THE LESSON FROM SINGAPORE

President George W. Bush's plan to abolish the tax deductibility of corporate health insurance, while granting a tax break for its private purchase doesn't solve many of the US health system's problems. Not surprising; the incentives involved in healthcare purchase are bizarre, and always have been. Only when this reality is recognized, and the economics of the system adjusted, will healthcare become affordable for the long term future.

Healthcare purchase has always been largely directed by faith rather than reason. The medical profession didn't reach what a cynical MBA would call "operating break-even" in which it cured as many people as it killed until at least 1925 or so, maybe even until the invention of antibiotics in the 1940s. Nevertheless, medical expenditures before this time were very substantial. In 1900 advanced countries such as the United States and Britain spent fully 3% of Gross Domestic Product on medical services that had a net negative effect on life expectancy.

George Bernard Shaw's splendid 1906 play "The Doctor's Dilemma" illustrates this. The play involves interaction between six Harley Street specialists, five of whom are highly-qualified quacks while the sixth is the only doctor with a treatment that might cure a particular patient suffering from tuberculosis. Even Shaw's hero has ideas that are pretty weird by modern standards. However since he was young he may eventually have achieved lifetime medical break-even by surviving into the 1940s and curing more patients in the 1940s with early antibiotics than he killed in 1906 without them!

All six of Shaw's doctors made very good livings indeed, and three of them had been knighted. Nevertheless a patient entering one of their consulting rooms at random had at most a 1 in 6 chance of medical benefit (even granting Shaw's thesis that his hero knew what he was doing.) It may be objected that in the other five cases the patient could try again, so putting him above medical breakeven for his huge expenditure in consulting Harley Street specialist after Harley Street specialist, but that's assuming the other specialists didn't kill him first. We learn for example that the patient allowing Sir Colenso Ridgeon to "stimulate the phagocytes" had about a 50-50 chance of losing an arm or two in the process!

It is thus clear that the patient consulting Shaw's Harley Street was wasting his money. Similarly the Jane Austen heroine waiting anxiously for the doctor to arrive was wasting her time. Maybe Sir Colenso Ridgeon's bedside manner was so suave and authoritative that a few patients recovered through a placebo effect, but that surely cannot go far to justify the enormous expense involved in consulting him. To summarize: the 3% of GDP spent in 1900 on healthcare was completely wasted, an utterly irrational use of resources.

If pretty well all medical expenditure was economically irrational in 1900, why should we suppose that much such expenditure is not equally irrational now? It is in this context that we should judge the 16% of U.S. GDP spent currently on healthcare. It's not as if the underlying economic realities have been revolutionized. The United States spends more of its income on healthcare than any other country, yet does not achieve better results in terms of life expectancy and chronic illness. Meanwhile, an average of 250,000 patients died in the U.S. through preventable medical error in 2002-04, according to HealthGrades, and that's not counting deaths even today due to diagnoses and treatments like Sir Colenso Ridgeon's, thought appropriate at the time but later found to be fantasy.

Not only are consumers ignorant of the realities of their healthcare treatments, they are incentivized by the U.S. third-party payer system to spend even more on healthcare than the irrationally large amount they would spend in a free market. The Bush tax plan does nothing to address this. In addition, by failing to address the problem that health care premiums rise with age, it provides an extra subsidy of the young and healthy at the expense of the middle aged, surely unnecessary when life has subsidized the young and healthy so much already!

Lovers of the British National Health Service needn't smile in a superior fashion. Apart from costing less than the U.S. system, it has no other noticeable benefits. It is more or less a producer cartel, except that because of the 1948 Labour Party's slavery to the unions, the doctors in the NHS have almost no power and the mass proletariat of cleaners and low level administrative staff collectively controls the system. The principal objective of Aneurin Bevan at the system's inception was the properly 1940s-Soviet one of defenestrating Sir Colenso Ridgeon; this was achieved, but at what a cost! In the long run, socialized medical systems are freeloaders off the innovation in private systems. This is inherently unstable, particularly as private medical systems become socialist themselves.

A well designed healthcare system will discourage people's willingness to spend uneconomically large amounts of money, particularly other people's money, on healthcare. It will also recognize the unfairness of life, and the need to subsidize (but not ad infinitum) those who through no fault of their own incur large medical expenses in youth or middle age. Conversely, it will recognize that death comes to us all in the end, and that there is no point in prolonging life beyond where it is economically or hedonically useful. Finally, it will recognize that in healthcare as in everything else, rich people can afford more than poor people; this is not an inequality that should be removed from the system.

If people tend to spend too much rather than too little money on healthcare, then healthcare expenditures should be as far as possible made through health savings accounts, or some equivalent mechanism whereby the expenditure is directly out of pocket to the consumer. These should be much larger than has been suggested by all past discussions, perhaps funded by a levy of 10% of the individual's total income until the age of 75. They would need to be, because as well as the individual's own health care expenses they would need to cover the medical costs of the individual's children under 18, with the general principle that both biological parents should pay equally for children's treatment.

By mandating healthcare savings accounts at such a high level, the President and Congress would increase the U.S. savings rate, and would redress the balance between youth and middle age - payments would be a constant proportion of income through the early and middle parts of life, with the effect of building up large balances that were spent down later.

Surprisingly, one possible model for such a system has existed since 1984, in Singapore's Central Provident Fund (motto "Integrity, Service, Excellence" - not what one finds in government bodies nearer home!) This compulsory savings scheme provides for healthcare, retirement, life insurance and home ownership, provides accounts that remain the property of the individual at all times and offers a variety of investment options. Contributions are 33% of employees' wages until age 50 of which 13% is paid by the employer; the contributions scale down at higher ages. For the self-employed, the system is limited to a medical savings account, with premiums of 6-8% of earnings. There is also a catastrophic medical insurance scheme, for early major illnesses. Medical costs are paid directly out of the CPF Fund, and the saver is advised to stay in "affordable wards" to make his Medisave funds go further. Funds can be withdrawn on retirement, subject to retention of a minimum sum, converted to an annuity for basic living expenses and a Medisave minimum for end-of-life medical expenses. At death, an individual's CPF holding is transferable to his heirs.

The principal benefit of the Singapore system is that it makes almost all healthcare costs payable by the patient, directly from his healthcare savings account. There are no insurance intermediaries adding costs, determining what treatments are acceptable, or negotiating in their own interest with healthcare providers, attempting to get cost discounts compared with the uninsured. Hospitals and other healthcare providers are forced to provide a transparent fees schedule, and estimates of cost in advance of treatment, so that the patient or his near relatives can make an informed decision as to which treatments to select.

Needless to say, the Singapore system is so sensible that it is most unlikely to be adopted in Britain or the U.S. Although the compulsory savings must seem high to the young, tax rates are correspondingly lower; the top marginal rate of Singapore's individual income tax is only 20%, so tax plus CPF contribution totals a maximum marginal 40%, still reasonable. Furthermore, by diverting health and retirement payments to the private sector, with contributions and payments administered through the CPF, it reduces the size of government itself, which in Singapore absorbs only 16% of GDP, far below its percentage in the U.S. or Europe.

By reducing the proportion of the economy administered by third parties, and forcibly raising the national savings rate, the CPF system brings two huge economic benefits which would enormously help the performance of both the US and British economies. It need hardly be added that by reducing the resources available to government, the CPF also reduces corruption; Singapore ranks fifth on the Transparency International Corruption Perceptions Index, with a 9.4 ranking, compared to the U.S. at 20th with 7.3.

Anyone who has watched TV news broadcasts on healthcare subjects has seen that healthcare naturally appeals to the lowest common denominator sentimentality of the voting public. Hence healthcare funding, if subjected to a democratic process is particularly subject to subversion and cost escalation. If Demos governs the system, economically sensible solutions such as rigid caps on uninsured cost reimbursements are impossible to implement. However, without economic rationality, healthcare costs in socialized and insurance-based systems alike are likely to continue expanding until they have swallowed the entire wealth generating capacity of the economy.

Economic rationality is unlikely in the short term; this isn't Singapore. Instead policymakers, notably including George W. Bush, Tony Blair and Gordon Brown, will treat healthcare funding like Sir Colenso Ridgeon treated medicine, stimulating the phagocytes until the patient's arm drops off!

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For greatest efficiency, lowest cost and maximum choice, ALL hospitals and health insurance schemes should be privately owned and run -- with government-paid vouchers for the very poor and minimal regulation. Both Australia and Sweden have large private sector health systems with government reimbursement for privately-provided services so can a purely private system with some level of government reimbursement or insurance for the poor be so hard to do?

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