Published in The Financial Post, September 10, 2004, p. FP-11.

The Nanny Monster
by
Pierre Lemieux

 

In the health care debate, the crucial question is, Should parallel private health care (private duplicate insurance and private hospitals or clinics) remain illegal in Canada, which is unique among OECD countries? Many proponents of legalizing private health care argue that it would help reduce waiting lines in the public system. Opponents reply that, on the contrary, a parallel private system would negatively affect the public health care system. They cite cases such as the U.K. and New Zealand, which have both private health care and public queues. In a recent article in the Journal of Health Politics, Policy and Law, Carolyn Tuohy, Colleen Flood and Mark Stabile of the University of Toronto provide an econometric analysis of the situation in OECD countries over the past two decades. The authors find that "estimating the relationship between private and public spending yields a negative and significant correlation in either direction" (my emphasis). In other words, we can just as easily say that public health care has a negative impact on private health care as to argue the converse. "In the end," the authors say, "what these various analyses suggest is that the dynamic relationship between private and public finance in the health care area is a complex one, mediated by the design of [different national] systems, and that any attempt to capture aggregate effects runs the risk of oversimplification." However, the formal conclusion of Tuohy and colleagues disputes their own analytical results. "Indeed," they conclude, "a resort to private finance is, on balance, more likely to harm than to help publicly financed systems.... For those who would seek to improve publicly financed systems, the locus of reform efforts must remain the public system itself." In a National Post op-ed, Colleen Flood was even more assertive: "For most Canadians, a two-tier system will mean an era of more, not less, waiting." Although these authors don't produce evidence, one theoretical reason that could justify their stretched conclusion is the so-called "crowding out" of public by private health care. This is economic nonsense, as "crowding out" is a concept designed to work the other way around: Compulsory taxes and unfair competition from subsidized public services crowd out private competition and expenditures. To say that private activity crowds out state intervention can only mean that individuals prefer to do things privately. Therefore, it is not surprising that the econometric analysis of the Tuohy article does not support some sort of mechanical "crowding-out" of public expenditures by private expenditures. Queues in the public sector are simply a consequence of taxpayers not being willing to supply everything that consumers demand at zero (or controlled) prices. Another possible justification for the hypothesis that private health care would reduce public expenditures per public patient is the political support argument. High-income earners and part of the middle class would desert the public system by buying private health insurance and patronizing private facilities (hospitals, diagnostic facilities, etc.). These defectors would stop, as consumers, to demand good public services and to voice complaints. As voters, they also would withdraw their political support from the beleaguered public system. Call this the "Nigerian hypothesis," following Albert Hirschman, who noted that the public trains in Nigeria deteriorated after their wealthier customers switched to private automobiles. The reaction of the public health care system to the exit of wealthier and healthier customers depends on how the state behaves as an institution, that is, on which model of the state explains reality better. Assume that the state is an organization whose main function is to help the poor -- the reader will forgive my calling this the "naive model of the state," as it predates contemporary public choice models. In the naive model, the exit of the clienteles who can purchase private insurance and services will simply leave more public resources to care for those who really need it. Other, more sophisticated, public-choice models reach the same conclusions. Voters and bureaucrats may want to continue helping the poor even if, as consumers, they would themselves flee to the private sector. This is especially true for bureaucrats, who earn a living by expanding state intervention. However, there is one model of the state that is consistent with the Nigerian hypothesis. This model is known in public choice theory as the Leviathan model (Bertrand de Jouvenel calls the beast "the Minotaur" instead). The state is conceived as an organization that redistributes power and income to its tenants (politicians and bureaucrats) and to the political clienteles whose support they need. The state will exploit its subjects to the maximum possible, and provide only the minimum level of services it can get away with. Once the wealthy and articulate stop complaining about public health care, and once the politicians and bureaucrats have private alternatives, the state will let the public system deteriorate. It is a fascinating paradox, which shows the power of the reigning ideology, that the very people who want us to trust the state as a benevolent nanny also want us to believe that it will behave as Leviathan if it loses its health monopoly. Either the state is a benevolent institution that can be trusted and there is no reason to believe that it will screw the sick and poor once the others have migrated to the private sector, or else the state is a Leviathan that tries to exploit its subjects, in which case it is suicidal to grant it a monopoly over one of the most important industries -- health care. One way or another, private health care should no longer be forbidden. In her National Post piece, Professor Flood claims that "in order for the private tier to succeed, the public tier must be second-rate." But she doesn't inquire why the Canadian public monopoly is second-rate even without a private tier. She does not seem to understand the role of incentives. She just assumes that the second tier should be first-rate, as opposed to a basic safety net; that is, she assumes that equality is desirable per se. One is reminded of the old communist joke: "We are in deep s--t," says the first comrade. "The question is," replies the second comrade, "will everybody get an equal share?