The unforeseen pitfalls of private healthcare.

When I was studying at university I did a business module which included the analysis of the business plan for a private healthcare clinic. There were some significant and possibly obvious points which I thought I would outline here for the benefit of anyone who didn’t do that particular course.

The business model of a niche private healthcare clinic, within the context of a largely state provided healthcare system, generally revolves around treating patients in exchange for payments from the state under a pre-agreed contract. The terms of this contract are likely to be, in summary, the treatment of X patients per year with condition Y for a payment of Z.

However the practical realities of such a contract in the real world are likely to be:

1) The facilities at the clinic will be inferior to those at the local hospital, since the company running it will be constructing it on a commercial basis for the sole treatment of condition Y.

2) The private healthcare clinic has every incentive to screen patients with additional risk factors and direct them to the better equipped local hospital.

3) In the event of complications during surgery the patient will have to be put in an ambulance and sent to the local hospital anyway.

These points are not necessarily bad in themselves, since the patients treated at the private clinic may indeed cost the state less in isolation than an equivalent service delivered through the local hospital. However, even if the private clinic executes the contract exactly as foreseen, there will be adverse consequences for the state run elements of the health service and in particular the statistical and financial performance of public provision relative to private.

1) The local hospital will see only those patients with additional risk factors, or certainly an increased number of them relative to a non public/private scenario. This will elevate the cost per patient and depress the clinical outcomes of the public provision when compared to the private clinic.

2) Patients who develop complications and have to be rushed into the local hospital will further exacerbate the poor performance of the public relative to the private for cost and clinical outcomes, due to their condition and the unplanned nature of their arrival.

The net result is that the cost of the same service provided by the public sector will appear far higher than an equivalent private sector contract. At the same time outcomes for the patients treated by the state are likely to be worse, on average, than those treated by the private sector. In the political domain these statistical relationships can easily be misrepresented:

Private: low cost, strong patient outcomes, highly efficient
Public: high cost, worse patient outcomes, highly inefficient

Based on such a summary it appears easy to justify the expansion of the private elements of healthcare provision, funded by transfering money from state provided services. This logic leads to a self-fulfilling prophecy, as the state is left with increasingly ill and expensive to treat patients whilst the private sector creams off routine cases, treats them efficiently and may even make profits in the process.

There are further negative implications from the operation of such private clinics:

1) The private clinics are dependent on the state for the training of their staff. This represents an “invisible” benefit to the private sector, at the expense of the state.

2) The private sector will be able to offer higher pay and improved working conditions to the best clinical staff, bringing them in to the private sector where they will treat only routine patients. The state will be left with those unable to find private sector employment and at the same time faced with more challenging patients to treat. That’s not to say that financial rewards are all that count, but their impact cannot be overlooked for those seeking employment.

Whilst none of these elements are necessarily that bad in themselves, their combination is potentially toxic for the long term viability of the state healthcare system. It should also be pointed out that there are significant non-medical benefits from having state provided healthcare, in particular the fact that national health budgets provide a strong anti-inflationary pressure, and that such a system free at the point of use massively reduces healthcare inequality. The importance of the first point cannot be understated, since a sustained gap of just 3% between medical sector inflation and wages will lead to a doubling of healthcare costs over just 24 years – which represents a significant wealth transfer from society at large into the healthcare sector. The ability to set a fixed national healthcare budget, linked to growth in wages and tax revenues, together with the presence of a single major buyer within the domestic healthcare market of a country, provides stronger resistance to the cost-push elements of inflation.

In private and insurance based healthcare systems no such anti-inflationary check exists. Cost increases can be passed directly through to consumers through their premiums, with prices only revealed to the patient after the purchase of medical servies has already been made, with those costs being defered to next years premiums through the claim process. In such a scenario the inflationary resistance is negligible, leading to the highest medical costs in the world being found in countries which employ purely private provision as a healthcare delivery mechanism.

In summary, the coexistence of private healthcare providers within a predominantly state controlled medical system is likely to lead to the abuse of statistical evidence by those who wish to advance the agenda of private medical provision, regarless of the wider consequences for society as a whole.

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One thought on “The unforeseen pitfalls of private healthcare.

  1. freshgreen says:

    if this is what you think about during a cowboy party, i cannot wait to pick your brain when you’re not sleep deprived! you made some really good points here. talk soon!

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