1 Journal of Public Health Medicine Vol. 19, No. 1, pp Printed in Great Britain Health care reform: who's selling the market, and why? Robert G. Evans Keywords: health care reform, private markets, income redistribution, conflicting interests '...fundamental economic principles... put efficient, competitive health care markets in the same class as powdered unicorn hom'. 'Health care without perverse incentives.' Scientific American 1993; 260(1): 109. What role is there for private markets in health care? Should we 'roll back the frontiers of the state', and unleash the forces of the marketplace to reform our health care systems? Is this the solution to the health care 'crises' that are alleged to threaten both the health and the wealth of populations throughout the developed world? Such questions are now intellectually fashionable, but they replay ancient debates that date back to the beginning of this century at least. There is little if anything that is really new in their current form. The interesting question for today is rather: 'Why are these old ideas coming back?' Why are such issues raised at all? After several decades of experience, carefully reflected upon, in Europe, North America, and throughout the developed world, we can now be pretty sure that efficient, competitive markets for healdi care do not and cannot exist. Their advocates are selling powdered unicom hom. So why are they getting a hearing? Of course, if you are determined to buy powdered unicorn hom, you will be offered any number of boxes of various powders with that label. Private markets in health care are very real, and could easily be expanded. But they bear no relation to the highly stylized and hypothetical markets that economists spend their time studying. Indeed, decentralized voluntary exchange among large numbers of fully informed transactors does have certain attractive features as a way of organizing economic life. But far too many economists, when they hear the familiar words 'market' or 'competition' or 'price', assume that what is on the label must also be in the box. They then exhibit the same conditioned responses as Pavlov's dogs. As the contents are not in fact described by the label, it follows that economic theory can provide no a priori support for private markets in health care. Nor can one draw inferences from experience elsewhere in the economy. Both pillars of the common arguments for the general superiority of the private sector are missing. Failure to grasp this basic point results in a good deal of confusion in the discussion of 'the role of the market', as the advocates of the abstract and the connoisseurs of the concrete talk past each other. But the fundamental forces driving the current pro-market agenda lie elsewhere. None of dus is news to those who make dieir livings in the health sector. In every country, and long before universal public funding, private firms and professional organizations had succeeded in acquiring very specific forms of state regulation to suppress the normal operation of the marketplace. These interventions, however, have become so much a part of die landscape that most market advocates are now oblivious to them. Most obviously, the makers of Pharmaceuticals (and medical equipment and devices) have sought and received extensive patent protection for their products. The police power of the state is used to suppress would-be competitors. Professional groups have likewise been able to reserve the sale of particular products or services exclusively for their members - possessors of the requisite license. Unlicensed competitors are declared to be criminals. Both restrictions represent overt barriers to entry by competitors; more subtly, they provide means to co-ordinate provider behaviour so as to protect market share and hold up prices. Private insurers, in a number of countries, receive substantial public subsidies through the tax expenditure system. (Employees are not taxable on premiums paid on their behalf by employers, even though these are deductible by the employer.) This subsidy has long been criticized (especially by economists) as both inefficient and inequitable, and it is. But the criticisms have no discernible effect The point of these examples is that private interests in health care have never sought, and do not want, 'efficient, competitive markets'. Instead, they have argued that the public interest is better served by state intervention - regulation and/or subsidy - under their direction and control. And there may well be a public interest involved; but what is certain is that their interests are served in this way. Centre for Health Services and Policy Research, Room 429, 2194 Health Sciences Mall, University of British Columbia, Vancouver, BC V6T 1Z3, Canada. Robert G. Evans, Professor of Economics This paper was commissioned by the Editors. Oxford University Press 1997
2 46 JOURNAL OF PUBLIC HEALTH MEDICINE Insofar as the extension of private markets is supported by 'the supply side', therefore, and not merely by academic economists with tenure, we can be confident that the objectives pursued are private, not public. Its advocates have a very shrewd notion of what is really in the box, and what it will do for them. Two relationships are fundamental to understanding the position of those who are paid for health care, either directly as care-givers, or indirectly as managers, as financiers, or as producers and distributors of drugs, equipment and supplies. The first is an accounting identity; expenditure on health care is exactly and precisely equal to incomes earned in health care. Indeed, these magnitudes cannot not be equal. The incomes may be professional fees or wages, the commissions of an insurance salesman, or dividends from a drug company, but in total they equal expenses. Thus those who are paid for health care do not and cannot share a general public interest in expenditure control. They may for political reasons participate in public rhetoric about management and cost containment, but the policies they recommend will always lead toward higher costs. More (money) is always better. But second, it is not possible tofinancea modern health care system wholly or even primarily through private markets. In all systems the bulk of funding comes, and must come, from governments. These two basic realities place governments and providers on a collision course. Slow growth and general fiscal problems have in recent years forced most governments to try to control their spending. Expenditures on health care, directly or indirectly, are now a major part of public budgets. By definition, however, expenditure restraint represents control of health sector incomes - lower incomes, lost jobs, or frustrated hopes for expansion. Those who make their livings from health care are thus in a profoundly ambiguous position. Without the central role of public funding, the health care sector in all countries would be much smaller and its participants less well paid. On the other hand, in the present fiscal climate more private money to supplement increasingly constrained public funds seems to be the only way of keeping health care incomes and market opportunities growing. Indeed, one might be able to use an expanded private sector as a political lever to force more money out of the public sector as well. Unlike the accounting identity, however, die statement that in the modern world health care cannot be to any significant degree privately financed does not derive its validity from the laws of arithmetic. It is a generalization from experience, including but going beyond the observation that in all developed countries most health care funding does come from me public sector. The most important observation is that the one great national exponent of privatefinance,the United States, does not in fact practice what it preaches. I infer mat it cannot The impression that the United States has a predominantly private system is sustained by the fact thatroughlytwo-thirds of the population reports private health insurance as their primary source of coverage. But these are almost entirely groups of employees and their dependants - the healthiest members of the US population. Basic underwriting principles force private firms to seek out and insure low-risk individuals, and to avoid those at high risk of use and cosl The tax expenditure subsidy further encourages employment-based coverage. The high-risk members of the population - the elderly, the poor, the unemployed, those in special needs categories - are covered by various public programs (or not at all). Public expenditures have been increasing over time as a share of the total; by now they account for about 45 per cent. Private insurance, by contrast, pays for only about 33 per cent of total health care costs, and out-of-pocket payments make up about 18 per cent. However, the tax expenditure subsidy now amounts to nearly 10 per cent of total health spending. If this is removed from private insurance and added to public sector contributions, public expenditure plus foregone revenue accounts for well over 50 per cent of US health care spending. Private insurance, net, is reduced to about a quarter. Another way of looking at the same point is to compare the United States with Canada, where hospital and medical services are fully covered for the entire population out of tax revenue, without user fees. Public expenditure (per capita) on health care is now higher in the United States than in Canada. Although the public share of total expenditure is lower, that total is much higher, so the US public sector is more expensive. (In 1994, public sector spending on health care in the United States was estimated at $1556 per capita, compared with Canadian spending (in $US) of $1300. As a share of GDP, Canadian public spending was 70 per cent, higher than the US at 61 per cent, but if the tax expenditure subsidy is included, the US ratio is about equal to Canada's.) Despite strong ideological predilections, therefore, and while presenting itself rhetorically as having a private system of health care finance, the United States has in fact evolved a predominantly public system. The predominance is not as marked as in other developed countries, but it has been growing steadily. This growth has been forced by a very basic fact Most health care is needed and used by a small proportion of the population. Again in the United States, 1 per cent of the population accounted (in 1987) for 30 per cent of all expenditure, and 5 per cent for 58 per cent The lowest using half of the population, by contrast, accounted for only 3 per cent And the characteristics of the high users are known - they are typically elderly and chronically ill, and many are poor. They cannot pay for their own care, and they cannot buy insurance. A truly private marketplace in health care funding thus requires that the poorest and sickest in the population be excluded from access. People would in fact die, possibly in significant numbers, because they could not afford the care they needed. No society has found this acceptable.
3 HEALTH CARE REFORM 47 The real choice is between an explicitly public, universal system of financing (with or without a private rump), or a cobbled-together mixture of public and private mechanisms. The latter option yields a system heavily based on public funding, but without a corresponding system of public regulation and control. Only the United States, driven by ideological conviction and political necessity, has gone down this road. The important, and crystal-clear, message of the last three decades of international experience is that it leads to very poor results. The US health care system scores relatively badly on every dimension and from every perspective: public satisfaction, measured health outcomes, overall cost, efficiency, coverage, equity of access, equity of finance. One could rehearse in some detail the supporting evidence, but the broad outlines are very familiar to any student of health care systems. Nor are these merely the jaundiced cavils of a 'Yankbashing' foreigner. US analysts have produced the international survey results that show the population in the United States to be the least satisfied with their health care system (not their own health care), and have supported the development of comparative cost data. USresearchershave documented the size, health status, and care use of their uninsured population, and the extraordinary administrative costs of their insurance system. And it was the widely travelled US advocate for market mechanisms, Alain Enthoven, who said in 1989, 'it would be, quite frankly, ridiculous... to suggest that we have achieved a satisfactory system that our European friends would be wise to emulate'. These observations return us to our original question. If the US experience has been so poor, and if this can be traced - as it has been - to US deviance on specific identifiable features common to other national systems, why would anyone be advocating the importation of US ideas and institutions into Europe or Canada or anywhere else? More generally, why would anyone be talking about extending the role of the private market, when the one major and sustained experience with the private market has turned out so badly? Are we to reverse the military maxim, to 'Abandon success while expediting failure'? To understand this peculiar behaviour, it is completely unproductive to get into detailed discussions of the characteristics and predicted effects of particular market-based proposals. 'When a man walks into your office, sits down in front of your desk, and tells you that he is Napoleon Bonaparte, do not get drawn into a discussion of cavalry tactics at the battle of Austerlitz.' (attr. Robert Solow) Endless attempts to estimate and interpret the 'elasticity of demand for health care' for example, or discussions of the hypothetical benefits to 'consumers' from the opportunity to 'choose' among a complex array of alternative private insurance plans - plans they do not understand to cover contingencies they cannot imagine - these are cavalry tactics. They conceal the central point The thing is mad. Instead we should ask why, given what we already know, is this conversation happening at all? We can then break out of an intellectual straitjacket that economists fashion for themselves and others - the assumption of a homogeneous 'We'. The interesting question is again a very old one: 'Who benefits from these proposals, and who loses?' And the answers are not hard to find. The conflicts of interest in health care financing can be grouped around three main axes. One of these we have already identified; the opposition between those who pay for services, and those who are paid for them. More income, in total, for the latter group requires higher contributions from the former. (People may, of course, belong to both groups, but to different degrees. Doctors and nurses pay taxes that go to support health care, but on balance they are income recipients.) The second axis of opposition is among payers - Who pays? And how much? The choice of method of finance determines what share of any given level of health spending will be bome by different groups in the population. Financing from general taxation places a larger burden on people at higher incomes. Increasing the share of private payment or private insurance places a larger burden on those who become (or are at most risk of becoming) ill. But anyone can become ill. The third axis of conflict is over access to services. A universal public system financed from taxation gives no advantages to people with higher incomes, no special access to 'the best' care, or to the most prompt and courteous attention. Expanding the role of the private sector, by contrast, permits them to buy their way to the front of the queue and to ensure that any 'rationing' is imposed on someone else. Private markets can offer a (real or perceived) higher standard of care for those willing or able to pay for it, without their having to pay taxes to support a similar standard for others. Theresurgenceof interest in private markets for health care is then readily explicable by reference to these three axes of opposing interests. Consider first the provider-payer axis. It has long been recognized that modern health care systems tend to expand without limit, absorbing more and more resources until firmly checked by external restraints. (Aaron Wildavsky in 1977 labelled this 'The Law of Medical Money'.) Accordingly, in all countries (except the United States) the public agencies responsible for paying for health care have over the last two decades evolved progressively tighter forms of control. By the 1990s, a half-century of steady and often spectacular growth may finally be at an end. Political decisions have been taken, not wholly uninformed or without reason, that health care should not be permitted to absorb an ever larger share of national income. 'We', or our political representatives, have chosen to place financial limits on this sector. Inresponse,the providers of health care are searching harder for ways to evade those limits and to fund continued expansion - to reverse these political choices. This conflict generates the
4 48 JOURNAL OF PUBLIC HEALTH MEDICINE sense of fiscal strain and crisis that seems to be common to all health care systems. The covering rhetoric is, as always, of expanding needs and constrained resources; but the same arguments are made in very well-funded systems (Canada) as in lean ones (the United Kingdom), and the most common arguments (population aging, technological change) are quantitatively unfounded. Questions of appropriateness of care and efficiency of provision are brushed aside. The relentless emphasis on 'more money' indicates that the real objectives are incomes and profits, jobs and careers. Recall that the identity between expenditure and income does not depend on any characteristics of the services themselves, or how they are provided, or what effects they have on the recipients. All expenditures are also incomes. A standard provider strategy is to convert cost control into cost shifting, to focus attention on the control of public budgets while expanding the inflow of private money. Thus we see, frequently repeated, the claim that we 'cannot afford' our public funding systems and that private money is required to meet growing needs. On its face this is nonsense. 'We' collectively, the citizens of each country, have to pay the cost of our health care, whether through public or private channels. We do not become richer, able to 'afford' more, by increasing the flow through private channels. If anything, privately financed care becomes less affordable because of the much higher cost of administrative overhead. The real meaning of the claim is that, contrary to much of the pro-market rhetoric, there are as yet no effective mechanisms for limiting the flow of money through private channels. So more private money means higher overall costs and incomes. In advocating private finance, providers can recruit as allies the more well-off members of society. Consider die second axis of conflict, among payers. Whatever the amount that a nation spends on its health care system, the share of that total borne by different people will vary depending upon the mixture of financing sources. As noted, tax finance imposes a larger share of the burden on people with higher incomes; user charges or private insurance impose more of the burden on those who use (or can be expected to use) care. Thus a reduction in the public share will (all else being equal) transfer money from lower- to higher-income people. Even if privatefinancingleads to higher costs overall, wealthy people may reasonably expect that they will still come out ahead through paying a reduced share - lower taxes - of this increased total. The covering rhetoric in this case will be 'economistical', emphasizing the importance of making people 'responsible' in their use of care and in the protection of their health. Imposing greater financial burdens on the ill while lowering the taxes of the wealthy can be presented as a benefit for all concerned. However, the underlying reality is in fact very simple; money is being moved from one set of pockets to another. There is no mystery in the observation that higher-income people tend to support private finance, whereas lower-income people do not. The third axis of conflict is more interesting - who gets what kind of care, and on what terms? Here the provider argument of 'ever-expanding needs' becomes critical. If providers can convince significant numbers of people that cost containment does entail risks to health - that 'needed' services are being denied, or unduly delayed, or are of inadequate quality - then individuals can be frightened into offering to pay privately, and mobilized politically to overturn restrictions on private markets. Of course, the same arguments can serve to undermine support for restraints on public budgets. The difference is that private financing offers people the opportunity to purchase more or better services for themselves without having to pay the taxes necessary to support a similar standard for everyone else. This is particularly advantageous for the wealthy, who are not only better able to afford private payment, but would pay a larger share of the taxes needed to support a more general expansion. Here we meet another common argument, that selective private payment 'by those who can afford it' will relieve the pressure on the public purse while bringing in the resources that the health care system so badly needs. Again, the statement is nonsense on its face; it is tax finance that raises money 'from those who can afford it'. Private finance taps only those who happen to need care. But further, the statement takes as given - beyond debate - precisely the claim for 'more, always more' that is rejected by any effort to limit the growth of this sector. Health care must absorb an ever larger share of national income, or else 'needs will not be met'. Private financing offers the better-off the chance to enjoy an allegedly ever-rising standard of care, without having to share it It is thus not difficult to understand the resilience of the arguments for private markets in health care, and an expansion in private financing. There is a natural alliance on this issue between upper-income taxpayers and providers (and private insurers) of care. Whenever fiscal pressures on the state lead to threats of higher taxes or lower spending in the public system, the same old private interests advocate the same old private policies - albeit with claims of 'new' thinking. To date, however, these arguments have had very limited success in most countries with universal public systems. There has been much more interest in borrowing and adapting management techniques from the private sector to improve the efficiency of publicly funded systems, while preserving public finance. But this borrowing is still very much in the experimental stage, and on neither side of the Atlantic have market mechanisms yet fulfilled the promises of their advocates. Moreover, the patterns of behaviour and the underlying modes of thought characteristic of private markets may well turn out to be fundamentally inconsistent with universal, publicly funded systems. Performance could then deteriorate. But whatever other changes are made, none of the objectives of private market advocates identified in this paper will be met so long as the financing of health care remains tax-based and
5 HEALTH CARE REFORM 49 limited. The danger is that private sector mechanisms, grafted onto public systems, might provide them with greater opportunities to change financing patterns as well. They will certainly try. Background reading 1 Enthoven, AC. What can Europeans learn from Americans aboutfinancingand organization of medical care? Hlth Care Financ Rev, Ann Suppl December 1989; Evans RG. Going for the gold: the redistributive agenda behind market-based health care reform. J Hlth Politics, Policy Law 1997; 22(2) (forthcoming). 3 Hurst J. The NHS reforms in an international context. In: Culyer AJ, Wagstaff A, eds. Reforming health care systems: experiments with the NHS. Cheltenham: Edward Elgar, 1996: Morone JA, Goggin JM. Health policies in Europe: welfare states in a market era. J Hlth Politics, Policy Law 1995; 20(3): Rasell E, Bernstein J, Tang K. The impact of health care financing on family budgets. Int J Hlth Serv 1994; 24(4): White J. Competing solutions: American health care proposals and international experience. Washington, DC: Brookings, 1995: Chapters 1-6. Accepted on 25 September 1996