The limits of Social Health Insurance (Part 1)
5 June 2023
SUGGESTED
Labour Market
Healthcare
Economic Theory
11 November 2024
The idea of replacing the NHS with a Social Health Insurance (SHI) system has gained some traction in recent years. In absolute terms, it is, of course, still very much a minority position. If a political party put that proposal in its election manifesto, it would be wiped out at the next General Election, and if we had an NHS-vs-SHI referendum, the pro-NHS side would easily win over 90% of the vote.
But it would no longer be like the Falkland Islands Sovereignty Referendum, where only three people voted against the status quo. The case for SHI has move from far outside to just within the Overton Window, from David Icke territory to “Interesting idea, but…”. When a variation of “NHS vs SHI” is the motion of a university debating society event, the vote can nowadays go either way. (In fact, I have been on such panels where the anti-NHS side won.)
The ongoing popularity of the NHS rests mostly on romanticism and cheap sentimentalism. When someone from the pro-SHI side compares survival rates for cancers, strokes and heart attacks, and then someone from the pro-NHS side stands up and cries “But the NHS literally saved my life!”, you know which side is going to win.
I have, however, noticed that the pro-SHI side can also be guilty of slightly overegging the pudding. They observe – correctly – that SHI systems are clearly superior to the NHS in some important respects, and extrapolate that they must be superior in every respect.
This is neither necessary, nor helpful. If car model X is demonstrably faster, safer, more fuel-efficient, and less in need of repairs than car model Y, that is a strong-enough argument for favouring X over Y. There is no need to speculate about how X might also be easier to wash, or easier to park, than Y.
I believe that switching to an SHI system would be a huge improvement over the NHS in several important respects. But I also believe that there are issues with the current system that a switch to SHI would not, or at best marginally, improve, and SHI-supporters should be open about this. We should promote SHI as a solution to a specific set of problems, not as an all-purpose solution.
So in this article, I am going to address four areas in which I have seen SHI supporters overstate their case, namely:
Incentives
In a tax-funded health system, healthcare costs are collectivised. If you do something that minimises your risk of getting sick, the resulting savings do not accrue to you: they accrue to all taxpayers. By the same token, if you do something that increases your risk of getting sick, the resulting extra costs are not paid by you: they are shared among all taxpayers.
This argument is correct as far as it goes, but, although the mechanism is different, this is also true in SHI systems. If you take up smoking, your health insurance premium will not go up, and if you take up running, your health insurance premium will not go down.
In one of the SHI systems, namely the Swiss one, co-payments are fairly high: for most people in Switzerland, healthcare is not free at the point of use; so in that system, there is some financial incentive to keep your healthcare costs down. But that is not a matter of NHS-vs-SHI. It is a matter of the extent to which healthcare costs are collectivised. The NHS could, in principle, charge substantial co-payments as well. There are tax-funded health systems which do that (e.g. Italy, Spain), just as there are SHI systems which do not (e.g. the Netherlands).
There are some differences at the margin. In SHI systems, some insurers offer things like discounted gym memberships, and while the NHS could, in principle, do this too, in SHI systems, there is greater scope for experimentation with different incentive schemes to test which ones work and which do not. But these are all-carrot-no-stick schemes, which can only reach the easiest cases.
Nanny Statism
This is an extension of the above argument, which sees the Nanny State as an understandable response to the moral hazard resulting from the collectivisation of healthcare costs. But, again, SHI systems also collectivise healthcare costs, so this argument applies to both systems, and, indeed, Nanny Statists in SHI systems also use that logic to justify their preferred policies.
In practice, the argument does have greater salience in the UK – but this has little to do with the specifics of how healthcare is financed, and more with the cultishness around the NHS.
British Nanny State campaigners constantly talk about how smoking, alcohol, obesity, or whatever their bête noir, impose a burden on the NHS, and interestingly, they always say “the NHS”, not “the taxpayer”, or simply, “other people”. That is a subtle but important distinction. If I accuse you of imposing costs on other people, I am basically calling you a free-rider. But if I accuse you of imposing costs on “the NHS”, I am accusing you of blaspheming against a sacred institution. This is a much stronger accusation. We tolerate free-riders (up to a point), but not blasphemers.
Spain and Italy also have largely tax-funded health systems, but they do not have an equivalent of the British NHS cult, so Nanny State arguments do not wash there to the same extent they do here.
In any case – it is best not to take all justifications for the Nanny State at face value. Nanny Statism is driven by a mix of moralism, paternalism, and anti-capitalism. The anti-free-riding argument is mostly a rationalisation.
Continued to Part 2
But it would no longer be like the Falkland Islands Sovereignty Referendum, where only three people voted against the status quo. The case for SHI has move from far outside to just within the Overton Window, from David Icke territory to “Interesting idea, but…”. When a variation of “NHS vs SHI” is the motion of a university debating society event, the vote can nowadays go either way. (In fact, I have been on such panels where the anti-NHS side won.)
The ongoing popularity of the NHS rests mostly on romanticism and cheap sentimentalism. When someone from the pro-SHI side compares survival rates for cancers, strokes and heart attacks, and then someone from the pro-NHS side stands up and cries “But the NHS literally saved my life!”, you know which side is going to win.
I have, however, noticed that the pro-SHI side can also be guilty of slightly overegging the pudding. They observe – correctly – that SHI systems are clearly superior to the NHS in some important respects, and extrapolate that they must be superior in every respect.
This is neither necessary, nor helpful. If car model X is demonstrably faster, safer, more fuel-efficient, and less in need of repairs than car model Y, that is a strong-enough argument for favouring X over Y. There is no need to speculate about how X might also be easier to wash, or easier to park, than Y.
I believe that switching to an SHI system would be a huge improvement over the NHS in several important respects. But I also believe that there are issues with the current system that a switch to SHI would not, or at best marginally, improve, and SHI-supporters should be open about this. We should promote SHI as a solution to a specific set of problems, not as an all-purpose solution.
So in this article, I am going to address four areas in which I have seen SHI supporters overstate their case, namely:
- “In a tax-funded health system like the NHS, there’s no financial incentive to look after your own health. An insurance-based system would promote healthier lifestyles.”
- “A tax-funded health system like the NHS makes Nanny Statism inevitable. If you have to pay for my healthcare costs – of course you will take an interest in whether I smoke, drink, overeat, or otherwise damage my health. In a different system, my lifestyle choices would be none of your business.”
- “Doctors and nurses in the UK are underpaid, because the NHS is a monopsony employer. In a market-based system, they would get the decent pay they deserve.”
- “The NHS is suffering from [insert NHS crisis of the day]. If you tell a Dutchman, a Swiss or a German about this, they will have no idea what you’re even talking about, because in their system, this is just not an issue. The way to solve the current crisis is to adopt a system like theirs.”
Incentives
In a tax-funded health system, healthcare costs are collectivised. If you do something that minimises your risk of getting sick, the resulting savings do not accrue to you: they accrue to all taxpayers. By the same token, if you do something that increases your risk of getting sick, the resulting extra costs are not paid by you: they are shared among all taxpayers.
This argument is correct as far as it goes, but, although the mechanism is different, this is also true in SHI systems. If you take up smoking, your health insurance premium will not go up, and if you take up running, your health insurance premium will not go down.
In one of the SHI systems, namely the Swiss one, co-payments are fairly high: for most people in Switzerland, healthcare is not free at the point of use; so in that system, there is some financial incentive to keep your healthcare costs down. But that is not a matter of NHS-vs-SHI. It is a matter of the extent to which healthcare costs are collectivised. The NHS could, in principle, charge substantial co-payments as well. There are tax-funded health systems which do that (e.g. Italy, Spain), just as there are SHI systems which do not (e.g. the Netherlands).
There are some differences at the margin. In SHI systems, some insurers offer things like discounted gym memberships, and while the NHS could, in principle, do this too, in SHI systems, there is greater scope for experimentation with different incentive schemes to test which ones work and which do not. But these are all-carrot-no-stick schemes, which can only reach the easiest cases.
Nanny Statism
This is an extension of the above argument, which sees the Nanny State as an understandable response to the moral hazard resulting from the collectivisation of healthcare costs. But, again, SHI systems also collectivise healthcare costs, so this argument applies to both systems, and, indeed, Nanny Statists in SHI systems also use that logic to justify their preferred policies.
In practice, the argument does have greater salience in the UK – but this has little to do with the specifics of how healthcare is financed, and more with the cultishness around the NHS.
British Nanny State campaigners constantly talk about how smoking, alcohol, obesity, or whatever their bête noir, impose a burden on the NHS, and interestingly, they always say “the NHS”, not “the taxpayer”, or simply, “other people”. That is a subtle but important distinction. If I accuse you of imposing costs on other people, I am basically calling you a free-rider. But if I accuse you of imposing costs on “the NHS”, I am accusing you of blaspheming against a sacred institution. This is a much stronger accusation. We tolerate free-riders (up to a point), but not blasphemers.
Spain and Italy also have largely tax-funded health systems, but they do not have an equivalent of the British NHS cult, so Nanny State arguments do not wash there to the same extent they do here.
In any case – it is best not to take all justifications for the Nanny State at face value. Nanny Statism is driven by a mix of moralism, paternalism, and anti-capitalism. The anti-free-riding argument is mostly a rationalisation.
Continued to Part 2
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