Tuesday, December 27, 2016

Will a User Pays Healthcare System Improve Population Health and Reduce Healthcare Costs?

We have a problem.  In Australia and other Western countries we are spending an increasingly significant amount of our GDP on healthcare [1].  This trend is expected to continue as healthcare spending is increasing at a faster rate than GDP (due to an ageing population and the increasing prevalence of certain diseases such as type 2 diabetes).  This is particularly concerning as Australia is in progressively higher amounts of national debt.  Clearly something needs to change


I find the arguments that ‘healthcare creates wealth’ and that ‘it isn’t necessarily an issue because economies can be flexible’ to be like the ‘broken window fallacy’.  Our ‘sickcare’ system really just patches up broken windows.  There is an opportunity cost in that those resources could be spent on other projects if the window wasn’t broken in the first place.  My aim is to reduce broken windows

As I mentioned in the previous post, the efficacy of relying on personal responsibility (which every public health strategy does to some extent except holding out for miracle drugs and simply banning everything that’s unhealthy) as a public health strategy would be improved if our healthcare systems are structured in such a way that individuals are more incentivised to be in good health.  One way to do this is to have individuals bear more of the financial costs of diet and lifestyle diseases rather than the government

* In 2009-10 Australia spent 9.4% of total GDP on healthcare [2], with 121.4 billion spent on healthcare (~$5,000 per person) [2].  Federal, state and local governments contribute 70% towards healthcare [2], and federal, state and local governments received a combined total of 333.336 billion in tax revenue [3], therefore 25.5% of taxes went towards healthcare in 2009-10

Advantages to a User Pays Healthcare System

There are advantages and disadvantages to more socialised healthcare systems and to user pays healthcare systems.  For this blog post, I’ll just mention some advantages to a user pays healthcare system that has some potential to reduce healthcare costs for most people

Individuals would be more incentivised to improve their diet and lifestyle, rather than face the financial costs of developing and/or poorly managing lifestyle diseases, that could otherwise be prevented or treated through changes in diet and lifestyle.  This would particularly be the case if pharmaceutical drugs for lifestyle diseases were not subsidised through policies like the Pharmaceutical Benefits Scheme we have in Australia (which we seem to be paying too much for [4]).  This will shift cost-benefit analyses in favour of diet and lifestyle, much like how renewable energy would be more cost effective sooner if fossil fuels were no longer subsidised.  For example, someone with type 2 diabetes has a few options: they could either continue what they’re doing and take insulin and Metformin to try and manage their glucose levels; they could simply reduce the amount of carbohydrates they’re eating; and they could try to reverse their diabetes by using the Newcastle diet or other dietary approaches that lead to a short-term spontaneous reduction in calorie intake.  If diabetes drugs and health care associated with diabetic complications becomes more expensive then people will see less value in drugs, while changes in diet and lifestyle (which are more effective anyway) would become more appealing.  As a result, there may be a shift in the culture from popping pills and seeing them as miracle drugs, and more towards a normalisation of healthy diet and lifestyle behaviours.  However, this depends on improving access and dissemination of more than just basic health information such as: the costs and benefits of various pharmaceutical drugs, measured in both relative risk and the number needed to treat; and strategies to prevent and manage many chronic diseases (the focus of the next post)

A major cost for the healthcare system is end-of-life care [5], but quite often end-of-life care prolongs the suffering of the patient, sacrificing quality of life for a few extra months.  Some people would not value it as much as it costs and would prefer to opt out and have that money go toward things they place more value on or toward their families (this should be coupled with voluntary euthanasia).  Similarly, healthcare costs could also be reduced by people opting out of things that offer marginal benefits.  This is basically the idea that individuals are best placed to maximise their utility (↓ money, ↑ value), but standard of care and subsidies distort this

When the cost of something is low (particularly when it’s free) there is a higher demand for it and it isn’t valued as much.  There are obviously many doctor’s visits and hospital admissions that are extremely important, but there are also some trivial ones such as seeing a doctor for the common cold to get a prescription for antibiotics (which won’t work anyway because a viral infection is causing the symptoms)

There are also some minor areas where costs can go down such as lower administrative costs, less bureaucracy, competition driving costs down, being able to shop around for a particular doctor or standard of healthcare, and not needing to see a doctor to get a blood test

In addition, it would remove almost all the rationale for fat shaming or other shaming related to health or health related behaviours

Insurance

You could hardly discuss the costs of healthcare without talking about health insurance.  In my opinion health insurance, much like other forms of insurance, doesn’t make economic sense in most contexts.  That is because a healthcare system based on health insurance involves the average individual not only covering their costs in the health insurance premiums, but also paying for the overhead costs of running an insurance company, the profit the insurance companies need to make, and the additional admin costs at the doctor’s office.  So not only is the average person not getting their money back, but healthcare itself is made more expensive.  A healthcare system based on health insurance is probably a fair part of the reason why the US healthcare system is much more expensive.  It makes more economic sense, for both the individual and society, for people to self-insure the things they can by saving and investing that money for a rainy day or simply adopting universal healthcare [6]

Some of the contexts where health insurance makes sense include: (1) Where an individual doesn’t have enough capacity to save to self-insure themselves (so insuring your house is more likely to make sense).  (2) If the government subsidises health insurance through income tax concessions (an odd policy that really only benefits middle-upper income earners, who have more capacity to self-insure themselves anyway).  (3) If the government mandates that health insurance companies can’t charge women, older people and people with chronic diseases more (because everything else being equal, these people receive more healthcare on average*).  In this situation your health insurance policy will suffer because young healthy men will refuse to subsidise everyone else and opt out of the system, and only get insured when they’re old and sick.  This will either cause the system to run out of money, increase premiums and/or reduce payments beyond which was previously promised (sound familiar?)

* If you accept this, but you don’t think they should be charged higher health insurance premiums, then do you also think that young men shouldn’t have to pay more for car insurance?

Universal Basic Income

This raises the question of what to do with the extra tax revenue if a user pays health care system is implemented, and also how will low income earners and/or sick people be able to afford healthcare?

With the extra tax revenue, the government could either lower taxes by a quarter or could use that revenue for other projects, and could potentially further reduce total healthcare expenditure by putting money into project that would improve population health.  One possible project is to make public transport free.  There’s a saying in business that you can pick only 2 of the following 3 attributes: fast, good, and cheap.  Public transport is neither, because unless you’re catching a train into the city, driving is faster, cheaper and more pleasant.  Free public transport would at least give it one advantage over driving (cost) while likely being a good form of wealth distribution and improving congestion, population health and the environment

Another option that may addresses both issues well is the implementation of a universal basic income (UBI) or at least one solely for the purposes of a health savings account.  A UBI is basically where every adult citizen receives a regular small parcel of money from the government.  It is attractive to some on the left because of economic security and providing and minimum standard of living, and is attractive to some on the right because it would reduce bureaucracy and current welfare systems can be abused and don’t adequately incentivise employment.  In the future a UBI might become more attractive as there is a great potential for advances in technology leading to more automation and therefore job losses

But how much should the UBI be?  I think it should be set at a level that makes it very difficult to near impossible to live on the UBI alone indefinitely, so that some work is generally necessary.  Some articles mention a UBI of $40,000 per year (~$800 per week or a $20 per hour job) [7], which is simply far too much as it alone would require ~$720 billion (40,000 x ~18,000,000 adults), much more than current tax revenues ($446 billion for 2014-2015 [8]) while providing little incentive to work and causing massive inflation.  With the government spending ~$5,000 on healthcare per person per year, this equates to ~$100 per person per week, but the part of the UBI used for the health can be invested in a health savings account, and total healthcare costs may be reduced as explained above, therefore it may only need to be ~$50-75.  The federal government spends 154 billion on social security and welfare [9], so a UBI for living and healthcare (~275 billion) could be distributed at about $15,000 per year for each adult or ~$300 per week.  At a minimum of $200 for living ($100 maximum going to a health savings account) people won’t be starving in the streets, but won’t be living comfortably on the UBI alone.  The government would then consider the UBI to be part of someone’s income and tax their total income as normal, which addresses an objection to UBI that high income earners really don’t need extra money.  So for people in Australia almost half of the UBI would be taxed for those making over $180,000, compared with 19% being taxed for those making between $18,201-$37,000.  These taxes could go towards disability pensions, people who had a bad accident they couldn’t pay for, and people who lost the genetic lottery regarding health, although if more was needed the UBI might be a bit smaller

The incentive part of a health savings account is that it can be used for family members and whatever is left can become part of your estate (much like the Singapore’s healthcare system [8, 9, 10]).  You could further incentivise good health from the health savings account by allowing a dividend of sorts to be paid yearly based a small proportion of what is left at the end of the year.  But you would want to save most of the health savings account in the event of an accident and because most people receive more healthcare as they get older.  In addition it’s better if this was a system where the health saving account was forced as a default (but something you could opt out of if you signed something that future healthcare is dependent on your ability to pay) because otherwise too many people wouldn’t save for future healthcare (because we are wired to be instant gratification monkeys), much like how superannuation is a somewhat idiot-proof method (but one that’s a tax concession that quite disproportionately benefits high income earners) to have people save for their retirement to avoid the government paying pensions 

I don’t consider myself to be that knowledgeable in healthcare and economics but I think these are some ideas worth considering.  My thoughts on this may change with time as outcomes > ideology and intentions

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