RM Issue #030902
Health care's hidden costs
Pierre Lemieux Financial Post Thursday, August 28, 2003
Socialist systems are especially efficient at hiding costs. Workers and producers are underpaid by the state. Economist Mancur Olson has demonstrated Stalin's genius at devising remuneration systems that encouraged people to work hard for mere subsistence wages. Also, in a socialist system, consumers spend much time in queues, sacrificing valued leisure or income, which is a real cost. What does this have to do with Canada?
An article in last week's New England Journal of Medicine by a group of American and Canadian health experts (Woolhandler et al.) claims that the administrative costs of health care (clerical personnel, time spent on administrative matters by doctors, etc.) are lower in Canada (US$307 per capita) than in the United States ($US1,059 per capita). The authors suggest that the centralized, monopolistic, public, Canadian system costs less to administer than the polycentric American system.
In the same issue of the NEJM, an editorial by Henry Aaron, a Brookings Institution economist, criticizes the methodology of Woolhandler et al., arguing that their data are unreliable and their comparison meaningless. But neither Woodlandler et al. nor their critic recognize all the hidden costs of the socialized Canadian system.
For example, neither acknowledge that time is money. Canada's long waiting lines saves the health system money but at a cost to patients. Apart from the patients' time, the first category of hidden costs include the added health risks from delayed appointments, exams, results and treatments, as well as the anguish suffered by the patients.
Socialist systems are oblivious to anguish, or to other subjective factors which bureaucrats cannot measure. In contrast, because Americans place a premium on good service, they face an added administrative burden. The benefit comes in hospitals that are generally better administered, better furnished and more cheerily designed, and in doctors who are generally easier to reach.
Another hidden cost in the same category is even more difficult to estimate. When money cannot buy services, some people manage to jump the queue. In communist countries, they were the elite in power, called the nomenklatura. The phenomenon is more subtle in Canada, where personal relations become the currency with which to pay for quick and personalized health care. If you have medical friends, chances are that you won't wait much. The long-term consequences of this East-Europeanization of the health care industry certainly increase the real social cost of the system.
The second category of hidden costs relates to the partial conscription of medical personnel in the Canadian system. In certain cases, like for young Quebec doctors forced to work in far away regions, the term "conscription" takes its full meaning. In most cases, doctors and other medical personnel are only subjected to partial conscription under the form of revenue ceiling or wage fixing by the government.
The third type of hidden costs in the Canadian public health system is the cost of raising the taxes necessary to finance it. The system costs Canadian taxpayers more than $75-billion -- more than 20% of all taxes levied in Canada. The administrative cost of collecting these taxes can be roughly estimated at $1-billion. But their real economic cost, i.e., the value they destroy elsewhere in the economy (what economists call the "deadweight loss" of taxes), is much higher -- perhaps of the order of $20-billion.
A large proportion of U.S. health expenditures is actually paid by government (especially through Medicare and Medicaid): 44% compared to 71% in Canada. The United States thus also experiences this deadweight loss, albeit to a lesser extent.
The United State's large public health sector and its stringently regulated private sector also remind us that their system is not exactly a free-market ideal. But the U.S. system is still better than the Canadian socialist system. Recall that, despite being administered by the different provincial governments, the Canadian medicare system is tightly standardized and cartellized by federal legislation, and that each provincial sub-system holds a territorial monopoly: These facts are recognized by another, instructive, article (by Detsky et al.) in the same issue of the NEJM.
Once a public health system with stealth costs and mirage benefits is established, getting rid of it becomes nearly unthinkable, if only because private institutions and solutions decay. As Detsky et al. point out, the Canadian system "is unique in the world in that it bans coverage of ... core services by private insurance companies, allowing supplemental insurance only for perquisites such as private hospital rooms." This crucial point is echoed by the NEJM editorial: "... in Canada, by contrast, private insurance for services covered under the various provincial health plans is prohibited."
According to official figures, Canadians spend less than Americans on health care: 9.7% of GDP compared to 13.9%. Now, even if all the hidden costs of the Canadian system are ignored and if the Woolhandler estimates are correct, this large gap in expenditures is still not totally accounted for. Even in the Brave New World of the public health advocates, Americans still get more (and better) health care after paying their administrative costs. The consumers get more of what they want, which is the ultimate criterion for any economic system.
In the short-run, the only efficient solution to the problems of the Canadian system would be to legalize private health insurance and let private institutions compete with the state system. As for the United States, the NEJM editorialist comes close to suggesting that imposing a Canadian-style monopolistic system would ignite a second American Revolution.
Pierre Lemieux is co-director of the Economics and Liberty Research Group at the University of Québec in Outaouais, and a Research Fellow at the Independent Institute (California). E-mail: PL@pierrelemieux.org.
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