On two-tiered medicine in Canada

My boss, Mark Stabile, has an op-ed in the Globe and Mail today, arguing against two-tier health care in Canada. He’s the kind of economist who is interested in facts, and he cites a few. For example, with an added tier of private medicine:

there is little evidence that wait times in the public system go down. And there is little evidence that a private system reduces the costs of public systems. In fact, in some jurisdictions, overall costs in the public system actually went up in those cases where the tax system subsidizes people who purchase private insurance (as Canada does). Over all, those systems that have private insurance have had to continue to grapple with issues of costs and access, much as we do here in Canada.

Now I’m the kind of non-economist who is quite interested in incentives, so I find it interesting to speculate about why allowing people to opt out of the public system and purchase health care privately would not free up resources in the public system. It is, after all, a bit mysterious. One can easily imagine arrangements in which people who opt out of the public system would continue to pay the same taxes as before, and yet would be freeing up space in the health care system, because they would be going to private hospitals and paying out of pocket. It’s just like with private schools – if you opt out of the public system, you continue to pay the same taxes as before, but you free up a space in the public schools, by putting your kid in a private school rather than a public school. This looks like it should be a win-win outcome. While it may promote social inequality, it does so in a way that, on paper at least, seems to benefit everyone.

Now if the proposal were to have people opt out from public health care with compensation then the case would be easy. Allowing people to buy private medicine, and deduct this from their taxes so they don’t have to support the public system, would generate an adverse selection effect that would undermine the central efficiency gains of having a public system in the first place. There’s your harm to the public right there, case closed. The tough question is why people should not be allowed to opt out without compensation, the way they do with schools.

There are some bad arguments floating around about why we should not permit this. Some people say that a private system would harm the public system, by giving doctors and nurses an incentive to leave the public system, thereby creating labour shortages. This is a terrible argument, just because the number of doctors and nurses is not a constant. (This is obvious in the case of education, where the existence of private schools does not create a shortage of qualified teachers in the public schools, it just expands the number of teachers, by increasing overall consumption of education.) In any case, the numbers of doctors and nurses is effectively controlled by the government, through its control of the universities, so if the government were to decide to implement two-tier medicine, it could easily just train more doctors and nurses.

The second bad argument that one finds floating around is a pure levelling-down objection. Some people are willing to grant the basic premise that the public system would benefit from having rich people opt out and go private, but then object to this merely on the grounds that it would result in an exacerbation of health inequalities, because rich people would be able to buy themselves better care. So, we should create greater health equality, not by actually improving anyone’s health, but by preventing the rich from achieving better health outcomes… Actually, this is not a terrible argument, but it does involve some very controversial moral judgements that I’m not very confident in making.

So what does explain the empirical phenomenon that Mark is pointing out? In other words, why doesn’t the existence of a parallel private medicine system free up space and resources in the public system? My suspicion is that the dynamic is political. Once you allow the wealthiest, more powerful members of society to opt out of a public program, and yet you force them to continue financing that program, then you give them an incentive to starve that program of funding. One can see a similar dynamic at work in schools. Suppose there were no private schools in Toronto, everyone was forced to send their child to public school. Would they tolerate the conditions and the funding level of the Toronto District School Board? I suspect not. In fact, I think that a certain amount of the tax resistance one sees among the wealthy in Toronto (who are, in comparative terms, not paying very much in municipal taxes), is due to the fact that they have opted out of a lot of programs, including education, so the fact that public services are so crappy does not affect them.

What I find interesting about this analysis is that it shows that the problem confronting the wealthy in our society is essentially a commitment problem. One can imagine the argument going something like this:

Rich person: “I don’t want to wait in line at a public hospital, I want the surgery right away, and I’m willing to pay for it myself.”
Rest of society: “You can’t do that, it’s not allowed.”
Rich person: “Why not? It’s not harming anyone. I’ll pay for my own care. And by giving up my place in line, I’ll help move things along for all the people behind me.”
Rest of society: “Yes, but if we let you opt out, then you will no longer want to keep paying taxes to support the public system.”
Rich person: “So what? I have no choice but to keep paying them.”
Rest of society: “Yeah, but I know you rich people, you’ll push to get your taxes lowered, donate to political parties offering tax cuts. You’ll starve the public system of money.”
Rich person: “Okay, what if I promise not to do that. Then can I have my surgery?”
Rest of society: “No.”
Rich person: “Why not?”
Rest of society: “I don’t trust you”
Rich person: “What can I do to convince you? All I want to do is opt out of public health care and pay for my own surgery. Better for me, better for you, better for everyone. Are you telling me that I can’t do that, because you can’t trust me?”
Rest of society: “That’s right. Look around the world. Read this op-ed by Mark Stabile. These mutual benefits that you’re talking about never seem to materialize.”

Personally, I’m not sure how I feel about this line of argument. If it’s right though, it suggests that proponents of two-tier medicine have been wasting a lot of time, focusing on the wrong issues. They invest huge effort in emphasizing the Pareto improvement, trying to show that no one would be harmed (in the short term) by private medicine. But what they really need to be addressing is the commitment problem. In order for the wealthy to convince the public in general, they need to find some way of binding their hands, so that after they’ve got their private medicine, they won’t turn around and start starving the public system of funds.

I’m not sure how to do that, but I do know that if I were a fan of two-tier medicine, this is the issue that I would be working on. Brian Day take note.

Update: for a general overview of the issues surrounding “two tier” medicine, see Colleen Flood and Amanda Haugan, “Is Canada Odd?Health Economics, Policy and Law, 5 (2010): 319-341.



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