Privatising Health Care

With the release of National’s real health policy, I have noticed a number of comments from Act supporters and Libertarians promoting the complete privatisation of health care. However, some of these advocates seem to think that Australia has completely privatised health care, which is untrue. Australia retains control and ownership of its public hospital system and infrastructure. Their funding stream is via a universal insurance system known as Medicare. Technically, this is not very different from New Zealand’s DHB funding system.

National are advocating the simple use of private New Zealand health care to alleviate shortages in the public system, which is very far away from privatisation. Again, it is very similar to the system in Australia which allows medicare payments to private hospitals and provides tax rebates for people who purchase private health insurance.

As I blogged yesterday, there is definite evidence that utilizing private health care in this way does produce better health outcomes. Note that there is no evidence better health outcomes increase longevity. US life expectancy is below New Zealand’s, despite its health outcomes being substantially better. In the longevity stakes, lifestyle habits trump healthcare every time. This means that life expectancy is a very poor way of determining the adequacy of health care.

So whereas we may live no longer, utilizing private health resources does appear to increase the efficiency of the overall health system. The question would then be whether complete privatisation would improve efficiency still further. 

Here the evidence is not so clear cut. Although US health outcomes are mostly the best in the world, systems with public/private partnerships such as Australia and Singapore appear to have outcomes nearly as good, at less than half the cost of US healthcare (as a percentage of GDP). Arguably, US healthcare outcomes are lower than they should be because of the large number of uninsured. However, this effect is likely to be small overall (0.5 – 1% improvement).

It is certainly possible to convert New Zealand to a completely private health system. There are entirely predictable market problems that must be compensated for. Any insurance-driven system will experience adverse selection (where insurance is denied the very sick, either literally or by absurdly high premiums). This can be avoided by providing a universal basic insurance which has built-in compensation for severe and chronic illness. You then allow people to purchase insurance voluntarily over and above the universal insurance.

The other market-related problem is that of moral hazard (where people use a system to the extent of its perceived cost – the lower the cost, the more use). This is traditionally solved by a system of co-payments. Care must be taken not to set co-payments high enough to discourage necessary use, only unnecessary use – this is often a very fine line.

Moral hazard is, of course, not constrained to private systems. The dropping of the part-charge for ED visits in New Zealand, was followed by a gradual rise in low-acuity ED presentations, out of proportion to population rise. This was directly attributable to moral hazard.

Privatisation of health care in New Zealand is readily achievable. However, there seems to be little appetite both in the political arena and amongst the public for privatising health. The overall benefit of privatisation would also seem to be questionable, making it very unlikely that there will be the political will for this any time soon.

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