Structural Spending Reform, Part 4

Health care is one of America’s most contentious policy issues. While Democrats keep pushing for more government involvement, Republicans have presented a good reform to move in the opposite direction. It remains to be seen which way Congress ultimately goes on this issue; with the budget deficit essentially out of control and the two political parties deadlocked in a mad fight over ideology and a highly contested election, it is unlikely we will see sound reform efforts any time soon.

That said, if the Democrats recognize the voter message in their loss of seats in the House of Representatives and that they probably will not gain control over the Senate; if they replace Nancy Pelosi with an ideologically more moderate Speaker, there is a chance for reform efforts across the aisle. That, in turn, could become a moderating force in the event a radical Biden administration were to take office in January.

America is in dire need of bipartisanship on major, structural entitlement reform. If we continue in the opposite direction; if we see more monetization of deficits; we are destined for uncontrollable deficits, hyperinflation and eventually economic implosion.

Too many people still shake their heads at this prospect, thinking it cannot happen in America. They are foolishly ignorant.

Fortunately, there are reforms out there that could appeal to a bipartisan coalition of common sense in Congress. I will discuss three of those reforms, starting today with health insurance.

To work, structural spending reforms must meet three criteria:

  1. Part with the algorithm that grows government spending. The modern American welfare state is built around the principle that entitlement spending should grow annually as the economy becomes more prosperous. We must redesign the welfare state in line with socially conservative principles, where it provides a basic safety net and an institutional framework.
  2. Protect the weakest among us. It is essential that a structural reform does not make life worse for those who are unable to provide for themselves and who live on the very edge of destitution. If they end up worse as a result of a market-based structural reform, then the reform has morally failed. This demographic depends critically on the welfare state because government has essentially marginalized the private sector in providing for the poor and the vulnerable; when we roll back the welfare state, we therefore have to prioritize the weakest demographic and secure their path to a better life before anyone else benefits from the reform.
  3. Stimulate economic growth based on free-market principles. No economic system is better at combining efficiency with quality than free-market capitalism. It rewards him who finds a way to do more with less and thereby drives resources to where they can steadily improve quality and affordability.

We will discuss these three criteria in the context of Social Security and welfare reform. First, though, we will take a look at how we can reform our health-insurance market with these criteria in mind.

The Republican Study Committee reform plan is important in this context, but there is an even more interesting example, namely the Dutch health insurance reform. It gives us a context from a political environment that generally favors government involvement in the economy, yet the reform took a few important steps in the opposite direction.

In 2006 the Netherlands reformed its health-insurance system, from one that primarily relied on taxpayers to one where private insurance became the norm. The shift was dramatic, literally flipping the proportions of tax-paid and private insurance funding:

Figure 1

Sources of raw data: Eurostat, OECD

The reform did not happen abruptly, but followed logically after the country moved in the direction of “managed competition” in 2000. That reform, in turn, came on the heels of a long struggle to contain costs in what was essentially a system with Medicaid for the masses and private insurance for the privileged few. From Health Affairs, 2008:

By the end of the 1960s the Dutch government became worried about the seemingly uncontrollable growth of health care spending. The reason for this was twofold. First, rising health care spending could jeopardize the goal of universal access to basic care. Second, the government feared that rising health care costs would result in higher labor costs, which would raise unemployment and harm the Dutch open economy, which relies heavily on exports. The growing pressure to contain medical spending led to increasing supply and price regulation beginning in the mid-1970s.

When they realized that more government involvement did not solve the underlying problems of runaway costs for an inefficient health-care system, they tried a different approach:

From the early 1980s top-down rationing policies were subjected to growing criticism, focused particularly on the lack of incentives for efficiency and innovation within the prevailing system of health care finance and delivery. This led to broad support for incentive-based reforms and a reconsideration of the role of competition. In 1987 the government-appointed Dekker Committee advised a market-oriented health care reform and a national health insurance system. The Health Insurance Act (2006) and the current regulatory regime are based on these proposals.

The reform was centered around a market for private insurance. It was not a complete market-based reform: there are price controls that give price signals a moderate scope for transmitting supply and demand signals through the market. There is also a coverage mandate, which is controversial from an American viewpoint but understandable if you transition from a Medicaid-for-the-Masses model into a predominantly private system.

One of the best accounts of the Dutch health-insurance reform is from 2008 and was actually written at Lehigh University by an undergraduate student, Rachel Stewart (confirming that a wide assortment of PhD’s fall victim to the sea squirt theorem). Titled “Dutch Health Insurance Reform: An Evolving Effort to Transform Healthcare”, the report highlights the introduction of competitive elements in what was previously an over-regulated system. For example:

Although the basic policy’s coverage is prescribed, insurers can establish their own contracts with healthcare providers. This was not the case in the old system, where insurers were required to contract with all healthcare providers in their respective region.

Government mandates a basic package of benefits to be covered by every insurance plan, but the system is open-ended in terms of supplementary insurance plans.

Institutionally, the funding model is designed to allow for more room for market-based premiums, but there is also a “risk equalization fund” that essentially fills the function of U.S. high-risk pools. Stewart reports:

The new system’s elimination of risk selection by requiring insurers to accept all applicants is an important feature; it provides everyone with the opportunity to purchase health insurance, but it poses a financial problem for insurers. Because there is a strong incentive to select against higher health risks, and because forbidding the practice creates a potential for an unequal distribution of risks between insurers, the Risk Equalization Fund (REF) compensates insurers for bearing uneven cost burdens.

This is, again, an institutional feature characteristic of a reform that goes from Medicaid for the Masses to a generally private model. While better solutions are available, it fits within the framework of a reform that seeks broad political support for the introduction of market-based mechanisms to combine efficiency with quality.

In this respect, the reform appears to have worked. It was designed to create incentives for both patients and providers to be efficient with resources and mindful of quality. In this regard, the reform appears to have worked, as visible in Eurostat and OECD health-care data.

  • Cost containment has worked: in the seven years prior to the reform, total national health-care costs in the Netherlands increased by 7.4 percent per year; in the seven years immediately after the reform, the annual cost increase was less than 4.7 percent.
  • In the same pre-reform period, the number of hospital employees decreased at -0.35 percent per year; after the reform staffing increased by almost two percent per year.
  • In 1999-2005, medical doctors accounted for 18.7 percent of hospital employees; in 2006-2012 that share increased to 21.2 percent, on average. This increase was visible in annual growth rates: pre reform, hospitals added 1.7 percent medical doctors per year; post reform the annual growth rate was 4.1 percent.

Overall, the Dutch health insurance reform brought key features of the free market into a system that for decades had been dominated by government. While not directly informative for an American reform model, it shows how a reform effort in an ideologically charged political environment can be honed in on the three criteria listed above:

  1. The spending-growth algorithm. While the Dutch model does not confine government strictly to a last-resort provider role, it does reduce government funding to a secondary function. Its focus is on subsidies that indirectly benefit low-income earners more than others. Unlike the Obamacare model, which seeks to simply redistribute insurance coverage, the Dutch reform designed subsidies to guarantee access to basic care. This is a more socially conservative approach than a traditional socialist model.
  2. By scaling back government participation to a secondary function, the reform can better guarantee protection for the poorest citizens. This role is not perfected in the Dutch reform, but it is highlighted. When government parts with the socialist ambition to provide a benefit to everyone – when the Medicaid-for-All idea is tossed out – it can limit its burden on taxpayers while moving closer to fiscal sustainability.
  3. Putting market mechanisms in the front seat means that both health-insurance plans, health-care providers and patients have incentives to do more with less. Competition and consumer choice are prioritized. To be clear, the Dutch reform is by no means perfect in this regard, but available quality data suggests that the reform has worked in this respect. Cost increases have tapered off while patients have better access to doctors than before the reform.

The Dutch reform is relevant from an American viewpoint more for its design features than for its actual performance. What matters is the thinking behind the reform; to move our system in the right direction, and away from increasingly costly government involvement, we need a somewhat different focus. Again, the Republican Study Committee has given us a very good idea of what that means.

Click here to learn about how we can reform Social Security.

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Covid-19 and Medicaid for All: Part 3

With a substantial part of America’s youth having a favorable view of socialism, there is a considerable risk that in the near future we will experience the final government takeover of our health care system. Those who think this is a good idea sometimes claim that it will actually reduce the cost of health care, a point I refuted in Part 1, and they unanimously ignore the rationing that takes place under single-payer systems.

In Part 2 I covered one angle of health-care rationing, namely the decline in hospital beds per capita in European health-care systems. I explained how countries with more stingy medical resources were more likely to suffer worse from the Covid-19 epidemic.

This third and last installment takes another angle to the supply of health-care resources, namely spending and staffing. Focus is not specifically on the performance of Europe’s health-care systems during the epidemic, but on what happens to them under episodes of fiscal austerity. When tax revenue is in decline and government runs a big deficit, a system for socialized medicine suffers accordingly. A review of European countries confirms this:

Austria: Government funds three quarters of the health-care system. Out-of-pocket costs charged to patients pay for 19 percent of total health-care costs. During 2005-2009 total health spending increased by 4.6 percent per year; the increase tapered off to 3.24 percent per year during the austerity period. The slowdown in funding was pronounced in preventative care, declining from five percent per year in the pre-crisis period to one percent under austerity. The slowdown in funding was also noticeable for residential long-term care patients, although the annual pre-crisis rate of eight percent was cut to a still-reasonable 3.6 percent.

Belgium: Government funds 77 percent of the health-care system. Out-of-pocket costs for patients account for about 18 percent of total health-care costs. In the pre-crisis years total spending on health care increased by 5.35 percent per year; in the austerity years that dropped to 3.35 percent. Cost containment was most pronounced in general hospitals, where annual budget increases were reduced by half, and in preventative care, where resources grew by 26 percent per year pre-crisis and ground to a halt during austerity. In terms of staffing, the total headcount grew by 2.1 percent per year pre-crisis, 1.1 percent during austerity. There were outright cuts in staff with low or no medical training; a third of all nursing associates lost their jobs in 2010-2014.

Cyprus: Hit hard by the austerity storm, one would expect Cyprus to exhibit serious budget-cut symptoms. However, it appears as though the high private funding share in Cypriot health care helped protect it. From 2010 – the earliest year for which the OECD reports health-care spending for Cyprus – to 2017, the private share rose from 51.5 percent to 57.4 percent. Out-of-pocket costs rose from 41 percent to 44.6 percent. Per capita, this represents an increase from 606 euros per year to 686 euros, or an average of 2,744 euros for a family of four. Though strenuous for hard-hit Cypriot families, this increase helped weather the austerity storm: the number of staff in the health-care system per 1,000 residents increased from five in 2004 to 6.6 in 2014. Better still: the share of highly educated health-care professionals – doctors and nurses – rose from 79 to 81 percent.

Denmark: With government paying for 84 percent of all health care and households contributing almost all of the rest out of pocket, the Danish system is one of the most socialized in the world. The growth in health-care system staff slowed from 2.1 percent per year pre-crisis to one percent per year under austerity. There were explicit reductions in the number of health-care assistants, while hospitals and clinics continued to slowly increase the number of doctors and nurses (albeit at very low rates). All in all, the Danish system remained stable, but residential long-term care facilities have seen a noticeable slowdown in the growth of appropriations.

Estonia: Government funds 76 cents of every euro of their health care. Households provide almost all the rest out of pocket. There was a dramatic slowdown of appropriations increases from the pre-crisis years to the austerity episode: in 2005-2009 the annual increase was 13.5 percent; in the austerity years 2010-2014 it was 5.85 percent. This is still a respectable year-to-year increase, bringing per-capita health-care spending up from 478 euros in 2006 to 1,072 euros ten years later. Staff-wise, the system has emphasized hiring more health-care assistants and so-called “other medical professionals”, ostensibly to expand accessibility of the health-care system as much as possible.

Finland: Three quarters of every euro the health-care system gets comes from taxpayers. Out-of-pocket payments account for another 20 percent. With funding growth slowing from 5.4 percent per year pre-crisis to four percent during the austerity episode, staffing policies shifted from nurses and midwives to nursing associates, a lower-educated category. Preventative care and long-term residential care took the brunt of the cost containment.

France: Taxpayers bankroll 76.5 percent of French health care, though in the last couple of years it has increased to more than 83 percent. This increase has replaced some of the “voluntary” contributions that previously accounted for 13.5 percent, on average, of annual funding. Patients pay about 9.5 percent out of pocket. Similar to many other countries, when the funding increase slowed down – from 4.4 percent per year pre-crisis to 2.6 percent under austerity – residential long-term care and preventative-care services took a hard hit. The latter category actually lost more than five percent annually of its funding (though most of the cuts were made in 2010). Medical staff was cut by -0.6 percent per year on an annual basis during the austerity episode, a change from an almost two-percent increase pre-crisis. Cuts were made primarily to health-care assistants and administrators.

Germany: With three quarters of total funding coming from taxpayers and out-of-pocket costs accounting for 12.5 percent, the German system has a standardized funding model. However, except for cuts in preventative care and in lower-educated medical staff, the system was largely unaffected by the austerity episode. The main reason is very likely that the German economy took less of a beating from the Great Recession generally, as the currency union – the euro zone – was designed around the Deutsch mark. This gave the Germans an inherent comparative advantage vs. other economies in the union. Therefore, their economic growth was affected less, as were their tax base.

Greece: While no data is available for health-care funding prior to the austerity episode, OECD numbers from 2009 forward show a decline in government funding from 68.5 percent in 2009 to 60.8 percent in 2017. During the same period of time, out-of-pocket costs increase in importance from 29.3 percent to 34.8 percent. This increase in share did not increase the current-price cost to households, the reason being that health-care funding in Greece was basically butchered: in 2009 total spending on health care amounted to 22.5 billion euros; in 2013 that had dropped to 15.2 billion euros. By 2017 it had declined further, to 14.5 billion. From 2009 to 2014, the core of the austerity era, the health-care system lost 15.4 percent of its staff, including 10.3 percent of its medical doctors. Hospitals lost 36 percent of their funding, with a 19.4-percent drop for mental hospitals. Ambulatory care was cut almost in half. Without increased reliance on out-of-pocket costs, the system would have lost another seven percent of its funding from 2009 to 2014.

Ireland: During austerity, modest staffing reductions replaced pre-crisis increases. This was achieved through reductions in the number of nurses and administrators, and a halt in hiring “other medical professionals”. The Irish health system responded like many others, by prioritizing quality amongst cutbacks. With 72 percent of health care being tax-funded, the rest is split equally between out-of-pocket charges and voluntary contributions. This has resulted in a small rise in the share of health-care professionals being medical doctors.

Italy: The Italian health system has taken a beating or two in recent years. It became the poster child for botched Covid-19 response, but few people dug deeper to see why. In reality, the Italians went into this epidemic with a health-care system in bad shape. During the 2010-2014 austerity episode they cut every category of medical professionals, with three percent fewer doctors and nurses and four percent overall staff reductions. The number of hospital beds, on the other hand, fell precipitously throughout the austerity episode and beyond. It was 14 percent smaller (measured per 1,000 residents) in 2016 than it was in 2010.

Lithuania: During the austerity years, 2010-2014, funding of health care shifted from 72 percent government money to 67.6 percent. That share continued to drop after that, though modestly. Households pay the remaining share out of pocket. However, overall funding remained good: there were minor changes in staffing, and after cuts of 3.6 percent in, respectively, 2009 and 2010, Lithuanian health care has enjoyed five-percent annual increases in funding.

Netherlands: The Dutch economy was among the ones taking a bad beating during and after the Great Recession. In health care, annual increases in funding dropped by half, from 5.3 percent pre-crisis to 2.6 percent during the austerity years. Reductions hit all forms of providers, but mental hospitals took the largest beating. Their funding ground to a virtual halt after 6.4-percent annual growth in 2005-2009. While overall staff increases also ended, the expansion of medical-doctor staff continued under austerity. This indicates attention to quality, which in turn may be attributable to the funding reform from 2006 when the Dutch parliament cut back government funding from two thirds of all health care to one third. Funding was instead shifted to private insurance, which now cover two thirds of the country’s health-care costs. Out-of-pocket payments have remained in the 10-11 percent bracket.

Portugal: Government funding of health care fell from 69.5 percent pre-crisis to 67.2 percent. During austerity, total revenue for the health-care system dropped three years in a row; in 2017 total funding was almost the same as in 2009. Austerity policies in 2010-2014 took a toll on every form of health care, reducing funding across the board (except long-term residential). Staff cuts reduced the number of health-care employees from 12.1 per 1,000 Portuguese people in 2010 to just over 11.3 in 2014.

Spain: Second only to Greece, the Spanish economy was hit very hard by the austerity crisis. Government funding dropped from 75 percent to 70, with households picking up the balance by increasing out-of-pocket contributions from 19.5 to 24.5 percent. Every provider form was slashed (except long-term residential care whose funding stood still), with specialized hospitals losing 10.8 percent of revenue per year in 2010-2014. Providers of preventative care lost almost as much during the same period of time, 9.85 percent per year. Staff reductions concentrated to health-care assistants, other medical professionals and administrators kept the number of doctors, nurses and midwives steady. Thanks only to a decline in population, Spain did not suffer a drop in health-care staff density.

The lesson from this review is clear: if you want to protect your health care from bad times and budget cuts, make sure as much as possible of the funding comes from private sources. Government is the least reliable provider of money for your medical needs.