Friday, July 06, 2007


Yesterday, my colleagues Mićo Mrkaić and Rado Pezdir, on behalf of INERHC (Institute for Economic Reforms in Health Care), organized a 'roundtable' discussion on the problem of general inefficiency of public spending in Slovenian health care sector. The given arguments have been thoroughly supported by the examination of the entire health care system in a publication called Health Economics, including the proposals to escape the financial and structural collapse of the currently highly inefficient sector of health care services in Slovenia which is based mainly on public funding.

Slovenian health care sector inherited a bulk of post-communist organizational and structural symptoms varying from a several lack of market mechanisms to failures of supply determination on nearly all levels of decision making and corporate governance. In 1973, Mark Pauly and Michael Redisched showed that non-profit public hospitals whose service and supply is determined out of the market mechanism framework, function, act and perform as socialist cooperatives.

In Slovenia, health care expenditures are not small-scaled, accounting for 6,4 percent of the GDP. Netherlands contributes 4 percent of the GDP expenditure to health care sector, Finland's expenditure rate is 6 percent, but the numbers turn differently when we rank the (in)efficiency of the allocation of resources and spending indicators and parameters in a multimple outcome health sector efficiency model. Using the estimates conducted by the IMF, Slovenia is ranked 18th (among 22 countries) in terms of efficiency score despite having a relatively high health care expenditure rate. Where is then the hidden trap which produces such low and uncompetitive efficiency rate? A part of the answer to this particular question lies in the cost structure of Slovenian health care sector. Mrkaić (2007) shows that labor costs present 57 percent of total sectoral costs which is a recording-breaking indicator in an international perspective.

On the other side, the indicators of capacity and productivity in Slovenian health care sector vary significantly among hospitals and physicians. The real deficiency of the incentive system in Slovenian health care sector is that annual salaries of physicians are determined through fixed collective agreements which do not reward the most productive physicians but fix their salary on the basis of collective bargaining compared to other employees in public sector which is (in Slovenia) the second biggest in the world (Fraser, 2006). It is thus quite unreasonable why the government and trade unions in the public sector preferably exclude the market mechanism of productivity measures of wage determination among public sector employees such as physicians.

According to European Observatory on Health Care Systems (2002), nearly 90 percent of the financial resources in health care sector are contributed from public funds, which is far more than in other transition countries such as Estonia and Hungary. Besides, in Slovenian system, we can find many annoying faults such as subsidies to generic industry, emerging from the absence of cost-benefit analysis in prescribing drugs to patients. In this case, generic industry receives a hidden rent at the expense of patients who pay the rent through a 22 percent employee contribution rate under the system designed by Bismarck which still remains rooted in many national health care systems around the globe.

One of the significant threats endangering the sustainability of mostly public funded Slovenian health care system is a demographic threat. As already known, Slovenia recently imposed one of the most generous retirement schemes in the world. The largest consumers of health care services are thus elderly whose treatment costs 4-5 times more than the treatment of youth and middle-aged population.

In addition, the growth of monthly pensions of Slovenian retirees is moving along the line of productivity growth twice a year and has been made permanent without the possible undertaking of the effects of long run pressures and volatility of public finance which remains the only source of financing the basic health insurance scheme.

The long-run effect of such a generous scheme is a severe outlift of the employer-employee contribution rate to cover the amount of expenditure flows into health care sector.

In addition, new and emerging technologies in health sector present a strong cost-push shock which spreads further possibility of unsustainable public finances in the middle run.

Above all, the proposals and solutions to avoid the breakdown of the health care system in Slovenia presented in INERHC's publication Health Economics go in the right direction suggesting a fundamental reform of the entire corporate and internal structure of the public-funded health care sector in Slovenia.


b said...

I guess there is always something wrong with the health-care systems. In the USA they have problems, UK has problems, nordic counties do have problems. As such, health-care systems tend to co-exist with errors on many, many levels (ranging from a single practitioner-patient encounter to interorganisational encounters). Bearing that in mind, I could not even wish to start to list all the things that are wrong in Slovenian health care. All that is pointed out are mere symptoms, the true reasons lie elsewhere, hidden from the public and possible even for research.
To me it is striking that every organisational position is taken by physicians who get there by rule of climbing proffessional ladders (what has my experience with patients to do with organisational demands?) and that this system is relatively closed for outsiders. Next comes the rigidity. It is understandable to highly regulate proffessions which juggle with lives but to take away autonomy is just bizzarre. Hospitals, community health centers and others are locked (due to inability to find ways or actually) in a barely-living state. But the greates paradox of them all is: the medical chamber of Slovenia is the most rigid of all the players in the field. Instead of fighting for liberal principles, free market attitudes and such they exert enormous power by writing outdated regulatory law (that is passed to the ministry and eventually to the parliament) by which everything is even worse. Not to mention that within the chamber the most active members are those who are already retired. What do you say?

Rocks said...

You pointed out the essence of the rigidity in Slovenian health-care system. First, the system itself controls drug prices as well as the list of the suggested drugs. Next is the efficiency of public spending in health care. Slovenia doesn't spend much less on health-care than Nordic countries do but it scores much less in terms of the efficiency of the publicly funded health-care schemes.

Slovenian health-care system hasn't yet realized that corporate governance is ought to be guided by business professionals, economists and mathematicians. Doctors are well-trained to fulfill the medical operations but not to aggregate the knowledge and govern the whole health-care scheme by taking care of the rent-seeking which is so costly to economic growth. The real failure of the health-care system in Slovenia is that productivity is not rewarded but, instead, collective bargaining determines the wages. Such a restrictive practice, of course, rewards less productive physicians and penalizes those who work longer and are therefore more productive.

You pointed out the regulatory law. Yes, you're right. Medical chamber is nothing else but a bulk of rent-seekers, creating a volatile cost-push pressure on the efficiency of spending and funding. Its attitude is a nice case of rent-seeking. The chamber is afraid of the competitive law, because it would boost their supply and so it'd be forced to cut prices and start behaving competitively. Chamber of course, is a typical case of a monopolist. The emergence of incentives to work, save and invest would force it to foster the productivity and liberalize the prices as well as currently-standing rigid rules and regulatory burden. That means that members of the chamber would have to cuta bigger slice or portion of their free-time to work and foster their aggregate efficiency reflected in bringing quality and value to the customers, namely patients. Retired memebers of the chamber receive double-digit rent. Once is the government pension and the second one is the rent emerging from membership participation. Where's the common sense?

Currently, there is no such thing as competition in health-care even though patients would benefit from the competitive supply or as Don Boudreaux once emphasized "free markets save lives".

Thank you for visiting my blog and writing this thorough comment. Enjoy the rest of Sunday!


b said...

Thanx for responding. I disagree with the statement "there is no such thing as competition in health-care". There is but in my opinion in all the wrong places.
All doctors who wish to work with patiens on their own account and independently need licences. Licences are awarded to them after they pass speciality exams. They can do that after they finish specializations. To get a post in the specialization scheme (set by the Medical Chamber) they must compete with others in a centralized call for applications (issuded by the Medical Chamber). In the application, a future specialist can apply only for one position in one region in one call. Of course, one can miscalculate and apply for the wrong region. Maybe the competition is underestimated. And so one has to wait at least six months for another call. The sad part is, the conditions are distorted in a way that gives those who are more into academic medicine a fair share of competitive advantage and the final employee has no word in the candidate selection process.
I think the call for applications system has been invented to eliminate the influence of a small country where everybody knows virtually everyone and bring in a bit of objectiveness. Instead of doing that it ruined the the supply and demand part of the market phylosophy.
To conclude, I do believe there is competition in the health-care in Slovenia. But the energy is channeled towards unworthy causes.
Have a nice day!

B said...

Employer not employee, of course.


B said...

Browsing through the new Medical Chamber website I stumbled upon this and...


Rocks said...

Regarding competition - competitiveness in productivity already exists but the obstacle which erases the effect of competition is the miscalculation of rewards granted on the basis of productivity.

Currently, the wages in the health-care sector are determined through collective agreements which pay "hefty dividends" to the group of physicians lagging far behind the level of productive behavior.

Another huge hibe is the rigidity of rules and administrative burden which frequently occured also in Sweden where today, doctors see 4 patients a day compared to 9 in 1975.

To conclude, there is a divergent productivity among physicians in Slovenia varying significantly as shown by the ratios and coefficients which numercially show the effect and output of productivity.

There is also a weak link or partnership exchange between universities and health care sector which has obviously been shown by the international evidence.

There is none of Slovenian universities among top 500 in the world. Medical cartel controls virtually everything, from university entry number of students to drug listings and generic subsidies.

According to what you said, you're right on most points. We disagreed on competition as I regarded competition as a process of competing between hospitals through supply quality, treatment and prices while you regarded it as a competition between doctors which notably exists already. In fact, I don't think employees or trade unions should decide about the candidate's credibilities.

It would be against the fair treatment of anyone as employees can form a strong union, setting preferences about employee selection.

This could seriously endanger the competitive principles because there is a high frequency of cartelized establishment such as self-management and we all know that this dangerous experiment falied.

Also, Medical chamber fuels the asymetry of information on its own, a burden which patients have to bear.

At the same time, there is no cost-benefit analysis about the usefulness and efficiency of certain enlisted drugs which inevitably works as a "hidden subsidy" to generic industry who largely benefits from high and undistorted gross margins which taxpayers and patients have to pay instead of paying for themselves and their loved ones...

Public health care has its own neighbourhood effects and the essential question to make it efficient and dynamic is how to internalize those effects.

There're externalities in public health such as flood prevention, the cure of epedimies and clear water... as the panel of services funded by public health care scheme grows... the marginal costs increase through complexity, welfare cheating and hidden rent-seeking on behalf of game strategies or game theories which further out-burst the cost push shocks and therefore fiscal burden as well.

Of course, as I wrote, Slovenian health care sector needs a radical reform. I think it's about time that hospitals start to work on market mechanism by compelling the sophistications of their value chain and pursue the best possible products and services at the rock-bottom price, but to let the price find its place in equilibrium, price controls (possessed by medical chamber) should be abolished.

That's how cost-push inflation would nearly disappear and the fiscal sector could easily reduce spending and ease the pressures on revenue side of the budget.

There is no such thing as impossible. As my friend says, impossibility is the word found in the dictionary of fools. Also, it is not impossible to reform old-fashioned public health care sector. It just takes willingness and dedication to pursue global success from which future generations will benefit.

Enjoy the rest of the day!


B said...

Productivity varies throughout health-care systems, that is given. Whether it is best treated with fixed rates per hour, productivity-based incentives or a combination of the two should be debatable. Otherwise some get the burnout-syndrome and others fat paychecks for sitting in the office...
Agreeing with a vast majority of things you wrote here I have but one question: If it is known what is wrong, if it is known what should be done - why then so little is actually done? It is almost unbearable to think that the public cannot push changes when presented with facts and given the alternatives...
I enjoyed this debate, thank you,

Rocks said...

The answer to your question lies in the net position of rent-seeking groups who de facto prevent any kind of panel of reform which could boost the efficiency of the health care sector itself.

Rent-seeking groups naturally maximize their utility function by organizing the rules of the game on their account to maximize the rent which patients and users of the health service have to finance.

Otherwise, market behavior or health-care competition based on private sector operations, could not generate such an affordable level of income, unless the productivity of the physicians could play a greater role in rewarding the physicians on behalf of their real wages.

Currently, trade union of physicians has a powerful influence on policymakers and so they bargained the level of wages relative to other public sector employees such as in judiciary or government-run education sector.

Therefore, the incentives to work and invest in human capital are simply banished, leading the structural situation to 'status quo' where the breakdown of the public health care schemes and funs is inevitable in the middle run.

You see, in Slovenia, 75% of the adult population is functionally illiterate according to OECD's Literacy in the Information Age. In 2003, IMD measured the economic and financial literacy of the Slovenian youth.

Nevertheless, Slovenia was ranked 53rd in the group of 60 most advanced economies in the world. What does this have to do with health-care? People of course, are sometimes very naive, believing that government intervention is the only solution that can cure public health-care agony.

Also, Slovenian policymakers are mostly socialist as they hardly understand the challenges of ageing population. For instance, the treatment of an average 65 years old individual is 4-times more expensive than the treatment of a person like me who's 19 years old.

Slovenia has the youngest retired population and it is not difficult to find out that such a lopsided age structure creates a significant cost pressure on public schemes, creating a space to raise taxes and employee/employer ontribution rates.

If the status quo remained in effect, the employee/employer health care insurance contribution rate would double in the next 25 years.

Then tell me how a person like me could live and work in an environment where I'd be taxed to the eyeballs? But politicians want to gain support and the cost of this is to run campaigns through utility-type promotion of services such as health-care on the aspect of political marketing, where they expect to gain votes where high rents to rent-seeking groups (through collective negotiations) to fulfill the exchange.

Also, the emergence of new technologies aim to reduce the mortality rate and prolong the life expectancy. New technologies of course do not pertain the economies of scale but create value through competitive margins and thus create a strong external pressure called cost-push inflation or medical inflation. Decreasing growth of population is not neccessarily a big problem unless this motion reflects the rise of retired person and the decline of labor force.

If a population growth slows down, the "loss triangle" can easily be compensated by the import of foreign labor, a measure which brough Spain lower unemployment and a booming economy. In Slovenia, the decline in population growth is combined with the most restrictive market for foreign labor.

And when tax base shrinks, tax rates are usually raised unless the government goes in fiscal deficit resulted from high public spending rate.

Thus, rent-seekers (looking for rent away from market mechanism) in government-funded health care sector, further claim demands which seriously threaten the sustainability of the health care system in the future, a system which is already an important factor of fiscal crisis in Slovenia in the light of both, ageing population and Soviet-styled health-care system which fenomenally shows us why rent-seeking is so costly to growth? Take a look at Slovenia and you'll see this clearly.

*One should know that demands for higher wages on collective basis naturally demolishes the productivity created in the private sector.

Thank you for this wonderful debate. I wish you an enjoyable day and take care!