Unsustainable health care spending and the government system

The Canadian Institution for Health Information has released a study claiming that the steady increase in health spending is not due to the aging population demographics. Considering that government health care expenditure has been on average rising faster than GDP since 1975, I think that the CIHI is correct. After all the demographic time bomb hasn’t gone off yet, most boomers are still not in retirement. So why would expenditure be so high already?

The study’s explanation is that the increase spending is a political choice. Significant segments of the electorate demands improved services and political parties respond by promising increased spending. Again, without having examined the study closely, this makes intuitive sense to me. It is difficult to find any major provincial party that does not routinely promise spending increases that outpace GDP growth.

This serves as a good example of how demand operates in a government system compared to a market system.

In a market system if individuals want better service they pay for it out of their own pockets. Since the individual pays the cost they would balanced the increased spending with their other desires and needs. Providers of the services know this and they realize that they are competing for dollars. To succeed the providers would not price themselves so high that they chase away the customers. Thus in a market system there is a built in restraint on unsustainable growth in health care spending.

In a government system individuals that want better service won’t be paying directly for it. Instead they will vote for politicians that will use tax dollars to pay for it. The cost would be spread out among not just those that want better service but to those who are either already satisfied or indifferent as well. Politicians would attempt to outbid each other in spending increases to secure the pro-health care increase segment of the electorate. Governments do have to balance priorities, just as an individual does, but the main incentive of political leaders is to win elections and often priority balancing takes a backseat to that. Thus money appears to be unlimited and there is no natural restraint on unsustainable growth in health care spending.

Of course money isn’t unlimited and eventually governments do become bankrupt, but usually the politicians who have caused the problem are safely retired by the time it becomes an issue. There is a clear agency problem in entrusting health care spending to politicians who are making decisions that are based on their own needs not the general public’s wellbeing. The only true solution to the unsustainable spending in health care is take it out of the hands of politicians and put it into the hands of consumers.