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The US health-care system is not worth copying

by Hans Dembowski


Germany’s health-care system largely depends on payroll taxes and ensures universal coverage: district hospital in Greiz, a small town in eastern German.

Germany’s health-care system largely depends on payroll taxes and ensures universal coverage: district hospital in Greiz, a small town in eastern German.

In many sectors, markets are efficient and thus serve human welfare. Health care is not one of them. It is a good example of the need to complement market dynamics with prudent state action.

Policymakers love to emphasise the efficiency of markets, but in the health sector, this is the wrong approach. If market dynamics, in themselves, led to the best results in this field, the USA would be the model every other country would be copying. Its health-care system is almost entirely market-driven – and more so than the systems of other rich nations.

The results are utterly unconvincing however. The USA spends a greater share of its national income on health care than any other prosperous nation, but its life expectancy is below prosperous nations’ average. If you don’t trust me, you might trust Paul Krugman, an American winner of the Nobel prize in economics.

There are several reasons why markets tend not to deliver the best results in health care. One of them is monopolist power. Indeed, the business model of major pharma producers depends on the patents for innovative medications. As long as the patents are in force, the owner need not fear competition. This is a recipe for high drug prices.

Countervailing forces can put a check on prices of course. One example is when the buyer is in a monopolistic position too. That is so where a single health insurance dominates the market or where the government provides health care to the majority of the people. Indeed, US President Donald Trump was aware of this truth and toyed with the idea to empower Medicare – the governmental health-insurance programme that covers senior citizens in the USA – to negotiate prices with drug companies. The idea made sense, but Trump did not follow up words with action. Again, Krugman understands these issues better than I do.

In the USA, supply of patented drugs is monopolised, but the demand is not. There are so many different health insurances that none of them can negotiate forcefully. In advanced nations with strong governmental health-care systems, such a large share of demand is in a single hand. Accordingly, bargaining becomes possible – and drug prices tend to be lower. 

Another reason why the interplay of supply and demand does not work well in health care is that the customers are, almost by definition, ignorant – and desperate too. The classical example of markets is the famers’ market. People can easily tell good apples from rotten ones, and if apples are too expensive they will opt for pears or peaches instead. Sick people, however, normally need a doctor’s diagnosis to know what is wrong with them, and they’ll trust the expert’s opinion on what therapy they need. If they are told they need heart surgery, they cannot opt for something cheaper instead. In this sense, health-care markets are inherently not transparent. Market efficiency, however, depends on transparency.

The most important reason for market failure in health care, however, is that masses of people simply cannot afford the health services they need unless proper social-protection policies are in force. European nations developed various systems of government-sponsored health insurances that ensure universal coverage. These systems are an expression of solidarity and serve social stability. They lead to better results than the market-driven US model.

Last year, I discussed challenge of chronic diseases with Zafrullah Chowdhury, the veteran health-care activist from Bangladesh. He pointed out that his country does not have “a government-run national health service that covers everyone as is the case in Taiwan, Iran or Britain, for example”. He went on to say: 

“Instead, we are copying the American model of private health care. Global institutions like the World Health Organization and the World Bank are paying too little attention to health economics. I think European donor governments should promote, at the global level, the kind of governmental health care that works so well in their own countries. The challenge is twofold. Services must not only become available, but affordable too. The free market does not deliver that. To cover everyone, solidarity is more important than competition.”

Government guaranteed universal health coverage, by the way, does not only help the poor. It contributes to prosperity of society in general. The reason is that, if not treated properly, health problems unnecessarily diminish the economic productivity of patients – plus they prevent the relatives, who take care of them, from earning money.

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