Government Health Financing for All, Not Insurance

Yves here. This post by By Jomo Kwame Sundaram and Nazihah Noor is aimed mainly at policymakers in developing countries, and should put Americans to shame. The authors explain why both private health insurance and social health insurance schemes like Medicare, which enroll entire or large populations are inferior to government-provided health care due to bad incentives and extra administrative costs.

This is a short, cogent argument, so please circulate widely.

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development, and Nazihah Noor, a public policy researcher. Originally published at Jomo’s website

To achieve universal health coverage, people need public healthcare systems providing fair access to decent health care. This should be an entitlement for all, regardless of means, requiring adequate, appropriate and sustainable financing over the long term.

Appropriate arrangements can help ensure a financially sustainable, effective and equitable healthcare system. However, insurance-based systems – both private and social – not only incur unnecessary costs, but also undermine ensuring health for all.

Private Health Insurance

Voluntary private health insurance (PHI) is not an acceptable option for both equity and efficiency reasons. Those with lower health risks are less likely to buy insurance. Paying the same rate will be seen as benefiting those deemed greater risks, especially the less healthy, often also those less well off.

Hence, PHI premiums are often ‘risk-rated’. This means those considered greater risks – e.g., the elderly or those with pre-existing conditions – face higher premiums. As these are often un-affordable, many cannot afford coverage.

This is clearly neither cost-effective nor equitable, but also socially risky, especially with communicable diseases. This typically means poorer health outcomes compared to spending. Also, various insurance premium rate arrangements have different distributional consequences.

‘Fee-for-service’ reimbursement encourages unnecessary investigations and over-treatment. This escalates costs, raising premiums, without correspondingly improving health. But limiting such ‘abuse’ requires monitoring, always costly.

Unsurprisingly, many PHI companies use costly ‘managed healthcare’ services to try to limit rising costs due to such abuses. Thus, Americans spend much more on health than others, but with surprisingly modest, unequal and hardly cost-effective health outcomes.

With PHI, much public expenditure is needed to cover the poor and others who cannot afford the premiums, often also deemed to be at greater risk. Hence, achieving ‘health-for-all’ in such circumstances would require costly public subsidization of PHI.

Social Health Insurance

Unlike typically ‘voluntary’ PHI, social health insurance (SHI) is usually mandatory for entire national populations. Although often espoused with the best of intentions, SHI is invariably costlier due to its limitations and problems.

SHI incurs additional costs of health insurance administration to enrol, collect premiums, ascertain eligibility and benefits, make payments and minimize abuses. Revenue financed universal coverage need not incur such costs.

Compared to PHI, SHI seems like a step forward for countries with weak or non-existent public healthcare arrangements. But like PHI, SHI encourages over-treatment and cost escalation, as well as costly bureaucratic insurance administration.

Instead of such abuses inherent to insurance systems, a revenue financed health systems would incentivize prioritizing the health and wellbeing of those it is responsible for, thus emphasizing preventive health.

Such a health system contrasts with insurance systems’ emphasis on minimizing costs for the often unnecessary medical services it incentivizes, instead of improving the population’s health and wellbeing.

Government subsidies for health insurance, private or social, would inevitably go to the transnational giants which dominate health insurance internationally.

Financing SHI Complications

Hence, SHI involves much more per capita health spending, raising it by 3-4%! But despite being much more costly than revenue-financed systems, there is no evidence health outcomes are improved by switching to SHI from government funding.

Germany’s SHI has been more cost-effective than the US with its PHI. But it is less cost effective than most other economies with revenue-financed healthcare. Nevertheless, healthcare financing consultants, continue to recommend versions of SHI, although it is clearly not cost-effective, appropriate, efficient or equitable.

SHI schemes remain in some rich countries for specific historical reasons, e.g., Germany’s evolved from its long history of union-provided health insurance. But more recently, even these economies rely increasingly on supplementary revenue financing. But again, such hybrid financing does not improve cost-effectiveness.

As SHI typically involves imposing a flat payroll tax, it discourages employers from providing proper employment contracts to staff. SHI is estimated to have reduced formal employment by 8-10% worldwide, and total employment in rich countries by 5-6%!

It is also difficult and costly to collect SHI premiums from the self-employed, or from casual, temporary and informal workers not on regular payrolls. Also, most working people in developing countries are not in formal employment, with far fewer unionized.

SHI schemes are always difficult to introduce as they would reduce take-home incomes. In most developing countries, most families cannot afford such pay-cuts. Hence, government revenue would still be needed to cover the uncovered to achieve health for all.

Many SHI proposals also recommend earmarking revenue from new ‘health’ taxes collected. Such earmarking creates likely conflicts of interest reminiscent of justifications for ‘sin taxes’ on addictive narcotics, smoking, alcohol consumption and gambling.

Will governments perpetuate unhealthy practices and behaviours to secure more tax revenue? Is there an optimum level of smoking or sugar consumption to be allowed, even encouraged, to get such earmarked funding?

Revenue Financing

International evidence shows progressive revenue-funded public health financing to be much more equitable, cost-effective and beneficial than SHI. Hence, moving from revenue-financing to SHI would be a step backwards in terms of both equity and efficiency, or cost-effectiveness.

The late World Bank economist Adam Wagstaff and others have long advocated tax- or revenue-financed health provisioning due to the significant additional costs of managing health insurance systems, both private and social.

Revenue-financed public healthcare financing avoids the many insurance administration expenses incurred by both PHI and SHI. There will be no more need for such costly payments for unnecessary medical tests, procedures and treatments, and bureaucratic processes to manage insurance procedures and curb abuses, e.g., those associated with ‘moral hazard’.

Better financing and reorganization of preventive health efforts are needed. Public health programmes requiring mass participation, e.g., breast or cervical cancer screening, generally have much better outcomes with revenue-financing compared to SHI.

Better results can be achieved by improving tax-funded healthcare. More resources need to be deployed to improve preventive and primary healthcare. Strengthening public health services must include improving staff service conditions, morale and retention rates.

There is nothing inherently wrong with revenue-financed healthcare. Underfunding is largely due to political choices and fiscal constraints. These are typically due to externally imposed political limits.

Instead of dogmatically insisting on SHI, as is typical of health financing consultants, revenue financing of public healthcare should be reformed, strengthened and improved by:

* increasing and improving budget allocations.
* eliminating waste and corruption with competitive bidding, etc.
* increasing government revenue with fairer taxation, including wealth, ‘windfall’ and deterrent ‘sin’ taxes, e.g., of tobacco and sugar consumption.

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  1. John R Moffett

    Good summary of the differences. The idea that public health should have anything to do with “insurance” is disgusting.

    1. Susan the other

      This was interesting. I had assumed Medicare was directly funded. Dedicated deductions from SS, etc. But this throws a new light on the whole mess – even though it is the best of our messes. All the paperwork and administrative costs really are very antithetical to the whole effort. The concept of mutual insurance could easily be expanded to a mutual entitlement for everyone to insure good public health, and etc. This makes good sense. Health rights. Raising the underlying question, How can we even dream of denying anyone good healthcare just so insurance corporations can play the odds. Everybody knows the House always wins.

  2. KD

    If some progressive wants to use this to push VA benefits for all, god bless them. One of the problems of trying to enact some progressive scheme is that stuff like free college and state funded health care is reserved for veterans, and making them public would impact military recruiting.

    It has always been possible to open Medicaid to all on the state level, but no one has been able to do it on the state level due to the insurance lobby. Expanded eligibility for Medicare seems to have died in Congress. At this point, the best you could hope for is some kind of universal super cat insurance, which would still leave plenty of fat for the insurance companies, while leaving the government holding the tail risk. This might indirectly help the public avoid medical bankruptcies.

    1. Jams O'Donnell

      “making them public would impact military recruiting” – this is of course an added benefit. Obesity, drug taking, poor education and health are already impacting US military recruitment, “VA benefits for all’ is what is needed to complete the picture.

    2. Kouros

      Making healthcare public, removed from work coverage would be like manumitting the population from the bondage of their employers as well…

      1. Arizona Slim

        If and when that happens, we’ll have a new National Anthem. I predict that it will be the Johnny Paycheck version of “Take This Job and Shove It.”

  3. William Beyer

    Hal Freeman, who blogs from Luga, Russia and is occasionally is linked here had this in his latest post:

    The great thing about emergency care in Russia is that it is free. There was no charge for her being seen. I mentioned before that quite some time ago Gabriel had a kidney infection, and they discovered a stone as well. The pediatrician here filled out the form saying he needed emergency treatment. The ambulance took him from Luga to St. Petersburg, which is about 90 miles away, and he stayed in the children’s hospital for 3 days until the infection was gone and he passed the stone. There was no charge for anything. I shudder to think what the cost would have been in the U.S. Free emergency treatment means you never have to hesitate on whether to take someone in for emergency care because you are afraid of the costs.

    We really do have a totally crapified healthcare “system.”

  4. Neutrino

    330 million Americans, many of whom struggle to pay for healthcare, are misled by policy discussions. Feature, not bug. Their eyes glaze over at the bafflegab and willful misdirection. They return to easier distractions.

    How to begin to solve that problem? Come up with a short, succinct, to-the-point summary [;>] that they can see at a glance. Add graphics to stimulate those visually inclined. Show differences. Provide documentation links.

    Competing for eyeballs and attention is hard, and the other side has unlimited patience and funding, courtesy of your spending habits.

    1. Mica Leon Busey

      > Their eyes glaze over at the bafflegab and willful misdirection.

      Referring to an industry whose members treat symptoms instead of remedy cause of sickness as “health care” is the most important misdirection.

  5. Paul Jurczak

    SHI incurs additional costs of health insurance administration to enrol, collect premiums, ascertain eligibility and benefits, make payments and minimize abuses. Revenue financed universal coverage need not incur such costs.

    What is the mechanism of fraud magically disappearing with revenue financed universal coverage? I smell magic thinking here, in part due to my long experience with government run universal healthcare coverage. Not saying that it is not a viable option, but let’s switch the lens tint from rosy to neutral.

    1. Yves Smith Post author

      Your comment is a straw man. Jomo said minimize abuses and he put it last on the list, meaning it is the least important source of cost saving. He never said it would end.

      But since you asked… Medicare fraud is estimated at $60 billion per annum. Medicare has 65.7 million members.

      The UK population is 67.7 million. Residents as well as citizens are enrolled.

      NHS fraud is 1.27 billion pounds a year. And the Tories have every reason not to minimize the number since they hate the NHS.

      1. Revenant

        To expand on that, there are three kinds of medical fraud: fraudulently receiving treatment you do not clinically need, fraudulently receiving treatment you are not eligible for, and fraudulent receiving value for services not required/delivered. The first is vanishingly small and merits a clinical diagnosis in its own right somewhere between hypochondria and Münchhausen’s syndrome. The second is also negligible: whatever the NHS’s merits, its rationing by waiting list and its like of private hospital hospitality (wards, no single rooms) discourages medical tourism and very few non-eligible patients had been found to justify the Tory attempts to force clinicians to administer ID and immigration procedures on all patients, once you excluded protected category patients such as asylum seekers and refugees. The third is good old fashioned corruption and will be present in any system but the opportunity in the NHS (with transparent public procurement by administrators and no paymemt by results or volumes of clinicians) is limited.

        UK private healthcare may be susceptible to US problems of over-diagnosis and over-treatment but, because the vast majority of clinicians in the systems are the same people operating in their private time and spend the majority of their time in the NHS, there is a weird moral surveillance (partly envy too, perhaps). Surgeons who operate too radically and too often for the money get talked about by their peers and theatre nurses and anaesthetists, which brings them into line (the medical set is small and close-knitin provincial UK and even in London, where the major teaching hospitals are their own small worlds) or worse brings them into question in their NHS practice, which is usually the basis of their reputation and often the provider of their key clinical or operating theatre time. Also, with a handful of exceptions, UK private hospitals do NOT have ER departments and are totally reliant on NHS facilities across the road or in the same building for high dependency care. As a result, private medicine has to bow before NHS mores and not vice versa.

      2. Paul Jurczak

        Revenue financed universal coverage need not incur such costs.

        He never said it would end.

        He suggested it would end, since the cost of minimizing abuses will no longer be needed. Just quoting.

        1. Yves Smith Post author

          The entire sentence is that SHI incurs “additional costs” to “minimize abuses”. Your parsing is incorrect.

          You also ignored the data I provided supporting the author’s point. Given that Medicare fraud, on a comparably sized system to the NHS, is way over an order of magnitude higher than for NHS fraud, I am highly confident the money spend chasing Medicare abuse is also greater.

  6. Meng

    Which country has Revenue Finance Healthcare? What is it, no description is provided. He says it is the ‘best’ but provides no substantiation – what is this International Evidence? The bulk of the costs of bureacracy seems to me to be the same.

  7. Meng

    Which country has Revenue Financed Healthcare? He doesn’t explain how the cost of bureacracy is reduced.

    1. jrkrideau

      He doesn’t explain how the cost of bureacracy is reduced.

      You don’t need as many administrators. In my province of Ontario there is a single payer system. As I understand it, a doctor submits a bill and gets paid. That’s it. I am oversimplifying a bit but there are no insurance companies to deal with.

      The family medical clinic where I am a patient had one OHIP billing specialist a few years ago for roughly a dozen or so MDs, a raft of residents, and perhaps 4 or 5 nurse-practitioners. This may have changed as the clinic has added some more MDs.

  8. Nahk

    Sounds like a demand for a bailout of a looted bankrupted grift-riddled sick-care complex and introduction of the same actors, schools, corps., etc.:to a bigger even moar bureaucratic with AI promoted sicker-care neo-gene therapy pharma subscriptions and Chinese style Social Credit Score punishment for those that would opt out of the whole Eugenic Program .

    And the blanket liability shields for ‘The Science’ of pharma trial liars, nosocomial infection murders, non-pharma/mRNA deniers ( YOU AIN’T A HORSE, despised bitter linger Trumpers ), etc..

    = NO F’in THANKS !!

  9. Meng

    If you ask the average person which country spends the most money on Healthcare, I think most would tend to name countries in Europe. They are sadly misinformed.

  10. jackiebass63

    The fact is we need a one payer universal system where everyone is covered from birth to death. It would eliminate all of the unnecessary spending that has nothing to do with patient care. Profit and greed make our health care one of the worst in the world and the most expensive.

    1. Meng

      The British NHS is I believe a “one payer unisversal system” – I also believe it is imploding. Someone said free public healthcare is like owning a boat, you keep throwing money at a hole in the water. It appears to me to the Parkinsons’s principle of “work expands to fill the time available” – that “Health needs expands to fill the Health care available”.
      That was why I was so interested in what Revenue Financing is but ….. sadly I still have no idea.

  11. Dick Swenson

    Why do we use the word “health” and not “medical?” We don’t need a way to finance health care. We need a way to finance medical care.

    It also seems that we like to make everything a “for profit” activity and not a “for fairness” activity.

    It seems that Americans like to use euphemisms and not correct words. For xample, we “pass’; we don’t die.

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