Thursday, 29 May 2008

If it's free, it's not valued...

At a recent dinner, a dear friend explained to me that his views on economics were liberal (in the English sense) but that he viewed the US healthcare system as a failure in that it did not provide universal access to healthcare! The US Medicare and Medicaid programmes do provide coverage but only for retirees and people below the poverty line. He then went to defend the Canadian and Continental European systems as examples of well-run healthcare systems.

As usual, defenders of tax-funded universal healthcare demonstrate a basic misunderstanding of economics (he is a journalist). They view healthcare as a "right" instead of what it is...a transaction which is subject to the same economic forces as any other (supply and demand!). As a consequence, any service which is free or supplied at less than cost tends to lead to shortages and rationing. Both the Canadian and Continental European systems demonstrate such trends in the form of waiting lists. Hence, a patient who requires surgery has to wait for critical weeks to obtain surgery; weeks during which illness progresses and often leads to terminal conditions. It is not suprising, therefore, that many Canadians often cross the border to the US to obtain healthcare rather than be subject to potentially fatal waiting lists.

In Spain, the previous government tried to introduce a one-euro fee for visits to consultants and then rapidly withdrew its proposal after social outrage. One only has to visit a public hospital to witness the queues of patients lining up for imaginary illnesses. Many retirees often visit their consultants once a week- if it's free, why not? Like other "free goods", demand is virtually unlimited, while supply is only forthcoming at the price where it mobilises resources. Witness the recent shortage of water in Barcelona as an example. No doubt my friend would defend that water is also a "right"...which is why there are shortages. After all, someone has to pay for a supplier to offer it. There are numerous studies which show that demand for healthcare falls dramatically when a price signal is attached to it, without any impact on the overall healthcare of users. Thus, catastrophic healthcare insurance (which would cover expenses from USD 2500 onwards, say) would save governments inmeasurable resources to spend on other more useful matters (how about improving productivity?).

The problem with the "catastrophic coverage" system is that, in most countries (including the US), healthcare insurance can be provided by companies as a non-taxable payment in kind to employees. As a result, employees often choose coverage with a lower deductible, given the tax benefit (subsidy) obtained; which leads to higher demand for healthcare as well as higher (pre-tax) premiums. Thus, when a person loses his/her job, the cost of maintaining former insurance (without the tax benefit) can be prohibitive. However, the cost of catastrophic coverage is reasonable (e.g. USD 29/month with a USD 250 euro deductible and capped at USD 1 million for a 30yr old non-smoking female).

Tax-funded healthcare systems, therefore, tend to lead to lower quality and higher cost delivery of healthcare. It also leads to disincentives to care for one's health (why should I stop smoking or eating fatty foods if the consequences are paid by everyone). In my opinion, compulsory catastrophic insurance combined with voluntary supplementary care would lead to a more efficient allocation of resources. If it's free, it's not valued...