Tuesday, August 5, 2008

Privatize or Socialize: Solutions to the Healthcare ticking bomb

By this point, it is no secret that healthcare will grow to become one of the largest, if not the largest, global industry in the coming decades. Healthcare is no longer just a concern of the developed countries, as even the developing countries are finding themselves becoming what we have come to refer to as “greying countries”.

With the continuing increase in life expectancy, more and more people are rushing into the senior demographic. Many of today’s seniors are likely going to be still around in ten years, but more are going to be joining them in the coming years. And with the baby boomers of the developed countries joining this demographic en masse in this coming decade, we are bound to see a boom in the following:
- Significant increase in number of retirees
- Significant growth in healthcare expenses

From a practical standpoint, one’s retirement years are the worst possible years in which to increase healthcare expenses. No other expense can be as great as healthcare, one cannot really avoid it if he wants to, and one’s need for it only increases as one grows older and less able to earn a livelihood by which to pay for the care.

Therefore, much discussion has been made regarding this long-anticipated demographic transition. Much has been proposed. Much debated and argued about. (This is a good link of resources)

One of the most significant debates has been in how best to provide healthcare for the greatest majority, as more members of society become dependent on it. Should it be provided by private companies, or should it be a socialised expense? Is it better done through the private sector, or by the government?

The US is a prime example of a country that has organized its healthcare sector on the former, while Canada, France, and Norway, are prime examples of those who organized healthcare provision around the government.

Private sector proponents expound the benefits of market competition, private enterprise, and the invisible hand in providing the best possible care to those in need.

Social democrats lean more on the conviction that government best provides healthcare, since private enterprises will always do everything for profit. Healthcare is a right common to all, these social democrats say, and no one should be denied it because of the inability to pay. More importantly, since healthcare is a significant expense, and one that concerns large populations at any given time, they believe that only the government has the scale and scope large enough to achieve the efficiencies and reach necessary.

Lately, with the increase in the number of uninsured Americans needing more and more healthcare, even the US is now debating the merits and costs of a privatized healthcare system. Stories abound of needy patients being thrown out into the street by hospitals because they can no longer pay their bills. Stories abound of people who go without medicine, and die because of it. Go watch Michael Moore’s “Sicko” documentary, if you would like a comprehensive array of arguments against the privatized healthcare system.

To an extent, these criticisms of privatized healthcare are true. No one can expect a business organized for profit to go out and conduct a profitable business in a largely altruistic activity such as providing care. Doctors cost money to educate and employ. Medicines cost money to develop, produce, and distribute. Hospitals cost money to build, staff, and to stock with the necessary equipment and supplies. Medical procedures cost money to organize and operate, and the more complicated the procedure, the more money it will take. For these activities to be done by a company organized to maximize investment return to its shareholders only increases healthcare’s cost to society. If healthcare were to continue to be provided by private sector initiatives and entities, we invite the inevitability of providers colluding to increase costs, and thereby profits, for themselves.

On the other hand, socialized healthcare is no solution either. In a socialized setting, there are no incentives, only directives. And in a socialized setting, all directives come from the government. With its scale and scope of reach also comes scale and scope of problems. Many problems, when attacked at the governmental level, become a matter of which majority is more preferred, more vocal, or more political. At the governmental level, many decisions are made by compromises, rather than by market discipline, or market intuition.

In a socialized healthcare setting, the government has the incentive to control expenses by minimizing the construction of more hospitals, the education of more doctors and healthcare professionals, or the development of cures for a variety of diseases. To a government bureaucrat, all these personal stories of tragedy and charity are reduced, if not to the level of dollars and cents as it would be by a private health provider, to the level of statistics, politics, and agenda.

What government, already fazed by the difficulties of balancing its budget, fighting crime, building roads and bridges, maintaining an army and keeping a full economy, is going to set aside a significant chunk of scarce government funding to build perhaps, two hospitals a year, or set aside a billion dollars to fund research on cancer, or to train the next generation of doctors and nurses? Government can definitely help, but it would by no means ensure that everybody is happy, and gets the healthcare they need.

In a socialized setting, doctors do not have the incentives to get more new patients once they have reached a certain level or quota. They certainly will not have the incentive to get the patients that will require more intensive care and monitoring, since these will only increase their working hours, or greatly increase their malpractice risk, without correspondingly increasing their level of professional income. In a socialized setting, therefore, you will likely find doctors turning away patients, and more of those turned away will likely be those in greatest need of healthcare.

In a socialised setting, therefore, one’s existing relationship with a family doctor can become a very precious, and very scarce, asset. One will likely avoid making big decisions, such as moving to another area to work, if it would mean giving up his existing relationship with his doctor, and risk going to an area where his chances of securing a similar relationship is significantly smaller. In Canada, for instance, there are instances of patients who endure long waiting periods just to secure the services of a family doctor. Away from the metropolitan cities, a pregnant woman can already be due before she finds a qualified obstetrician to look after her pregnancy.

This presents big social costs. Who will move to a province that is generally known to have a low ratio of healthcare providers to the general population? How can businesses attract talent there then? Taking this argument further, how can more students be enticed to become doctors if the government will have a say in where they practice, how much patients they take in, or whom and how much they charge?

In a nutshell, what I am saying is that basing the healthcare argument just on whether it should be socialized or privatized is not addressing the roots of the problem at all. Both systems have their advantages and costs. Both have their limitations, and both have their attractions.

What is necessary to go in the right direction of solving the problem, I think, is in increasing society’s ability to pay for healthcare.

Healthcare is scheduled to become the largest expense, and most possibly, the largest sector in the global economy in the coming decades. Unfortunately, unlike manufacturing, trading, or many service industries, healthcare is not value-creating. It is, by its essence, value-consuming.

What do I mean? Well, the business, or for that matter the country, that sells a tangible product - creates livelihood for its employees, promotes trade among the economy, and creates profit for the business, or surplus for the economy - profit or surplus which can then be used to fund more activities. Healthcare, meanwhile, while providing livelihood for its practitioners, eats away from its patients’ incomes, and the more healthcare needed, the more income eaten away.

And even if the care is paid for by a private insurance, or by a socialized government-funded program, it takes away resources that might have been used to grow the economy. The more sick people a country has does not bode well for the country, no matter how much income that could mean for its domestic healthcare economy. Sickness is always value-consuming, and the more that it spent on it, the less is spent elsewhere on value-creating activities.

An ageing country, with more of its people entering the time in their lives where they are able to work less, but require more in terms of care, is a country that will experience a significant decline in over-all standard of living, no matter if its healthcare is funded for by private sector programs, or by the government.

This is a phenomenon never before experienced in history. Historically, people have been involved in livelihoods where they worked until they could no longer stand up, in which case, they will soon die. There has never been an instance before when a significant portion of the population is retired, living longer, and requiring medicines and cures for illnesses never before available, but incurring expenses never before seen by people who have essentially stopped working.

The only way that society can escape this unprecedented ticking bomb is to ensure that healthcare does not , in fact, grow to become the biggest sector in the economy.

More activity has to be in value-creating activities. What does this entail? I can only think of two basic but broad implications.

Firstly, people will need to continue working, to pay for their healthcare, for as long as they need it. That could mean working until they are ready to kick the bucket. Secondly, and I think this was the assumption in the minds of the original architects of Social Security and Socialized Healthcare – the number of people in working age should perhaps at least be ten times as much as the number of people taking healthcare benefits. That means that the larger the number of people expected to enter their senior phases in coming years, the greater the proportion of people need to be born to take their place in the productive economy, when that time comes.

This means that, ever-growing life expectancy, plus ever-growing healthcare expenses, can only be sustained in the long-term - if coupled with an ever growing young population. No greying countries allowed.

update: social security won't ever bankrupt

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