Wednesday, January 18, 2006

The Two Most Important Things You Need to Know About "Public Versus Private" Health Care

Public discourse over the state of our health system has repeatedly stumbled over the issue of "privatization" and how it relates to the "unsustainable" situation of escalating costs and growing waiting lists. Some point out that Canada already has "private" clinics, that Paul Martin and Jack Layton have both used them, and that most doctors and even most (not-for-profit) hospitals are already "private" actors, so why get worked up about greater privatization of delivery of health services? Now that the Supreme Court has ruled that in certain situations banning private health insurance for medically necessary services is unconstitutional, and large parts of the non-medicare health system are already being purchased privately, what could be wrong with allowing people to purchase better health care? Is the whole "public versus private" debate much ado about nothing? To understand why it is not, voters (and governments, and judges) need to grasp the implications of two fundamental distinctions: first, between financing and delivery; and second, between medicare and non-medicare components of health care expenditures.

Financing versus Delivery. This distinction is recognized as fundamental by everyone who studies health policy, but its implications weigh perhaps most heavily in the analysis of the Kirby Senate Committee Report on health care reform. Kirby states that a public monopoly (single-tier) health insurance for medically necessary services is essential to the achievement of both efficiency and equity because of the gains from larger scale; simpler administration; restrictions on the impact of inevitable market failures; and better cost control. These gains are so significant that Harvard Professor David Himmelstein has estimated that adopting a single-payer system in the US would free up sufficient funds to allow universal coverage in a country that now has over 30 million uninsured people. Kirby, however, does not see any similar advantages for public delivery: indeed, he sees competition in delivery (either within the public sector or in the private sector) as crucial to the sustainability of the system. This is another version of the "governments should steer, not row" philosophy that underlies much contemporary policy that goes by the name of New Public Management, Smart Regulation, et cetera.

The Kirby view strikes me as being quintessentially liberal--and Liberal. It is certainly true that more private and competitive health care delivery will not necessarily destroy our cherished medicare system. The heart of medicare is single tier financing of medically necessary physician and hospital services, not the idea that healthcare providers should be public employees. But the professed open-mindededness of the Kirby approach --"we are completely neutral as to whether delivery is done by private actors, interested only that competititon be allowed and efficiency be attained" runs into at least a couple of objections. The notion (endorsed by the B.C. Medical Association) that private, for-profit clinics would necessarily spend public monies more efficiently is highly questionable. Researchers at McMaster University released a detailed study in 2004 of for-profit hospitals in the US indicating that services cost 19% more in for-profit hospitals than in non-profit ones and that health outcomes were worse on average in for-profit facilities. Furthermore, trade policy analysts generally agree that the greater the degree of privatization and marketization, the greater the likelihood that health care measures will fall outside of trade treaty exclusion clauses for public services and therefore be subject to NAFTA and GATS/WTO obligations. These obligations could make reversing privatization prohibitively expensive--either in terms of financial compensation to private actors under NAFTA, trade sanctions under the GATS, or both. In short, there is a danger that privatization could get "locked in", whether it is in the public interest or not.

These considerations do not mean that competitive or for-profit delivery is always wrong. But in my mind they should create a presumption in favour of healthcare that is public or not-for-profit in how it is delivered, and not just in how it is financed. If that presumption is to be rebutted, it should be on a case-by-case basis in terms of demonstrated cost savings and efficiencies for the health system as a whole, without harm to quality of service or equality of access.

Medicare versus Non-Medicare. It is remarkable how seldom combatants in health care debates take the trouble to distinguish between different categories of health care expenditure, or to even specify what they mean by "medicare". It turns out to matter very, very much. Indeed, to use the term "medicare" as a synonym for health expenditures or even for public health expenditures is extremely misleading. Between 1993 and 2003 total annual health expenditures in Canada grew by about $50 billion--by 69.8 percent, as compared to 66.8 percent growth in GDP. But if we break these aggregate figures down we see a surprising result. If we reserve the term "medicare" for the two major founding programs which came into being in the 1960s, that is, hospital services and physician services, we find that their combined cost as a share of GDP actually declined over the decade--from 5.11 percent to 4.29 percent! The big increases occur in such categories as "other professionals", "other institutions", "prescription drugs", "capital", and "public health and administration", according to the Canadian Institute for Health Information. As Hugh Scott, the former executive director of the McGill University Health Centre, puts it, "it is difficult to see what is unsustainable about medicare funding as viewed from this perspective".

Indeed, when we look more closely at the categories of healthcare expenditure that are growing fastest, we find that they are to a large degree private. Compared to other countries, Canada is distinguished by the degree to which classic medicare (hospitals and physicians) is public, while the fastest growing items of expenditure, e.g. "other professionals", and to a large degree "drugs", are private. That makes it prima facie very difficult see how further privatization--whether of funding or delivery, and whether of medicare or non-medicare items--can be the panacea for reining in "unsustainable" cost increases.

Indeed, medicare has adapted quite well to technological and demographic change, although it has been temporarily compromised by under-funding and under-supply of health care professionals. A decade ago, the concerns about "waste" and "over-servicing" in the context of budget-cutting at the federal level led to major cutbacks in hospitals and decreases in health professional enrolment opportunities. The resultant personnel shortages are the root source of long current waiting lists. Fortunately, current efforts to increase the supply of health professionals, coupled with an effective waiting list management strategy, should mean than by the time the first baby boomers turn 65, most waiting lists will have been greatly reduced or eliminated.

The real question for the future is not whether we can continue to afford the publicly funded medicare component of our healthcare system, but whether we can afford the privately funded, non-medicare components of that system.


me said...

Mark, thanks for making some clear distinctions that cut through so much of the raucous debate. I’m surprised by your figures of a decrease in hospital and physician cost as proportion of GDP. So it is the add-ons that seem to be driving upward costs.

Given the Supreme Court decision and the terms of NAFTA, it seems that the best respond is the one you have identified: to piecemeal give up those medical procedures that are proven to be as good and cheaper in the private realm.

Regarding the monopoly on financing, one obscure but large cost of the public system you didn’t account for is the “private costs of public funds” associated with tax avoidance. Given this cost, it makes sense to restrict the monopoly on financing to not extend far beyond the original areas of service. An obvious exception would be for new services and treatments where the scale economies make it much cheaper.

The NAFTA induced problem of imposing large reversibility costs, seem to rule out a sane policies: letting the private sector provide the new and dubious technologies initially and then over time pulling the proven services that can be cheaply provided into the public sector.

Mark Crawford said...

ME: Many Thanks for adding a little economic sophistication to my blog! Yes, isn't it interesting that ostensibly liberalizing trade law actually counts AGAINST otherwise useful experiments in market-based health reform? That was the "ironic" conclusion referred to in the conclusion of my article in Canadian Foreign Policy. --MC

P.S. The sources for the surprising statistic on decline in medicare costs as a share of GDP: Canadian Institute for Health Information, National Health Expenditure Trends--1975-2003. Calculations were by Hugh Scott in Policy Options, August 2004, p.60.

Ted said...

I found your paper interesting and informative, Mark.

I have been looking at the issue of rising health care costs for some years now, but had completely overlooked the reduction in core costs that you discuss. However, I don't know that the solution to the problem is necessarily to cut loose existing private provision as ME suggests.

Private institutions, for example, are largely those such as nursing homes and group homes. There is every reason to believe that these services could be provided more cheaply if they were publicly owned. Cutting them loose from public finance, as ME suggests, simply puts people either in acute care beds or on the street. The effect of withdrawal of such services from public finance would not be neutral for the public sector.

Similarly, the partial nationalization of drugs has given Canadian govenments considerable leverage of drug prices. That is why Americans are ordering their drugs from Canada. Rather than cutting the system loose, the more effective solution would appear to be more, rather than less, nationalization.

Although you have referred to the cost of health care as a proportion of GDP, others have drawn attention to its importance as a proportion of public expenditure. There is no doubt that the proportionate cost of health care has been been growing in real terms. What is more, a projection of this proportion suggests that it will consume all revenues within the next 20 to 30 years. However, much - perhaps all - of this dilemma is the result of the overall shrinkage of government expenditures in real terms.

The effects of opening the core services to private provision are already well-documented in Britain. There, public and private services have coexisted since the beginning of the National Health Service. These effects have been well-dcoumented for half a century. Richard Titmuss [Essays on the Welfare State (1958&1963)Unwin] quite clearly showed that the two-tier system results in the public sector subsidizing the private sector. That is, in a two-tier system, the private sector cannot sustain itself without the public sector.

People in the United Kingdom are able to purchase priority service only if physicians are able to 'make up' their income from the public sector and/or to work in public sector hospitals. Very few physicians can afford to rely exclusively on private patients.

Finally, I have been unable to find any evidence that health care of any kind has a significant effect on mortality or morbidity. Longevity showed exactly the same rate of increase after the introduction of hospital insurance and medicare as it did before. (The same is true of the introduction of streptomycin and penicillin.) However, hospital insurance and medicare do represent an increasing transfer of income from rich to poor.

Poor people die young. They lack money, not doctors. However, as long as both rich and poor believe that they need medical services to survive, they will try to buy them. Of course, those costs will represent a much higher proportion of the income of poorer people. As long as these services are publicly funded, they will allow poorer people the freedom to buy more and better things that really keep them healthy - food, shelter & heat. And that is what it is really all about.

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