. Prior to its introduction, every country had some government-funded program to meet the health care needs of the poor. The middle-class working population not only paid for its own health care but also paid taxes to fund health care for the poor. National health insurance extends the "free ride" to those who pay taxes to support it. Such systems respond to the political demands of the middle-class working population, and they serve the interests of this population.
Why do national health insurance schemes skimp on expensive services to the seriously ill while providing so many inexpensive services to those who are only marginally ill? Because the latter services benefit millions of people (read: millions of voters), while acute and intensive care services concentrate large amounts of money on a handful of patients (read: small number of voters). Democratic political pressures in this case dictate the redistribution of resources from the few to the many.
Why are sensitive rationing decisions and other issues of hospital management left to hospital bureaucracies? Because the alternative is politically impossible. As a practical matter, no government can make it a national policy that 9,000 people will die every year because they will be denied treatment for chronic kidney failure. Nor can any government announce that some people must wait for surgery so that the elderly can use hospitals as nursing homes, or that elderly patients must be moved so that surgery can proceed.
These decisions are so emotionally loaded that no elected official can afford to claim responsibility for them. Important decisions on who will and will not receive care and on how that care will be delivered are left to the hospital bureaucracy because no other course is politically possible.
Myth No. 18: People in all developed countries, including the US, prefer national health insurance.
As far back as the presidency of Richard Nixon, polls showed as much as 61% of the people favoured national health insurance.151 And only 3% of Canadians and 12% of the British say they would trade their own system for the US health care system.152 But polls also tell us that most Britons believe the cost to them of national health insurance is about 1/20th of what it actually costs. At 1/20th of its real costs, the British health care system might look attractive to most people. Since health care taxes are also disguised in Canada, it seems likely that Canadians are unaware of their individual contribution to national health insurance as well. Thus, most of these people think they get a lot more than they pay for.
Thus, polling data give no indication that people are willing to pay 15% of their income to finance national health insurance. Nor do the polls indicate that Americans are willing to accept the negative aspects of national health insurance. For example:156
Myth No. 19: Since national health insurance is popular in other countries, it would also be popular in the US.
National health insurance works in other countries for 3 reasons. First, the wealthy, powerful and sophisticated - those most skilled at articulating their complaints - find ways to manœuver to the front of the rationing lines. Second, those pushed to the end of the lines are generally unaware of medical technologies they are being denied. Third, there are no (or severely limited) contingency fees, no generally recognised right of due process and no cadre of lawyers willing to represent those who are discriminated against. National health insurance "works" in other countries because those who could change the system are best served by it. If a member of the British Parliament, the CEO of a large British company or the head of a major British trade union had no greater access to renal dialysis than any other British citizen, the British NHS would not last a week. National health insurance, as it operates in other countries, simply would not survive in the US cultural and legal system.
Myth No. 20: Adopting the health care programs of other countries requires government.
The primary way other developed countries control health care costs is through "global budgets." Hospitals, physicians or area health authorities are told by government how much money they have to spend. The government then leaves decisions about how to ration the funds to the health care bureaucracy.157
There is nothing mysterious about this process, and no reason why a large company needs government in order to copy it. For example, Chrysler workers or any other large group could form their own HMO, called a national health insurance HMO (NHI HMO). The total amount of money given to NHI HMO each year could be 75% or even 50% of what Chrysler now spends on employee health care, and the NHI HMO managers could be instructed to ration care to Chrysler employees. If Chrysler workers wanted to exert more direct control, they could elect the chief executive officer of the NHI HMO in annual balloting, and candidacy could be open to all health care bureaucrats or restricted to those with certain qualifications. If NHI HMO physicians rationed medical care the way the British do, there would be many potential malpractice suits. But if Chrysler workers owned their own HMO and if enough legal documents were signed, even this obstacle could be overcome. Chrysler employees could realise "benefits" of national health insurance through private action, without government intervention, provided that is their sincere objective. On the other hand, if the rhetoric coming from Chrysler is merely a ruse to get taxpayers to pay Chrysler's annual health care bill, federal government coercion would be required.
The Politics Of Medicine
Economic principles, if carefully applied, explain much of what happens in politics. Take the concept of competition. Just as producers of goods and services compete for consumer dollars, so politicians in a democracy compete for votes. Moreover, the process of competition leads to certain well-defined results. In the economic marketplace, competition inevitably forces producers to choose the most efficient method of production. Those who fail to do so either go out of business or mend their ways. The ultimate outcome - efficient production - is independent of any particular producer's wishes or desires. In a similar way, political competition inexorably leads candidates to adopt a specific position called the winning platform. The idea of a winning platform is a fairly simple one. It is a set of political policies that can defeat any other set of policies in an election. A politician who wants to be elected or re-elected has every incentive to endorse the winning platform. If he does not, he becomes vulnerable; for if his opponent adopts the winning platform, the opponent will win.
Of course in the real world, things are rarely simple. Many factors influence voters other than substantive political issues - a candidate's religion, general appearance, speaking ability, party affiliation, et cetera. Even when voters are influenced by real political issues, politicians don't always know what the winning platform is. Often they must guess at it. Nonetheless, public choice theory holds that, other things equal, a candidate always improves his chances of winning by endorsing the winning platform. Hence, all candidates have an incentive to identify and endorse this platform. Candidates who do not are unlikely to survive the political competition.
This line of reasoning leads to a remarkable conclusion: In democratic systems with two major political parties, both parties tend to adopt the same policies. They do so not because the party leaders think alike or share the same ideological preferences, but because their top priority is to win elections and hold office.
Two corollaries follow from this conclusion. The first is that it is absurd to complain about the fact that "major candidates all sound alike," or that "it doesn't seem to make any difference who wins." The complaints are merely evidence that political competition is working precisely as the theory predicts it will work. Indeed, the more accurate information political candidates receive through better polling techniques and computerisation, the more similar they will become. The theory predicts that, in a world of perfect information, the policies of the two major parties would be identical.
The second corollary is more relevant for our purposes. In its extreme form, the corollary asserts that "politicians don't matter." Over the long haul, if we want to explain why we have the political policies we have, it is futile to investigate the motives, personalities and characters of those who hold office. Instead, we must focus on those factors which determine the nature of the winning platform.
This corollary is crucial to an understanding of national health insurance. A great many British health economists who support socialised medicine are quick to concede that the British National Health Service has defects. But these defects, in their view, are not those of socialism; they merely represent a failure of political will, or the fact that the wrong politicians were in office. The ultimate goal, they hold, is to retain the system of socialised medicine and make it work better.
By contrast, we argue that the defects of the policies which govern national health insurance programs are natural and inevitable consequences of placing the market for health under the control of politicians. It is not true that British health care policy just happens to be as it is. Enoch Powell, a former Minister of Health who ran the British National Health Service, seems to have appreciated this fact. Powell wrote that "whatever is entrusted to politicians becomes political even if it is not political anyhow"159 and goes on to say that
An extensive analysis of the British health care system shows that all of the major features of national health insurance can be explained in terms of public choice theory.161 That is, far from being the consequence of preferences of politicians (who could be replaced by different politicians with different preferences in the next election), the major features of national health insurance follow inevitably from the fact that politicians have the authority to allocate health care resources and from that fact alone. The following is a brief summary.
In the real world, politicians rarely have the opportunity to tailor their spending purely to the desires of a specific voter. Generally they must allocate spending among programmes that affect thousands of voters at the same time. New spending for a hospital, for example, provides benefits for every one in the surrounding community. No matter what level of spending is chosen, some voters will have preferred more, and others less. Often in such cases, the vote-maximising level of spending will be the level of spending preferred by the average voter.
In theory, creating regional equality is a relatively simple task. All governments have to do is spend more in areas that are relatively deprived and less in areas that are relatively well-endowed. But most governments have not done this. Why? Public choice theory supplies a possible answer. Policymakers must make two choices about spending in a particular area or region. First, they must decide how many total dollars are to be spent there. Second, they must decide how to allocate those dollars. In a democracy, there is no particular reason why per capita spending will be the same in all areas. Per capita spending may differ across voting districts for numerous reasons. Voter turnout may be higher in some districts than in others, which suggests that those districts are willing to "pay" more (in terms of votes) for political largesse. Given that a certain amount of money is going to be spent in a certain area or region, competition for votes dictates that the money be allocated in accordance with the preference of voters.
Spending Priorities: "Caring" versus "Curing"
We have mentioned the British National Health Service's emphasis on "caring" rather than "curing." This feature of the NHS marks a radical difference between British and American health care. There can be no doubt that Britain's choices are the result of conscious political decisions. And the current trend is toward even more caring and less curing. What political pressures lead decision makers to prefer caring over curing? Rozbicki believes it is a matter of numbers - numbers of votes. Money spent on caring is spread out over far more people than money spent on curing. Most Britons know little about medical technology. This ignorance, moreover, is quite "rational." Information is costly. The rational person has an incentive to expand his knowledge about any subject only to the point at which the cost of an additional bit of information is equal to its benefit. This is the economic explanation for the commonly observed fact that the average person does not become an expert in medical science. In a free market for medical care, suppliers of medical services have an incentive to inform potential customers about new developments. Such information increases the demand for new services and, thus, promises to enhance the income of those who supply them.
The existence of non-price rationing tends to make all health care services less valuable than those services would be in the free market. But because non-acute services can be adjusted to increase the certainty of some treatment, whereas acute services generally cannot, the former tend to become more valuable relative to the latter. Thus, to a certain extent, the priority given to non-acute treatment is perfectly rational.
Closely related to the distinction between caring and curing in Britain is the distinction between current and capital expenditures. Despite the fact that the NHS inherited a deteriorating capital stock, only one new hospital was built in the first 15 years of NHS operation. Today, over 50% of the hospital beds are in 19th-century buildings. Moreover, despite 800,000 people on the hospital waiting lists, there are fewer hospital beds today than there were when the NHS was founded.
Capital expenditure creates a flow of long-term benefits. Current expenditure, by definition, creates short-term benefits. Clearly, the political preference of the British is for benefits now. Can public choice theory help us explain this preference? Since voters are usually ignorant of the connection between capital spending and specific benefits, politicians cannot look forward to realising the full costs or the full benefits of their decisions. Since a politician is not likely to be in office for very many years, long-term penalties and rewards are largely irrelevant. Democratic governments have a natural tendency to skimp on capital spending.
One of the most remarkable features of national health insurance is the enormous amount of decision-making power left in the hands of doctors. By and large, the medical communities in Britain, Canada and New Zealand have escaped the disciplines of both the free market and government regulation. In the view of Michael Cooper,170 Anthony Culyer171 and many others, this discretion is the principal reason for many of the gross inefficiencies found in the British National Health Service. In addition to the power of GPs and consultants, other producer interest groups also have obtained power and influence. Within the NHS, these include hospital administrators, junior doctors and non-medical hospital staff. The complaint made again and again is that the NHS is primarily organised and administered to benefit such special interest groups rather than patients.
Adam Smith observed that government regulation in the marketplace inevitably seemed to benefit producer interest groups at the expense of consumers. Things have changed very little with the passage of time. Economic studies of virtually every major regulatory commission in the United States have come to the same conclusion: the welfare of producers is regularly favoured over the welfare of consumers.173 Why should we expect the NHS to be different?
To achieve any fundamental change of policy, voters must be informed about what kinds of changes they specifically seek. They must also be organised - at least to the extent that they can communicate to politicians their willingness to withhold electoral support unless their desires are satisfied. But information is costly. Organising a political coalition is also costly and the incentives for any single individual to bear these costs are extremely weak. Producers are in a different position. Since they are working in the industry, they already possess a great deal of information about which policies are consistent with their self-interest and which are not. Their costs of political organising also are much lower because they are relatively few in number and share common interests. Each producer has a much greater personal incentive to contribute to political efforts that protect the interests of producers as a group.
Most British patients grossly underestimate the taxes they pay to finance the NHS, instead feeling that they are getting something for nothing. Public opinion polls have found that 60% of the British public believes that the entire cost of the NHS is met, not from general taxes, but from the weekly payroll tax (called the "insurance stamp").180 In fact, in 1972, when the opinion polls were taken, the payroll tax represented only 8.5% of the total cost of the NHS. Moreover, the worker's nominal share of the weekly payroll tax is only 2/3 - the remainder being nominally "paid" by employers. Although most economists believe that the employers' share of the payroll tax ultimately comes out of wages that would have been paid to workers, very few workers believe that. Most people in Britain believe that the total tax they pay to finance the NHS is about 1/20th of what it actually is! Given this perception, no wonder the British public looks upon the NHS as a good bargain.
There have been successful attempts to privatize public health care programs (for example, in Singapore and Chile), and among less-developed countries there will probably be more (for example, in Colombia and Venezuela). But among developed countries, all serious attempts at fundamental reform have been blocked by the politics of medicine. Any public sector retreat in health care is likely to come about as people seek private sector alternatives rather than through changes at the ballot box.
Our survey of national health insurance in countries around the world provides convincing evidence that government control of health care usually makes citizens worse off. When health care is made free at the point of consumption, rationing by waiting is inevitable. Government control of the health care system makes the rationing problem worse as governments attempt to limit access to modern medical technology. Under government management, both efficiency and quality of patient care steadily deteriorate.
The lesson from other countries is that America would not be well-served by an expansion of government bureaucracy or by greater governmental control over the US health care system. Instead, what is needed is to limit the role of government and allow the private sector to solve our health care problems.
About The Authors
Gerald L Musgrave is President of Economics America, Incorporated, a consulting firm in Ann Arbor, Michigan. A former Research Professor of Economics at the University of Michigan, Dr Musgrave also has written widely on health care and other issues, and is the author or coauthor of several other NCPA studies. He is the chairman of the Health Economics Roundtable of the National Association of Business Economists and served as a presidential appointee to the National Institutes of Health Recombinant DNA Advisory Committee. He is a director of the Mackinac Center in Michigan and chairman of the academic advisory board of the Bahamas Institute of Economic Affairs.
John C Goodman is president of the National Center for Policy Analysis. Dr Goodman earned his PhD in economics at Columbia University and has engaged in teaching and research at 6 colleges and universities, including Columbia University, Stanford University, Dartmouth College, Sarah Lawrence College and Southern Methodist University. Dr Goodman has written widely on health care, Social Security, privatization, the welfare state and other public policy issues. He is author of 6 books and numerous scholarly articles. His published works include National Health Care in Great Britain, Regulation of Medical Care: Is the Price Too High?, Economics of Public Policy and Social Security in the United Kingdom.
Source: ncpa.org NCPA Policy Report #166 December 1991 Executive Summary
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