Sunday, 7 January 2018

Healthonomics: Not Everyone Values Healthcare Equally

In a recent Blog post I explained why public sector provision is usually not good value for money compared with the private sector. This shouldn't be as bewildering as it is to lefties, because no one sane thinks that the state should take over, say, the running of the food industry, or the hair and make-up industry, or the clothes industry. Equally, very few people think that something like national defence or the rule of law should be given up by the state.

There are, however, some services that most people think ought to be provided by the state that would be better off provided by the price system of private enterprise. A good example is health care. A frequent problem with health care analyses is that people tend to think of health as some kind of special category whose remit sits outside of market capability. This is not so - it is perfectly straightforward to get people to pay for their healthcare like they do their social care or even their food and drink, while having a tax-based welfare system that caters for the unfortunate folk that require a helping hand.

Food, drink, heating, clothes and shoes are all important necessities for humans, but there is no National Food Service or National Clothes Service - they are provided by markets, and anybody who cannot afford these things is given welfare money with which to buy them. The same should be true of health care, where a safety net is provided, but where the services are provided by markets, with competition reducing prices and increasing quality.

Market forces would also help incentivise people to look after their health a bit better if they valued good health more than the costs of indulgence and bad health. Evidently, Brits like the NHS ethos, but remember that every good thing about the health service is already being done by market forces - it is being provided by nurses, doctors, cleaners, caterers, porters and receptionists, not the state. The state is only the abstraction that pervades the process of provision and adds on bureaucratic costs while doing so. 

Crunching some numbers
Let me run some numbers by you to prove the point. The NHS has 1.7 million employees, and there are 65 million people in the UK. That means there is one NHS worker for every 38 people in the UK - which, fairly obviously, is way too many in terms of assessing commercial demand. Last time I checked, the annual health bill per person is about £2,000. If asked "Would you rather the government let you keep an additional £2,000 a year of your money but you had to pay for your own health care when it was required?" it's obviously better for you, and most people, if you say yes, especially if you remember that health care would be cheaper if it was driven by market incentives.
Remember, a health system emerged in the past 150 years quite naturally and organically. The state, in gradually commandeering this service and making health care much more expensive, hampered people's ability to govern their own affairs and disincentivised them to even try that hard. You probably cannot imagine how much capital would be freed up if health care prices were to be in line with supply and demand. People would pay less tax, but have more money to spend, and have all round better, less-expensive health care.

The main reason that people seem to think we need a state-run health system is to provide health for people that cannot afford it. But that's a flimsy reason - the system would be better if people keep their money to pay for their own health care, and any instance when a citizen's ability to pay is in jeopardy, the state can give them the funds to pay for it, without the price system being interfered with (remember that when all is totalled up, the average citizen spends about 60% of their entire income on taxes).

Let's have a recap about how things are at present. The current system for most people is one whereby the state forces National Insurance out of your hand and then sells you some of the value back in the shape of health care insurance that you may or may not need. What you have to ask yourself is, on what grounds can we distinguish between needing a state-run national health service any more than a state-run food service, or a state-run bicycle service, or a state-run TV channel?

What I'm really getting at is this. If the state sets up a system in which you are likely to pay in more than you get out, many will overuse the service relative to the intrinsic benefits it provides. The same is true of higher education; when university education is subsidised by other taxpayers, some people will study even when the education they receive is worth less to them than what it costs others to provide it. In both the cases of health and higher education, incentives have been skewed.

Consumer choice is primary
Here's what's really important that very few people acknowledge. In private markets, health care is valued differently by different people: we are a very diverse range of people in society, and although non-economists find it hard to get to grips with this - the fact is, not everyone feels the same about the benefits of health care, or the trade off between their life choices and how they spend their money.

Only the consumer - that's you and me - knows whether we'd prefer reassurance from a doctor about a throat infection, or the benefits from not visiting the doctor's surgery; or whether we'd prefer a bit more junk food and an increased probability of a heart attack, or healthier food and a longer life expectancy. And the best way to combine the expertise of the providers with the revealed preference of the consumers is through the price system - which will only be near equilibrium if consumers spend their money more freely.

Doctors are professionals; they know things about our health that we do not, and they can make us better, which is why they command high salaries. Patients, on the other hand, are professionals too - they are professionals over their own lives. When it comes to your own wants, needs, desires, preferences and budget, you are the world’s biggest expert. No qualification, skill or service can match your knowledge of yourself.

Let me use my car as a real life analogy. My Subaru has one or two faults. The passenger-side speaker is intermittently faulty, and the driver-side electric window motor is broken. Clive Atthowe, my mechanic, knows how to fix these faults, and we both know how much it will cost (about £750 for parts and labour). The cost and the expertise to fix these things are based on Clive Atthowe's knowledge - but what Clive won’t know is how much I value having a working speaker and electric window against the value of £750 and doing without them.

The same is true of cleaning the car. The hand wash roadside services have the machinery to get my car cleaned much better and quicker than I can, but they don’t know my trade off preferences for a car cleaned less frequently and saving on the cost and hassle of regular visits to the hand wash station.

This information, and many other examples like it, are precisely what the price system is based on - the marginal value of goods, services and labour, all coterminous with the value we place on them. That is why, government interference aside, you can be confident that when you buy a bar of chocolate, a microwave, or a car, the price you are being charged is proximally close to the value that every individual places on those products as a weighted average of society.

It’s been designed, not from on high, but through billions of local decisions every day, to solve the supply and demand problems and the asymmetry of information problems, while factoring in investment costs, risks and so forth, to ensure that every price very closely reflects society’s aggregated revealed preferences.

There may be some mileage in a centralised health system, but implicit in that framework would have to be a scenario for individuals where their preferences and their expenditure are more closely aligned. Put it this way, if the NHS didn’t exist and the current model was put forward as the way to design it, anyone economically savvy would reject it and opt to create something different. Like the European Union, people tend to be emotionally connected to it because it’s already there and has been for years, more than they are emotionally connected to it because it's the model they would choose to create from scratch.  

A world full of better alternatives
Incidentally, from what I've seen, I rather like the idea of a health savings account, like the one in Singapore, where instead of the state taking money through taxes and letting you have it back in the form of free health care, you get to keep more of your money to put into a medical savings account.

That money is used to pay for your health care where you can negotiate doctor-patient contracts in a market system, much like you would now with insurance and banking, and what you don't spend on health throughout your life gets added to your pension pot. Naturally when you spend your own money directly on health you are more careful with your health, what you consume and how you behave.

What is often not realised is that the best solution to goods and services is market-based solutions, but a mix of market and state can often be worse than even just the state running things (as the US health system and UK railways demonstrate). Mixing market incentives with political ones is often a toxic recipe, because you often get the worst of both worlds, whereby special interest groups obtain too much power, public money makes things less efficient, and market signals are ignored when the state backs it with a guarantee.

Kate Andrews at the IEA talks about the NHS's relative performance in this article:

"While countries like Switzerland and Germany spend a few percentage points more of their GDP on healthcare than the UK, many countries – including Hong Kong, South Korea, Portugal, Australia, and Iceland – spend close to the same or less, and fare better when it comes to patient outcomes. It is clear that what sets the NHS apart from its European neighbours (and indeed, the rest of the developed world) is its extremely centralised system that allows for almost no competition or patient choice. The UK’s unwillingness to adopt the social insurance systems that dominate Europe is what separates it on the league charts – usually ranking in the bottom third of international comparisons."

Remember, also, vital goods and services are just the kind of important things that need to be allocated most efficiently by the signals of supply and demand. There is no reason why health shouldn't follow the same template, rather than how it currently is (in the UK) whereby the state forcibly takes whopping sums of money from us and compels us to prop up a health system that has the weeds of information asymmetry, unfairness, perverse incentives and sub-optimal allocation of resources entangled in its flowerbed, and a shortage of price-based reflection of revealed preferences in its DNA.

It's important to remember, the services don't have to be radically altered - just the way they are run and how they are paid for. What you have to remember is that currently there are consumers and providers, and politicians as middle men who take lots of our money to pay for healthcare and then give us that healthcare if and when we need it. It is a system that not only cannot be sustained, it's also one that is a recipe for mass inefficiency.

A change is imminent - here's where to start
The best way to reform a large superstructure like the NHS is to reform it bit by bit, and start with the low hanging fruit - the bits every Tom, Dick and Harry can see are not fit for purpose. So let's pick a few obvious examples.

The first is that it is absolutely ridiculous how much of the NHS resources the binge culture drains, where drunk people need medical attention because they've over-consumed in an irresponsible way. Some of those cases take up to 6 medical staff and usually two police officers too. Such people should be given a bill for this.

The second is doctor's appointments - missed appointments cost the NHS a few billion pounds a year, and once you add on all the people that have an appointment that didn't need one, that probably triples. A price incentive has to be built into this.

Plus, and a lot of this has already happened or is happening, numerous goods and services that do not need to be built into the centralised NHS framework - things like facilities management, payroll, HR and staffing agencies, catering, imaging and pathology, community health services and after-care, pensions, portering, laundry, IT and cleaning - that could instead enjoy increased competition and patient choice for the consumer (some of these are already privatised to good effect).

This will be broadened out to gradually include more GP surgeries, out of hours services, diagnostic services, community nursing and a range of other community services, which will cut down on public costs and improve efficiency.

It has to be said, there have been some disastrous private financial contracts handed over, where the provider has made a loss and found the contract agreement to be financially unviable - something which can be avoided if the gradual process occurs in the right way.

The other thing that needs to accompany these changes (and will) is the increased technological advancement that makes all these links between how people can keep more of their money and pay in accordance with usage more viable. So, for example, if charging for the NHS usage whilst pissed on a Saturday night were introduced tomorrow, it would be a bureaucratic nightmare to enforce. Fast forward to a time when the entire administrative cost can be finalised with a quick tap of a card or a fingerprint on a scanner and it will be much easier, because the concomitant behind the scenes technology will also be more sophisticated.

Remember, someone in the 1950s would be quite astonished to think that you could walk in to a supermarket, scan the goods in your basket and tap a payment card on the sensor to complete the transaction. Imagine in the future when money earned and money spent on health care can be so much more prodigiously efficient thanks to advanced technology.

An awful lot of positive developments in society are made possible by life-changing technology. Think of any detective movie in the old film noir era with Humphrey Bogart and Robert Mitchum and imagine how much easier their cases would be to solve with a smart phone. Think of how much easier the protracted scientific revolution would have been if all the exponents had laptops and the internet. Think of how much quicker the Industrial Revolution would have gathered momentum with more advanced electrical and combustion capabilities.

But all that's just the boring stuff about NHS service minutia - the really compelling part to all this is how radically improved systems are when information signals related to preferences play out more freely. When I buy white goods (fridge, freezer, washing machine, etc) I never pay extra to insure them because it's a certain additional cost against a small probability of ever needing that insurance. Some people are risk-averse and willingly pay the extra, usually unnecessarily, but sometimes the peace of mind is worth the cost. Others just get duped because of ignorance or price-insensitivity. Either way, the price system reflects those different choices, and a law that insisted everyone insure white goods would be one that is bad for consumers.

Not only would it fail to reflect people's revealed preferences in the price system, it would also disincentivise us to look after those goods as well as we would if we picked up the cost more directly. You'd defrost your freezer less frequently if you knew that once it packs in the government has a ready-made replacement all bought and paid for with your taxes. Under that system society will get through a lot more freezers too, which means the annual bill is higher. Think of that as a good analogy for the NHS.

But there's more. Misallocating resources occurs when the price system cannot take into account not just what people want, but what they don't want too. A taxpayer subsidised system like the NHS encourages overuse because there are sunk costs in terms of all the National Insurance you've paid.

Consider my Subaru again. I told you earlier that one of the electric windows stopped working. The garage said it would cost over £700 to replace the motor, so I decided I could live without one of the windows working. Now if cars, like health, came under a nationalised system, whereby I could get the window motor fixed under public expense to which I'd already contributed, I may well do so - but I'd be doing so not because I value the fixed car window more than the £700, but because the sunk costs have already occurred in the paid taxes.

Only I know whether I value the cost of fixing the car window more than spending the £700 on other things, so a nationalised car policy that encouraged me to overestimate the value I placed on fixing the car window would be more of a hindrance to me than a help. The same is true of a nationalised heath service - it just takes a bit more imagination to see how radically different it could be, and will, be, in the future.

* Politicians from different parties keep squabbling about who has got the most attractive peacock’s tail, where biggest peacock’s tail here means how much money they will put into the NHS. They try to call this their health policy, but that’s not a health policy, it’s a redistribution of income policy. A health policy, which politicians are apparently too frightened to propose for fear of committing blasphemy against subscribers to the religion of the NHS, would be a policy that lays out plans for properly modifying the health care framework, and one that tackles the funding problem and helps align usage and incentives and constraining usage by making the costs more accountable to the consumer. Simply bleating about how much extra funding you can put in, and increasingly burdening future generations to do so, does nothing to attempt to tackle the fundamental problems.