Trade-offs in healthcare systems

Los Angeles, April 24th, by Davi Marco Lyra Leite

My favorite economist, Dr. Thomas Sowell, defends that everything in life – and especially in public policies – is based on trade-offs. Usually, we have a number of different options and we weight them using certain standards, to evaluate which one is the best before we implement the result. With healthcare systems, this could not be different. However, sometimes it is trickier to evaluate which is the best option, because of political impacts and often the other options of models are applied in completely different conditions and seem to give good results, but would totally fail in our context. We must remember that healthcare is a scarce resource, as it presents limitations in viable and available technology, a finite number of professionals, limited infrastructure, among other things. In this text, I will discuss a little about some economics behind the different types of systems and of the choices, focusing on hidden aspects that arise when selecting a model.

Los Angeles County Hospital (source: LA Times)
Los Angeles County Hospital (source: LA Times)

From medical offered by churches in mid-1800’s to socialized medicine in Cuba, and the health insurance industry in the United States, every country has its own healthcare system and its idiosyncrasies. In addition, the US cannot adopt the same model as the UK or Sweden or Singapore because of a simple fact: they are different countries. The same is valid if Brazil is thinking about switching from the current failed socialized medicine to the American system. However, are there any points that can be used to evaluate which system is more consistent or presents better results? This is a topic for multiple studies – and tons of thesis in public health and economics -, and I talk about some trade-offs usually done in the different models. Nevertheless, an important point is that everything will always rely in cultural aspects, opportunity cost and desirable outcomes.

Starting with the complete socialized medicine system, similar to the Cuban or the Soviet. It is a model where both areas are concentrated in the State: payment and service provision. In addition, private entities cannot participate in the “market”, which is the biggest difference to the British, Scandinavian and Brazilian systems. In this case, we usually see the goal to offer the same standards of healthcare to everyone regardless of economic power, social status — a noble objective, in which people are willingly to pay more in taxes (or have reduced income) in order to allow others to have access to the healthcare. The government defines which services it will provide, hires the professionals, buys the supplies, builds the hospitals, pays for medicine, etc. The public administration also concentrates all information from medical services in a centralized system, and tries to estimate what is necessary for a given area based on the statistics. Theoretically, this is an interesting model due to the presumption that the government will have all the data to foresee what is in need for a population, and the centralized single buyer will have strong economic power to reduce the associated costs of care — being able to impose price controls. However, when this kind of system was put in practice, the standard of healthcare usually degraded along the years, since it was not able to follow the technological advances that were happening outside. Additionally, this kind of healthcare provision usually generates long waiting times, corruption and high selection of which patients are treatable and which should not enter in the system. Furthermore, it only affects a small population – and has little to none global implication -, and usually implicated in more interference of the government in someone’s life – since everyone is paying for “your health”, the State is entitle to decide few things you should do to reduce the social costs. Another point worth noting is that the standardized care is not a reality, and the politicians and friends of the powerful people have access to better hospitals, equipment and professionals than the rest of the people – also, corruption is usually widespread with people “buying” their spots in line with food or money. One way to see the phenomenon of care degradation is comparing the Cuban health indexes before and after the complete socialization of the medicine – a country that was among the top 15 in the child mortality rate dropped to the 33rd position. In addition, Cuba relies on masking the statistics to pretend to be offering good services (abortion/number of newborn children rates are among the highest in the world and children who die after 6 months of age are not computed in the statistics of child mortality). Lastly, there is the fallacy that the model is free: when you pay high taxes — or in the Cuban case, when the government decides your payment –, citizens are already paying for the healthcare, even though you are not seeing it (and usually the price is more expensive than the market alternative with a similar output).

NHS Hospital (from Getty Images)
NHS Hospital (from Getty Images)

A different kind of socialized medicine system is seen in Europe, with its biggest exponents in the UK (the National Health Service – NHS), and the Scandinavian Countries. The biggest difference to the Cuban model relies on the fact that these European models allow the existence of a complementary private medical centers and services. Some particularities worth noting are the decentralized characteristic of the Swedish and Danish healthcare models and the British pride of the NHS. The decentralized administration of the Scandinavian healthcare organs, where the counties have more decision power, enables a better understanding of the communities in which the medical centers are inserted and a more effective evaluation of the need in that area. The British NHS is usually praised by the population, even being promoted during the London Olympics, however, it receives some bad criticisms by the press and has experienced some reforms. One interesting point is that almost all successful experiences with socialized healthcare happened in countries with small population (Denmark, Sweden and Norway combined have less than 21 million people, and Cuba has almost 12 million). Moreover, in bigger countries the decline of care is faster, for example, the UK has dropped enormously the number of beds and physicians per group people after the implementation of the NHS, and is using the private sector to operate more contracts in order to reduce system’s cost.

Toronto General Hospital (source: University of Toronto website)
Toronto General Hospital (source: University of Toronto website)

The second kind of system is similar to the Canadian, Australian and New Zealander: single payer, multiple providers for a number of specialties, and complementary private care. This is based on a monopsonistic assumption, where the single payer can dictate the terms to its suppliers, and therefore reduces the costs of services. It is something similar to price control by central government, therefore tends to present the same kinds of problems. This model has the advantage of enabling multiple kinds of care, which implies in better treatments for the patients, with sometimes the use of state-of-art technology and procedures. In addition, the hospitals — which are non-necessarily public — can compete for the economic resources, while innovating to offer better treatments and standards. Furthermore, since not everything is publicly funded, the costs to the population are lower than in the full-socialized model. This kind of healthcare model is more cost-effective than the fully-socialized medicine, presenting as its biggest advantage the opportunity of innovation by means of competition and research, adding also the possibility of private agents to participate complementing the services. For a relatively small and urban population (Canada has less that 36 million people, with more than 80% living in urban areas), this system can work really well, offering good standards of treatments. In addition, it is able to deal until some point with the cost of opportunity of not allowing the market to work. On the other hand, it still has the same problem as the Cuban system where a central government has to decide which procedures are payable with taxpayers money, therefore presenting a lag between some innovation and its full implementation/coverage. In addition, due to its monopsonistic nature, the model goes against the market rules for supply and demand, which, in the long run, creates a shortage in the number of physicians, long waiting times for procedures, consultations and even in the emergency room. The comparison with a price-controlled economy makes sense, because the agents do not have the right incentives to promote change, since they are not well rewarded for it. Hence, even though this system can promote good care, it still relies on criteria that are not necessarily “fair” to decide who should get a treatment and when — generating long lines for waiting a simple exam like an MRI. Finally, it can also impose burdens on immigration (restricting people to immigrate), and freedom to people decide what is the best option for their health and lifestyle.

The third system is comprised by a number of private insurance companies and private/public hospitals competing for clients (patients), offering different standards of care depending on the payment, combined with tax-exemptions and some sort of government financing. This is the core of the current American healthcare system, after the implementation of Medicare and Medicaid (1965), and the regulation of employer-based health insurance (1946), as described by Milton Friedman. The Affordable Care Act (Obamacare) does not change intrinsically this model, however it regulates even more the medical services and increases the mandatory coverage of health insurances, resulting in increased premiums in more than half of the States only few years after passed into law. This model presented a skyrocketing increase of costs in the last 70 years, surpassing all counterparts at OECD. One of the advantages of the US model is the fast implementation of innovative measures. Even with all FDA regulations, it is possible to work with health insurance companies and guarantee that a given new technology is covered. However, sometimes it will take a while before it is also covered by government, due to bureaucracy and lack of incentives for improving the system.

Medical bill (source: Georgia watch)
Medical bill (source: Georgia watch)

The American system, as described by Sanjit Mahanti in his presentation, is based on a cost-plus ineffective model, where many bureaucrats are present to negotiate prices (increasing the complexity and the costs). There is always a lag between modifications in healthcare facilities and the coverage by government, and lack of incentives to make it more effective. On the other hand, it enables physicians to have a fulfilling career where they can be rewarded financially according to their efforts, and it also promotes great innovation in the technological and pharmacological fields — usually the countries with socialized medicine rely on American discoveries to keep pushing forward their quality of treatment. Additionally, the profits of the companies are sometimes reversed in community and low cost medicine, foreign aid (donations of medicine for poor countries and humanitarian actions by physicians abroad). Furthermore, there is a network of entities offering medical care to those who cannot afford it — even though the coverage is theoretically reduced compared to socialized medicine systems, it still exists. Therefore, in some sense, the high costs are compensated with a wider row of services that does not need government to run.

All systems presents interesting and favorable aspects, and drawbacks. As a scarce resource, healthcare cannot be totally universal without some loss in quality, increase in waiting time, or lack of innovation. There is no model able to address all the problems at the same time. Nevertheless, they can be more effective than they currently are in the US and around the globe — especially without the problems of corruption and mismanagement. Therefore, it is a matter of the population to choose what they want, but understanding that there is no perfect option, and we always need to evaluate the cost of opportunity of choosing a system before adopting it.

Personally, I agree with Dr. Friedman and his fellows from the Chicago School who advocate that healthcare should not be considered a special market good, and that people know better what they need than a bureaucrat seating in a desk thousands of miles away. I am extremely skeptical with someone being able to control a reality far from his/hers, especially because I come from a country with a socialized medicine system, but everyone wants to get a health insurance to stop relying on public hospitals — therefore, the population pays twice for healthcare: with high taxes and private insurances. Even with the best and noblest intentions, an economic agent does not have all the information (it is impossible to do so) and cannot work properly to foresee everything in the market. I believe that only some sort of universal catastrophic insurance could be provided, considering that other aspects related to health are already part of the government realm like sanitation, pollution control, healthcare regulations. However, people should be able to freely choose their healthcare agents (hospitals, physicians, insurances) — knowing that sometimes they will not be able to get everything they want –, and negotiate the prices without having someone deciding what is fair or not. They can buy other sort of insurances in order to spread the costs among all payers, but this should not be mandatory. With these measurements in practice, the system can probably be as effective as the other markets — and better suited to the American reality than the socialized versions seen in Europe and Canada. In this reality, innovation would be rapidly absorbed, people would see reduced costs of care. In addition, constant incentives of paying attention to the quality of treatment would be present — not only by suing bad professionals, but with providing variable outputs depending on the excellence of care. Finally, people would care for people without relying on an oneiric institution called State to do so — as the founding fathers of US envisioned happening.

(This article was written as an assignment for the Class BME 566b)

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