In yesterday’s Wall Street Journal (“In China…“), there is an interesting article about health care in rural China. The article gets at the heart of a number of health care issues:
- Physicians paid on a fee-for-service basis treat their patients more intensely compared to physicians paid on a salaried or capitation basis. In rural China, doctors made almost all of their annual earnings from prescribing pharmaceuticals. Thus, it comes as no surprise that patients were often over-prescribed drugs; some patients even died from excess drug prescription. “Ni Shiqiao, a 37-year-old doctor in a nearby village, whose father and grandfather were both village doctors, says that before the experiment started, he made nearly all his income selling prescription drugs. Now he makes a monthly salary and prescribes fewer drugs than before.” On the other hand, salaried doctor may under-treat patients since they make zero marginal revenue from most medical services they provide.
- The benefits and costs of a government-run health care system. It is easy to see that when the health care system is federally run, the risk of any idiosyncratic negative health shock is spread across a large population. Nevertheless, rural farmers in China were hesitant to contribute to this risk-sharing national health plan. Harvard health economist William Hsiao states, “When the government collects money from them [the villagers], they often worry that the money is going into the pockets of the government officials, not beings used for the people.”
- The pros and cons of decentralization. Dr. Hsiao started a program in which villagers would elect their own representative to administer their own health insurance funds. The village doctor would be hired and fired by this council. One can see that decentralization empowers villagers; “the more the villagers understood about where their money was going, the more they would want to participate.” Having decentralized health insurance, however, may not be optimal when risk is not idiosyncratic. For instance, if a virus was to infect all the farmers in a village, the local health insurance pool would likely not be sufficient in order to cover the necessary cost of treatment for each individual.