(Reprinted from HKCER Letters, Vol. 22, September, 1993) 


Comments on Towards Better Health:
A Consultation Document

Joel W. Hay


The Hong Kong government's green paper on health care reform reminds me of Gertrude Stein's comment about her native city of Oakland, California: "There is no 'there' there." Hong Kong's health care system needs major reform. Other industrialized countries have taken major steps to establish either comprehensive government or private market health insurance programs for their populations. Even the United States under the Clinton Administration is finally embarking on a fundamental reformation of U.S. health care financing and delivery. And yet, the Hong Kong government's health care document proposes tinkering at the margins with a health care delivery system that will collapse under the weight of its own bureaucracy in a short period of time unless it is modified.

Before Hong Kong can decide what type of health care system reforms should be implemented, fundamental questions need to be addressed about where health care belongs in the political and economic structure of society. Does Hong Kong want to maintain the decrepit and decaying facilities and plummeting staff morale that typify its government and Hospital Authority health care systems, or does it want to encourage within health care the powerful market forces that have made Hong Kong's economic growth rate and rising standard of living the envy of the rest of the world? Having studied Hong Kong's health care system, and having watched the bureaucratic reshuffling of the Government Hospital Department into the equally bureaucratic Hospital Authority, I would argue that a market-oriented approach to health care reform would be vastly superior to the central-planning approach that the Hong Kong government still clings to. (See Hay, Health Care in Hong Kong: An Economic Policy Assessment, Chinese University Press, 1992).

The 10 percent of Hong Kong hospital beds that are in the private sector provide 20 percent of the hospital care. Private sector doctors in Hong Kong provide 65 to 70 percent of the outpatient consultations (see Towards Better Health). When Hong Kong's people are given a choice, and when they can afford it, they overwhelmingly prefer the private sector.

Hong Kong's government should be working with the Hong Kong Medical Insurance Association, with the Hong Kong Medical Association, and with all other health care providers to design fair and equitable health insurance plans that guarantee all residents of Hong Kong access to affordable care, and to choices of hospitals, doctors, and other providers, both in the private and public sectors. The plan that I proposed for Hong Kong, ChoiceCare, would stimulate efficiency and quality in health care provision through competition among health care plans, while guaranteeing that no citizen is excluded, that competition obeys rules of fairness and equity, and that doctors, hospitals, and other providers in the public or private sector are efficient and competent (see Hay). Many of the aspects of ChoiceCare are also incorporated in the "Managed Competition" plan which the Clinton Administration has proposed for health care reform in the United States.

The United States has demonstrated the benefits of health care provider competition in the development of capitated managed care plans, also known as Health Maintenance Organizations (HMOs). We have also learned the dismal failure of trying to maintain a private health insurance market when all doctors are paid on a "fee-for-service" basis. Under "fee-for-service," the doctor takes advantage of the insurance plan by ordering more and more services, to the detriment of the patient -- who often does not need all of these services -- and also burdening the rest of society who has to pay the continually rising insurance premiums. Managed care plans do not pay doctors and hospitals on a fee-for-service basis. Health care providers are paid the same amount of money per member, per month, regardless of how many services are delivered. They are "at risk" for health care, and thus they provide it when it is really needed and truly appropriate. But managed care, if left to dominate the market by itself, is also a bad idea. If everyone were forced to belong to a single managed care organization which did not have to compete with any fee-for-service doctors, hospitals, or other providers, this plan would have a monopoly and would quickly regress to the levels of service and quality that are currently seen in Hong Kong's public health care sector.

What is needed is a mix of health insurance plans, some fee-for-service, some managed care, some public, some private, all competing in the health care market place. The government would regulate the market to ensure that no citizen was left out, that accurate information was being provided to patients, and that competition was based on efficiency and quality rather than on the monopoly power of certain hospitals or doctors, or on denying care to sick people.

Even countries like the United Kingdom, Australia and Canada, which have previously built their health care systems around government-controlled financing insurance schemes, are finding that their citizens are demanding more freedom of choice and more provider accountability. Unfortunately, in the five reform planning options that the Hong Kong Government Green Paper outlines, no fundamental vision of the future has been defined, and no plan has been outlined for where the system is headed and how to get there.

Let's look at each of these options separately.

Option A: Government Subsidy Approach

This option is just more of the same, with higher government spending and higher government revenues. The public sector Hospital Authority is extremely inefficient. Under Option A, more money would be poured into this inefficient system, without reforming the fundamental incentives that currently discourage government doctors and hospitals from providing efficient, high-quality care. Why should a hospital ward chief give up excess beds or equipment when more money is poured into the system, if he will not do so under the current Hospital Authority? Why will the GOPD clinics not continue to shuffle patients into the A&E and specialty wards for laboratory tests and services that should be delivered in clinics, but which are not due to the current inefficiencies? In fact, Option A is particularly unjust, since the additional money to fund expansion of the bloated and inefficient Hospital Authority is taken from those in greatest need, namely the sick patients lying in the public hospital beds. Patients would still be subject to the same levels of public health care by overworked doctors, in crowded A&E and specialty wards, and by public sector health care personnel with low morale.

Adding more money to government health care bureaucracies does not create efficient, high-quality care. If it did, the U.S. public sector hospitals -- the Veterans Affairs hospitals and the Indian Health Service hospitals -- which spend many times more per patient as the Hong Kong Hospital Authority -- would be shining examples to the world, and yet they are among the least efficient and lowest quality within the U.S. health care system.

Option B: Target Group Approach

Option B suffers from all of the problems of Option A. It does nothing to change the fundamental incentives in the existing public sector Hospital Authority, it merely charges patients more money in return for adding some minor amenities in terms of semi-private wards to the facilities offered in public hospitals. Hospitals forced to compete in the private market quickly learn which amenities and ward arrangements are preferred by their patients, and it does not take them years to do so.

Subsidizing low-income patients for hospital (and other) medical services is a given requirement for any country's health care system. The point at which the government subsidies should be incorporated should be at the point of deciding on an overall health insurance plan, not at the point of deciding whether or not to stay in the hospital for another day. Put another way, we know full well that making patients pay for part of their health care services discourages them from using those services. We have also learned from the Rand Health Insurance Experiment that the impact of high-service copayments, particularly in the hospital, is not always beneficial to patient health. It is simply not appropriate to force very sick hospital patients (or their families) to decide while in a compromised health state (sometimes unconscious) which level of ward amenities they want to pay for.

Option C: Coordinated Voluntary Insurance Approach

This option begins to move in the right direction, but it does not go nearly far enough. Health insurance markets can only work effectively if insurers are prevented from denying coverage to patients because of pre-existing medical conditions, past medical experience, patient age, employment, or any other patient condition. Otherwise, as we have sadly seen in the United States, it is much too tempting and easy for health insurers to compete by lowering their premiums through denying coverage to high-risk patients, rather than by guaranteeing high-quality, efficient health care.

But there is a two-edged sword here. If insurers are prohibited from denying coverage on the basis of pre-existing conditions, consumers must be forced to enroll in a comprehensive insurance plan. Otherwise, people will wait until they are sick to join an insurance plan, and the plan will go out of business. For health insurance markets to work correctly, premiums must be "community-rated," meaning everyone pays the same premium regardless of health condition or medical history, rather than "experience-rated," meaning that the insurance company can increase your premium every time you use medical care. On the other side, people must not be allowed to "opt out" of the system, or the market will unravel, with only the sick buying health insurance.

Having health insurance plans tied to employment as an employee benefit is also a big mistake, as we have also learned the hard way in the United States. Those people who get very sick lose their jobs. Then they lose their health insurance. Then they must fall back on the government health care system. Moreover, when health insurance is tied to the job, people often must choose jobs on the basis of their family's health status and how good the health insurance is, rather than on whether the job is the best place for them. Employers with the best health insurance plans will attract the sickest workers. Finally, during recessions or bad economic times, people will lose not only their jobs, but also their health care.

Option D: Compulsory Comprehensive Insurance Approach

This option also moves in the right direction but does not go far enough. As stated above, health insurance must be compulsory, or only the sick can be counted on to purchase it. The authors of the Green Paper have missed the real reason for compulsory insurance. Compulsory insurance should not mean that health insurance has to be provided by the employers. In fact, Switzerland, with a similar size population to Hong Kong, allows anyone to purchase health insurance, regardless of where they work, or whether they work. It also should not mean that people are forced into specific plans. Health insurance plans should be available to all residents, and all should have the ability to choose among a variety of health care plans.

It is the power of consumer choice that has led to the benefits of efficiency and quality that characterize economic markets the world over. There are specific reasons why laissez-faire markets are unsuited to dealing with all of the special circumstances of health insurance, but there are also specific mechanisms for solving these problems within the context of market competition. My proposal for Hong Kong, ChoiceCare, deals with these problems in ways that are similar to those that the Clinton Administration has proposed for the United States. In each of these approaches, market competition is the basis for health care delivery, while government provides regulatory oversight to ensure that health insurance plans compete on the basis of efficiency and quality of service, rather than by denying medical care to the sick or needy.

Option E: The Prioritization of Treatment Approach

Treatment prioritization will increasingly be incorporated into medical decision making at all levels. No society, no matter how rich, can afford to provide all of its people with all of the expensive treatments that are available today, much less the medical services and pharmaceuticals that will be available in the future. Already there are several technologies and medical interventions that cost millions of (U.S.) dollars per patient. We simply have to prioritize our medical care services.

Option E begs the question of how the medical service priorities will be established. In a government-run health care system, these prioritization decisions are made by bureaucrats, and thus you get camp beds in the hospital halls. In a competitive market health care system, patients will choose those health plans that succeed in prioritizing medical care in a fashion that best pleases the consumer. They will not patronize health plans that get the priorities wrong. This is how markets allocate goods and services, whether they are as complex and complicated as a jumbo jet, or as simple as a can of soup.


Hong Kong has advanced more rapidly than any other place on the planet, because of its recognition of the beneficial consequences of free and open economic competition. It would be ironic if those who are so foresighted in their understanding of Hong Kong's economic circumstances would fail to see the benefits of consumer choice in Hong Kong's health care sector as well. But getting to a health care system based on consumer choice will require genuine reform and real leadership.

Dr. Joel W. Hay is currently QSAD Centurion Associate Professor and Chairperson of the Department of Pharmaceutical Economics and Policy at the University of Southern California, Los Angeles. His publications include Health Care in Hong Kong: An Economic Policy Assessment, published for the Centre as an HKCER paperback by The Chinese University Press last year.


| Index | Research Projects | HKCER Letters |
| Speaker Program / Conference | Index of Economic Freedom |
The Hong Kong Centre for Economic Research
School of Economics and Finance
The University of Hong Kong
Phone: (852) 2547-8313 Fax: (852) 2548-6319
email: hkcer@econ.hku.hk