Chris Hattingh and Martin van Staden have made some arguments in support of privatisation of healthcare by stating that “wholesale liberation of healthcare in South Africa is clearly needed to drive costs down” in Daily Maverick (21 September). The argument of state control versus market competition is almost as old as the science of modern economics. It is unbelievable that this argument goes on unabated since 1776 when the magnum opus of Adam Smith, The Wealth Nations, was published.
Karl Marx’s response to utopian socialism further heightened this debate by advocating an overthrow of bourgeois capitalism through a revolution leading to a “dictatorship of the proletariat”. Karl Marx went beyond this debate in that, to him, state control was only temporary and preceded a communist “state” with no state control. Both options, state control or complete privatisation of industries, “were untenable since he was of the view that the political ideology of the state was informed by the ‘economic superstructure’”.
The Great Depression of the 1920’s and 30’s would lead to massive unemployment and foreclosure of banks in the developed world. This was seen by some as a final blow to neoclassical economics and its ideology of free markets. This followed a battle of ideology between John Maynard Keynes and Friedrich Hayek about the ability of free-markets to self-correct.
The argument would be won by Keynes as world economies remained under strain and there was no self-correction in sight. Keynes would support government intervention through increased government expenditure to stimulate an economy during periods of depression to boost inadequate demand. Keynes would not be advocating Marxist economics which he saw as a product of mistakes made by David Ricardo in his theory of the iron law of wages and the labour theory of value. Keynes’ ideas was based that on his theory that demand creates supply, a reversal of a law attributed to Jean Baptist-Say: supply creates demand.
The popularity of Keynes’ policies would not last for long. By the 1970’s, his policies would result in stagflation, which was characterised by high unemployment and high inflation, which until then, were never thought to happen simultaneously. While Keynesian economics was the ideology of choice in Western Europe in the 1950’s until the early 1970s, in eastern Europe and the Soviet Union, the governments were engulfed with Marxist ideology, which advocated wholesale state control of all sectors of the economy.
The unintended consequences of Keynesian economics in the late 1970’s and the fall of communism in 1980s would bring liberal economic policies back to life which would intensify under the guise of neo-liberalism which advocated unbridled competition now popularly known as deregulation. The article by Hatting and Van Staden ignores lessons we have learnt from history about rigid ideological positions.
What I find common about most ideologies, is that they do not focus on positioning themselves according to particular objectives or goals, but rather position themselves rigidly along a particular method and want to apply it universally, spatially or temporally, the one size fits all mentality. Those who are Marxist would advocate state control of almost every sector and every period ignoring to focus on the particular objectives which that particular sector or that particular period aims to achieve and then working backwards to determine the appropriate method. This applies similarly to the free-markets advocates. Because they support free-markets, they would want to align that particular sector or period along their chosen ideology .
This argument can be extended to gun control debate in the United States. Instead of focusing on crime prevention and lowering of rates of homicide which are unacceptably high, the argument is focused on the method, viz; private gun ownership or not. So spending money on courting politicians and paying legal fees for class action becomes the primary focus.
I agree with Hattingh and Van Staden that the public system is in shambles and that the private health system, while expensive if not unaffordable to many, is efficient and functional. Therefore “wholesale deference” to government control cannot be an option. I also agree that South Africans should try to find a way to ensure quality medical care is extended to the indigent, but that healthcare should be completely private or liberalised is not necessarily a logical conclusion.
Hattingh and Van Staden are again right that human beings are not completely altruistic and that government is not necessarily a benevolent provider. The selective quotation of Adam Smith is misleading. It is true that the great economist and philosopher asserted that people are generally led by self-interest, but he also said that human beings are also sympathetic towards their fellow beings in his treatise The Theory of Moral Sentiments:
“By whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellow feeling with all the emotions of our own breast, nor are we ever so much shocked as by the appearance of the contrary.”
Hattingh and Van Staden ignore the context of the times of Adam Smith. Adam Smith’s The Wealth of Nation was a response to mercantilistic policies that dominated his period which favoured the monarchy, the aristocratic and merchant class, focusing on accumulation of gold and silver and limiting any form of free trade that reduced their holdings of precious metals, even at the peril of the common man.
Adam Smith stated that wealth should not be measured according to number of bags in the treasury, but should consist of how well people are lodged, clothed and fed (Skousen, The Big Three in Economics,2007). Skousen further states that according Smith “the wealth of a state consists in the cheapness of provisions and all the other necessaries and conveniences of life”. Smith also foresaw the rise of corporate power, monopoly and oligopolies which unsettled him. One of his best known quotes on this matter is:
“People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.
Hattingh and Van Staden are again right that the government has been negligent in its provision of healthcare services. These problems include endless waiting times, a dearth of new doctors, unhygienic conditions and other problems which are virtually absent in the private sector. They attribute the lack of these problems in the private sector to the incentives. They state that because money is exchanged, the private providers have to ensure that we are satisfied and they also respond positively in response of competition.
Further to that, because of the lack of “money exchange” and the lack of competition, they argue, the public sector has no incentive to improve its services, and we continue to pay taxes regardless of this. Hattingh and Van Staden conclude that incentive is the “vast canyon” that separates the quality of service between public and private care. Although they concede that private sector is expensive, they attributed this to excessive government regulation, taxation and intervention and that the Health Market Inquiry (HMI) report will further exacerbate this.
They provide examples of excessive intervention which include; forcing medical aids to cover 231 prescribed minimum benefits, private hospitals being limited by provisions in the National Health Act, “ certificate of need (which they ascribe to flawed socialist notion that competition is wasteful), long approval process of drugs etc. They also remind us of the provision in the Constitution that gives right to access healthcare and not right to health, and that the State must take reasonable steps to ensure that right is achieved.
Ultimately, they assert that the profit motive is a right that must be upheld in order for the private sector to continue to provide quality care and that government must leave all healthcare provision of citizens to the private sector including that of the poor through a voucher system.
The aim which Hattingh and Van Staden want achieved is: leaving those who can afford healthcare to able to access it and eliminate the threat to private healthcare and open doors to the poor to access private healthcare. Through these schemes government will not have to manage hospitals and will have more money to allocate vouchers and power will no longer rest in government allowing us to achieve the anti-apartheid struggle. Hattingh and Van Staden’s market are “highly democratic” and are “borne out of human history”.
The argument by Hattingh and Van Staden that healthcare should be completely privatised is not supported by neoclassical economic theory and neither by empirical evidence. In terms of neoclassical economic theory, private goods are completely compatible with free markets (eg electronic products like TV’s and cellphones) and these should be completely privatised.
But healthcare and education are not completely private goods since the benefits are passed onto other members of society. This means healthier people benefit other members of society by being more productive and contributing to the general economy (positive externailities). healthcare and education can never be produced completely by free markets.
Complete privatisation of goods with a positive externalities is one of the causes of market failure since markets usually underproduce them at higher-than-equilibrium prices. Also private goods are produced mainly through private investment (although this is not always true since governments general assists infant industry through protectionism and strategic policies as in the roles government have played in the development of semi-conductor industry in Asia) and healthcare and education needs mobilisation of government resources.
With the exception of the private individuals, pharmaceutical industry and government, the other role players in the private healthcare industry like corporate-owned hospitals, corporate-owned pharmaceutical distributors and wholesalers and corporate pharmacies invest very little in research and development in new knowledge, treatments and technology in healthcare.
The pharmaceutical industry invests heavily in new treatments (with a profit motive) and governments spends money in public health research, medical education, infrastructure for medical schools and vocational training for young medical and pharmacy students (without a profit motive). Individuals invest in education and continuous professional development and training (with or without a profit motive).
Corporate-owned hospitals invest only to generate profit by focusing on hospitality, real estate, strategic supply chain development etc, and not in new knowledge, treatments and technologies. Corporate pharmacies invest in controlling the supply chain (through closed networks with medical schemes and control of distribution and wholesale). They have undercut profits of independent community pharmacies who lack control of distribution and wholesale. This has resulted in many pharmacists who own independent community pharmacies having to close shop. This is not going to make the profession attractive in the future. Social costs turns into private profit.
There is very little empirical evidence supporting complete privatisation of healthcare. In a review of competition in the South African Health System, Professor Alex van den Heever showed that deregulation has had some undesired consequences. For example, the Browne Commission of Inquiry (1986) accepted commercialisation of private healthcare, including product differentiation, greater flexibility in contribution rate determination and different level of benefits. This encouraged merging of small schemes with large ones for administrative efficiency. In some cases significant cost savings could be achieved if the member paid small claims himself and was only allowed to claim from the scheme after specific amount had been paid by himself. Risk rating, cost-sharing, member behavioural change and scheme consolidation occurred. Traditional insurance companies entered the industry and funding intermediaries emerged.
There was less governance in commercial schemes with approval and appointment of trustees and principal officers by the relevant administrators. Brokers from traditional insurance companies moved in with kickbacks becoming the norm. Kickback payments occurred either through selling of health insurance products designed into covering gaps in medical schemes (unseen for members), diversion of administration fees, use of re-insurance agreements at inflated premiums to divert schemes’ underwriting surplus which would be used in part to fund brokers and the charging of contributions at rates different to the registered contribution tables with the difference in part to fund brokers.
This resulted in the emergence in significant non-healthcare cost. By 2008, South Africa had the highest non-healthcare cost in the world, sitting at 14% (with US and Germany sitting at about 9% and 8% respectively). Hospital and specialist costs rose excessively. Today we have market dominance in the open schemes with two players dominating; Discovery and MMI which have cross-ownership.
Corporates entered the domain of private hospitals through mergers resulting in an oligopoly. These corporates controlling the industry have no direct and active role in underlying product; diagnosis and treatment of patients. It is the independent medical practitioner who offers that service, directs nursing care and motivates for availability of new technologies. It is government who trains doctors and invest in research and social capital while corporate hospitals focus on profit-maximisation.
Today the HHI (measure of market concentration) of private hospitals is about 2500, very high by international standards. In the UK, Netcare was forced to sell some hospitals in the UK after a market inquiry conducted by the Competition Commission found it to be acting anti-competitively.
It is government partial re-regulation in year 2000 that stabilised inflation of medical aid premiums, non-healthcare and medical services while increasing medical scheme membership thereafter.
Henry Mintzberg (Managing the Myth of healthcare, 2017), one of the top healthcare management theorists in the world, says one of the problems in healthcare is too much competition. He compares Canada and the US. In Canada, there is no competition and it is funded through general taxation, but has universal coverage and spends 17c for every dollar as compared to the US which spends 31c for every dollar but has millions that are not covered by insurance,public or private. He says that many of the most important services in healthcare come from neither public nor the private sector. He notes that although Canada and the United States sit near the two extremes on the issue, the vast majority of hospitals in both countries are in the plural sector, namely in the form of organisations that are owned by no-one (so called “voluntary in the US) and that includes the most prestigious.
According to Mintzberg, all sectors must play a role: the public sector, largely to maintain equality as well as in regulation, the private sector to provide supplies and equipment as well as some routine services, and the plural sector, for the delivery of many of the key professional services, including research. A good example is Japan, which spends only 6% of GDP on healthcare (as compared to the US which spends close to 17 % of GDP) but has universal coverage, no competition, government regulation but one of the best healthcare systems in the world.
Therefore, it is not private versus public. healthcare is about collaboration. It is about developing objectives, analysis of the environment (public and private), assess our strength and constraints and then making decisions so that our goals can be realised by mobilising the necessary resources, both public and private. We must also note that there are no two healthcare systems that are the same. We need to be innovative and have an honest conversation of challenges we face both in the public and private sector. DM
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