UBC Reports | Vol. 48 | No. 3 | Feb. 7, 2002

Accounting for health-care policy

Debate over private or public funding is clouding the real issues, suggests health-care economics expert

Two fundamental accounting relationships -- iron laws of finance -- must be clearly understood if one is to make sense of health-care policy debates.

The first is that every dollar of expenditure is simultaneously and necessarily a dollar of income for someone. The second is that while the residents of a country must collectively pay for their health-care system, the share contributed by each can vary widely depending on the way revenues are raised.

Weaker cost controls imply greater sales opportunities for providers and financiers of care. High administration costs are the sales of the private insurance industry. The monumentally expensive and inefficient American system is far and away the most effective generator of incomes on the planet, and the recipients of those incomes stand four-square against any real reform.

As citizens we may want effective health care, efficiently provided to those who need it. But the hard accounting reality is that all expenditure -- essential, useful, useless, or harmful -- is equally effective in generating income.

And that is why, no matter what the problem, the solution that emerges from the health-care sector always begins with "More money is needed to..."

Money contributed by whom?

Tax finance requires people to contribute roughly in proportion to their incomes, independent of their use of care. Private financing detaches contributions from income and attaches them to use.

The healthy and wealthy win and the unhealthy and unwealthy lose. Insofar as ability to pay becomes a condition of access to higher quality or more timely care, private financing also permits the better-off to enjoy a higher standard without having to support, via taxation, a similar standard for others.

The conflict of interest is real and unavoidable. There is no mystery as to why the issue never dies.

The need to present private interests as public benefits gives rise to "zombies" -- ideas or claims that are intellectually dead but will not stay buried, no matter how many times they are refuted.

They have just enough superficial plausibility to attract attention from those unfamiliar with the logic or the counter-evidence. Private payment will discourage unnecessary care-seeking, for example, or encourage healthy lifestyles, or "supplement" rather than substitute for taxation.

Stuff and nonsense, but often an effective distraction from the real issues.

The real issues are not how best to raise the money, but how much and for what? And that's a much tougher question.

Private capital markets demand "compounding earnings," mathematically irreconcilable with global cost containment (see iron law number one).

Managing for effective health care is very difficult; firms have found it more profitable to concentrate on patient selection, to offload costs onto the public sector ("privatize the profits, socialize the losses"), and to seek out opportunities to expand private charges. Competitive pressures have also led to some spectacular fraud cases.

In the United States, where prescription drugs are now advertised directly to the public, the industry spends twice as much on advertising as on research.

Everywhere, new, high cost drugs replace older cheaper ones; sometimes they are better but for many patients they provide the same therapeutic effect at higher prices -- and profits.

To the extent that "public expectations" are being created (at considerable expense) within the health-care sector itself, budgeting to meet them is chasing a will o' the wisp into a fiscal marsh.

Don't go there.

A professor of Economics and faculty member at the UBC Centre for Health Services and Policy Research, Robert Evans is widely regarded as the single most influential academic in Canadian health-care policy development.