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Moral Hazards and Fatal Flaws
By Meghan Laska
Wharton Health Care Systems
Professor Marc Pauly delves into
contrasting problems in health
care insurance in the developed
and developing worlds.
Thousands of people lost their lives in the December
2004 tsunami. Billions of dollars were pledged in
emergency relief. And although aid distribution efforts
were hampered by the isolated terrain, officials said that it
did slowly make its way to victims.
While the tsunami triggered an international crisis, health
care systems professor Mark Pauly says that the main health
care catastrophe in these developing countries wasn't caused
by a natural disaster, but triggered by more "mundane"
things that don't make the headlines. For example, the major
killers of children, such as diarrhea and infectious diseases
like malaria, in developing countries are more ever-present.
"The irony—and I feel this myself emotionally—is that
we now say we want to do something to help the tsunami
victims, but people should have been doing that a long time
ago," Pauly says.
Pauly points out that more people in Indonesia died over
the last 10 years as a result of poor health care and lack of
insurance than died in the Banda Aceh tsunami. "The actual
health consequences of the tsunami are so far relatively contained
in that people either died or they didn't," Pauly says.
He adds that he hopes that an end result of this disaster will
be an increased focus on the quality and availability of health
care for people in developing countries—something to
which he has devoted much attention.
Searching for the Fatal Flaw
These days, Pauly's focus on developing countries is through
the lens of health insurance. He quips that his "esoteric theoretical"
writings on insurance captured the attention of the
World Bank, which then asked Pauly to take a look at the
situation in developing countries to see if there are any fatal
flaws to the emergence of insurance. After a trip to Ghana
last summer and research on the issue, the short answer is "no."
"The silver lining is that it seems like they could offer insurance,"
Pauly says. "But at a practical level, you run into
problems of trust. The idea of someone asking for money
and in exchange giving you a piece of plastic which entitles
you to health care seems crazy. They say, 'Why should I believe
you?' How do you get people past that distrust?" And if
the insurance program is run by the government, corruption
is also a risk, as well as an inherent limitation of choices by
the people. These are the challenges.
So when the World Bank invited Pauly on a mission to
Ghana to assist in redesigning its overall health insurance system
in the summer of 2004, he joined the team. What he
saw in Ghana was worrisome.
Pauly explains that the majority of developing countries
such as Ghana have a system of free medical care, but the
financing is often woefully inadequate. "People may lack care
because the Ghana health service can't pay doctors enough
to locate away from the big cities. People who need care
end up paying out of pocket, using money they were going
to spend on buying seeds for their crops or for fees to send
their children to school." He explains that Ghana realistically
concluded that, since people were paying out of pocket for
health care, they would call their system a "cash and carry
system," but then officials became concerned with the financial
choices this forced people to make. The World Bank
project asks whether instead of making big, occasional payments,
perhaps people would pay smaller amounts periodically
for insurance.
So after a firsthand look at the system in Ghana and researching
what other countries have done, Pauly says there is
reason to be optimistic. "I wouldn't have recommended what
Ghana ultimately chose to do [local government-run insurance
program] to all countries, but it is admirable because at least it
carries forward the principle of having insurance," he says, adding
that the government was planning to sign people up for the program last fall. "We can be optimistic
because the alternative is worse and there is only room for
improvement."
Despite the many challenges, models of success exist in other
developing countries, Pauly notes. An area in India, for
instance, created a primitive health insurance system where people
contributed money to a community plan that paid for some health
care and medicines that otherwise would not
have been available.
Singapore, meanwhile, has implemented a modern health insurance
system. "It has become the poster child for a country
that started with the British health system model, which
was free but low quality, and they put in place a system of
insurance and spending accounts to create quite a well-functioning
health insurance system." While Singapore is a small
country that has emerged from poverty, it nonetheless serves
as a hopeful example, Pauly says.
Recently, the World Bank has asked Pauly and colleague
Peter Zweifel of the University of Zurich to write papers
using high-level insurance theory to analyze whether there
is a fatal flaw in efforts to provide real private and public
health insurance in developing countries. "There may be a
lot of practical problems and people have to make judgments
about whether those can be overcome, but we determined
that there are no logical reasons why we can't have real health
insurance. We have Singapore and other cases suggesting that
it is not hopeless." He explains that, while he doesn't think
the private insurance that emerges will be perfect, it will be
much better than the alternative of a poorly funded, low-quality public system that causes people to prefer to pay out
of pocket for effective care, with adverse consequences like
"not sending your kids to school or not being able to plant a
crop. But it's a hard message to preach—that you can do the
most good by doing a little even if it's not perfect," he says.
In March 2005, a Wharton Impact Conference called
Voluntary Health Insurance in Developing Countries took
a stab at preaching that message. Organized in collaboration
with the World Bank, the University of California
at Berkeley and the University of Zurich, the conference
presented the preliminary work from a large international
review of the potential role of private health insurance. In
addition to professors such as Pauly, participants included
policymakers from developing countries, leaders from the
health insurance industry, and international development
partners. Participants discussed topics such as the economics
of voluntary health insurance at low income levels, the role
of the health insurance industry and the World Bank Group,
and ways to apply theory to practice.
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