Do We Really Have Freer-Market Health Care?

Trent's recent post on health care reminds me of something I've been meaning to post on for awhile. In debates about health care it is often assumed by all sides that the US has the least socialist, most free-market health care system of any modern developed country. Advocates of market provision of health care point to the US system's advantages as evidence of the advantages of markets; proponents of socialized medicine point to our problems as evidence of market failure. Both will concede that our system is not really a completely free market, but say that despite some significant deviations from the ideal, we still have the closest approximation to a market health system in the First World.

But is that premise true? I want to argue that it may well be false-- that there may be other countries whose health care systems are more free-market than ours in most significant ways. This requires that I talk about what "more free-market" means and what it does not mean; I'm going to claim that the metrics by which it seems that the US is the most free-market are bad ones, and that the right metrics are inconclusive at best. Warning: geekery ahead.

I. Bad Metrics

There are, I think, two main criteria by which the US is adjudged to be more free-market than other First World countries in health care. First, health insurance coverage is not universal, and many people lack insurance. Second, the percentage of total health expenditures due to government is much smaller here than elsewhere (44% of health care dollars in the US are spent by government vs. 65-85% for other OECD countries).

But the first criterion is pretty clearly a confusion of ends with means, and has nothing necessarily to do with the degree of socialism in the health care system. If some Third World kleptocrat declares that his country's hospitals are henceforth state property, and reserves them for the use of him and his cronies, he's clearly made the health system both more socialist and less universal. At the other extreme, in a Libertopian world where voluntarily-funded free clinics and charity care ensured that everyone could easily access at least some basic health care, you'd have universality but not socialism. (Note also that the US does have at least one nontrivial, and quite costly, universal access guarantee in health care: emergency rooms, regardless of public or private status, are required by law to treat all comers regardless of ability to pay).

The second criterion is more plausible, but still not very decisive. Suppose that in Country A, the government spends 3% of GDP on health care and private actors spend another 1%, whereas in Country B the government spends 4% and private actors spend 2%. The percentage of health care expenditure due to government is lower in B. But in fact, B is probably less free-market, not more: the level of taxation required to fund B's government health care programs will be higher, the distortive effects of B's government expenditures will be larger, and B's government may well acquire greater control over its economy and society as a consequence.

II. Better Metrics

It seems clear to me that the right criteria for judging how free-market or socialized health care is in a country are:

1. the percentage of GDP (not of total health expenditures) that the government spends on health care

2. the level of regulation the government applies to private health care providers: that is, the degree of government-imposed restriction on whom they can treat in what ways, how much they can charge for that treatment, etc.

The first is quite easy to evaluate and compare across countries; the second is multi-dimensional and thus extremely difficult to use for comparisons. But these criteria express the central aspirations and pragmatic thesis of libertarians: we want the state to take a smaller fraction of our money and restrict less of what we do with our lives, and we think that movement in these two directions will, at least to a large extent and under most circumstances, make life better.

III. What the Data Show

To see how the US stacks up on metric (1) above, you can go to the OECD health data site, click on "Highlights for a selection of countries," and look at their summary reports for 15 countries, one of which is the US. These give total health care expenditures as a % of GDP and also give the % of total expenditures due to government, so a simple multiplication gives the number one wants. I'm commenting on a subset of 12 of them here; I exclude Korea and Mexico as (arguably) not quite being in the First World, and exclude Belgium since I couldn't find the "% due to government" number in their report.

The first striking thing is the narrowness of the range of results: in all 12 countries the government spends between 5.5% and 7.5% of GDP on health care. The second striking thing is that the US is squarely in the middle of the pack, at 6.6%. Ireland, the Netherlands, Japan, Italy, and Austria (if my quick in-the-head calculations are right) spend significantly less; Denmark, Canada, France, Germany, and Sweden spend significantly more; and the UK is about the same. So by metric (1) the US is certainly not the most free-market, not even close. (If anyone has the numbers for other significant First World countries-- esp. Australia, NZ, and Switzerland-- I'd be grateful if you could provide them in comments).

What about (2)? Well, as I said, comparison is extremely difficult. And there are some countries on my list which are much more highly regulated. In Canada, for example, private insurers are actually prohibited from covering services that the state covers; in Britain the state actually owns and runs a comprehensive system of providers, the NHS.

But in the other 9 non-US countries, AFAIK, neither of these things are the case: the state pays private providers but by and large does not own them, people can purchase private insurance and/or pay out-of-pocket to supplement or replace the coverage the state provides, and a substantial fraction of people do in fact purchase private coverage. (I welcome corrections on this from those who know more details about the foreign systems in question).

Now, certainly it is true that nominally private providers who are paid largely or mostly by government tend not to be very free-market in their practical operations, and the government can use its purse strings as an indirect means of control. But this cuts against the US system as well, since here the Medicare and Medicaid programs exert an enormous distorting influence on the behavior of virtually all private physicians. It is not obvious that a foreign universal-coverage-with-private-option system must necessarily be more controlling than the US one.

So the devil is in the details. How much are private insurance providers in (e.g.) the Netherlands and Ireland constrained as to the sorts of coverage they may offer and the degree of price discrimination by risk they may employ? Is entry into the medical profession there controlled in the same stringent guild-like manner as it is in the US? And so on. I don't know the answers to these; they certainly aren't typically found in debates about health care on the Net. Again, I'd welcome answers from those who know them.

One thing I do know is that health care here has become much more regulated over time and continues to do so. In the recent past we have the various acronymic acts-- ERISA, COBRA, HIPAA, etc-- and in the near future we'll have the Medicare prescription drug bill (which will vitiate one of the few respects in which the US has hitherto been clearly freer than elsewhere, namely that drug companies don't have to deal with the federal government as a near-monopsonic purchaser). So from the point of view of our "US is the most free-market" premise, not only does the present look murky at best, but the future is dark indeed.


Update: Follow-up here.

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That's a very nice source.

That's a very nice source. Thanks!

CESifo got some data you

CESifo got some data you might want.

But in the other 9 non-US countries, AFAIK, neither of these things are the case: the state pays private providers but by and large does not own them, people can purchase private insurance and/or pay out-of-pocket to supplement or replace the coverage the state provides, and a substantial fraction of people do in fact purchase private coverage. (I welcome corrections on this from those who know more details about the foreign systems in question).

Well, in Sweden it isn't more than a couple of hundred thousand (out of 9 million) that got a private insurance to supplement the state provided insurance. About 15% of the total health expenditures comes from private insurances and out-of-pocket payment.

Most of the hospitals are owned by local governments and last week the parliament banned for-profit hospitals.

6/27/05 Carnival of the

6/27/05 Carnival of the Capitalists
Welcome to the Carnival of the Capitalists, your source for the best business blogging of the past week. This week's carnival was done with the help of Brian Gongol's template. I also labeled a few of my favorite posts with...

June 26, 2005 Carnival of

June 26, 2005 Carnival of the Capitalists
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My name is michael from

My name is michael from western state in colorado, i have a qiostion based on how swedan socialsim class health care works... basicly if the swedan society is socioliced or private.
thank you