Saturday, April 02, 2005

Response to Matt

Here is my response to Matt's latest post.

There is also a difference between state "provision" and private "delivery". The provincial government has a mandate to provide a service called healthcare in general, but how it delivers the service is another matter.

For example, consider your dental benefits. Pretend that your dental benefits provider is the government. You get the service delivered through a private professional corporation - the dentist - who bills the benefits provider based on a list of charges for certain procedures. Hence, there is a difference between provision and delivery.

This is a weak argument because corporations will theoretically do business if they can even make 10$ per year.

Somewhat true, but there's a difference between accounting profits and economic profits. If the corporation's total investment were $100, it would make a 10% return. If its investment were $1,000,000, it would make a fraction of a percent and would have been better off investing the money in bonds. In the long run, corporations have to earn an economic profit in excess of their opportunity cost of investing.

The current system is plagued by free riders, but a private system might give way to rent-seeking. Free riders include people who go to emergency rooms for a cold at 4 am and take up resources that could be used elsewhere. Also, people want to pay low taxes and get the best service possible, but one result has been overcrowding and rationing - which has led to lengthly wait lists. To these people, the hospital seems grossly inefficient, when it turns out that it is a combination of over-demand and under-supply. In the absence of a price mechanism to coordinate behavior, the provider has to ration.

Health care expenditures are growing at a rate twice as fast as the economy's ability to grow, which implies that either taxes go up (don't want that!) or cuts are delivered to other areas. Clearly something has to be done.

The benefit tax has become de rigeur in public finance. It basically says that if you personally benefit from a service, then you should pay for it. This is popular because it discourages free riding. By being aware of the costs of your treatment, you can do your own cost-benefit analysis.

But health is a tricky thing. Some people get cancer due to externalities generated by industry. Ft. Saskatchewan Alberta, has one of the highest miscarriage and brain tumor rates in Canada (I'll have to find the citation). Do we want these people to pay higher health care fees simply because they live in proximity to a polluter? That's where Paretian optimality comes into play, but I won't go into it here.

I would be concerned about rent-seeking, and your idea of a "billable" list would prevent that. If you and I agree as private MD's that one stitch is worth $2, but is worth $2,000 when we sell it to the government, the collusion could cause costs to skyrocket.

Furthermore, something has to be done to lower the costs of doctors and nurses. Typically, doctors enter Med school with higher debtloads than other bachelor's level grads, and they incur even more debt to become MD's. This debt is affecting their locational choices upon graduation. Very few want to work in small, rural practices where they won't be able to recoup the return on their investment. It's funny, because this is where all the old people are.

So yeah, it's clear that something can and must be done to change the system; the debate of course, is how to go about doing it. Thanks for the ideas.