Finance Healthcare, Not Insurance Premia

Yves here. Jomo’s post summarizes a new study which lends yet more support to the view that inserting insurers into heathcare raises cost without improving results. And as an aside, it can worsen patient outcomes by denying and delaying care, as well as wasting the time of doctors, who should be treating patients, on billing administrative. Please circulate this post to skeptics who have yet to get the memo on the huge deadweight that medical insurance winds up creating.

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at  Jomo’s website

Comparative research on healthcare financing options shows revenue-financed healthcare to be the most cost-effective, efficient, and equitable, while all health insurance imposes avoidable additional costs.

Private Health Insurance

Rejecting the private health insurance option is easy due to well-known US problems. Risk pooling is limited as private insurance only covers those who can afford it.

The resulting ‘moral hazard’ and ‘cherry-picking’ problems reflect the public’s weak bargaining power vis-à-vis healthcare providers and insurance companies.

US health spending per capita is the highest, partly due to additional private health insurance costs. The share of US national income spent on healthcare has risen to 18%!

Such avoidable insurance management costs are quite high, averaging almost 4% more. Consequently, upward cost pressures remain intense.

Yet, despite spending so much, it only ranks 40th in average life expectancy worldwide. Its other health indicators also leave much to be desired.

Hence, greater spending does not necessarily improve health outcomes, and spending more on insurance does not improve health either.

Revenue Financing

Hence, the main healthcare financing choices are social health insurance (SHI) and revenue financing, which enables risk pooling for entire national populations.

After reviewing extensive evidence, the World Bank’s Adam Wagstaff found revenue financing much more cost-effective, efficient, and less expensive than insurance options.

Germany, the only major OECD country heavily reliant on SHI, is second only to the US in health spending per capita, largely due to insurance administration costs.

With insurance premium revenue increasingly inadequate, the government finances the ever-growing funding gap. Rather than being a healthcare financing option for the future, it should be recognised as an atavism, even for highly unionised Germany.

Social Health Insurance

SHI advocates insist it is needed owing to inadequate fiscal means. But budget shortfalls imply a lack of political will. SHI’s claims to raise more money are grossly exaggerated.

SHI premiums are effectively flat or pro rata taxes, making overall tax incidence more regressive. SHI financing is inadequate everywhere and under growing stress due to ageing societies.

Most governments claim to be committed to inclusion and equitable access, but SHI would undermine declared national commitments to the WHO’s ‘healthcare for all’ and the UN SDGs’ ‘universal healthcare’.

Besides betraying these commitments, SHI cannot ensure the needed funding or financial sustainability. Any realistic government should recognise SHI will be politically unpopular.

SHI’s costs and dangers, including the perverse incentives involved, are rarely acknowledged. Employers have minimised their SHI liabilities by casualising labour contracts. Rather than employ workers directly, they hire indirectly, using various contract labour arrangements.

Priorities?

The typical emphasis on curative health services has also worsened health outcomes by neglecting vital public health programmes. By emphasising curative services, many causes of ill health do not get sufficient attention.

Many preventive and public health problems remain neglected and underfunded. Most governments must spend more on prevention, especially to address largely preventable non-communicable diseases (NCDs).

The world needs far better healthcare financing. Various complementary reforms are also required. Instead, poorly sequenced, ill-considered reforms have been the norm in recent decades.

The resulting ‘non-system’ offers poor, weak and ineffective incentives for public and preventive health provision. Meanwhile, potentially lucrative segments have been privatised or contracted out, often to incompetent political cronies.

The UK NHS capitation system successfully transformed doctors’ incentives. Instead of prioritising patient payments, UK doctors are incentivised to ensure the well-being of those under their care.

Recognise Market Failure

Former UK Conservative Party adviser and “non-interventionist market economist” Professor Geoffrey Williams rejects “any [government] intervention … in almost every area of economic activity, but not in health, because health is quintessentially the place where markets fail.

“That is why we use health more often than any other example when we teach about market failure, particularly insurance market failure. We know the health market fails and that we cannot find market solutions to those market failures as we might in other forms of market failure.

“We know that government tax funding is the only real way of providing universal healthcare.” Neither universal healthcare nor health for all can be achieved without adequate revenue financing, even if termed insurance.

Improving Healthcare

Malaysia has low infant and maternal mortality rates and improved life expectancy thanks to simple, low-cost reforms introduced from the 1960s, especially training village midwives to help mothers and babies.

Lowering such mortality is responsible for over four-fifths of increased Malaysian life expectancy over the decades. Now, much more should be done to improve babies’ and mothers’ nutrition for the ‘first thousand days’ from conception to age two.

A ‘hybrid system’ would not work, as it would only provide some public financing to address egregious ‘market failures’. Targeting would be worse, both costly and involving both inclusion and exclusion errors.

With political will, revenue financing is sustainable despite rising costs. We should renew our commitment to public healthcare, not as it has become, but as it should be.