Giant or Dwarf? Free Market Healthcare in the Former East Block

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This is a transcription of the Fred Roeder’s talk at the ISIL 2013 World Conference.

Transcribed and edited by Kenli S.

Good morning everyone, I’m sorry that I didn’t join from the beginning of the conference, but we had a training in Germany for about 50 libertarian students from all over Europe, to make them multiplicators in their own countries—I think we had some 29 countries represented—to grow their own student movements. That’s why I was late yesterday.

So I have some time to talk about free-market healthcare findings or reforms in Eastern Europe. Definitely Eastern Europe has had to undergo a very large transition in the last 20-25 years. It could be observed that the health system and education system, are generally the last two sectors of an economy/society where the transitioning from a planned economy to a market economy actually takes place. That’s also connected for those Eastern European countries that joined the EU in 2004, 2007, and now 2013—with Croatia, the newest member of the happy family.

Usually reforms in the health system are not part of the coherence criteria of joining the EU. This criteria usually involves reforms in the financial sector or privatisation of some other sectors of the economy, but the health system is usually not part of these necessary reforms before you can access the club of happy EU countries.

So, that’s one of the reasons why the health systems in most of the Eastern European countries (post-communist countries) have not undergone the transitioning that most other parts of their economies have.

To be honest, most Eastern European countries still have a very centrally planned health system, but if you look at Western Europe, most countries—except the Netherlands and Switzerland—have heavily centrally planned health systems themselves. Some more, some less.

In Germany, at least you have the private provision of healthcare, but it’s publicly paid. In the UK, you just have every libertarian’s nightmare. So I should be very humble, as a German, when I talk about health systems in post-communist countries, as health care in most countries around the world are pretty much still in the centrally planned sector, or even in some parts on the march to become even more centrally planned. If you look at the US—where there is a sort of social democratization of their healthcare system going on.

There are a couple of very interesting examples in Eastern Europe, of what privatisation and deregulation of healthcare has achieved. I would like to highlight those, because they are also interesting for people from Western countries to get really good ammunition for arguments in why we need more markets and healthcare. Why do people benefit from more markets in healthcare?

There are only very few positive examples from around the world, because not so many countries have actually tried to liberalise healthcare. Switzerland is usually one of the OK examples one can come up with, but it is also not the perfect libertarian healthcare utopia.

Singapore works partially, though a lot of healthcare provisions in Singapore are actually owned by the state. I think half of the hospitals are state-owned, so it’s also not our vision for the world, where half of the provision of healthcare is directly owned by the government.

It’s always good to find more case studies in the world that we can use for our arguments, and cherry-picking is often necessary. This is the case because often you have one part of the reform that has led to very good results, but the rest of the reform was very bad. So one might say “Oh, they’re really good at funding healthcare privately, but they’re really bad at actually providing good private care to people, because it’s so regulated” or “because the drug prices are very heavily regulated or drug companies are pretty good lobbyists”.

Let’s take the US for example, where prescription drugs cost ridiculously high amounts. If you want to get some antibiotics, you pay something like ten times what you would in a European country despite it being the same product. That’s also not what you can call a free-market price, or what you could get on the market, it’s that way because of regulators and successful lobbyists. They are pretty good entrepreneurs in this field.

That’s why I think we have to cherry-pick different parts of the health sectors in countries which are closer to what we envision for our lives and for the world we would like to live in.

I would like to start with Romania, which is a terrible example. I think we also have Romanians here today, so if I forget something, please feel free to add it. Romania has a state-owned health system, you have state-owned health insurance, everyone is somehow part of it, I think it’s currently taxpayer funding. They’ve changed the funding a couple of times, either through payroll contributions or taxes, but in the end it’s more or less the same.

Hospitals are mainly state-owned, health care is for free. The only problem is, that to access healthcare, it’s pretty hard. Because there’s not so much healthcare, but it’s for free! I’m sure the British people here are also aware of this problem: that when healthcare is for free it’s usually quite hard to get. It’s like when you have an open bar event, but you only have a two-litre keg of beer. It’s hard to access the beer, but it’s for free. Maybe we all just take little beer shots, because then everyone gets a little of free beer.

So that’s a bit of the problem when you have “free” healthcare, there is no price mechanism that allocates the resources in a good way, and also helps to have a good match between supply and demand. It’s pretty simple economics, not rocket science, but the problem is that if it’s for free, healthcare is heavily rationed because it’s totally underfunded.

They probably only have a quarter of the money in the system that they actually need, to sufficiently provide the population with services. Doctors earn something like 100 or 200 euros officially per month, you cannot really live on that money. Not even in Eastern Europe.

Basically what happens, is you have informal payments. If you actually want to get this “free” healthcare, you have to pay—what the Greeks call it fakelaki. So basically fakelaki becomes the entrance fee to the “free” healthcare. Doctors have to charge these informal payments, because otherwise they cannot survive and they would not work in the health system.

That happens not only in Romania, but in Ukraine, and other Eastern European countries. Basically you have to buy yourself in, you have to bribe the doctors to treat you, in many cases. I’m not saying that all doctors are corrupt, but many people in the system are corrupt, and usually you have to pay out of your pocket for these services.

The problem with these informal payments, which are in effect “co-payments”, is that you cannot insure yourself for them. You cannot go to your insurance and say, “I bribed my doctor, can you reimburse me? I have a deductible of 200 euros in bribes, and the rest is paid by insurance”. This doesn’t really work.

That’s also the problem if you have black healthcare markets, you cannot insure yourself, there is an non-transparent price system. If the doctor is the only guy that can help you, or you don’t know where else you can find another good doctor, he can charge whatever he wants to charge you.

You also don’t have the bargaining power of insurance companies, where insurance companies take care of co-payments, and in a preferred provider network say that they send all their clients to a particular clinic, and demand a 40% discount. That isn’t possible if you have patients paying bribes, because you don’t have the bargaining power on the demand side, so it makes it more expensive for patients, good for doctors, because they don’t have to face any healthcare procurement efforts, from the patient’s side.

If you talk from a humanistic side, the worst problem of informal payments is that if you say have a car accident and are out of consciousness, they have to rush you to the emergency room. You know that if you were able to bribe them that they would use some better tools, or the head physician would actually come and treat you, but since you are out of consciousness—and you don’t have a bribe insurance card that they can swipe—you don’t get the super treatment, or at least you might not get it. Especially in cases of emergency, these informal payments are not the best solution.

Some countries have tried to legalise these informal payments. The Czech Republic for instance, they legalised that hospitals—even state-owned hospitals—are allowed to charge patients extra money. That’s up to them how much they want to charge. There are some limits, but they acknowledge that there is a funding problem, that they don’t have the money to provide sufficient healthcare, we have to ration a lot. So by legalising informal payments, then people can buy insurance for it, just like white markets are much more efficient than black markets. Especially for the patients.

If you are in an argument with someone and they say “Oh you are libertarian, you don’t care about people.” You can say “No, if you want to have this ‘free universal healthcare’ for everyone, you don’t care about people, because people suffer a lot since these universal healthcare systems do not work. As you can see, and people have to deal with corrupt doctors. You as a patient are basically always the weaker side in this relationship.” I think that’s a very good argument for why informal payments should be legalised, because they’re there anyway.

What’s really interesting, and let me give you a little analysis of Romania. There, a lot of private hospitals popped up, because the state health system is so bad, that anyone who can possibly afford it wants to go to a private hospital. Especially in the field of maternity clinics this happens, where they want to give birth to their child in a nice environment, something they’re willing to pay money for.

I compared some data from Romania on the average bribe that you pay in a state hospital to have a child, and I compared that with the cost to go through one of those 5-star luxury maternity clinics, what you pay there. You know, luxury room with a big screen TV, and multiple nurses or midwives that take care of you all the time. And actually it is cheaper to go these fancy clinics, than to stay in a state-owned hospital and pay the bribes.

That’s the absurdity, because this informal system is so inefficient that you can actually pay less to go to a private hospital and get much better services for it. This goes to show the absurdity of this state-owned system, and the “free” system is actually more expensive than the private nice system.

I tell you that a state-owned Romanian maternity unit is not where you want to give birth to a child. I mean, I can only say that as a man, but I would not do it.

The only good thing, I would say, in Romania is that they allow private companies to provide healthcare. This is not outlawed. Some provinces in Canada, for instance, where you also have state healthcare, these provinces do not allow private healthcare at all. While in places like the UK, you can say “I pay my taxes, I fund the really bad healthcare, but when I get sick I can pay out of pocket and go to a private hospital or private doctor”, in some places this is not possible. Especially Canada, which is a first-world country, but when you get sick, you have problems.

So in that case I would prefer to be sick in Romania than in Canada, because at least you can buy private healthcare or private insurance—which in Canada is absolutely not possible, at least in most provinces, and people are hopefully changing in the future.

Slovakia is another very interesting example. The general health system in Slovakia is kind of OK-ish, it looks like a Central European system, with payroll funded statutory health insurances, which actually used to be private for sometime—they were then nationalised, and are about to be privatised once more. It’s a bit back and forth, because Slovakia has this trend of four years of free-market reforms, then four years of evil dictatorship, then four years of free-market reforms. I am exaggerating, but Slovakia does have these interesting reform dynamics.

So in 2006, the government in Slovakia allowed pharmacy chains. In a lot of Central European countries pharmacy chains are not allowed. Germany is the leading example, where only pharmacists are allowed to own pharmacies, and at a maximum four of them.

Because otherwise you grow too big, and under performing pharmacies would actually go out of business. And the guild of pharmacies is pretty good at ensuring that no one goes out of business. Maximum four pharmacies, it’s kind of like communism where you were limited to something like 1 acre of land—this is the same attitude in Central European countries in the pharmacy market.

In 2006, the Slovak government liberalises the pharmacy market, and actually what happens—usually when you have these talks about liberalising pharmacies, pharmacy lobbyists that are interested in small family-owned pharmacies say “No, that’s really bad, if you liberalise the pharmacy market, and if you get pharmacy chains, what’s going to happen is that a lot of small pharmacies will close down. You’ll have villages without pharmacies anymore. It’s only in big cities that you will be able to find pharmacies, and they will only big big pharmacies. So people will have to walk much further to get to their pharmacy.”

Hm, let’s see what happened in Slovakia. They liberalised the pharmacy market, and 24 months later the number of pharmacies in the country were 40% than they were during regulated times. So they didn’t close pharmacies, they actually opened a lot of pharmacies. Cost of doing business was much lower, it was much easier to run pharmacies, you had a lot of economies of scale with pharmacy chains, so you could actually afford to open stores when it was not profitable to do so before.

The same happened in Sweden, where there was a government monopoly on pharmacies, and as soon as they opened the market, pharmacies were popping up everywhere. I look in the US, you have CVS and Walgreens everywhere! I wish actually that there were less of them!

I think that this makes for a really strong argument, because we have empirical data which shows that if you deregulate the pharmacy market, actually more pharmacies pop up. It might be that some go out of business, because they are lousy pharmacists that aren’t being protected any more, but that’s creative destruction, and that’s in the interest of the consumer, the patient, because that also saves inefficiencies.

My next example, and I think it’s the best example in the world, is the Republic of Georgia. Georgia, since 2003, 2004, underwent a lot of free-market reforms. They went pretty far with the back then Saakashvili, he cut the taxes everywhere, he privatised almost everything. They were at least considering to privatise the Parliament building, and make a shopping mall out of it, because they moved the capital to the middle of nowhere, they moved all the ministries to functional, cheap buildings. They also started reforming the health system, particularly from 2007, 2008.

Georgia had this typical Soviet health system, where everything is run by the government, funded through the general budget, and hospitals are owned by the government. So Georgia, started to privatise all hospitals. I think in 2 years they sold all the hospitals in the country, and they also privatised insurance.

What they did is they abolished the state insurance, and they introduced a program for the poorest of the country: the 10 lari program (which is like 5 dollars). Basically, poor people got vouchers to pay for insurance from private insurance companies. A basic benefit package, not too much, basically per insurer that’s 5 dollars per month, which is not too much in health insurance. But the Georgian government issued these vouchers and told people they could go to insurance companies and get insurance.

At the same time, Georgia needed a lot of investment for the health system. The hospitals were very old and run-down, Georgia is a very poor country, they currently have something like 4,500 GDP per capita purchasing power parity. It is really poor. Maybe it’s 5,000 dollars now—but ultimately, it’s a poor country, so they don’t have much money to renew the health system.

So, what the Georgian government said to the insurance companies, “OK, so now that we’ve given you this market, we have one condition, you have to build hospitals. You can either sell these hospitals after you’ve built them, or you can run them yourself. So you’re insurance and hospital, so you’re like a health maintenance organisation (like for instance Kaiser in the US, something similar, for profit)”

There were 5 insurance companies who thought that was interesting. Georgia is a country with 4.5 million people, so 5 insurance companies is kind of a lot. So these insurance companies started building hospitals all around the country, and I think 80 hospitals, or almost 100 hospitals were built. These were usually small clinics with around 25 beds.

Basically the healthcare system was completely deregulated. There were no prices set by the government, they said “you have to find your prices yourself, when people buy insurance you have to figure out what you negotiate with the hospitals what patients have to pay, what hospitals have to pay, that now has to happen on the market. We don’t know how our health system should look like, it’s an experiment.”

The government also did not regulate how the payers’ and providers’ sides should be structured. In most countries, they say the hospital system has to look like this, and the insurance system has to look like this, and we regulate the insurance companies heavily. In Georgia, they said “No, we don’t want to regulate this. We’re not even sure if there’s one insurance side and one provider side, maybe it’s the same thing.”

So different companies started out with different models. Some were classic indemnity insurance, you send us the claim and we pay for it, and you go to a hospital and they have their own price. Others were like “we provide everything, we want to have the whole value added chain in our company”.

There is this one company, for example, that is health insurance, it’s a hospital chain, it’s a pharmacy chain, and they also produce pharmaceuticals. So it’s an entire value chain all in one. I’m not sure if it’s the best idea, but it’s an experiment. It hasn’t been seen anywhere else before. I mean, it has been in state-owned ways, but there you don’t leverage the synergies of having the entire value chain in one organisations.

Various business models emerged within a couple of months. People were trying out what’s the best way. Two insurances even went bankrupt. Basically what happened was, the moment insurance declared bankruptcy all the other existing insurances are fighting immediately to get all the patients that were being insured by that company to gain marketshare. It’s not like “Oh, my insurance company went bankrupt and now I don’t have coverage”, all the other players think we have to get these patients, we need to have them immediately, because if we can get 10% marketshare overnight, then we have to do this!

Twice it happened, and the operational companies were almost killing each other to take over these bankrupt insurances, because they were like “Oh, we need to get these patients”. This is the number 2 insurance company in the country that’s gone bankrupt, and people would assume that this would be a disaster, but it was not. Overnight it was taken care of by the market.

So this nightmare idea that if you only have a private insurance system, and one firm goes bankrupt, what will happen with the patient? Other insurance companies will take care of that. Georgia is not the most sophisticated country in the world, where everyone has MBAs and knows how to run businesses, it was an experiment for most people. There were doctors trying it out, some people who had nothing to do with healthcare before, but were in banking, but they even found solutions that were much more sophisticated than in Western health systems.

Really interesting also was this voucher system, which was a very good compromise. You could of course say, “We want to have totally unregulated healthcare, and philanthropy should do it”. I think it would be very unfeasible to offer a system which simply philanthropy takes care of people who don’t have insurance. Maybe in a world where we are all more sophisticated and all understand that we should give to the poor, because it is something good and we don’t want to have unrest. It is possible, but in a country with $4,500 GDP per capita, and a rural population of 75% that is self-sustaining with micro-farming, such solutions might not be the most viable ones. I think that with this 10 lari voucher system, they made a really smart move.

What happened really, as a basic result in Georgia, was that 100 in-patient units were built by the private sector, no public money was used for that. What also happened also was that the corruption in the system was totally eliminated.

Let me tell you a quick anecdote. I was sitting with a client, he was from a big American health insurance, and they were interested in buying health insurance in Georgia. Insurance that had a similar model to them, they did it like Medicare, Medicaid state programs in the US.

They did programs in the Midwest, were a publicly-listed company, 10 billion dollar turnover, and they wanted to buy something in Georgia. My job was to find them a target. I did my due diligence, and we met up with a couple of CEOs of health insurance companies.

We meet this one CEO of this health insurance company, and they also own hospitals in the Khaketi region (a very nice wine region close to the Dagestan border), and we have dinner and he tells us this story of when he bought this hospital in the Khaketi region.

When he did, nurses went on strike. There was a huge nurse strike in this company, and he drove to the region and met with the nurses, and he asked them “Why are you on strike? After buying the hospitals where you work, I tripled your salaries! From $80 to $240 per month. Why are you on strike?”

They responded “Yeah, but we don’t get informal payments anymore. It was much better, we got it every day so we didn’t run out of money during the month. Everyday we got money from the patients, it was like liquidity. Management-wise it’s much better, because we don’t have to take care of it and we got much more back then.” He said “Oh? Shall I quote you on that?” And immediately the strike was solved. The nurses thought “OK, maybe it’s not so good to be on strike with that argument”.

If you have private ownership, and shareholders owning this hospital, they are interested in having every cent that is spent in that hospital to go to the pockets of the shareholders or of the company, and not of some corrupt employees. So corruption was wiped out basically overnight. There is a little bit of corruption that persists, but it is marginal.

What also happened, is that the costs per treatment in Georgia went down. They are now down 40% from what they used to be when they had a heavily regulated state system, because the informal payments disappeared. You also have to calculate informal payments into the cost of state-run health systems, because that is actually what people pay. Often within state-run health systems people cannot afford to get treatment.

To end, Georgia is a fantastic example of what spontaneous order does. I studied health economics in university, I had really smart professors, but the stuff that developed in Georgia in 2 years, in a place where no one studied health economics, is more sophisticated than what my textbooks talked about in terms of how to structure healthcare. Now there is a new government in Georgia, that is not such a big fan of free-markets, so we have to see if this system will actually survive. There are some old Soviet-type now running the ministry of health, he studied medicine in East Germany, and he has a bit of an idea of how to allocate resources and how to understand markets, though he doesn’t understand markets at all.

Nonetheless, so far, the Georgian system I think is one of the greatest miracles in free-market healthcare and it is an example that much more research has to be done one. I think so far the only publication about it has been done by Oxfam, saying how evil it is, and which has lousy quality. I think someone with a degree in the history of art probably wrote it.

Georgia is great, other examples exist. In Poland there is privatisation, Slovakia is a decent example of the improvement of healthcare. So the direction of Eastern Europe is bringing healthcare toward more market-based systems, and not the way that the US and other Western European countries are marching towards.

Thank you very much.

See more videos from the Lausanne Conference
This is a transcription of the Fred Roeder’s talk at the ISIL 2013 World Conference.

Transcribed and edited by Kenli S.

Kenli Schoolland

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