The "Deklein" of Policy Analysis

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John R. Graham

Alberta's Bill 11, which will allow private clinics to provide some medical services with public funds, has generated much comment. One contri- bution is a recent paper by Robert G. Evans, of the Health Policy Research Unit at the University of British Columbia, and four colleagues, all well-known health policy analysts.¹ They review the efficiency of private and public, for-profit and non-profit hospitals, ostensibly covering the same ground as The Fraser Institute's Martin Zelder,² but arriving at somewhat different conclusions. However, Evans et al. only discuss a fraction of the empirical literature assessed by Zelder, adopting instead an ideological stance against Bill 11.

The authors are unequivocal in their belief that the twin goals of profitability and patient care are incompatible. They note that 80 percent of patients for publicly funded cataract surgery in Calgary's private clinics pay extra for foldable lens implants, along with other services, such as a video of the operations, at price of $400 to $700. However, the lenses cost about $25 to manufacture.³ Evans et al. clearly question the value of the foldable lens implant when they ask: "How does the cataract patient know that the ‘superior quality' lens on offer for several hundred dollars provides no additional advantage in therapeutic outcome…?" In fact, the ophthalmologist who reported the manufacturing cost of $25 states that "foldable intraocular lens materials have transformed contemporary cataract surgery into a truly minimally invasive procedure."⁴ In any case, how can anyone but the patient decide the value of the convenience of the foldable implant, for which he will pay only once in his life? And why should society allow a group of health economists to decide how much a video of the operation is worth?

Because of their unquestioning faith in the public system, the authors are dismayed that the Regional Health Authority did not publicize this information; rather, the Consumers' Association of Canada did. However, this is not as great a distinction as they think. The ironically-named Consumers' Association receives significant, if not primary funding, from government. In any case, relying on the public sector rather than private markets to effectively inform consumers is extremely inefficient, because the public sector is not rewarded for communicating good information.

Where Evans et al point the finger at the private service provider, it would be more productive to propose reforms to the public health insurance scheme. Indeed, cataract lens surgery is a treatment eminently suitable for medical savings accounts: tax free accounts that compound in healthy years in order to pay for non-catastrophic maladies in the future.⁵

The authors are withering in their criticism of the profit motive, comparing it unfavourably with health care provided by those inspired by professionalism. While critical of corporate image building, they quote with reverence promotional material from the American Medical Association: "…physicians are not simply business people with high standards… They have different and higher duties than even the most ethical business person." However, professionalism is not a substitute for market transactions, but a facilitator of them, up to a point. Professionals jealously guard titles and degrees like "MD," because they can charge a market premium for their services. Titles and degrees are valuable because they serve to overcome the information asymmetry between consumer and provider. If there were no widely recognized title like "MD," identifying a qualified practitioner would be a more costly and risky process. The downside of professionalism is that doctors have been so effective at promoting their status that they have successfully lobbied for legislative protection that gives them monopoly power and prohibits others from competing against them.⁶

Evans et al.'s concept of profit is based upon bookkeeping, not economics. They believe that if there is no profit shown in the financial statements, then no profit exists. Therefore, "whatever motivations lie behind hospital behaviour, profit is not one of them." However, Zelder notes that, in the absence of explicit profit, employees of non-profit institutions have ways of capturing surplus. Managers, for example, can have more comfortable lives than they would in a for-profit institution. For example, they can avoid labour strife by acceding to wage demands far in excess of those in the private sector. This has been documented in a hospital in British Columbia, where unionized, non-medical hospital workers such as cooks and cleaners earned 25 to 63 percent more than their occupational counterparts in hotels, who were also unionized.⁷

Privately-owned clinics are unlikely to employ workers who belong to public sector unions. Evans et al. predict that this will result in lower wages, but argue that: "any reductions in labour costs that result from surgical work in a non-union, lower wage environment represents transfers of income from workers to either shareholders or taxpayers, rather than true improvements in economic efficiency." This seriously flawed argument ignores allocative efficiency. If governments are paying unionized health care workers more per hour than they would earn in a private market, then fewer health workers will be employed than would be in a free market. Without the motivation of profit, there is no motivation to use the right mix of capital and labour.⁸

Evans et al. also succumb to a specious argument regarding private capital, namely, that "since governments can raise capital more cheaply that private firms, the cost of capital will be greater when it is paid for by a private company." This has nothing to do with health care; it is true for any sector. Perhaps all goods and services would be cheaper if supplied with public capital? Could the government create a competitive advantage for Canadian firms by abolishing private capital markets entirely and financing all enterprises through a public funding agency? This is obviously an illusion. Governments have been privatizing activities that in an earlier period fell prey to the thinking espoused by Evans et al. The reason is that cheap capital does not result in lower total costs. Artificially cheap capital only leads to managers' undertaking unproductive investments that are financed by taxpayers.

The authors are concerned that fees charged by private clinics will be too high. Regional Health Authorities will be at a negotiating disadvantage because they do not know what the appropriate fees should be. This is because "there is no readily available information on the costs of providing surgical services in public facilities; the cost accounting frameworks have simply never been developed." A more convincing criticism of publicly-financed hospitals would be hard to imagine, but the authors let this one slide by without further comment. It makes one wonder what sort of advice these policy analysts have been giving their public sector clients for the last few decades.

Bill 11 is not perfect. The strict requirements for licensing, by both the Regional Health Authorities and the College of Physicians & Surgeons of Alberta, will restrict free entry into the marketplace and motivate potential operators of clinics to engage in political lobbying to get licensed. As well, in a so-called two-tier system, we should be wary of private clinics privatizing the profits and socializing the losses of their operations. If a clinic does botch a procedure, the public sector must not accept responsibility for rectifying the error. However, Bill 11 is an important, if tentative, step towards more consumer choice in health care. This important truth is concealed by Evans' paper.

Notes

1. R.G. Evans, M.L. Barer, S. Lewis, M. Rachlis, and G.L. Stoddart, "Private Highway, One-Way Street: The Deklein and Fall of Canadian Medicare?" Vancouver: University of British Columbia Health Policy Research Unit, March 2000. Discussion Paper HPRU: 2000: 3D. May be downloaded from www.chspr.ubc.ca.
2. Martin Zelder, How Private Hospital Competitions Can Improve Canadian Health Care, Public Policy Sources No. 35, Vancouver: The Fraser Institute, 2000.
3. Of course, if $25 is the marginal cost of manufacturing the unit, I suspect that that is a small proportion of the total costs, including fixed costs, which must be covered over the long term if the manufacturer is to stay in business.
4. B. Allan, "Intraocular lens implants," (editorial) British Medical Journal320 7227:73-74, Jan 8, 2000.
5. Cynthia Ramsay, Medical Saving Accounts: Universal, Accessible, Portable, Comprehensive Health Care for Canadians, Critical Issues Bulletin, Vancouver: The Fraser Institute, 1998.
6. Ronald Hamowy, Canadian Medicine: A Study in Restricted Entry, Vancouver: The Fraser Institute, 1984; and T.P. Wasley,What Has Government Done to Our Health Care? Washington, DC: Cato Institute, 1992.
7. Cynthia Ramsay, "Labour Costs in the Hospital Sector" Fraser Forum, November 1995.
8. See David Harriman, et al., The Availability of Medical Technology in Canada: An International Comparative Study, Public Policy Sources No. 28, Vancouver: The Fraser Institute, 1999, for a discussion of Canada's under-investment in medical technology.

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