Original article published in Spanish by Juan Ramón Rallo
When we consider how privatized healthcare would work in a free market setting, the United States quickly come to mind. In effect, the US lacks a public healthcare system similar to Europe (whether it be the Beveridge Model in the UK or Spain, where the state is the one in charge of providing health services in exchange for taxes, or the Bismarck Model in Germany or Austria, where citizens are bound by the state to take out heavily monitored and regulated health insurance), making it, in principle, a good testing ground for the effects of the privatization and liberalization of healthcare.
In this sense, however, the results are quite deplorable: the US spends around 17% of its GDP on its healthcare system –nearly double that of most European countries– without any spectacular results (American health is at the forefront in the implementation of new technologies as well as the use of preventive medicines, but these distinguishing factors don’t seem to justify the enormous overrun). With things as such, the debate over the superiority of public healthcare is left definitively settled: similar quality at half the price.
The subject, nevertheless, is not so simple. Just as I extensively explained in Una revolución liberal para España (A Liberal Revolution for Spain, only available in Spanish), the American healthcare system cannot be considered representative of a free market. On the supply side, the competition within, for example, the medical profession is artificial and unreasonably perturbed by licenses and professional associations. And, above all, on the side of demand, 90% of American healthcare spending is directed through two of patient’s different agents: insurers and the state (so you can get an idea of this nonsense: in Spain public spending on healthcare reaches 6.9% of the GDP… and in the US, 8.2%). Not even in Spain does the socialization of demand reach such a high level as in the US.
In particular, for every $100 that is spent on American healthcare, $45 is paid by the insurance companies, $45 by state programs Medicaid and Medicare, while the patient only plays $10 out of pocket. Put another way, Americans can spend $100 while only being responsible for paying $10. Who pays the other $90? Their fellow countrymen (whether it be through the IRS or their own health insurance). In the US, then, there is no relation between cost and health benefits: each citizen spends $100 to get $20 because, ultimately, they’re only paying $10. The incentive to skyrocket prices is the same as if a million people went to a restaurant together, individually ordered what they wanted, and then evenly split the bill between everyone.
And, effectively, the most exhaustive study on the overrun of healthcare in the US to date doesn’t leave any room for doubts: these costs are essentially due to uncontrolled growth in demand (above all in preventive medicine), which is capable of supporting growing prices given that nobody has an incentive to stop spending. As much as supply rises, demand grows even faster, multiplying prices. In fact, in the other sections of American healthcare that don’t produce this socialization of spending (because state programs or insurance don’t cover them), you don’t find these abnormal growths in prices: this is the case, for example, with dental services.
In Europe, where public healthcare is free for the user (but not for the taxpayer), they could certainly have similar consequences to those in the US of no longer existing because our politicians ration and place quotas on the health services that their citizens receive (the famous healthcare cutbacks are a structural practice of the system, although they were made more visible with the crisis): in the Old World the owners of our health are not ourselves, but rather the politicians and bureaucrats that organize the system according to their own taste, needs, and interests (waiting lists, late adoption of new technology, treatments and medications that aren’t covered, the build-up of patients…). Put another way: the perverse incentives on demand that lead to excess health spending are the same in the US as in Europe, except in Europe the politicians severely control the supply and prevent expenses from overinflating; it’s as if, once we arrived at the restaurant, the owner limits the quantity and quality of what each guests can ask for: as much as we would like to order many expensive dishes, we wouldn’t be able to.
But for what reason has the American healthcare demand been socialized to this level? No, don’t believe that the cause is from the free and normal working of the market: the problem comes as much from the establishment of Medicaid and Medicare (1966) as, above all, from the powerful incentive involved in, since 1954, the exemption of income tax and corporate contributions to Social Security from the costs associated with the contracting of a health insurance plan favorable to workers. In order to spend $100 on healthcare in the US the worker needs to earn $200 before taxes… unless that spending is directed through corporate health insurance (in which case, earning $100 before taxes is enough; a discount of 50%). The incentives to direct all health spending through corporate health insurance are, well, enormous, even in regards to expenditures that shouldn’t be covered by insurance (such as the majority of preventive medicines).
This socialization of 90% of American health costs –induced by state intervention– is primarily responsible for the growth of prices. The US is not a good example of a free healthcare market, where the majority of health expenses should be paid for from personal savings and only extraordinary and catastrophic expenses should be covered by insurance: Singapore, or even Switzerland, have larger similarities to a free healthcare market and their healthcare spending is completely under control, while their quality is extraordinary. If anything illustrates the American case it’s the potentially devastating effects of statism, even in doses that are in appearance harmless.
None of which, incidentally, should let us fall into complacent acceptance of European public health. Our aging population will cause, in the next few decades, either a huge growth in healthcare spending or a deterioration in the quality of services (already visible through cutbacks) that can only be counteracted with disruptive innovation within healthcare. The privatization and liberalization of this sector would be fundamental to competitively finding new organizational models that are able to keep a lid on costs and adapt to the increasingly diverse and personalized needs of patients (and not bureaucrats, as in Europe). But because of this we should wrest the management of public health from the politicians and bureaucrats and return it to the citizens: not emulating the US, but truly liberalizing.