(Reprint from HKCER Letters, Vol. 5, November 1990) 


Is Hong Kong Ready for Free Market Health Care?

Joel W. Hay


The Present Public Health System

Hong Kong has much to be proud of in both the health of its population and in its health care system. Hong Kong compares favourably to many OECD countries in terms of vital statistics and other health status measures. At the same time, Hong Kong residents have access to government medical services, both inpatient and outpatient, at extremely low financial cost to the consumer.

Nonetheless, there are some gaps in the existing health care system. Most of these relate to an inability to rationally plan or discuss the allocation of health care resources to realistic goals.

The government policy has been that "no one should be deprived of [health care] services because of a lack of financial means." But several economic factors have recently conspired to make this government commitment increasingly untenable.

First, Hong Kong has had the most rapidly growing economy in the world after World War II. As personal incomes rise, people demand to spend more of their income on health care services. The only way that such increasing demands can be satisfied within a governmental health care delivery system is to allocate increasingly greater shares of GDP to the government for health care services.

Second, as the sophistication, complexity and cost of medical services has risen over the past few decades, the focus of health care has shifted from acute conditions such as infectious disease to chronic conditions such as cardiovascular disease and cancers. Medical management of such chronic diseases is not as clear-cut as it is for acute conditions. There is literally no limit to the number and complexity of such medical services or to the expense of services that could be provided to prevent, retard, cure, or palliate the effects of chronic degenerative diseases.

Since currently existing medical technology cannot be provided to all consumers, rationing of medical services must occur. In Hong Kong this is carried out in the government health care system through the classic rationing scheme --the queue. People attending government outpatient departments often have to wait for hours in order to spend 3 to 5 minutes in consultation with a doctor. Elective surgeries and some diagnostic tests often take months or even years to complete. The Hong Kong government system allocates scarce medical manpower to consumers with the lowest opportunity cost of time and the greatest tolerance for waiting, rather than on the basis of medical need.

The bureaucratic rationing of other medical services in Hong Kong is not as obvious to the patient, but may be more decisive to health care outcomes. Currently, some technology and facilities that have been available in the Hong Kong private sector for several years are not available to patients under Hong Kong government care.

It would be fully appropriate for Hong Kong government health care policy-makers not to make available certain high-tech medical interventions on the basis of cost effectiveness. However, at present, there is no data or personnel with the requisite expertise regarding cost-benefit analysis of medical care. It is thus impossible to plan the rational and efficient utilization of Hong Kong health care resources. Government-sector funding decisions are currently based on cost-saving through ad hoc, arbitrary, bureaucratic delay of most or all spending requests, with the outcome that the loudest or most powerful medical staff obtains the most resources, irrespective of the impact of such allocations on patient care access or quality.

One of the putative redeeming aspects of Hong Kong government health care is said to be its overall frugality. It is often pointed out that the Health and Hospital Services Department budgets are only a bit more than 1 percent of GDP. However, the official Health and Hospital Department spending does not include several major cost items. For example, pensions, housing allowances, and other fringe benefits for government health care personnel are excluded. Some other items are provided gratis to the Health and Hospital Services Departments such as laundry done by prisoners, buildings maintenance, etc. The implicit rental value of land used for health care facilities is either treated as free, or is otherwise totally ignored in the government health care accounting system. No one knows how much the government really spends on health care.

The New Hospital Authority

After a long dormancy in health care policy, Hong Kong has recently moved toward the establishment of a new quasi-governmental agency charged with the planning, financing and delivery of health care services. Each hospital will have a Chief Executive Officer who will have the necessary responsibility and authority for managing hospitals. There will be more flexibility in staff promotions and benefits, as well as substantial improvements in the data collected for financial and patient service management.

I am not sanguine about the impact of the new organization on government-provided health care for several reasons. First, it only deals with one aspect of health care--hospital services. When an administrator has responsibility for only part of the total system, there will be strong incentives to shift the burden to the other parts, in this case from the hospitals to the outpatient sector, and vice versa. Second, as now, the Hospital Authority will maintain a top-down bureaucratic command structure with inadequate incentives to ensure hospital service quality and efficiency.

The strongest motivator for efficiency, quality, and equity in the delivery of health care services is the competitive market, just as it is for the delivery of other goods and services. In a competitive market, hospitals which provide the best services obtain greater financial resources directly from their patients; those that provide poor services lose financial resources directly. The feedback mechanism is immediate and unambiguous. In a bureaucracy, efficient hospitals have to fight political battles against the intrigues and delays of the multiple layers of bureaucracies. The poor-quality hospitals will devise endless justifications for why they deserve additional resources, despite their poor performance.

It has also been stated that the hospital management and financial information systems are to be quickly overhauled. This task is critical to any positive reform of the hospital system. Astoundingly, it appears that despite a major consultancy report on this subject, no attempt has yet been made by the government hospital managers to learn from data systems already running in private Hong Kong hospitals.

Private Health Care in Hong Kong

Hong Kong residents are increasingly turning to private sector health care providers and insurers as an alternative to the bureaucratic inadequacies of government health care. Unfortunately, even less information is available concerning private Hong Kong health care than for the government health care system.

There is 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 government has focused exclusively on the government health care system, and has ignored basic protection to the large segment of its population that receives health care in the private sector.

The mechanisms for private sector inspection; quality assurance; or for filing consumer grievances and complaints against doctors, hospitals, or insurers are totally inadequate. The government maintains a staff of restaurant inspectors, but has no staff of independent hospital inspectors for public or private hospitals. Medical insurers are totally unregulated. Grievances against doctors are difficult to pursue, and are said to run into a wall of resistance from a powerful professional guild that is dangerously reluctant to criticize or police its own membership.

A Market Alternative: ChoiceCare

Genuine improvements in Hong Kong health care services will rely increasingly on enhancing competitive market incentives. The plan that I propose for Hong Kong--ChoiceCare--is a blueprint for comprehensive health care reform.

A family opting for ChoiceCare would enroll in one or more private medical insurance plans qualified by the government. Should the family make no decision for a ChoiceCare option, they would automatically default back into the existing government health care system.

The government would encourage the development and growth of ChoiceCare by giving each family opting into the plan a Base Level Entitlement (BLE) adjusted for the ages and numbers of family members. Families could add additional money to this BLE to purchase health insurance plans with even greater coveragellevels and wider choice of providers. Some levels of deductibles and coinsurance would be allowable in order to discourage overuse of services for minor ailments.

If a family opted into ChoiceCare, a large variety of government doctors, hospitals, and other providers would still be available to them, but only under the terms and conditions of service availability and payment negotiated between government providers and ChoiceCare qualified medical insurance plans.

Private sector doctors, hospitals, and other providers would also be available to ChoiceCare families. The terms and conditions would be worked out between the providers and the insurers. Some ChoiceCare plans might negotiate higher fees and hospital charges and thus be forced to charge higher ChoiceCare premiums, while other plans would negotiate lower rates and lower premiums. It would be up to the family to choose which menu of services and level of insurance premium (above the Basic Level Entitlement) would best suit their needs and tastes.

By encouraging a responsible, competitive market for health care services, Hong Kong would 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 free market for health care would go much further in 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 offers. Those who wish to do so would be able to purchase the most expensive ChoiceCare plans, but the additional cost of such luxury plans, beyond the BLE, would come out of their own pockets, not the taxpayers?

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


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