President of the Canadian Labour Congress, Ken Georgetti, recently had an article in the Financial Post criticizing a movement towards a greater role of the private sector in health care. Since neither an editorial nor letter to the editor has been published to refute the article, I shall take on the task myself.
Mr. Georgetti begins his critique with the standard bromide that Canadians get better health outcomes and broader coverage at a lower price than Americans and attributes this to our universal public insurance system. Perhaps with the hope that nationalist sentiment and economic ignorance will trump facts and reality, the author limits his comparison between health care systems to that of Canada vs. America.
If the author wants to make a proper comparison by upholding full context, why does he not compare Canadian health care to health care in other countries? Answer: because the facts tell us that Canada spends more on health care than any other industrialized country providing universal access, save Iceland and Switzerland (both of which have a private tier), yet ranks low in measures of access to care according to How Good is Canadian Health Care? An International Comparison of Health Care Systems (2005 Report) released by The Fraser Institute. Surely, another unsavory revelation in the Fraser report is that all of the countries that outperform Canada have some form of private payment system in place.
Aside from the inaccurate and unconvincing comparison between the US and Canada, the proposition to introduce private health care in Canada is to provide something that is severely deficient in the US: free market mechanisms and deregulation in the delivery of health care. Contrary to popular mythology, the United States has a heavily regulated health care system. The heavy hand of government regulation in US health care is evidenced by the following: health insurance is provided by employers partly because of government regulation; health insurance for the poor and the elderly is government run; under medicare, government imposes wage and price controls on doctors and hospitals; private health insurance is heavily regulated; governments limit the number of doctors; the Food and Drug Administration has monopoly power on the licensing of prescription drugs. [For further discussion, see "Myths About US Health Care" by David R. Henderson in the book Better Medicine, edited by David Gratzer, ECW Press: 2002].
In the article, it is stated that our public system should be improved in many ways including: “[increase investment in] primary care to expanded recruitment of health care professionals, to greater investment in skills and new technologies, to more sophisticated wait-list management.” This statement is followed by the assertion that, “we do not need to add a profit dimension or compromise equal access in order to get the changes we need.”
These statements expresses a failure to understand the role of profits in a market economy.
Why does Canada have extensive waiting lists, recruitment problems, and poor investment in skills and new technologies compared to other industrialized countries?
In a market economy, profit creates the incentive and the means to improve production. Long waiting lists, shoddy and outdated technology, and labour shortages are a consequence of diminished capital ! in other words, these are problems pertaining to factors of production. It is only within a market system that capital accumulation is possible. Capital, in the form of profit is therefore the cause and consequence of expanding and improving production. In a free market, profit is driven by the ability of the business to serve customer demand; or in the case of health care: patient demand. Without the profit and loss mechanism, resource allocation towards expanding and improving production does not exist, or at least becomes very difficult.
If my analysis is unconvincing, ask yourself, “Why is it that I can walk into an electronics store and purchase a vast array of technological devices, many of which didn’t exist a decade ago, and watch prices falling on a monthly basis? On the other hand, as technological advances happen in health care, I’m told that health care is becoming more and more unaffordable for me?”
After assuring us that public health spending has remained unchanged since the mid-80s, the author denounces the apparent skyrocketing prices of private health insurance. According to the Canadian Institute for Health Information, private health insurance now makes up 12% of health care spending. This is the alleged case against private health insurance: vis-Ã -vis the public system, where costs have remained stable relative to national income, the private system is seeing rapid increase in costs associated with private health insurance.
Before embracing the author’s argument, consider the following statements contained in the article:
“About 90% of this private health insurance is provided by employers, and 57% of all employees ! mainly unionized workers and those with large employers ! are covered by an employer health plan. Already, a majority of private sector workers are not covered and it is very difficult and expensive for individuals and small employers to access private insurance.”
“A study for the CLC shows that the cost of employer health plans now averages more than 5% of a worker’s annual wage, with the majority of that cost accounted for by drug coverage. This cost can be much higher in good plans, especially if retirees are covered.”
“Health benefits as a share of wages have doubled over the past decade and will likely increase even faster over the next. Bargaining over health benefits has become more and more difficult in recent years because of fast-rising costs.”
So public health care spending has allegedly stayed the same over the past decades, yet there has been an increase in wait times (among many other ailments in our public system pertaining to the accessibility of health care). Correspondingly, there has been a progressive increase in costs associated with private insurance plans provided by employers (usually due to union or government mandates). What can be derived from the preceding statements? They are both examples of third party payment systems and the negative consequences that arise in the absence, not the presence, of a market system.
The problem with third-party payment systems are that the consumer does not directly see the cost of the product or service he is consuming. Instead of paying out of pocket for a bill ! such as when someone takes their car to a mechanic or their cat to the vet ! every time the consumer uses the service, it has the appearance of being free.
What happens in a market in which a product or service is “free” such as in Canadian public health care? The absence of a price system leads to an inefficient use of resources. The absence of individual economic calculation in the decision to consume health care services leads to shortages, as evidenced by waiting lists and shortages in technology and labour. Since health care bureaucrats and politicians lack the omnipotence and omniscience they seem to anoint themselves with, they can never keep pace with shifting and increasing demand for health care ! hence the perpetual shortages in technology, labour etc.
Consider now the cost of employer health plans that average 5% (and rising) of an employer’s wage, most of which goes towards pharmaceuticals. It sounds like a hefty premium on health insurance but only demonstrates economic laws in effect. An employee who goes to a doctor (I know this from first hand experience) without a benefit drug plan does not get the smorgasbord of drug options offered by a doctor who knows you have a drug plan. A dentist (I also know this from experience) who knows that their patient does not have a dental plan does not push appointments every 6 months along with endless suggestions such as braces, wisdom tooth removal, or various cosmetic procedures. A person without an eye-care plan does not purchase $500 glasses because they know that they get half the cost covered every two years. An individual without benefits coverage does not deem it necessary to purchase $200 orthodic insoles “just because he can.” Never mind the endless array of questionable coverage offered by private employer insurance such as chiropractics and massage therapy ! hardly life saving and essential therapies.
An increase in consumption of health care leads to an increase in prices for health care that most people, if they had to pay out of pocket, would think twice about consuming. A five percent deduction off of a paycheck might sound like an expensive premium, especially when it is deducted coercively, as per union policy. The consequence of this is that employees want to get their “fair share” of benefit from health premium payments and will consume health care in ways that are inconsistent with what would happen when prices are a direct factor in consumption.
To fully concretize my arguments, consider the following: imagine the government of Canada decided to create a “Universal Access Grocery System.” Under this system it is deemed that, since food distribution is such an essential service, and no person should suffer from hunger, no Canadian should have to pay for his own groceries. Imagine what would happen as people decide to do their weekly grocery shopping. Faced with the choice between shopping at a high-end store like A&P, or shopping at a budget store like No Frills or Food Basics, people would naturally choose to shop at A&P. People would not want to settle for ground chuck or rump roast when filet mignon is also covered under “universal access.” The obvious consequences would immediately be shortages of various luxury foods that would be more expensive under a market system. Soon enough, shortages would appear among many other foodstuffs: shortages of mangoes and star fruit would precede shortages in more basic goods like bananas and potatoes. Before long various pressure groups would demand “more funding” and the government would face increasing pressure for “slashing the grocery budget” as costs spiral upward into the stratosphere. Now that grocery stores no longer operate under the profit motive and instead operate according to a yearly budget, there is no incentive to be efficient and capital accumulation becomes impossible. Stores that operate over-budget due to inefficiencies and poor management are rewarded with increased funding while stores that operate under-budget are given no incentive to continue with efficiency due to fear of losing that funding during subsequent fiscal years. Now that capital accumulation is made impossible, there are no resources to invest in improving technology, raise wages etc.
As another example, imagine the government or unions mandated that employers pay for universal coverage auto insurance. With this universal coverage, car owners could go to their local mechanics and ! since it is unfair and unjust that people should have to pay out of pocket for their car repair and maintenance ! all auto work is universally covered. The logical consequence of this would not only be the rapid rise in demand for regular auto work, since every job including oil changes and tire rotations are covered by employee coverage (a third party payment system), the price system and the competitive environment would be obliterated. The immediate consequence would be a rise in prices associated with everyday auto-work — but it would not be noticed directly, it would be detected by the rising costs for auto insurance premiums. What incentive for individual rational economic calculation exists when everything pertaining to auto-work is “free”?
Substitute these two scenarios pertaining to groceries and auto repairs with health care and you have an explanation for why health care costs are rising as quality continues to diminish.
Contrary to Ken Georgetti’s idea, the mechanisms of the market cannot be evaded. The free market provides improving products and services and increasing efficiencies, innovations, and serves the needs and desires of customers (patients in the context of health care). To attribute the failures of employer paid health plans to the proper functioning free-market amounts to attacking a straw man. The proper way to move forward in health care policy begins with radical deregulation and allowing the proper flourishing of a free market ! as long as we can get over the fear and demagoguery surrounding the word “privatization.”
Ken Georgetti’s Article can be found on the Canadian Labour Congress website:
http://canadianlabour.ca/index.php/Opinion_Editorials/902
