The Asian Wall Street Journal
April 14, 1999

Why is it Compulsory?

The government of Hong Kong recently spent HK$7 million (US$907,000) for a team of researchers from Harvard University to tell it what was wrong with its health care system - something that anyone who slept through half of econ. 101 could have done. What is astounding about the Harvard report is that it fails to even mention the real problem: that health care is largely government provided, and those parts that are not are highly uncompetitive.

That the government even commissioned the report is a sign that it recognized its "universal" health care system is finally coming apart at the seams. This fact has not been one of the territory's best-kept secrets: the past two years have seen the quality of service sink to dangerous lows, as a growing number of serious medical blunders has plagued Hong Kong. These have included the fatal pumping of oxygen into a patient's bloodstream; the removal of part of a woman's reproductive organs instead of her appendix; and three deaths resulting from contaminated water being pumped into a dialysis machine.

Such horrors, as well as the excruciatingly long waits for care, are symptomatic of an industry removed from market pressures. Public hospitals have little incentive to provide high quality service, since they do not derive their income from consumers. And since patients do not pay the full cost of the services, they consume more than they otherwise would by magnifying minor health problems. Hospitals have begun to feel the effects of this in recent years, as their resources have become increasingly strained.

Even Hong Kong's private providers are largely removed from market forces. Restrictive entry barriers have given local private doctors near-monopoly powers, allowing them to charge exorbitant fees - often based on the patient's level of income - and to provide unnecessary services.

Yet there is nothing in the Harvard report that addresses this lack of competition in either the public or the private sector. Even the long-term recommendation for "Competitive Integrated Health Care", which is based somewhat on managed care in the U.S., would not remove the protections from competitive forces both sectors now enjoy.

Instead, the report calls for the implementation of mandatory insurance coverage for all Hong Kong residents, who would put between 1.5 and 2% of their salaries into a health plan. Such a system is already in place in Singapore, where workers and their employers are forced to pay between 12% and 16% of wages into a Medisave account.

What makes the recommendation superfluous, however, is the fact that affordable health insurance already exists in Hong Kong. A plan from National Mutual, for instance, offers basic coverage for as low as HK$1,042 for a 35-year old male worker. This would only amount to 1.24% of a HK$7,000 a month salary. Other providers offer comparable rates.

So why should Hong Kong residents be forced to pay for something they could already purchase on their own? The answer has more to do with bailing out an inefficient sector of the economy than it does with providing for the needs of the underprivileged. According to the Harvard team, public health expenditure will rise to as much as 4% of GDP by the year 2016, from the current 2.5%, and could consume as much as 23% of the government's budget - up from the current 14%.

Rather than suggest new ways to make the system more cost-effective, however, the report seems to presume that the existing inefficiencies will remain in place - all it seeks to do is find a way to pay for them. The debate now is whether government should implement the mandatory insurance scheme, or simply raise taxes to pay for the increasingly burdensome healthcare system. Neither option addresses the underlying malaise of the system itself.

The Harvard report's recommendations amount to little more than new ways to pay for an increasingly costly and inefficient system - with the Hong Kong people footing the bill. What Hong Kong really needs is to open up its health care industry to the therapeutic forces of competition.

Copyright Dow Jones & Co. 1999