Public health care

Recently I was accused of “increasingly exhibiting rational libertarian tendencies“. Now I’m sure this is true to some extent. While I think my normative goals in terms of social justice have stayed much the same, I’d certainly agree that my openness to methods of achieving these goals efficiently has changed. Hopefully this makes me rational. Libertarian, I’m not so sure.

In general I’m much more at ease than I once was with the use of markets to allocate goods efficiently. While I still think that inequality matters because low incomes are largely the result of poor fortune and we do need some method of redistributing wealth, in general though this is better done via a progressive taxation system and effective welfare than by price fixing and subsidies or by actual involvement in the production of services. Arguments for just how this is done though is meat for another post.

There is a select few areas though that I think deserve special consideration outside this general framework, because the alternatives are essentially either unfair or unworkable and the services provided are essential. In my view chief amongst these is health care.

Its easy to find problems with the health care system in Australia and other places with a similar system, bed shortages, long waiting lists and under resourcing. There is certainly plenty of room for fixes and considering better ways of delivering services. On the other hand, the radical solution to the problem that some would propose, is an entirely private health care system. I can only see this solution as far, far worse.

What is far, far worse of course depends on your goal is regarding health care. In my opinion that includes a high level of cover for every one in a country. Of course some limits have to be set, and I do not oppose a parallel private system where people can buy additional cover for if they prefer. Ultimately I realise that a public system is never going to be able to afford the maximum possible cover available as the cost for a tiny portion of individuals is going to be unacceptably high. The exceedingly wealthy are always going to be able to buy a higher level of care and should be allowed to as it doesn’t adversely effect what the general system is willing to spend.

The argument could be made (and is) that a private system of insurance can make up for the public system of insurance that we enjoy in Australia. It works well enough for insuring your house against theft, fire or storms. It works well enough for insuring your car against accident. If we accept that a competitive private system will through competition and innovation deliver the service at the lowest possible price, why not then let the private system extend to health cover? People buy insurance against getting ill (possibly with a governmental voucher top up for the poor) and the government leaves the field for the provision of this service.

The first problem with this is information asymmetry. This is always an insurance risk, but one that is easier to estimate for many other classes of insurance. For health care you have a better idea of your general health than your insurance company does, and so the mix of people taking up an insurance premium will always be biased towards the people who are more likely to be ill. This means there will tend to be a gap between what insurers will offer and what people will buy at.

However if we could eliminate the information asymmetry problem, give insurers full access to your medical history and allow them to do extensive physicals and genetic testing then you could probably get a market going. However there is an additional complication which has to do with the distribution of medical costs. As this article by Paul Krugman explains for the US:

… in any given year, most people have small medical bills, while a few people have very large bills. In 2003, health spending roughly followed the “80–20 rule”: 20 percent of the population accounted for 80 percent of expenses. Half the population had virtually no medical expenses; a mere 1 percent of the population accounted for 22 percent of expenses.

The statistics are similar here in Australia. Now this isn’t such an issue if we don’t know in advance who the one percent that take up nearly a quarter of the medical bills are. If the expected risk of individuals is relatively flat then its works. However, while some of these huge medical bills are due to accident (ie. relatively evenly distributed) in many case we do know who is likely to become chronically ill and require the exceedingly high medical bills.

Additionally in most cases of insurance you are insuring some of your physical assets against loss, we can expect people to be able to afford to allocate a small percentage of the value of those assets to insure against the risk of loss. This is not the case for someones health, where the cost are virtually the same regardless of the wealth of the individual. Especially as we would expect poverty and poor health to be correlated.

So as far as I can see if we are to get acceptable universal health care government intervention is necessary. Given that poor health is fairly arbitrary, this would seem an obvious place where government intervention can have a positive impact on equality of opportunity. Its also not clear that it costs more as the graph below from The Economist shows, the US with a comparatively private system spends more than most countries with a public system, not only in total, but also more than the OECD average in terms of public contribution. For all this spending they get great health care for a large portion of the population but still perform relatively poorly on basic statistics like child mortality compared to Europe and Australia, due to the quarter or so of the population not covered. Given this, I’m still skeptical of other models to give either good coverage or cost efficient delivery.


10 Responses to Public health care

  1. melaleuca says:

    Interesting post, Steve.

    I think Government can deliver services in a number of areas quite efficiently and may sometimes be the best option, particularly where there exists a natural monopoly/oligopoly. One such area is public transport. In Victoria, for example, the public subsidy for Melbourne’s public transport has more than doubled since privatision occurred. The State Government also had to pick up the tab when one of the three private owners did a runner a few years back.

    On the issue of health, I enjoy pointing out to the death beasties that Cuba, with its totally publicly owned health system, has the same life expectancy as America even though the difference in health expenditure is astronomical.

    Cuba actually has lower infant mortality figures than America.

    Obviously I’m no fan of Cuba but its health indicators has a positive story to tell about public service provision.

    I think there are plenty of other examples that demonstrate there isn’t an Iron Law of economics that means private service provision is always better than public provision.

  2. Steve says:

    Yes, I know about this fact about Cuba. You don’t have to be a socialist country to have public health, but even in socialist countries it works better at least by some basic measures.

    The reason I believe is the absense of any sort of health insurance for the bottom quarter of the US population. So while for 75% of people the stats are better, for this portion they are much worse. The US of course has the worlds best health care for the top 20% or so, but does this matter if the bottom quarter is so bad?

  3. james says:

    nice article steve.
    .. and good work reclaiming your lefty cred. although we all know its just a front and that really you regard the market mechanism as more than just a tool – market outcomes *define* what’s right don’t they ?

    Anyway, I agree that health care is an excellent (and concrete) example of where an unfettered market mechanism produces poor outcomes – where the dislocation between money and utility is laid bare. With reference to the example toy mention: the US performance on infant mortaility considering their massive spending on health is not an example of economic waste. For all the reasons you quote I think an unhindered market mechanism really does value (price) a boob job more than increasing the chance of an infant surviving to 2 yrs by blah%. Although its probably unfair to blame the market mechanism without qualification in as much as if we had some way of trading utility rather than cash then we’d get better outcomes (ie pamela’s boob job does not provide her as much utility as saving a poor person’s child does the parents…. probably).

    Here’s a straw man I prepared earlier:

    1/ allow a completely free market (subject to govt standards) for all health care and hopefully obtain some reasonable prices for treating various ailments. By ‘reasonable prices’ I mean that the market is working well enough that people really are valuing that shoulder operation in comparison with the torana spoiler kit they so desperately want.

    2/ take the attitude that welfare is ultimately about trying to maintain an acceptable minimum standard of living/opportunity/whatever (welfare line). That is, losing my job is an example of a moderate blow to my standard of living and so I get welfare payments to bring me up to the welfare line. Getting a hernia is also a blow to my standard of living and so I get welfare payments. How much of a blow to my standard of living is determined by the free market from 1/

    So my “adjusted income” includes the cost of the hernia operation which is more than I can afford on my meagre wage and so the govt tops me up by restoring my ‘adjusted income’ to the welfare line.

  4. graemebird says:


    The Americans don’t have a private health system at all. Everything is run through employers and insurance.

    People use insurance more over savings when they have currency debauch.

    And running things through insurance and employers doesn’t allow a cost-cutting market to work.

    So that therefore health costs were growing at GDP+2%.

    If you want to see what would happen under an AUTHENTIC FREE MARKET CONDITIONS you have to go to procedures which don’t allow insurance to give you a bit of an indication.

    So if you started pricing the cost of cosmetic surgery and see how thats going we would probably see that this would be something more like GDP-2%.

    And if thats true we see that a free enterprise health market would cut costs every year.

  5. graemebird says:

    “Yes, I know about this fact about Cuba. You don’t have to be a socialist country to have public health, but even in socialist countries it works better at least by some basic measures.”

    Come on. You are not buying into Castros JIVE are you.

    If that was the case Castro would have a growing source of hard currency. He could export these medical services.

    He’s lying and the leftists are helping him. This health system of the commies is just a myth.

  6. graemebird says:

    All of you have to simply stop comparing various socialist medical setups.

    What you must do is compare free enterprise with socialist medicine.

    You have not yet done this.

  7. Steve says:


    Firstly no idea why 2 of your 3 comments were held up in moderation.

    As for Cuba, I believe its true on some basic stuff stats over the US which is why I said “some basic measures” not better absolutely. It doesn’t seem unreasonable that amongst all the stuff they’ve got going wrong they’ve managed to get a couple of things right.

    You’ll have to explain to me why people wouldn’t use insurance without a currency debauch (by which I take it you mean metal backed currency and no fractional reserve banking).

    Why wouldn’t insurance be used in that system?

  8. Rod says:

    I think pure private is the way to go – If people cant look after their health or pay for insurance then why should I thru my taxes have to pay for them?

    F* them!

    Within the current system their are areas of little govt funding or intervention and these areas are innovating and cost cutting just as we would expect in a freer market (e.g. LASIK and Cosmetic Surgury)

    Private always does better! and if a few people fall thru the cracks.. so what.. they are falling thru the cracks in the public system anyway

    Here is an interesting study on Private black market education services in India

    Hyderabad, India

    In these areas alone our team found 918 schools: 35 percent were government run; 23 percent were private schools that had official recognition by the government (“recognized”); and, incredibly, 37 percent slipped under the government radar (“unrecognized”). The last group is, in effect, a black market in education, operating entirely without both state funding and regulation.

    In Hyderabad, students attending recognized and unrecognized private schools outperformed their peers in government schools by a full standard deviation in both English and math (after accounting for differences in their observable characteristics)

  9. Steve says:

    So you like a socialised road system Rod objecting to congestion charges, but oppose socailised medicine?

  10. Rod says:

    I’ll take a free ride on them now out of pure self interest.

    But I think that if their were only a tiny government we would all be driving hydrogen powered hovercars by now.

    You guy know in every NPV/IRR new project analysis you’ve every down that the tax line kills alot of project before theyve even got off the ground.

    When the government is in there taking 48.5% or 30% in every work / business transaction alot of transactions (which by definition creat utility) simply dont happen. And alot of waste and distortion in the economy arises.

    Contrast that to a transaction environment like SWIFT and the massive explosion of transactions in a zero transaction cost environment.

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