International conference on The Dutch Welfare State within Europe Pulchri, The Hague

1. Debate on Dutch Health Care Policies:An international perspectivewith Prof. Marmor (Yale)Rick van der Ploeg(EUI, Florence, CEPR, CESifo) International conference on The Dutch Welfare State within Europe Pulchri, The Hague 24 September 2004

2. Dutch Reform 1/1/2006 • Every adult must insure health care. • Insurers must accept everybody, i.e. cannot select, and must offer minimally the basic package of health care. • Insurers will have to bear risk without guarantee of back-up compensation. • They must ask the same premium for all independent of age, gender, health condition or income. Children sign up for free. Premium probably bit more than 1000 euro per year.

3. Dutch Health Care Reform ctd. • If premium exceeds 4% for single person or 6.5% for somebody with partner, people get income-dependent care bonus from tax office. • Own risk may not be more than 500 euro. • Insurers can offer top-up insurance for extra care. • Current ‘Ziekenfonds’ disappears. • Both social insurers and private insurers will operate on this new market.

4. Highlights Prof. Marmor • Can and must learn from history and from experience of other countries (GE, US) • But NL is provincial and does not learn from own history or experience of other countries • Rhetoric and language about concern with rising welfare costs is fierce but over the top (‘explosion’ of costs, ‘crisis’, etc.) • No analytical underpinning of policy reform • Unjustified belief in the benefits of the market and the role of business for containing health care costs

5. Highlights Prof. Marmor ctd. • Managed competition will fail • Health is not a normal market commodity • Moral hazard and adverse selection preclude functioning of market mechanism • Why want universal coverage? What is wrong with a mixed system of health care financing if there is 99% coverage? Are people unhappy? • Why not appreciate high quality care at reasonable cost relative to other countries? • Don’t fix it if it is not broken!

6. Prudent policy reform:The Marmor principle • (1-pHI) U(old) + pHI U(real) > (1-pLO) U(old)+pLO U(ideal) implies • pHI[U(real)-U(old)]>pLO[U(ideal)-U(old)] • Hence, better to do a realistic policy reform than a risky idealized reform with a high probability of failing or of not being implemented.

7. I applaud Prof. Marmor for interesting international perspective on Dutch health care policy and for reminding us to look at our own past and at experience of US, Canada and Germany. • I also share his critique of the Dutch government’s faith in the market to contain health care costs. • I want to go back a few steps and ask five crucial questions. • Economists are also extremely critical of this unfettered faith in the market mechanism as a cure for problems or perceived problems of the health sector.

8. My main questions: • Is the increase in health care costs really so bad for the economy? And for welfare? • What is the cause of the relentless growth in health care costs? • Why will the market solution for containing health care costs fail and be a disaster for the sick and poor in society? • How to organize solidarity between sick and healthy, old and young, and poor and rich? • Can we keep on delivering high-quality health care at reasonable cost?

9. Is the increase in health care costs really that bad? • No! • National income is not a good proxy for welfare: need to correct for pollution, leisure and household services (child care, cleaning, etc.) • Also need to convert to an equivalent stock concept to allow for expected lifetimes rising by almost two years every decade. • William Nordhaus (also Yale) shows that, if that is done, longer living and health care adds as much to welfare as innovations (PC’s, mobiles, and all others) during the past half a century. • Innovation Platform should focus at health care!

10. What causes the relentless growth in health care costs? • Not monopoly power of specialists, health care insurers, and others in the health sector. • It is true that information asymmetries give rise to huge monopolies and too high costs but they do not explain ever-increasing health care costs. • Not Baumol’s Cost Disease! Not lazy nurses or docters! • It is the interplay between rapid advances in medicines and medical technology & the demand for only the best health care (informational asymmetries plus bad incentives).

11. Charles Jones (Berkeley): • Real costs of existing treatments, after correcting for rise in care quality, decreased on average by 2% per year. • For heart attacks or glaucoma even 5%. Also, think of ‘peep tube’ operations. And aids patients use to die but now live on thanks to new expensive techniques. • Half to three quarters of rise in care costs is due to new treatments and medicines. In terminal phase of life much more.

12. Stretching lifetimes is expensive • Care expenditures rise on average with 10% per year as people get older. • But during the last three years of life they rise with almost 50% per year! • About a third of total care expenditures (3% of BBP) is caused by people in the last year of their life. • The level of costs depends on how much society is prepared to pay for people in the last year of their life.

13. Why the market solution is counterproductive and will fail? • Regional cartels of health insurers & patients less likely to shop around in other regions (especially if they are ill, old and confused). • What can insurers compete on? Price? Quality? • Dutch insurers do not nowadays bear any risk: they can simply pass all costs of health care and of management failures to the people. • Contradictory to give insurers task for coordinating health care and at the same to ask them to compete. • Remember failures of market solution for gas, electricity, water, taxi’s and notaries. • No privatization without competition: Need a lot of rules and regulations to organize it.

14. How to organize solidarity? • Will insurers do their best to insure/service the old, the sick or those with children? In all these cases the insurance premium may not correspond to marginal cost. • What is wrong with the tax system or income-related subsidies? Insurers cannot compete without flat fees. • But flat fees undermine solidarity between poor and rich. Hence, give tax vouchers to try to have solidarity without undermining the market mechanism.

15. Tax vouchers • IHCS’s – Individual Health Care Subsidies (tax vouchers) try to disentangle insurance from redistribution, so hopefully yield more choice and distort the market mechanism less. • Problem with IHCS’s is that they add to the poverty trap & make it less worthwhile for people to work and improve their lives. Also, difficult to administer solidarity between sick and healthy due to adverse selection problems. Bureaucratic nightmare.

16. Can we keep on delivering high-quality health care at reasonable cost? Yes if we cherish what we have and cope with the four real challenges: • New medicines & new medical technology. What to include and what not? • Internet: much more vocal clients and patients and danger of adverse selection • Europe: get best (most expensive) care even if it is abroad • Globalization and migration