Economics Myths In the Great Population Debate- Some Healthcare Perspectives

The essay “Economics Myths In the Great Population Debate” by Donald Low, Yeoh Lam Keong, Tan Kim Song and Manu Bhaskaran, all well-regarded economic thinkers has been circulated widely and intensely studied by Singaporeans interested in the economics behind the population debates.
I claim no special expertise in economics but do have some perspectives on healthcare which is one of the key sectors discussed in Myth #4. Perhaps it is easiest for the reader if my perspectives are embedded into the text as below. My comments are in [] while Low et al’s actual text are in bold.

Myth #4: Spending on healthcare and social services are costs which have to be financed by higher taxes, and are therefore a drain on the economy
The final myth is that some parts of the economy – like healthcare and social services – are a drain on the economy, while others are productive, “value-creating”, and generate “exciting jobs.” This characterisation of the economy has no basis in economic theory or evidence, although it is true that some sectors of the economy experience persistently lower productivity growth than others.
In the popular imagination, healthcare and social services are a drain on the productive parts of the economy. They have to be funded by taxpayers and are therefore seen as a cost that reduces national output. This is bad economics. Healthcare and social services, like other industries such as manufacturing, financial services or construction, also contribute to national output (or GDP) growth. Your spending in healthcare and social services is someone else’s income and his spending boosts another person’s income. So raising our spending in these two areas is not different from increasing spending in other parts of the economy. There is no economic basis for the common intuition that some industries are a cost while others are a form of investment.
What about the fact that healthcare and social services have to be financed by taxation? Doesn’t that mean they are a drag on the economy? Again, there is little economic basis for that argument. Many other things are financed by taxation too – MRT lines, public housing, law and order, security – but we don’t view these as a drag on the economy. Indeed, we may even see these things as productive investments.
[What is economic growth for? Surely it must be to improve the lives of citizens. Here Japan offers an interesting example. Despite the oft-described economic trauma Japan has experienced over the last two decades and is continuing to experience, Japan still leads the world in life expectancy. What is interesting is that Japan has led even throughout the economic ‘dark times’ and even extended its lead. Japanese life expectancy in 1980? 79.1 years, just a quarter of a year ahead of the Netherlands in second position. Japanese life expectancy in 2010? 82.73 years, coming in almost a full year ahead of second placed Switzerland (81.81 years). Yes, economic growth is important but as the Japanese demonstrate, it not only cannot be everything, but it may even be the wrong metric for highly developed ecoonomies to chase if health and wellbeing are sought.]
But won’t taxes have to rise sharply to finance our higher spending on healthcare and social services? Not necessarily. First, Singapore has large fiscal surpluses which can be used to finance a well-planned expansion of such services in a sustainable way. Second, if productivity increases and people’s incomes across-the-board rise, we should be able to afford the rising costs of healthcare.
[If increased healthcare and social spending improve the lives of citizens substantially, perhaps it is a worthwhile investment. Even if taxes have to rise or we have to cut back on something else to fund these, Singaporeans may decide this is a path worth going down.]
The real issue in healthcare spending is how the risks of incurring high healthcare costs are allocated. Most economists argue that given the low-frequency, high-impact nature of many medical contingencies, the most efficient way of financing healthcare would be through some form of risk-pooling or social insurance. That Singapore lacks a comprehensive and universal health insurance programme, combined with the fact that the bulk of healthcare spending currently comes from out-of-pocket payments, suggests that we can have a more equitable healthcare financing system without compromising on its efficiency.
[It is important to clarify that the Singapore government does agree with the central role of risk pooling in “low-frequency, high-impact nature of many medical contingencies”. That is exactly what MediShield, established in 1990, is supposed to do*. MediShield, though dubbed the national insurance scheme, is not a national health insurance in the form or substance, of say Taiwan’s National Health Insurance or Germany’s social insurance. MediShield is not ‘comprehensive’ in the sense ‘comprehensive’ is used in health financing nomenclature and is instead catastrophic, effective mainly for large inpatient bills only. Citizens are expected to cope with smaller bills through a combination of Medisave, out-of-pocket payments and employer benefits.
The second clarification is in the phrase “the bulk of healthcare spending currently comes from out-of-pocket payments”. This is technically correct but imprecise in conveying the full picture as Singapore is perhaps unique in compelling citizens to save specifically for healthcare (Medisave). MediShield is also categorized as ‘private spending’ although a government scheme since it is operated on commercial actuarial terms. Furthermore, about a third of funding probably comes from employer benefits which are usually through some third-party insurance plan, but this tends to be lumped together as ‘private’ spending. This occurs for two reasons: One, the government often has no visibility on employer benefits and two, Singapore has a culture of post hoc employer reimbursements for healthcare and hence some of what is actually employer benefits may be counted as personal out-of-pocket spending.
That said, can we do more? Yes, most definitely. I will elaborate in my upcoming book, but one point worth making here is that co-payments as a proportion of the total bill are regressive as lower income citizens are much more deeply impacted. In Germany and Sweden, citizens are protected from financial ruin by a cap on the total amount the citizen has to pay, and this cap is usually a percentage of the citizen’s individual monthly income. I have shared my views on co-payments in healthcare previously and will just reiterate here that I think co-payments in preventive health services and long term care are poorly conceived in Singapore.]
With an ageing population, won’t rising health and social care expenditures hurt our economic dynamism, as it has in Japan and other rapidly ageing societies? Perhaps, but not for the reasons that are commonly cited. Health and social care services tend to experience slower-than-average productivity growth. This is because they are more dependent on labour, and are much less amenable to automation and other labour-saving technological improvements.
[While I agree in general with the assertion of “slower-than-average productivity growth”, healthcare is such a laggard in the productivity and labor-optimizing journeys that there can be significant savings of both costs and labor at this stage. Technology has barely permeated health systems management and can enable profound transformation in healthcare just as it has in personal banking and many other sectors. The efficiencies arising from having data at one’s finger tips and the ability to analyze for trends are well understood but technology can enable a much larger transformation in the actual delivery of care.
Does a stable and well-controlled hypertensive need to physically consult her doctor every 2-3 months? Would a virtual consult or even a computer-augmented self-management regime suffice in between annual visits to her physician? Years ago, I had the privilege to visit Kaiser Permanente, a world-renowned integrated care provider based largely in California and I asked the medical director: “How often a well-controlled patient needs to physically consult?” His response: “Never”, with the qualification that an annual in-person preventive health screening could incorporate discussion about high blood pressure control.
There are possibilities even in intensive care. Why do individual hospitals have one senior doctor in every single one of the ICUs at night? Can we centralize expertise? Tele-medicine may enable. In various studies such as the one from Worchester, ICUs supported by remote experts do better than those without. Could we think about ICUs differently and have one expert sitting in a ‘command center’ managing a number of ICUs in different hospitals remotely?
Radiology might be similar. Does every hospital need an on-staff radiologist at night? Can hospitals use technology to enable pooling of specialist expertise across Singapore?]
But despite productivity growth in healthcare and social services being lower than in other industries (such as manufacturing or ICT), wages in these “stagnant” sectors rise just as fast as they do in other sectors because if they did not, workers would leave these sectors. This means costs and prices rise in healthcare and social services rise faster than they do in other parts of the economy. Over time, healthcare and other social services will take up a larger share of our incomes – both individually and nationally. But this outcome does not spell doom. As long as we sustain labour productivity growth at historical rates of about 2%, we can afford more of everything even as the share of healthcare and social services in our total spending rises.
[I am not that persuaded ‘cost disease’ applies fully in healthcare. Healthcare is both local and global. The health workforce is impacted by global markets and mobility across borders which influence both supply and demand. Despite the prevalence of protectionist measures, many governments faced with dire shortages have opened their countries’ doors in some limited way to foreign doctors and nurses, thus creating a global workforce and to some extent opportunities for rich countries to obtain lower cost resources from developing economies. While markets will equilibrate in the longer term, in the short to medium term, rich countries can have recourse to augmenting with a cheaper workforce. Definitely an issue that merits more academic discourse.]
The real risk of the “cost disease” (a term coined by the economist, William Baumol) is not that health and social care costs are rising, but that policymakers misdiagnose the problem and deal with it in a kneejerk way. For instance, they may shift a larger share of the rising costs to citizens. This doesn’t solve the underlying problem and may, in fact, make the problem worse as privatised healthcare is likely to experience faster cost inflation than socialised healthcare.
[Agree that cost shifting is probably the worst of policy options. To me, the correct response on the part of policy makers in Singapore in health services provision falls into three broad categories:
a. Increasing the capacity of the health service to cope with the population expansion and the increase in numbers of the elderly and those with chronic conditions such as diabetes. MOH is driving this but the reality is that the catch up is already difficult enough. This thrust should be seen as necessary but insufficient.
b. Beyond increasing numbers, optimizing the existing eco-system to fully utilize the resources present in both the public and private sectors. DPM Tharman Shanmugaratnam highlighted 2 years ago at a Raffles Medical Group dinner that the private sector had to contribute to serving public (or subsidized) patients and that it was “all hands on deck”. The load imbalance between public and private sectors is stark and hurts Singaporeans. MOH has started efforts in primary care but much more needs to be done, especially in specialist care.
c. Deepening the transformation of the healthcare sector to focus more and more on primary care and extended care (or intermediate and long term care). We have outstanding specialist and acute hospital services by and large, albeit in insufficient numbers, but to cope with what epidemiologists describe as the demographic and epidemiologic transitions (aging and increases in chronic diseases), we desperately do need to improve the other parts of the healthcare continuum.
It would be very disappointing if all the efforts were aimed at being in the main incremental rather than transformative. What do I mean by transformative? For example, what are we doing to encourage widespread adoption of tele-health which can be very beneficial if deployed well as we have discussed above? Given the labor shortages and difficulties with recruiting and retaining healthcare professionals, how are we changing the healthcare paradigm so that we can do more with less? Can virtual or remote consultations increasingly substitute for in-person visits, especially for the elderly with constrained mobility? What roles currently played by doctors can be taken over by nurses or other healthcare professionals?
There are some parallels between the debates around the Population White Paper and healthcare. Simply increasing factor input, more doctors, more beds, is ‘short-termism’ and while needed, is unsustainable without a parallel effort in restructuring and changing the way we deliver healthcare.

*MediShield is designed as a low-cost, basic, catastrophic insurance program which hence has high deductibles and is really only effective for the major medical conditions requiring expensive and prolonged hospitalizations. MediShield in brief has a deductible (From 1 Mar 2013) of S$2,000 and S$1,500 respectively for Class B2 and C hospital admissions and a 20% co-payment beyond this. What this means is that for a hospitalization of say S$3,000 in a Class B2 ward, the patient still has to pay through other means, e.g. cash or Medisave or a combination, the first S$2,000 and 20% of the remaining S$1,000, i.e. total of S$2,200 out of a final bill of S$3,000. Spectacularly uninspiring, but this is the basic design of MediShield. Consider the alternative of a bill of S$30,000 in a Class B2 ward where MediShield would cover S$30,000 – deductible of S$2,000 and 20% co-payment of S$5,600, or a total of S$22,400 out of a final bill of S$30,000. Not bad.


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