The economics of Canadian healthcare

This is a column I wrote for my local paper, the Morinville Monday Morning News:

A persistent difficulty with Canadian healthcare is waiting-lists. In Alberta, the waits from the time a doctor recommends the patient see a specialist to actual treatment range from 6 months to 3 years. In this column, I will address the cause of waiting-lists and propose a possible solution.

The cause of waiting-lists is that our public, single-payer model of healthcare is a form of central-planning and all central-planning suffers from a knowledge-problem that makes efficient deployment of resources, in this case tax-dollars, impossible.

The reason our healthcare system is a form of central-planning is that decisions about which procedures, equipment, and other healthcare goods will be bought or provided are made by a central body, viz. provincial health ministries.

That central-planning suffers from a knowledge-problem that prevents efficient resource allocation was first indentified by Nobel Laureate economist F.A. Hayek. He argues that central planners cannot allocate resources efficiently because they cannot accommodate the quickly changing ‘circumstantial’-knowledge individuals possess in their allocation decisions. Basically what this means for healthcare is that provincial funding decisions cannot take account of fast changing, individually-based information like the patient’s awareness of their condition or the doctor knowledge’s of how general treatments apply to particular patients. As such, provincial funding never aligns with patient needs and waiting-lists form.

The main solution to overcoming the knowledge problem is a market. In a market, individuals choose what treatments to consume or provide to others or based on their circumstantial knowledge. The knowledge they require in addition to their own to make such decisions is conveyed to them by prices, which reflect the information other patients and practitioners hold.

The main objection to creating a market for healthcare is the well-known problems of the United States healthcare system. These are two. The first is the producer-demand failure. Doctors know more about patients’ health than patients do and therefore have an incentive to sell them more services than they need. The second is insurance-agent problem. Since an insurance company is paying rather than the patient, the patient tends to choose more expensive treatments which insurance companies pass on as higher premiums.

If our single-payer healthcare suffers from an irreconcilable knowledge problem and the common solution – a market – produces the failures of the United States, what can we do? In short, we allow a market in healthcare, but, unlike the United States, we encourage government to correct the two failures. Many European countries have pursued this strategy successfully. My preferred example is Switzerland. They mandate that insurances companies offer everyone basic coverage at no profit. This corrects the failure of producer-led demand by precluding over-charging. It also removes the increasing costs that insurance companies pass on to consumers. To ensure that insurance companies are still viable, though, the Swiss allow insurance companies to allow for-profit services over and above the basic plans.

Next time someone mentions private healthcare, don’t get up in arms. It can produce better outcomes than what we enjoy now as long as we correct the problems the Americans won’t.