Paying for Universal Healthcare

Otto von Bismarck looms large in German history.  He unified the Prussian states and became the first Chancellor of the fledgling German Empire in 1871.

Ironically, the man known as the Iron Duke – who was aggressively anti-Socialist – presided over the introduction of the world’s first health insurance bill in 1883.  His Social Insurance program found many imitators across the world.

Bismarck was fortunate to be introducing a scheme when there was no other alternative already in place.  Debates in the US and, now, South Africa, occur against the backdrop of established industries.

There are numerous ways to ensure that individuals are covered for hospital and health needs.  The government can pay directly, as it does in the UK, Austria and Canada, limiting care to what it can afford.  The government can finance social insurance, and encourage a private healthcare market of hospitals and doctors, as happens in Germany and France.  Or, as in the Netherlands and Switzerland, the private sector can cover the majority with state incentives to ensure that everyone has a policy.

The US has - or, potentially, had (if their new healthcare bill is implemented as imagined) - a tangled mess of something of everything, and South Africa has two entirely alienated health systems consisting of state-owned healthcare separate from private-insurance and private healthcare.

Private insurance is useful for stimulating competition, but it has its own problems.  Basic policies are attractive to the young and healthy.  Comprehensive policies are more popular with people who have reason to be concerned about their health.  This is self-selection and, if too many unhealthy people are covered relative to the general subscribers, then providing such insurance becomes unaffordable.

This is the attraction for having a single state-owned, social insurance policy which everyone has to be covered by.  It is also the one being considered in South Africa.  The US, by comparison, wants to maintain its private health insurance market but legislate that everyone must buy cover.

The reason for promoting private insurance is for reasons of innovation.  No state-owned health insurance company would have come up with Discovery Health’s clever notion of paying clients to stay healthy.  The simple idea of negotiating steeply-reduced fees on their gym memberships for medical aid subscribers is now common practice.  Competition between insurers to attract members acts to reduce the costs of care, as well as to increase the overall health of society so that such care is needed less.

Yet, insurance companies can only exercise such price discrimination if they know what is actually happening in private hospitals and surgeries.  Patients being treated for illness are often scared and unsure of what is happening.  They may agree to unnecessary tests or additional services that aren’t required.  This can drive up insurers’ costs and place pressure on premiums. 

In addition, insurance can only offer care if such care exists.  Germany has four times as many hospital beds available for care as does South Africa.  More insurance isn’t going to help if all the beds available are already full.  The current moratorium on new private hospital construction means that, even if a new insurance scheme covered everyone, everyone would still be reliant on the state to build new hospital beds to provide such care.

To give you a sense of what is required to provide a German level of care, consider that the state spends some $ 584 thousand a year on each bed.  That figure is a mere $ 156 thousand a bed in South Africa.

A German level of care would cost South Africa a total of $ 60 billion a year, and this excludes the cost of creating an additional 285,000 hospital beds.  The current health budget is only $ 12.7 billion for 2010/11.

Such costs are equivalent to increasing overall state expenditure by 30%.  Any solution will, therefore, have to involve the private sector.  Governments should not act as if they alone have the answer to resolving the quest for affordable care.