(Reprint from HKCER Letters, Vol. 12, January 1992) 


Health Care: A Market Approach

Joel W. Hay


Health Care in Hong Kong

Based on available vital and health statistics, Hong Kong people appear to be in quite good health, compared with the U.S. and other Organization for Economic Cooperation and Development (OECD) countries. However, in his recent study, Health Care in Hong Kong: An Economic Policy Assessment), Dr. Joel Hay points out that there is little to suggest that government health and medical programs deserve primary credit for these positive results. First, data on every aspect of health status and health care utilization is sorely deficient. It is difficult for government to take credit for results when they cannot even say what is happening to the population in terms of chronic disease prevalence, chronic disease risk factor prevalence, prevalence of activity restrictions and other disability measures, or what role government is playing in these areas.

Second, the area where modern medical practice has been most effective is the prevention and treatment of infectious and communicable diseases. The evidence suggests that, with sexually transmitted diseases being the notable exception, Hong Kong does not perform as well as the U.S. and other OECD countries. If Hong Kong government medical care cannot perform as well as many OECD countries in areas for which the prevention and treatment regimens are well-established and effective, it is unlikely that they are outperforming them in medical treatment for other conditions. The implication is that the high levels of health among Hong Kong people are due primarily to local cultural, and lifestyle factors, rather than government health care.

According to official statistics, Hong Kong health care expenditures, both for the public sector and in total, are quite low by international comparison. This has led many local health policy experts to conclude that Hong Kong government health care is either a great bargain or excessively frugal. But officially reported expenditures are incomplete. The actual levels are conservatively double the Health and Hospital Services Department budgets, and probably larger than that.

It is taken as government policy that medical care is provided for free, but this is illusory, since the actual cost to the consumer in terms of waiting time and inconvenience is substantial. Rather than allocating scarce medical manpower on the basis of medical need, the Hong Kong government system allocates it to the consumers with the greatest tolerance for waiting.

The average cost per bed per day in government and private hospitals is very low by international comparison. The fees charged for all government medical services are also extremely low. On the other hand, private doctor fees in Hong Kong are among the highest in the world. Hong Kong doctors in private practice engage in overt price discrimination, with the same surgeon charging 2 to 20 times as much to a high-income (private ward) patient as to a low-income (general ward) patient. The existence of such price discrimination is strong evidence of a monopolistic market structure for private physician services in Hong Kong.

Staff turnover is high in all areas of government medical services, and morale appears quite low. Nevertheless, the absolute number of government medical staff has increased steadily over the years in all medical professions. The excessive workloads result from a growth in demand that has outpaced the growth in supply, rather than a real decline in government medical staff.

While government medical staff working conditions and pay levels seem poor, the high visibility of this issue can be partly accounted for by high-profile bargaining over pay and other issues between the government and its medical staff. With government exercising a clear monopsony power over hospital and other medical staff, nursing shortages and overwork of medical staff will persist as long as the government, or any other unified authority, controls such a large portion of the hospital care sector.

Very little information is available on the private health care sector in Hong Kong. Anecdotal reports suggest that variability in private sector fees and quality of care is substantial. There is also anecdotal evidence that some doctors charge excessive fees, provide unnecessary services, and in some cases, are providing services beyond their areas of competency. One of the biggest failings of the current system is that public officials have focused exclusively on the government health care system and have ignored basic protection to the large segment of the Hong Kong population which receives health care in the private sector.

The private medical insurance market has been growing at about 40 percent annually. Even so, only about 14 percent of the population has health insurance. Those insured are most likely to be male, better educated, employed, and with relatively higher income. The modal reported that the monthly medical insurance premium was HK$201-HK$500. The level of medical benefits coverage obtained at these prices is limited however. A catastrophic medical event would quickly put the beneficiary of such a policy back into the government hospital system.

Medical insurers have almost no ability to check the appropriateness of fees and services provided by doctors or to exclude or limit excessive fees or unnecessary claims from abusive doctors, hospitals, or other providers. The Hong Kong Medical Council has insisted that medical insurers must cover services provided by all licensed Hong Kong doctors, claiming that if medical insurers were to maintain a panel of "preferred providers," as is commonly done in the United States, this would violate the regulation restricting doctor advertising. This is the biggest barrier to enhancing the quality and efficiency of private medical care.

Health care policy has developed at a very slow pace in Hong Kong. The major innovation in the past ten years has been the establishment of a new quasi-nongovernmental agency, the Hospital Authority, to manage and operate all government and subvented hospitals in Hong Kong. Dr. Hay does not believe that the Hospital Authority will substantially improve the standards and performance of government medical care institutions for several reasons. First, a major problem with government health care in Hong Kong is the lack of continuity of care between doctors and patients. This problem will be exacerbated with the public sector hospitals formally splitting away from the government outpatient, public health, and preventive services. There will be a strong incentive for hospitals to shift as much of the burden as possible onto the outpatient sector and vice versa.

Also, the reshuffling of the hospital administration will preserve the hierarchical management structure without any changes in the fundamental incentives, and with few new resources available from government. The Hospital Authority will maintain its near-monopoly over Hong Kong hospital resources, and the Authority staff will focus on pleasing hospital management rather than hospital patients. No bureaucracy can, by itself, create the efficiency and quality needed to match that of an enterprise forced to operate in a competitive market.

Problems with Public Provision

The growing dissatisfaction with medical and health services in Hong Kong is a result of many factors. The most important factor is the public health system. Health care providers dominate the system, and patients have little choice but to accept whatever is decided for them. The quality of service is necessarily poor because it is not patient-oriented. Health care providers are also frustrated and demoralized because they see themselves as underpaid, overworked, and unappreciated.

The public provision of medical and health care cannot be efficient. The problem with planned systems is that there is little incentive to allocate and manage scarce resources efficiently. The system is tolerated only when health care is provided cheaply and where private care as an alternative is available to those who have a high demand for quality care.

In the past, the system was better tolerated because the population was less prosperous, less educated, and less elderly. In short, there were fewer high-demand clients then, and fewer who could afford expensive private care. The situation has since changed. The health care needs of the 1990s cannot be met by simply devoting more resources to our existing health care system. Dr. Hay has argued that, given a more complete financial accounting of the resources, health care in Hong Kong is neither a bargain nor excessively frugal. It does, however, imply that our health care system is probably grossly inefficient. A fundamental reform of the system is clearly indicated.

The dominance of the public health system implies that most of our health care spending is channelled through the public sector. Unless there is a fundamental restructuring of the way in which we finance and deliver health care, government spending in this area would have to rise much faster than economic growth, simply to meet demand and cover costs. One cannot entertain any hope that the quality of care that is provided can even be improved. The budgetary implication alone will have serious repercussions for our economic system of low tax rates and limited government. It is abundantly clear that additional resources are not going to be easily available to the public sector in the future.

There are two kinds of problems facing our health care administrators. There is public dissatisfaction with the quality of services provided, and apprehension about the coming financial crunch. While there is a lot of concern about the impending crisis, this may well be a blessing, for it provides for the first time an opportunity to reconsider the way in which our health care needs are to be provided and how they are to be funded without assuming the problem away by throwing more tax money into the existing system. It is important to recognize that the provision of health care and its funding are not separate issues and each cannot be considered in isolation from the other.

In health care, as in all other industries, there are only two methods to improve performance. One method is to commit more resources to the industry; another is to improve efficiency through changes in the way in which the industry is organized so that the same amount of resources can become more productively utilized. This is a fundamental dictum of economic reasoning. Health care is no exception. The most obvious solution for improving the performance of a planned system where prices are not utilized to allocate resources is to reintroduce the market mechanism of price-directed allocation.

Attempts to raise user fees for publicly provided health care without at the same time introducing market pricing of health services will not be well received by the public for good reasons. It proposes merely to tap private resources to help fund health expenditures in the public sector without promising to carry out necessary reforms to improve the quality of care. Another problem with high user fees is that those who get sick may not be those who can afford the treatment. Public resistance to increases in user fees may be less intransigent if they are moderate and if the poor are given exemptions. Unfortunately, the additional resources that will be made available will necessarily be very limited, and there cannot be any impact on quality. The experience of the United Kingdom proves the point.

To improve efficiency, one must create a market for health care services. The quality of health care is best maintained through competition among health care providers. Such a system would ensure the proper pricing of health care services, facilities, and medicine, that would reflect the true costs of delivering health care services. Much of the abuse and waste inherent in the monopolistic public health system stems from the absence of competition and the lack of proper pricing of scarce resources. The present dominant role played by the public health sector and numerous other institutional barriers and restrictions impede effective competition in the health sector and make it impossible to have a genuine patient-oriented health care system.

A Market Approach

There is understandable conflict between the desire to have government-ensured health care access for all and the recognition that private markets provide goods and services more effectively and efficiently than does government. Genuine improvements in Hong Kong health care services will rely increasingly on enhancing competitive market incentives.

An important issue in health care is: How should services be financed when resources are to be correctly priced in the market? The issue of equity is crucial in this discussion. Clearly, the vast majority of the sick population would not be able to pay health care bills if prices were to reflect genuine costs. But the conflict between equity and efficiency is more apparent than real. Dr. Hay proposes, in this study, a scheme that provides the ideal alternative for combining efficiency with equity. He calls his proposal ChoiceCare.

In the Hong Kong context, his proposal calls for the introduction of a publicly subsidised competitive insurance scheme as an alternative that will coexist with the existing public health system. Families will be presented with the choice each year of using either the existing public health care service or enrolling in ChoiceCare. Those who opt for ChoiceCare will receive a Basic Level Entitlement from the government that can be used to purchase an insurance policy provided by a hospital, a health maintenance organization, or an insurance company. The insurance policies will be vetted by the government and are required to include a required minimum level of coverage. Qualified insurance plans would have to provide full coverage for catastrophic care to ensure that ChoiceCare patients did not become a burden on the government system for their most dire health care needs. Families may add to the Basic Level Entitlement and purchase insurance schemes with more extensive coverage if they so choose. Families that opt for ChoiceCare can choose their own preferred doctor and hospital in either the public or private sector. Their expenses will be covered by the insurance policy. Families who do not enroll in ChoiceCare can continue to utilize the existing services in the public health system where their expenses will be covered by direct government funding. It should be noted that in both the market sector and the public health system, funding comes primarily from the public purse. The difference is in the mechanism through which funding is provided and the extent to which competition and prices are used to allocate scarce health resources.

ChoiceCare is a purely voluntary arrangement and no one is compelled to join it. ChoiceCare plans would not be limited to private sector medical facilities and staff. Nonprofit ChoiceCare medical plans could also be offered directly by hospitals and doctors working under the new Hospital Authority. Competition between different hospital and doctor groups within the private and public sectors would be a strong motivating force to guarantee the quality and efficiency of medical care throughout Hong Kong. This system would provide an opportunity for more effective competition among health care providers, which is crucial for improving the quality of health care.

All insurance schemes have potential moral hazard problems. Both patients and doctors may be induced to abuse the scheme unless incentives are built in to discourage them. This is why competition among insurance companies is important. Companies who are unable to contain costs will become less competitive. A compulsory social insurance scheme will not be subjected to market competition and will have less incentive to contain costs than competitive schemes. The experience of the United States is especially relevant here.

It is important to note that the success of any insurance scheme must be based on a system of market prices maintained through effective competition. Voluntary competitive insurance schemes are better than a single compulsory social insurance scheme because of the element of competition. It is essential not only for containing costs, but also for improving the quality of health care. Without competition and market prices, it would be very easy for a social insurance scheme to degenerate into little more than a scheme of health taxes, and this would defeat the whole purpose of introducing such a system to save costs, improve efficiency, and provide better care. The scheme that is being proposed by Dr. Hay in this study calls for gradual and feasible but fundamental changes to the financing and delivery of health care services. It relies on competitive market forces to maintain the economic quality of health care services, but preserves the role of government in the funding of health care. Dr. Hay's case provides a refreshing perspective to the entire debate on the future evolution of the Hong Kong's health care system.

By encouraging a responsible, competitive market for health care services, Hong Kong could relieve the pressure on the overburdened government health care system without having to raise more and more revenues through taxes. The powerful competitive incentives in a ChoiceCare market for health care would go much further towards enhancing the quality and efficiency of health care services than legions of government bureaucrats ever could. Consumers would have access to a wide spectrum of health care options, including ones tailored much more closely to their particular circumstances, than the current system or a government insurance monopoly could offer.

Dr. Joel W. Hay is a Senior Research Fellow at the Hoover Institution at Stanford University.


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