Since the middle of the 1980s, health care reform has been one of the top policy initiatives of most Western industrialized states and a strong determinant, in my humble opinion, of the factors determining why some people healthy and others are not. A new wave of reform has emerged that focuses on harnessing competition to more efficiently achieve social justice ends.
This paper briefly analyzes this wave of health care reform and compares two types of competition-oriented reform models, internal market reform and managed competition reform, which I feel is gleaned in Chapters 1, 2 and 4 from Evans et al (1994) and Chapter 4, Naidoo and Willis. These models are looked at in the context of their implementation in the UK, New Zealand, the US, and the Netherlands. The fundamental reason why some people are healthy and others are not can be determined by analyzing which reform model best solves the complex optimization problem of how to strike a balance between individual needs and societal interests and more generally between equity and efficiency.
Managed competition reform and internal market reform models represent an important change from the traditional approach to health care reform. This traditional approach focuses on reducing the resources available to a health care system (e.g. the hospital beds, nursing services, technology, etc.). This traditional approach assumes that physicians, when faced with restricted resources, will allocate resources optimally amongst various medical needs. By contrast, the new reform models require purchasers, government-appointed authorities, private insurers, or risk-bearing groups of health providers, to proactively manage and allocate resources amongst different health care needs (Blendon, 1990).
Purchasers are expected to manage treatment decision-making by physicians and other health providers. Managed competition and internal market reform combine elements of both government planning and market approaches. Managed care, another concept that is often referred to in the context of health care reform, is the mechanism through which managed competition proposals seek to obtain cost savings, but as described further below, can be employed in any health care system.
Although increasing costs are often cited as a justification for health care reform, it is far from clear what is “too much” in terms of total expenditures on health services. Why are we not similarly concerned that we are spending increasing amounts on telecommunications services, cable television, computer products, or novelty toys? The concern over rising total health care expenditures is, in fact, rooted in two separate issues, concern over government spending and concern over inefficiency.
In most Organization for Economic Cooperation and Development (OECD) countries, government pays for the majority of health care expenditures. Even in the US, government expenditures account for over 44 percent of total health care spending (Weale, 2002). Moreover, in most countries, health care is the most significant component of total government expenditures. Thus, increased concern over public sector deficits has been a strong impetus for health care reform.
It is often difficult to disentangle fiscal realities from ideological pursuits, but a further factor contributing to calls for health care reform has likely been a rise in ideology, questioning the legitimacy and role of government in all sectors. This new ideology has not been the sole domain of neo-conservatives; governments of many political stripes have privatized and deregulated formerly government-owned industries, e.g., telecommunications, electricity, gas, broadcasting, airlines. In a number of countries, the final stages of reinventing government are resulting in re-engineering and/or partial privatization of social service systems such as education and health.
The moral hazard problem of third-party insurance in an unregulated fee-for-service system means that hospitals often do not have to compete for custom on the basis of price, but will seek to attract patients with the promise of high-quality care. Quality of health care may, however, be very difficult to measure because of information problems. Hospitals will therefore tend to compete with each other on the basis of what Donabedian describes as “structural” measures as surrogate indicators of quality, e.g. the actual buildings and beds, technology, and skilled labor employed (Donabedian, 1988). Hospitals will attract the allegiance of physicians (who refer or admit patients to the hospital) by providing the type of technology demanded by them in that region and amenities such as adjacent offices.
Thomson notes that this type of competition increases hospitals’ costs as physicians like hospitals to have spare capacity to suit their needs and prefer the latest technological equipment and highly-trained support staff. A hospital that displays a high number of qualitative indicators does not, however, necessarily supply higher quality care or result in better patient outcomes. Therefore in areas where there are many competitors, contrary to what neo-classical economic theory would predict, prices may increase rather than fall in an unregulated fee-for-service market.
In response to the information asymmetry problem a government may intervene to control costs by restricting the number of inputs into the health system. This has been a common reform initiative in single-payer systems like Canada where the government has reduced the numbers of hospital beds, nursing staff, and technology in the hope that physicians, when faced with limited resources, will appropriately prioritize health needs and respond with the most cost-effective services possible. A government may attempt to change the financial incentives that physicians have to exploit their market power deriving from information asymmetries.
This might involve the use of annual prospective global budgets for hospitals, managed care, and changing the fee-for-service payment system for physicians. These changes may be achieved by direct regulation and/or through contracts (as per the internal market model). Alternatively, government could delegate responsibility for micro-managing the supply side to private institutions and require these institutions to compete on price and quality dimensions (as per the managed competition model). All potential solutions have costs and benefits and are discussed in subsequent chapters
Depending on the particular health service market in question there may be economies of scale on the supply side. As mentioned above, economies of scale occur in a market when long-run average costs decline over time and are generally associated with industries or sectors where there are high start-up costs before even one good or service can be produced. For example, because of the high capital costs involved in hospital construction it is likely that in rural areas it would be inefficient to have more than one hospital, as to do so would duplicate high fixed costs. This would be a waste of society’s scarce resources and thus allocatively inefficient (Farber, 1991). If government intervenes to prevent more than one hospital in a region then the problem arises that the hospital is a monopoly. From an economic perspective the problem with a monopoly is that it generally prefers to produce at a higher price and at lower output than in a competitive market.
The result is economic inefficiency if consumers substitute away from the monopolist’s higher priced services to other services that are of a relatively cheaper price but in real terms cost more to produce (allocative inefficiency). There are also significant distributional consequences flowing from allowing an unregulated monopoly as there is a wealth transfer from consumers to the monopoly owners. A large wealth transfer means that consumers have not reduced their consumption in the face of price increases either by abstinence or through the consumption of substitutes (i.e. demand is inelastic). This will be so in the case of many hospital services as demand is likely to be highly inelastic and there are few realistic substitutes.
In response to the monopoly problem a government could regulate the price a monopolist charges to eliminate supra-normal (excessive) profits, and regulate and monitor the quality of services produced by the monopoly. Regulatory costs may be high, however, given that hospitals will have much better information than a regulator about their own costs and the quality of the services they supply. Some commentators believe that regulatory costs will outweigh any inefficiencies resulting from unregulated monopoly and recommend instead reliance upon “competition for the market” or a “contestable market” (Enthoven, 1978).
In other words, provided there is the threat that a new entrant could supplant the incumbent monopoly, the monopoly will supply services at a price and quantity that is closer to what would occur in a competitive market. At the other end of the regulatory spectrum, in response to the monopoly problem and the high costs of regulation, a government may choose to nationalize (i.e. own and operate) the hospitals themselves. In the UK and New Zealand government finances, owns, and operates the majority of hospitals, and not just those that would, in the absence of government intervention, hold a monopoly position.
Health certainly has the characteristics of one of Rawls’ “primary goods” (although, interestingly, not so characterized by Rawls), being something that a rational person would want irrespective of what else she would want, all other things being equal (Rawls, 1971). Treatment of disease can stop, prevent, or ameliorate physical deterioration, pain, and premature death. Health is of overriding importance to most of us as without good health our ability to participate in and social life is severely limited. Daniels grounds a right to health care services in the idea of fair opportunity: “properties distributed by the lottery of social and biological life are not grounds for morally acceptable discrimination if they are not the sorts of properties that people have a fair chance to acquire or overcome” (Daniels, 1985). Health is fundamental to our feelings of well being, security, comfort, and ultimately happiness.
We care very deeply not only about our own good health but that of our family and friends and to a lesser but still significant extent of the health of others in our community. We also know that as we grow older ultimately our health must deteriorate and this can either be very quickly, for example, in the case of a fatal heart attack, or a slow deterioration, through cancer or a chronic disease. Generally, we do not know what our own life-path holds in store for us in terms of illnesses, disabilities, and the way that we will die. This uncertainty characterizes each and every one of our lives. The high cost of many health care interventions coupled with the uncertainty of what our health care needs will be makes it difficult to save funds to pay for services when they are needed.
One must, however, not mistakenly assume that access to health care services will ensure a fair allocation of health. The endless utilization of health care services will not necessarily result in better health. Other determinants of health besides access to health care services include biological factors, physical environment, lifestyle, and social environment (Ruwaard, Kramers, Jeths & Achterberg, 1994). Access to social welfare services, education, and socioeconomic status may have as great an impact (although more indirect and long term) on health as the consumption of health care services (Vagero, 1994). Equity in the context of health is, however, generally characterized as achieving a fair distribution of health care services rather than achieving a fair distribution of health, as the latter goal is viewed as too problematic (Mooney, 1987). Thus, fair access to medical and health care services is used as a very rough proxy for access to health.
This explains why, even in countries that attempt to provide universal access to a very broad range of health care services, the poor and otherwise vulnerable populations are in significantly poorer health relative to other people within the country in question (Hurowitz, 1993). Notwithstanding the strong appeal of the arguments in favor of equal access for equal need, there are some that find the concept illogical (Menzel, 1992. This is because it seems contradictory to ensure an individual access to the latest medical technology such as heart and liver transplants yet not to ensure her adequate shelter, nutrition, income, and education. The irony is even greater when one acknowledges that, in the long run, these factors are as likely to influence one’s health as access to health care services.
However, it is somewhat nihilistic to argue that unfairness in the distribution of most resources can be used to justify unfairness in the area of health care allocation. There is surely an argument that individuals that are restored to or are maintained in as good health as is possible through the utilization of health care services have much better prospects for providing for themselves with respect to shelter, income, education, and nutrition (Daniels, pp. 26-28) arguing that health care should be provided to allow individuals to achieve ‘species-typical normal functioning.’ Moreover, most Western industrialized countries do in fact ensure that their citizens have a minimum level of social security and access to education, at least up to the tertiary level.
We can thus, safely conclude from the above mentioned observations that, as socioeconomic status is closely associated with poor health it may be just as rational to focus on targeting and improving the welfare of low-income groups as it is to finance a universal health care program. However, putting in place wealth redistribution programs cannot be the sole solution. Even in relatively healthy societies people still get injured, get sick, and eventually die. It is at these key moments of vulnerability that we want health care services and we have the most empathy for those in need of health care services. Many in society, would place less value on living an extra year of life at the end of a long life than on having medical and nursing care to alleviate the pain and other effects of the illness that finally kills them. Thus, access to health care services is so fundamental to life, our quality of life, and how we eventually die that people should have access to them even if they cannot afford to pay for them.
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