Friday, 3 October 2008

The Law of Unintended Consequences

3rd October 2008

The Malta Independent - Friday Wisdom

In submitting proposals for consideration to be included in the next budget a Church commission suggested that the government should charge a nominal fee on medicines presently distributed free and should also levy hospitalisation fees on those holding private health insurance.

I do not quite get it why a Church commission should be making proposals for the next budget. If the Church has any advice to give to the civil administration this should be on matters of strategy and general orientation rather than just join every Tom, Dick and Harry in submitting proposals for a short-term instrument as is a budget with life span of merely 12 months. Furthermore, the proposal to charge a nominal fee for dispensing free medicine had been tried by the Labour administration of 1996-1998, not as a means of raising funds, but merely as a measure to discourage waste.

Political opportunism led to the then Nationalist opposition crucifying the Labour government with cheap demagoguery rather than responsible burden sharing and no Church commission at the time did come out to defend a measure which remains as sensible today as it was 10 years ago.

More worrying however is the proposal to levy hospitalisation fees on those holding private health insurance. This proposal is based on a false premise that claims on private health insurance policies are funded by the underwriting insurance companies. That’s a fallacy. Insurance underwriters only manage the direct impact of such claims but ultimately these would be funded by the insured. If government starts claiming hospitalisation fees selectively on those who have opted for a health insurance policy, the increased cost of claims will be passed on the insured through increased future premiums. Ultimately therefore the hospitalisation bills for otherwise free state health services will be indirectly paid by the individuals who are caring enough to take out their own private health insurance policy.

The law of unintended consequences will therefore apply. When measures are not thought deeply enough there is a risk that one gets results which are diametrically opposite to those intended.

A perfect example of this is when the US Treasury last week extended insurance guarantees on all money market funds where many retail investors kept their liquid savings. Money market funds generally produce a slightly better rate of return than normal bank savings accounts but unlike the latter they were not covered by limited federal insurance deposit protection. The extension of cover to money market funds was meant to stop panic withdrawals from these funds causing confusion of the market. The aim was perfectly rational.

What happened in practice? Many savers started withdrawing money from the savings accounts and investing them in money market funds to get a better return now enjoying similar insurance protection. This created a problem of liquidity for banks that were faced with a sudden withdrawal of normally stable deposits. Clearly the US Treasury did not think through this measure deep enough and suffered from the law of unintended consequences.

The same would happen if the measure to charge hospitalisation fees for services rendered to private insurance policy holders were to be implemented. Human nature being what it is, the comparative disadvantage treatment meted out by the State on private policy holders will encourage many if not most to give up their policy, save the premium and start relying entirely on the free national health service.

In reality what we need is to move in the opposite direction. We should encourage as many people as possible to take out private health insurance by offering fiscal incentives. It is a proven fact that holders of private insurance policies, whenever they need hospitalisation services, will opt for private hospitals where they can enjoy more privacy and comfort. This optional choice made by private health insurance policy holders does in fact save the State a considerable amount of recurring expenses it would incur if the selective hospitalisation fees will force such policy holders to rely entirely on public health services. Hence the case for considering fiscal incentives to promote more people to opt for private health services.

Private health insurance policy holders would only opt for public hospitalisation services in the thankfully rare occasions where the medical or surgical treatment needed is complex enough to warrant relying on the more elaborate public health treatment even though in the process they would be sacrificing the privacy and comfort obtainable in private hospitals that are not as equipped for complicated cases as the general hospital is.

What we should be discussing, now that it is quite fashionable to break pre-election pledges, is whether it is feasible and economic for the long term to continue offering free universal health services across the board irrespective of the creeping health costs caused by more expensive treatments and the general ageing of the population.

Any sensible person would admit that the present system is unsustainable. If we persist in trying to square a circle what will happen in the long term is that public health services would have to be rationed or lowered in quality resulting in longer waiting lists, medicine shortages and poor services to in and out-patients. That would hurt those who by necessity have to rely on public health services and would in the long run force the more comfortable to re-take private health insurance as they become concerned that public services would not be as effective as they expect.

What we should be working upon to preserve sustainability and social fairness is the introduction of a compulsory national health insurance scheme with opt-outs for those who prefer private insurance. When we are all covered by some sort of health insurance the state health system will start charging reasonable fees for its services to render us more sensitive to the cost incurred by the general taxpayers for providing such services.

This obviously leaves the question of what cover can be offered to those who cannot afford to pay their compulsory insurance premium. We certainly cannot even contemplate the American system of leaving the most vulnerable uncovered. It would be up to the State to re-direct the funds saved as it is relieved from providing free universal health services, to the payment or subsidy of insurance premium to certain classes who by reliable and refined means testing (which tests not just the declared incomes but also the expenditure on life-style) are proven as not being able to pay the compulsory insurance premium.

This is by no means a blueprint but it could be a possible framework to work out a long term solution to a growing problem without falling into the temptation of quick fixes that suffer from the law of unintended consequences.

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