A Better Way to Pay for Health Care

Living standards during the past generation have improved massively across the broad spectrum of our lives thanks to technological innovation and productivity. A new pair of shoes, a gallon of milk, a flight to visit our parents, a coast-to-coast call or a new television require only a fraction of hours worked compared to our parents.

Health care has been a stunning exception. Spending in the U.S. is the highest among any developed nation in the world. Outlays have nearly tripled from 6 percent of GDP in 1970 to 18 percent in 2019, though bang for buck compared to other nations is mediocre. For most Americans, real wages have barely budged for decades, so health care costs have vastly outpaced our ability to pay them.

To understand why health care costs tend to stay at elevated levels, let us imagine a farmer’s market. We bring our shopping list, comparing quality and price between stands. We see and smell how ripe a peach is and decide whether our money is better spent on two apples instead. If we discover a rotten apple in the bag, we return it for a fresh one, or take our business to another stall next time.

Health care is different. Most of us don’t know what we’re buying, or how much it costs—the fundamental inputs of any market. The seller has substantial informational superiority, coupled with an incentive to oversell to naive consumers—a toxic combination. We are often in a desperate state when sick or injured, so our bargaining power is compromised. Someone else is paying if we are insured, so why bother? If we’re disappointed with the services provided, recourse is usually impractical (try returning an artificial hip).

Any of these attributes game the health care system in favor of the seller and disadvantage the consumer. Collectively, they have led to an unprecedented bonanza of wealth redistribution from consumers to providers of health care products and services.

WHAT ARE THE CHOICES?

For decades, the debate around health care has been intractable. Critics of single-payer models used in Australia, Britain and Canada argue that an absence of competition leads to low efficiency, long waiting times and less innovation. They are right. Critics of free market models argue that “fee for service” creates moral hazards, as more care means more costs. They are also right.

The political debate also tends to conflate health care technology and health care. There has been deserved praise about how our collective ingenuity produced approximately 300 COVID vaccines in a matter of months, with 17 already in use. Technological advances have increased the length of our lives by roughly half over the past century. But the discovery of innovative technology is a different world from the rendering of care. 

IS THERE A BETTER WAY?

Singapore inherited Britain’s National Health Service after it became independent in 1965, but encountered the same shortcomings that are being criticized today. It then adopted aspects of America’s “free market” model, but experienced similar deficiencies to those outlined above.

After over 50 years of trial and error, Singapore has learned from these flaws and developed a health care system that achieves equivalent or superior health care outcomes at less than 25 percent of the cost of the U.S. and around 40 percent of the cost of Australia, Canada, and Europe. What accounts for much of Singapore’s success is its consumers have an incentive to save. Here’s how it works: about 20 percent of wages are withheld each month, with around half for pensions and half for health care, with employers matching. The patient then uses their savings to pay for healthcare treatments for themselves or their family. As such, it is a kind of dedicated currency, so the patient has “skin in the game” and always has some interest in watching over their bill. Since we spend 75 percent of our lifetime cost of health care during our last five years of life, on average, it mimics actuarially a pension plan with early savings accruing over a lifetime. Once sufficient savings thresholds have been met, excess savings are diverted to the patient’s pension fund. Unused savings form part of the patient’s estate which the spouse or children inherit upon death.

Skin in the game shifts power from doctors and hospitals to patients. With power also comes responsibility and self-sufficiency. The least expensive form of health care is prevention, so healthy diets, exercise, abstention from smoking take on added meaning when consumers are rewarded for good behavior. The notion of Caveat emptor (Latin for “let the buyer beware”), hitherto largely absent from health care transactions, becomes important. 

Savings-conscious patients lead to more competitive costs. Patients in Singapore often ask their doctors, for example, about whether generic versions of a drug are available? Singapore’s government requires hospitals to regularly publish prices for services, and provides selected quality indicators online to encourage transparency, knowledge, and choice. A typical cost of a hip replacement, for instance, in Singapore is U.S. $14,000 versus U.S. $40,000 in the United States.

Greater transparency and a watchful eye contribute significantly towards fewer incidences of fraud and malfeasance. These cost an estimated U.S. $272 billion annually in the U.S. alone, pointing again to the distorted incentives arising from a fee-for-service model.

THE FUTURE WILL BE ON SMARTPHONES

Health care is in the midst of its own 5G transition as smartphones radically change how medical care is delivered. Digitally empowered patients will be driving health care from the bottom up and taking increasing charge of their own health care.

Significant strides are being made in predictive diagnostics, sensors and telemedicine on the back of 3.6 billion smartphone users worldwide. In the first instance, they will create a more level playing field and reduce the amount of information advantage doctors hold over patients. IBM’s Watson, or Ping An’s AskBob provide increasingly precise, user-friendly, AI-based predictive diagnosis and treatment; often these are more accurate treatments than issued by professional doctors, obviating the need for patients to constantly go to doctors’ offices or the hospital, usually the costliest element on health care’s value chain.

Such advances are dependent on the patient having an incentive to harness these tools. Singapore’s model fosters the contest for progress and innovation, while the American model discourages both, and herein lies its flaw.

Singapore’s health care system suggests that considerable scope for improvement is within our grasp: today from architecture and tomorrow from smartphone-friendly technology. We are likely on the cusp of achieving gains in technology in services of a magnitude and speed historically confined to medical advances in products.

All of this suggests that the tedious debate between of single payer versus free market may be obsolete, or at least anachronistic.

Health care systems around the world are under growing pressure to do more for less. With populations rapidly aging, the vicious trajectory of costs outpacing wages is programmed to accelerate. Someone in their 80s spends six times more per annum, on average, than someone in their early teens.

Maybe now is a good time to challenge the dogma that has been holding us back. Why confine the debate to two unsatisfactory and antiquated models? Why not take a fresh look and ask ourselves what system is optimal for the future, rather than bemoaning the past?

Perhaps a “Singapore lite” version of skin in the game combined with some good old Silicon Valley ingenuity may be worth trying.

This article was written with research input from Olivia Bisbee and Donald Carlow.

This is an opinion and analysis article; the views expressed by the author or authors are not necessarily those of Scientific American.



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