China economy

Private sector must not be allowed a free rein in China's health care

Tsung-Mei Cheng says that an unfettered private market is a poor provider of health care, as other economies have proved and China has found in a failed experiment that must not be repeated

PUBLISHED : Tuesday, 11 June, 2013, 12:00am
UPDATED : Tuesday, 11 June, 2013, 1:44am

In a recent speech to party cadres, Premier Li Keqiang said that Beijing wants the private sector to play a more prominent role in China's economy. The stated objective is to unleash the creative energies of private enterprise and thus improve standards of living for the middle class.

This makes sense in many areas of China's vast economy, where easy state credit and excessive regulation can lead to a misallocation of scarce capital.

Private enterprise is not structured to achieve the ethical objectives sought for a health system

It will not, however, make sense in China's growing health care sector, where unfettered private market forces can easily divert the country from the goal of a "harmonious society" - the aim of the ambitious health reform begun in 2009. In health care, a retreat by the government would be a giant step back.

After all, China has been there before, when in the wake of the market reforms of 1978, its health sector was turned over to private market forces, only to end up with a hugely expensive but much diminished system that denied millions access to health insurance and health care and led to widespread public dissatisfaction with the system. In 2005, the powerful Development Research Centre of the State Council pronounced the then market-driven health reform "fundamentally unsuccessful". A 2006 survey by the Chinese Academy of Social Sciences found "high medical expenses" the top social concern.

The government responded to these cries for help with its health reform of 2009, which can claim some impressive results so far. Today, more than 95 per cent of China's population of 1.34 billion is covered by one of three health insurance schemes: for urban employees, non-remunerated urban residents, and rural residents. A medical assistance programme takes care of the poor and needy.

China has also begun to introduce clinical pathways in public hospitals to make health care more efficient and has started to limit the dangerous overuse of drugs - especially antibiotics - in treatment.

It is important to understand that private markets work well only when certain conditions are met. These include: first, both sellers and buyers must make rational choices; second, they must fully understand the nature and quality of the goods or services being traded; third, the price of the goods and services must be correctly understood by both sides; fourth, buyers must bear the full price of the goods and services they buy; and, fifth, there must be free and easy entry into and exit from the market for goods or services.

Alas, as Nobel laureate Kenneth Arrow pointed out, these conditions are rarely met when it comes to health care. For example, patients are often frightened when they go to see a doctor or into hospital. They cannot be counted on to behave like well-informed consumers. Moreover, their health insurance covers much of the cost, so they are insulated from the bulk of the cost of inefficiently produced health care. In a free market, unscrupulous health care providers can exploit these weaknesses.

Finally, and most importantly, private markets distribute scarce goods and services only to those able to pay the highest price for them. Without strong government regulation, a private health care market will run counter to Beijing's objective of providing basic health care to every Chinese, rich and poor alike.

That objective was made clear in the 2009 reform: equal access to health care and medical services was the most important aim in attempting to build a "harmonious society". A private market for health care would deny countless millions access to health care, not because private enterprise is evil, but because it is not structured to achieve the ethical objectives sought for a health system.

In an article in the 2012 book The Economics of Public Health Care Reform in Advanced and Emerging Economies, a co-author and I argued that if health care services were not allocated to the highest bidders, then the government would have to use a strong hand to control the insurance side of the market, including regulating how providers compete for patients and are paid. The aim should be to provide every citizen with access to health care without driving families into financial distress. Also, the goal should be to only pay what is needed to attract the right supply of health care services.

If insurance and payments are properly controlled, then private enterprise can safely be invited to supply services and products and compete for patient-care revenue.

In most advanced economies, governments play precisely that role. In Germany, Switzerland, the Netherlands, France, Canada, Japan and South Korea, the government tightly regulates the health insurance sector and how providers are paid. It also ensures both fair and honest competition among private providers, and patient safety. The US regulates its health care sector more heavily than may be realised, in part because about half of its total health care spending is financed by taxes and flows through government budgets. However, America's approach has been called "half-hearted regulation and half-hearted markets". Its private health insurance and payment side is so fragmented it lacks sufficient countervailing market power vis-à-vis the supply side.

The consequence is that prices for any service or product in the US are at least twice as high as those in other countries of the Organisation for Economic Co-operation and Development.

As a result, health care claims 18 per cent of US gross domestic product and that will only rise. Health care is now viewed as the largest threat to the fiscal solvency of both federal and state governments, crowding out spending for education and infrastructure, and threatening US global competitiveness. And tens of millions of Americans remain uninsured and face bankruptcy should they fall ill.

China has the time and opportunities to avoid these pitfalls of public policy. Free enterprise can certainly play a productive role in its health care system, but only under the strong guidance and supervision of government, as happens in most OECD countries.

Tsung-Mei Cheng is a health policy research analyst at the Woodrow Wilson School of Public and International Affairs, Princeton University, and co-founder of the Princeton Conference