Government Turns Over Hospital to the Private Sector – Then What Happens?

I’ve written a lot about the poor incentives in our healthcare system. Austrian Economics teaches us that systems tend to produce the outcomes that they are incentivized to. In our healthcare systems – be them the socialized ones in the UK and Canada, or the so-called “private” one in the USA (and even Singapore which is the best of a bad bunch in that they spend less and deliver better outcomes) everyone is paid for treating ill-health. They are incentivized to turn out ill-health, and that’s what we get. Despite being the most treated population in history, we just get sicker and sicker for longer and longer and shell out more and more for the privilege.

Of course, every one of us profits from good health in the long run. A stitch in time saves nine, when it comes to healthcare. 70% of our diseases are preventable, life-style related diseases according to the New England Medical Journal’s very well-researched article Actual Causes of Death in the United States, firstpublished in 1993 and repeated in 2004. And these are not only destructive of the quality of life, but also more expensive to treat than they are to prevent. Chemo can run upwards of $250,000 a patient, diabetes treatment can easily run over $15,000 a year, and a heart attack can cost hundreds of thousands of dollars in treatment once you factor in hospital charges, prescription drugs, additional doctor’s visits, and care at home for the rest of a person’s life.

Since the benefit of cookies and a sedentary lifestyle are enjoyed in the short run but their effects are only felt much later, a sensible, free market system, would find a way to mobilize the huge amounts of money we throw at preventable diseases into disease prevention problems for the willing, and penalties on the cost of coverage for the unwilling.

However, as Keynes quipped, “In the long run we’re all dead,” and our systems are so myopic and short-termist in nature as to disincentivize preventative care by forcing those with healthy lifestyles to subsidize those who pursue unhealthy ones. Systematic change is necessary and wanted from all corners of the political compass, but without some models it will be hard for the wider public to accept that change can happen.

Valencia, Spain, accidently stumbled into a groundbreaking experiment that demonstrated how a simple change in incentives can naturally lead to the integration of more preventative care in hospitals. It also provides an interesting bi-partisan model which could be accepted as a step in the right direction, both to those on the left who favor completely socialized medicine, and to those on the right who favor a completely hands-off free-market approach. True, it may alienate purists on both sides, but we can always learn from real-world examples, even if they don’t match our perfect preferences. My personal outlook is very libertarian, but I am willing to accept any improvement on the present system.

The Socialist Party, who formed the government of Spain at the time had continually failed to provide funds for a local hospital in Alzira, Valencia, despite years of promises to the people. Finally, in response to the furor, the local government solicited a private company to pay for, design and deliver government-provided healthcare and keep costs down.  

The terms weren’t exactly favorable to the private company… for one thing they would have to hand the hospital back after ten years – so they’d have to make it pay quick! Until then, they would get paid a sum per year based upon the number of people in the Ribera area that was to be no higher than the amount spent per capita elsewhere in the region. If people left Ribera and went to hospitals outside, they would lose money, but if they came to Ribera to take advantage of the hospital, they’d make more money. I guess this solved the incentive problem, because the better care they delivered the more money they’d get to keep! As a consequence of being placed in this “sink or swim” position they became ingenious in their approach, providing lots of active, preventative care to keep people away from hospitals! For example, the hospital took note of who would come in with chronic bronchitis in the winter, and then contact them the following October to offer a visit. If they were suffering from poor health they were given preventative treatment, making them less likely to end up in hospital later. This saved patients traumatic trips to the emergency department on cold winter nights – and saved the hospital money, too. They also monitored people with known heart conditions to offer early treatment, and consequently, managed to half the number heart attack admissions. After all that, they still managed to turn a profit![1]

This is now called The Alzira Model, after the little town where the hospital was built and still functions. Some academic work has been done advocating it for adoption elsewhere, but I have seen precious few examples of it actually being implemented.

Alas, The Alzira Model was destined to fail in Valencia as the deal necessitated the private company handing the hospital back to the regional government ten years later. It’s amazing that even under these strictly government co-ordinated conditions, a set of outside eyes were still able to swoop in and turn things around. It can only provoke us to wonder what would happen in a free market environment where people cut out the middle men – private insurers and the government – and instead “subscribed” to their local hospital for a fee which might rise or fall depending on how well they took care of themselves and engaged in disease-prevention programs. Under these circumstances the hospitals would be incentivized to treat less wherever possible and offer evidence-based guidance to patients to help them avoid the need of care. We could save a lot of money on healthcare – not to mention unnecessary suffering.

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[1] Bartholomew, J. (2016) “The Welfare of Nations” Cato Institute, p64