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Healthcare Funding in a Democratic Economy

Aaron Connolly Nutting

Marquette University May 2014

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Since the peak of the 2008 world economic recession, nations across the globe have set

out to rein in spending in hopes of becoming more fiscally sound. Deficits were driven down as

governments sought to curb rising unemployment through different means as automatic

sequesters and austerity measures. Nevertheless, counties are still dealing with restricted budgets

that require additional short term and long term cuts. While each capitalistic democracy differs

in institutional model, there is one common expenditure that has countries worried about long

term fiscal hardship—national health care spending. As one of the most important commodities

to invest in, these democracies are strapped by political pressure to invest heavily in health

resources, and ignore long term consequences. As a result, these expenditures have skyrocketed

over the past two decades. This paper will look into this phenomenon to analyze what the best

course of action is for a nation when deciding how much of the national GDP should be devoted

to health care and resources. Specifically, I will look to answer the question: does a

government’s fiscal involvement in a nation’s healthcare system diminish the quality of care?

To conduct this research, I will be evaluating two specific cross national differences in a

comparative manner— affordability and efficiency. A cost analysis will look into the out-of-

pocket and state spending on healthcare per nation, with an emphasis on the sustainability of

these spending methods. In addition, the efficiency measurement will take into account the

sensitivity of the system to respond to people in a timely manner to extend life and reduce

personal hardships. It will also analyze the effectiveness of medical attention by providers,

specifically looking into a qualitative analysis of the success of the medical attention

administered.

The analysis will begin by choosing sample countries to use for this cross sectional

analysis. The counties will not be chosen at random, but based on a scale of the levels of

government involvement. The scale created is based off of a sample model used by economist

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Paul Krugman, and represents a policy neutral outlook approach to levels of healthcare

intervention.1 The scale is as follows, ranging from the most lassie fair systems to the most

regulated:

1) Unregulated insurance

2) Regulated insurers 3) Regulated insurers + mandate + subsidies

4) Single Payer 5) Public Provision of Care

Choosing counties based on their location on the scale in essential to the final result of this

product; it presents a wider range of government styles that transcend different types of

capitalistic democracies.

Analysis Background

The first country to be evaluated for the merits of this project is Great Britain, as it is an

example of a system regulated to the highest extent. Great Britain utilizes a public provision of

national healthcare that allows the state to act as a single payer—as a result, the state employs

most healthcare personal and owns more healthcare resources/ capital within the country. The

private market only accounts for ~11% in this system.2 The reminder of the market is dictated

by the National Health Service (NHS), which provides care in the form of hospital and physician

services and prescription drugs to all residents.3 Coverage is truly universal, and the scope to

which service extends is undefined by the NHS—leaving room for bureaucratic system growth.

Saying this, these undefined limitations breads uncertainty in regards to how much the NHS is

willing to spend to maintain “satisfactory” public citizen coverage.

1 Krugman 2014 2 Thomson, Osborn, Squires, & Jun, 2013. 9-10 3 Thomson, Osborn, Squires, & Jun, 2013. 37-38

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The next two countries to evaluate are Sweden and Canada—each of which employs

single payer system that allows for private mechanisms of health coverage purchasing. Sweden

uses general tax revenue to fund the National Health Service.4 This institute provides universal

health insurance at a national level that reciprocates down through 21 regional control institutes.

The given benefit package is undefined, leaving room for their bureaucratic institute to find the

best ways to fund primary care centers and hospitals—both of which are mostly privately owned.

Up until 2010, less than 10% of the nation owned supplemental private plans; saying this, this

number has risen significantly in previous years.

Canadian provinces and territories have the primary responsibility of implementing their

nation’s single payer system, which provides universal coverage to residents.5 The manner of

distribution is similar to that of Medicare within the United States, wherein it is the government’s

role to provide reimbursement payments to private hospitals, general practitioners, and

physicians. Similar to the Swedish and British implementation styles, costs and results are

closely monitored by government agencies, who are often forced to accept trade-offs due to

increased budgetary pressure.

Germany will also be evaluated to represent countries that a median approach to health

care regulation. This democracy maintains high insurance regulation, individual mandates, and

subsidies that completely support the elderly, youth, and poor. Health insurance is mandatory

for all residents, and the government also provides public options.6 Coverage is provided to

those who cannot afford a private plan. This is vital for young people and the self-employed, as

private insurance often is distributed through employment. To an extent, this current German

model emulates the intended policy outcome of the Affordable Care Act in the United States.

4 Thomson, Osborn, Squires, & Jun, 2013. 113-115 5 Thomson, Osborn, Squires, & Jun, 2013. 19 6 Thomson, Osborn, Squires, & Jun, 2013. 57

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The final democracy that will be evaluated in this study is Switzerland. While not

completely free from regulation, Switzerland maintains one of the most well recognized

examples of a health system with minimal government involvement. Regulation exists at the

Federal and local (Cantonal) levels, but as a whole it may be considered highly decentralized

compared to other democracies.7 Coverage is mandated by the federal government, leaving very

few residents uninsured. Mandatory Health Savings Accounts (HSA) are also required, which

reduces the need for state involvement with end of life spending. On a Cantonal level, local

governments may provide insurance /hospital subsides, or may even just leave their constituent

market unimpeded by government. Regardless, the Swiss chose their health packages from a

competitive marketplace that helps drive down the costs, while allowing them decide their

premium/ deductible trade based on their projected health needs.8 This is system that seems to

have positive spending consequences, and is worth comparing against other state centered

systems.

Affordability Analysis

Any conversation regarding the merits of a nation’s efficiency must unquestionably begin

with an analysis of the financial burden of the system in question. Quality of care can be at a

paramount level, but long term financial struggles have the ability to cripple a system and its

nation’s finances over time. These nations in question not only represent all different aspects of

Krugman’s scale, but they also provide a wide range of state purchasing power when it comes to

healthcare. Those nations which spend the most also have the largest regulating purchasing

power, as they can force the market to become reactionary to their spending. This is especially

true for single payer systems, such as Canada and Sweden, who allow for private mechanisms of

7 Thomson, Osborn, Squires, & Jun, 2013. 120 8 Avik 2013

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funding. Below is a chat of the nations in question, revealing the breakdown of state and private

expenses.9

Based on this data compiled from the World Bank, it is evident there are correlations that

exist through state spending patterns on health care. The data provided reveals the total

healthcare spending in relation to the per capita GPD of each country, evaluated over a 15 year

period. The results clearly indicate a high propensity for more regulated states to increase their

spending on health provisions over time. Canada even managed to increase their spending 309%

over this scope in question. In comparison, the nations that rely less heavily on government to

provide coverage are inclined to raise their health care budget at a much smaller rate.

Switzerland, the freest system in question, was able to increase their spending only 132% over

this time period, and only raise their percentage point GDP spending by 11%.

It is also worth noting that Switzerland is the wealthiest system in question, and it is

reasonable to believe that wealthier nations are willing to spend more on individual private care.

High private expenses may not be a reasonably bad thing. Health care is a highly sought after

commodity, and the pointing of per capital GDP reveals a correlation between this factor and

9 World Bank, 2014

Country GDP per

Cap

ita ($

Milli

on)

Public +

Priv

ate H

elath

Car

e Spen

ding

% In

creas

e ove

r Pas

t 15 Y

ears

Public +

Priv

ate H

ealth

Car

e Spen

ding

% G

DP

% In

creas

e ove

r Pas

t 15 ye

ars

Normal

retir

ment A

ge

Perce

ntage

of C

ountry O

ver 6

5

Rate in

crea

se o

ver p

ast 1

5 year

s

Great Britain 36,569$ 3,609$ 264% 9.4% 38% 68 17% 6%

Sweden 40,304$ 5,331$ 233% 9.5% 18% 65 19% 11%

Canada 42,317$ 5,630$ 309% 11.2% 24% 67 15% 25%

Germany $ 38,666 $ 4,875 178% 11.3% 13% 67 21% 31%

Switzerland 44,864$ 5,643$ 132% 10.9% 11% 65 17% 13%

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high private spending, which may only suggest that people with more money tend to spend more

on health coverage.10

The long term consequences from this practice may be devastating, as increased state

spending may crowd out other state investments just to ensure universal coverage. This is

evident in the numbers representing the growing portion of national GDP health care comprises

for the more regulated nations. As the main provider of treatment or funds for treatment,

democracies in Great Britain, Sweden, and Canada are faced with undue pressure to provide

additional benefits in order to ensure re-election. The negative externalities from this practice

are not few, as it leads to increased moral hazard amongst recipients who are more prone to

overindulge in these resources. As a result, costs are more susceptible to steep increases.

This being said, the numbers provide some equitable justification to states that regulate

their system, while also allowing for private markets. Over the past 15 years, Germany and

Canada have seen the rate of their elderly increase dramatically. This is especially evident in

comparison to provision of health programs in Britain and a more free system in Switzerland.

This may suggest that these programs are better equipped to address adverse selection amongst

the elderly to provide better end of life insurance coverage. Thus, these systems seem to prolong

life at a better pace than the other nations in question. Saying this, the cost of this spending must

be taken into account over the long run.

The rise of the population percentage over 65 shows the grave danger all of these nations

will face in the coming years, as the population becomes older. The elderly comprise the vast

majority of private and public health care costs. The fiscal outlook of these states is currently in

jeopardy, and the costs could continue to pile on to unprecedented levels. All nations are at risk

to this, but nations with large state regulation will face budgetary crisis in years to come that will

10 Avik, 2013

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force them to reform their health spending or raise the retirement ages. Either will be unpopular

and detrimental to those in office, but leaving the situation unaltered could result in massive

deficits, higher inflation, and increased taxes.

Efficiency Analysis

The discussion of healthcare efficiency will begin with an evaluation of more centralized

systems, such as that of Great Britain. The system of a public provision of care that Britain

provides maintains features often unseen be more free systems, while also maintaining

institutional disadvantages due to funding inaccessibility.11 Two large benefits that derive from a

highly regulated system is the expansion of electronic records sharing, and a reduction in adverse

selection. Doing so allows for easier transparency amongst doctors, care providers, government

regulators, and even the patients. It reduces the need for one to be completely associated with

one doctor or hospital, ultimately allowing for less short term and long run transactions costs. In

addition, adverse selection of insurance candidates who may not qualify for private insurance is

reduced through state aid.12 To many states, the problem of this adverse selection is unsolvable

through the free market, allowing a provision of care for the most vulnerable.

Saying this, one of the main criticisms of this state planning system is the consequence of

long wait times for treatment. This issue occurs most frequently when dealing with specialist

providers. While a survey found that a strong 70% of British citizens were able to get an

appointment the next day with a primary physician, 19% of the country was forced to wait over

two months to see a specialist.13 The chart below shows the countries examined for this study in

terms of these key primary/specialist provisions. The first five columns are survey data taken by

the Commonwealth Fund, and the final two columns that account for MRI and CT data were

11 Nordqvist, 2014 12 Stribley, Egbuonu, & Fritz, 2012 13 Thomson, Osborn, Squires, & Jun, 2013. 3-6

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obtained through the WHO. This number is extremely high compared to more free systems such

as Switzerland. Great Britain and other highly regulated countries score very well on primary

care, but score much lower when dealing with specialist care. Criticism of financial pressure on

the state to drive down costs to need budgetary restrictions can help to explain this discrepancy.

An example of this can be seen in the percentage of children with Measles vaccinations.

According to The Commonwealth Fund, 90% of children have access to the appropriate

vaccinations. While this number is high, it places Great Britain second to last an eleven country

study of some of the strongest economic nations in the world (the study average was 96.5%). A

prime example of non-preventative care rationing was seen last May, when a NHS regulator

leaked that a “number of emergency-care beds in hospitals should be scaled back in order to

divert much-needed funds to other areas of the National Health Service.”14 With the growing

cost of healthcare to a state budget, supply rationing poses a considerable to the stability and

efficiency of this state run program.

14 RT News, 2013

Country Sam

e/ Next

Day

Appoin

tmen

t

Waite

d 2+ M

onths f

or a

Specia

list A

pt.

Hostpita

l Bed

s per 1

000 p

op.

Perce

njt of C

hildre

n with

Mea

sles I

mm

unizatio

n

Syst

em W

orks W

ell, M

inor C

hang

es N

eeded

Exper

ience

d Cord

inat

ion P

roble

ms w

ith M

edica

l Rec

ords

MRI U

nits p

er Milli

on

CT Sc

anner

per

Milli

on

Great Britain 70% 19% 2.41 90% 62% 13% 5.9 8.2

Sweden 47% 31% 2.01 97% 44% 16% n/a n/a

Canada 45% 41% 1.73 98% 38% 25% 8.5 n/a

Germany 66% 7% 5.33 97% 38% 16% 10.3 17.7

Switzerland n/a 5% 3.03 92% 46% 11% 17.8 32.6

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The chart also reveals the great disparity in response to demand for specialized MRI or

CT units. There is a direct correlation between how free a country is, and how the country’s

health care system responds to the demand of high level treatment. Switzerland vastly

outperforms the rest of the field in terms of these units/ million residents, which can also provide

rationale for why they have the lowest wait complaints for their residents to see specialists.

But could these supply results differ in a system which includes more private influence to

meet the supply and demand of medical needs? A look into the Canadian and Swedish system

reveals more stability, but also similar problems. Like the state run British system, Sweden and

Canadian system can pride themselves over their high degree of communication and overall low

health disparities between different parts of the population—a negative consequence often seen

in more free countries. Saying this, the sharp rise in the level of private insurance purchases

suggests that many are unsatisfied with the performance of the single payer systems. As with

Britain, wait times are of great concern to the people more so than in free systems. Swedish news

station The Local confirms this notion, stating that roughly 1/10 now covered privately, up 400%

over the past decade.15 The reason for this massive spike in out-of-pocket spending can be

attributed to increased wait times for general and specialized care. Sweden recently put

implemented a $5 billion “queue shortening” project5billion, but this endeavor seems to have

had marginal impacts on overall wait times.

Overall, two major trends can be inferred from this efficiency chart. First, less regulated

economies place more financial emphasis on specialized care. Second, those nations who are

highly regulated and highly unregulated tend to perform better in terms of citizen satisfaction,

lessened coordination problems, providing immediate care, and keeping the number of available

hospital beds at a large level. This correlation thus indicates that states that intertwine high

15 The Local, 2014

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levels of public spending with private enterprise often have problems communicating records

and providing the adequate supply of hospital beds and available emergency practitioners. These

results could occur for many reasons, but provide an underlying correlation that suggests states

that either take over the whole health care supply chain or leave it be are better able to meet

supply and demand of its citizens. Saying this, this trend does not hold true when dealing with

healthcare specialists, as highly regulated states are not able to keep up with adequate demand.

Cumulative Assessment of Affordability and Efficiency

Ultimately, the realm of health care involves institutions that run much deeper than

logistical numbers that evaluate a state’s role in this sector. Health care provisions require a

nation to evaluate what factors are central to their standard of living. The tradeoffs that occur

force the nations to evaluate if they want their health sector to act as a provider and with a large

social safety net, as seen in many Social Market Economies, or if they want to take a more hands

off approach to national involvement. What is important to conceptualize is that every nation is

involved in healthcare in some form, and no system in the developed democratic sphere is truly

free. Even Switzerland, who scores the most free in the analysis, still is largely regulated

through individual mandates and forced Health Savings Accounts. Regardless, this system

allows their citizens great amounts of liberty in choosing a specific plan that fits them and

allowing for a competitive marketplace that drives prices down. These results in a system

wherein most people chose high deductible plans that alleviate excess moral hazard and

overindulgence in the system.

As pointed out when evaluating efficiency, those states that provide a public provision of

care or stay mostly out of the system seem to have the most competent systems when it comes to

basic care. Saying this, widespread specialized care is not a strength of counties who have more

control over the system. Free systems struggle to require electronic records systems, but they

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also report fewer complaints over these records than most regulated states. Regardless, both

ends of the spectrum seem to be the most efficient systems of health care systems.

With this in mind, one must also take into consideration the financial burden attached to

these two systems. As pointed out by the affordability chart, free nations that require more out

of pocket spending have cost growth at a much slower pace. The reasons for this include but are

not limited to: less cost insulation, decreased moral hazard through high deductibles, and the

absence of a need for government to provide additional coverage. Inversely, nations with more

regulation do not have the ability to keep costs down without sacrificing certain services.

Democracy responds to the people, and when the people demand increased coverage, the party

that provides this additional funding will end up in office. The result of this is a vicious cycle

wherein no rational politician would elect to cut spending, and as a result people become more

insulated from their overall costs. This causes an overindulgence of care, and forces costs to

skyrocket as people feel these programs are free. Evidence of this trend can be seen in the

efficiency chart, as there is a trend in states with limited government involvement to want

additional government coverage—putting systems such as Sweden and Canada on pace to adopt

additional government control.

In addition to these problems, increased percent of GDP that a nation spends on

healthcare can lead to additional long term consequences. These may include heightened

inflation to match the exponential health care price tag, increased taxes, crowding out of national

spending in other industries, and additional national debt (which alone would cause additional

taxes, inflation, and crowding out).

The trend to demand more government in the realm of health care is a slippery slope, and

the financial implications can lead to unprecedented long term consequences. This is especially

relevant considering the rate of spending increases for each of these systems is on track to

become an even larger fraction of each nation’s total spending. While large government dictated

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systems have their advantages in terms of electronic files and cost insulation for constituents, the

bottom line is that the government heavy style in unsustainable. Costs cannot be kept down in

these systems which threatens the supply of health services and overall fiscal welfare of the

nation in the long run. The Swiss system is not perfect, but scores the highest in this analysis

based on both efficiency and cost feasibility.

Conclusion

To answer out question, does a government’s fiscal involvement in a nation’s healthcare

system diminish the quality of care? , the answer remains unclear. A “free” Switzerland seems

to be the most competent system, but many still would consider it highly regulated. Switzerland

seems to have all the right components, but they still will face a long term problem in keeping

costs down. The only difference is that it will take them significantly longer to incur these

budgetary problems compared to the other nations in question. To address how strong a

completely free system would be, one can look at aspects of lesser scrutinized systems that

maintain completely free elements for. This requires a more liberal approach to the study, which

may mean analyzing a lesser developed capitalistic democracy, such as India.

India only spends $21 per capita on healthcare in its highly unregulated system, but also

produces the some of the lowest healthcare costs in the world. This system if full of free market

principles that drive the prices down. These concepts include: relaxed national certification

standards which increases doctor supply, a lower reliance on health insurance that lowers moral

hazard and increases individual health liability, and a lack of patient/practitioner cost

insulation.16 All of this amounts to procedural prices that on average are at least 10% - 40% less

than global costs. While it is certain that no developed capitalistic country would trade their

16 Govindarajan & Ramamurti, 2013

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system of care for that of India, there are clear free market lessons that can be learned in regards

to keeping procedural costs low.

Regardless of this applicability of this completely “free” model, the fact remains that

there is a clear correlation between the Swiss system and long term sustainability. When taken

into consideration that this analysis proves that Switzerland provides a high level of care, it

seems that they would prove that a more free system provides the greatest quality of care that is

feasible in the long term. Nonetheless, the cost burden of all systems analyzed in these findings

remains very high, posing fiscal warning signs for all nations. It will be years before the

consequences of this high spending are realized, wherein each nation will be given the daunting

task of choosing between deregulation or continuing the trend towards nationalization. In the

meantime, nations will continue to choose between trade-offs involving how much of a social

safety net they are willing to provide different groups of citizens, and their democratic institution

will reap the consequences.

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MA: MIT, 2007. Print.

Krugman, Paul. "Health Care." WWS 472 Class Lecture. Princeton, New Jersey, Princeton. 12

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