Universal Healthcare: Its Importance to the Economy and Incentivising the Proper Uses of Funds

(Note: Post backdated to date of original writing.)

Those that feel that universal healthcare is a bad idea typically point to the high utilizations in some jurisdictions as "proof" that it would increase the incentive to go to the doctor unnecessarily and for doctors to overcharge. Their arguments typically end there.

It is unfortunate that those naysayers who oppose universal healthcare appear to be unable to or seem to not be bothered to think of a way to reduce healthcare finance risk for Singaporeans while ensuring that funds are not drained unnecessarily. This is why I am a fan of The SDP's Healthcare Plan. They have made an effort to create a comprehensive scheme for healthcare finance which precisely reduces the healthcare finance risk for Singaporeans. It can be improved a little though (which is the subject of the second part of this note).

Healthcare Risk and the Larger Economy
It is certainly good to reduce one's the healthcare finance risk. But to see how it is important and not simply a "good to have", compare the following two lotteries (which are equal in expectation):

1. 99% of the time you pay out $100, 1% of the time you pay out $100000
2. 99% of the time you pay out $1000, 1% of the time you pay out $10900

To most, the second lottery looks far better (or far less bad). Rather, the first lottery looks very undesirable. This is because the latter is far less risky than the former. One can play dice in cases where one gets many goes at it (which reduces the variance of the average case, by the way). But in life where one gets a single shot, it is far more prudent to act in a manner such that one can has a basis on which to plan one's life. This means certainty that when bad things happen, they can be managed. This means that will not be necessary to pour inordinate amounts of one's resources into protecting against downside risk. This means stability. This is the very reason why many MNCs have invested in Singapore: stability.

Supporting stability is one of the justifications that the Singapore government has given for all manner of political abuses. Yet while they wax lyrical about human resources being our most important resource, they hypocritically deny that resource the stability on which to build their lives. How then can a vibrant economy, based on enterprising Singaporeans, grow from the absence of personal stability?

Incentivising the Proper Use of Funds
Economic commentary aside, I would like to describe a simple framework for thinking about the usage of funds. I will acknowledge that uncontrolled availability of funds provides incentives to go the doctor unnecessarily and for doctors to overcharge. A fixed ratio co-payment scheme does not provide a complete answer as the co-payment is so small in some cases that unnecessary visits still occur (say, for the purposes of getting "medical leave"). The same fixed ratio may also result in an onerous payment should a necessary medical expense have a high base cost.

Now what is onerous and what is trivial depend on the size of the expense, its necessity and the income level of the one paying. If one earns less than $1000 a month, one would be careful not to waste $5 on an unnecessary medical co-payment (but would probably be willing to pay it out if actually sick). On the other hand, someone earning $5000 a month would gladly shell out the same $5 for a day of "medical leave". For the individual earning $1000 a month, a $2000 medical co-payment for a major procedure is extremely onerous. For the individual earning $5000 a month, it means forgoing a spa package: just a pinch. It is thus useful for co-payments to vary with (i) income levels and (ii) the size of the expense. I would add on to that set of criteria, (iii) the type of ailment being treated.

The why of (i) and (ii) should be clear. Small payments are not huge downsides that people have to be protected against. (And unnecessary trivialities are what the healthcare system should not be loaded with.) In contrast, large downsides have to be smoothed out.

On (iii), using the type of ailment as a criterion for determining the percentage of the co-payment can be explained based on the undesirability of various ailments. While NSFs have been known to eat toothpaste in the hope of contracting a "fever" to skive out of a 3-day outfield training exercise, I know of no one who willingly contracts diabetes or cancer. Co-payments should be lower for ailments which are "less likely to be abused". Notably, (iii) is far less important as a consideration than (i) and (ii), but it is included for "completeness".

An economist might call a scheme built using the above framework a "progressive incentive compatible co-payment scheme". These are nice sounding words: "progressive" refers to lower income individuals paying less for the same treatment and "incentive compatible" refers to the incentives to use the system only with necessary/the disincentives to use the system when unnecessary.

I will stop short of proposing co-payment percentages as it demands knowledge of how individuals at various income levels use their earnings, how serious various ailments are, as well as a number of other matters that I do not possess the relevant domain knowledge to comment on.

Summary
The level of healthcare finance risk is an important element determining individual economic stability. It is thus important to broadly reduce healthcare finance risk, as its reduction will give individuals more capacity to pursue ventures as opposed to locking money down to protect themselves against financial downsides associated with healthcare.

While cutting healthcare finance risk for individuals is important. It is important that state resources are used prudently. I have proposed a framework for developing co-payments that are progressive and "incentive compatible" to address this question. Comments on the framework are very much welcome.

On "Economic Flexibility"

Being pinned down is no fun. It can be tremendously suffocating knowing that you are trapped and there is no way out. This is really the situation that many Singaporeans find themselves in. Young Singaporeans find themselves in low income jobs (as benchmarked to comparable work overseas). The necessity of a roof over their heads leads into expensive mortgages for houses whose title deeds their names are not on. It is a rut. A sad, sad rut.

The financial burden often deals a death blow to any enterprise that would entail risk. Aspirations are killed and with them, the possibility of a stronger, more vibrant, more productive economy. This may seem to be quite a logical leap, but it most assuredly does follow.

We are in need of new enterprises that generate real-value to rejuvenate our economy. The Singapore government knows this and is already gambling on what might generate, in public service lingo, the next S-curve. These businesses we need are certainly not the “safe” businesses that exploit the socio-politico-economic system to extract rents (or isomorphically, protection money). The desirable businesses will create goods and services that add-value to the lives of people or facilitate the conduct of people’s lives or businesses. Barring the most brilliant insights into consumer needs, almost all value-adding businesses will carry considerable financial risk as they will have to be operational before they can be revenue generating. The founders will have to raise capital by debt or (in the fortunate but rarer cases) issuing equity while running the risk of failure.

Many young people leave school with a different perspective on how things might be done. They have learnt about possibly new ways of doing things in school and after a year or two of hands-on work, they are ready to combine the updated perspective from the academy with their knowledge of current practices into a business. Unfortunately, the vicissitudes of the Singapore system catch up with them. Already a few hundred thousand in debt after paying for the lease of a HDB flat, the capacity to take on the additional risks of starting a business is lost.

What I hope for Singaporeans is Economic Flexibility. It is being released from the economic coercion of debt and financial risk and being able to pursue experiences and/or enterprises. While there is something primordially irreducible in start-up costs for businesses, we can do something about the financial burden that young Singaporeans are forced to shoulder. Possible angles of attack for this problem, which might yield huge dividends, are the cost of housing and the financial outcomes associated with the risk of medical disaster.

The SDP has published a proposal for a national healthcare insurance system and it looks good. In fact, I’m told that a number of doctors thanked the authors of the proposal for bringing up that important issue. Should that proposal or a variant of it be implemented, perhaps 90% of Singaporeans will have a substantial fraction of the financial risk associated with medical issues reduced.

From the housing angle, the first question to be asked is whether public housing has to cost so much. It turns out that construction costs are not as outrageous as HDB flat prices are. This is because flat prices consist of the construction cost, cost of overheads, and the cost of land. Based on the fact that flat prices have essentially doubled since 2005, while construction costs cannot be said to have increased by much, it then follows that land costs, which reflect market prices, must make up a large fraction of HDB flat prices. I’ve written about how we can create a public housing system that better meets the needs of Singaporeans without destabilizing the present housing market. (Tentatively, the reader may ignore the pricing recommendation. I've had a lot of push-back from people on the matter of pricing with auctions so it may detract from the point I'm trying to make here. The auction is for allocative efficiency and represents pure consumption of households. The article may be read as if a fixed price were recommended.) I’ve also written about how land pricing can be done on a rational basis which will enable shorter lease (hence, cheaper) flats to become attractive (LINK). In a nutshell, it is possible to quickly reduce the financial burden associated with housing costs without destabilizing the housing market.

Dealing with both healthcare and housing would certainly unshackle Singaporeans who will then be free to venture into business, invest, or pursue experiences. Economic flexibility is not just about money, it is about having flexibility in living life. This is a compelling vision for the future and I hope that we, as a nation, can get there.