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Professor Euston Quah, President, Economic Society of Singapore (ESS)

Fellow economists

Ladies and gentlemen

Friends, colleagues

1.             It is my pleasure to join you this morning. When Euston invited me to speak, I jumped at this opportunity, not because of the theme, but because I am hoping more economists will work for the Ministry of Health (MOH).

2.             Today, speaking to a roomful of economists, I am inclined to confine myself to talk about markets and price, dollars and cents. But because I am also a Health Minister, I need to also talk about life and death, of values and trade-offs. Suffice to say, to solve today’s complex healthcare challenges, we need more economics, not less. So here it goes.

A thought experiment

3.             I would like to start with a simple thought experiment. If a country had a significant absolute advantage in healthcare and decided that this shall be its main  economic sector to drive employment and growth, what would happen?

4.             The country would build world class hospitals, train many doctors, nurses, allied health and healthcare talent who would treat many patients. Good, meaningful jobs were created in abundance. The healthcare workers paid taxes. Hospitals made money and paid taxes. Government coffers grew.

5.             So far so good. But very soon the country realised that healthcare was not just an economic activity but, like education and public transport, also an essential service for society. For the lower income especially, healthcare needs to be subsidised, accessible and affordable.

6.             So our hypothetical country decided it needed to subsidise healthcare. They studied best practices in OECD countries and realised almost all the OECD countries subsidised healthcare very generously. They asked the United Nations and World Health Organization, which told them the same thing – that universal healthcare is very important. Hence this country decided to make healthcare free for all citizens.

7.             Problems soon arose. Their Ministry of Finance discovered that the expenditure needed to subsidise healthcare was ballooning. The taxation they collected from the healthcare sector was not enough to pay for the subsidies.

8.             One way to solve this problem was to raise more revenue by attracting foreign patients who would seek healthcare in the  country, enjoy its excellent services, pay their full hospital bills without subsidy and therefore they will make money. Hence they promoted medical tourism and it was good business.

9.             But problems were brewing on a separate front. Because when local healthcare is free, the  demand will become excessively high. Doctors would order more tests and treatments. Patients do not have to pay and happily accept those prescriptions. In fact, patients would visit several doctors for the same illness since it is free. We know this is happening in some countries.

10.          With demand ballooning and capacity limited, patient waiting times got longer. Service levels fell. The situation was aggravated because many top doctors and healthcare professionals preferred to work in the medical tourism sector as that was  where the financial rewards were better. Citizens began to notice the disparity in service levels between what they were experiencing and what the medical tourists experienced, and were not happy.

11.          I shall stop my hypothetical scenario here because it just gets messier. Suffice to say, there was no clear path to a happy ending.

12.          The basic point I want to illustrate is that the healthcare sector is complex. Having spent many years in public service moving from ministry to ministry, I find healthcare by far the most complex system I have ever worked in. Like all public services, it is useful to examine healthcare from an economic lens, so that we know how best to regulate the sector. In that regard, I will talk about three of the most salient economic challenges in healthcare today. They are not exhaustive, but I think these are the three challenges that are most salient.

Allocating scarce resources to indefinite demand

13.          First, and the most basic of all economic objectives, is to match demand and supply of healthcare. But in healthcare, it does not work like the Marshallian demand-supple curve where the price just moves to where demand cuts supply and the problem is solved – you have got an equilibrium. It does not quite work like that.

14.          Supply of healthcare is limited and sticky, as it takes years to train healthcare professionals and build hospitals and facilities. Demand for healthcare, on the other hand, is potentially unlimited and very fluid – fuelled by subsidies but also emotions such as fear, anxiety and love, and often untamed by price.

15.          Some describe the task of allocating healthcare supply and demand as managing the iron triangle. There are three desired outcomes for healthcare – we want it to be affordable, high quality and accessible. The final analysis, just like monetary economics, is that healthcare authorities can achieve only two out of three. You have got to sacrifice one. In Singapore, we try to juggle all three, and to achieve most of each outcome.

16.          How a nation resolves this mismatch is a key factor in determining the performance of its healthcare system. In this regard, I think Singapore has not done too badly. Our average lifespan and health-adjusted life years – two key indicators –  are one of the highest in the world. Yet we spend slightly less than 5% of our GDP on healthcare, less than half the average of developed countries.

17.          When I go overseas, this is one of the most common questions I get from my foreign counterparts and fellow Health Ministers. They ask how did Singapore spend less but get more?

18.          The truth is we had benefited from having a young population who tend to be healthy. But it is ageing rapidly, and this is driving up our healthcare expenditure. 5% will not be sustainable. In the coming years, it will go up. While we have a good healthcare system and policies today, we still need to adapt to a new reality of an ageing population and there is a lot more room for improvement.

19.          Nevertheless, it is useful to understand how different countries manage the iron triangle, and the varied results they have produced. As an essential service, healthcare costs need to be socialised, that is, to be borne by society as a whole. How this is done makes all the difference to the performance of the healthcare system.

20.          Let us consider two examples – the UK and the US. Both are complex systems with many factors at play. But let me just highlight one key feature of both systems, which is how they are primarily funded.

21.          The UK decided to adopt a single payer model, i.e. the government collects tax revenue to pay for healthcare and patients do not have to pay at the point of care. Socially, this is very just and equitable, but there are significant downsides. Just like our hypothetical country, when healthcare is free, demand will exceed supply.

22.          Today, there are seven million UK patients waiting for treatment. UK healthcare workers work very hard. They feel underpaid and have gone on strikes recently. The system is under a lot of stress, especially post COVID-19 pandemic. Government healthcare expenditure is rising and needs to compete with other pressing needs  such as education.

23.          In the US, private insurance is a major feature of healthcare financing. Insurance, being self-financed through premiums, is more sustainable than the single payer model. There is less competition with other public spending such as education and defence. Insurance also offers choice to the consumer, who can opt to pay more for better coverage. It is a more market-based approach to socialise healthcare expenditure.

24.          However, in any country, there are rich people who can afford a lot, and those who cannot afford anything at all. And for something so essential to life as healthcare, this market-based approach can be perceived as socially unjust and unfair which is happening in the US. People who cannot afford insurance premiums can be denied healthcare services while the rich enjoy five-star service.

25.          Whatever the starting point, most countries ended up with a mixed funding system. While no UK government – whether the Conservative Party or Labour Party – will move away from the principle of free healthcare, private insurance is available. Those who can afford the premiums can skip the waiting lines and get prompt treatment. In the US, the Obama Administration pushed for the Affordable Care Act. Today about half of National Health Expenditure in the US is already government funded, no longer relying on insurance

26.          Singapore has always recognised the pros and cons of subsidies and insurance in socialising healthcare costs, and decided to use both to pay for healthcare. We also added a third component of personal responsibility and co-payment through mandatory savings. This forms our S+2M framework (Subsidies, MediSave and MediShield Life).

27.          There is no Goldilocks optimal point of restful equilibrium in healthcare. Instead, it is a constant juggling act to complement these funding mechanisms, to deliver the best value to our people with the least cost. That is challenge number one.

Aligning incentives of the players

28.          The second major economic challenge in healthcare is to align the incentives of the three key players. They are: the payer, which can be the government or insurance companies; the provider, namely hospitals, doctors and clinics; and the patient, who receives healthcare services. Unfortunately, for these three players, in Chinese, you would say 同床异梦. They can share the same bed but have different dreams. In economics jargon, you would call this the principal-agent problem.

29.          To illustrate, insurance companies as the payer want to keep cost under control. They may resort to denying claims for procedures that can be beneficial, hence harming patients’ interests. Hospitals are often funded by fee for service. In other words, they are paid based on workload, so they may order more tests, procedures and surgeries than necessary to get more money, which is against the payers’ interest. Patients are supposed to keep themselves healthy, but since healthcare costs are paid for, we have little incentive to do so, which is against everyone’s interest including ourselves.

30.          In Singapore, we have been actively addressing these principal-agent problems. To start with, MOH subsidises healthcare, runs the MediShield Life national health insurance programme, and also oversees the delivery of public healthcare to our hospital clusters. We are hence both the major payer and provider in Singapore, which is probably the best way to resolve trade-offs between the two.

31.          To further make the public health providers fall in line, we practise value-based care at our hospitals, and have transited to a capitation funding model, which if implemented well, has the potential to eliminate all levels of wastage – at a clinical or disease level.

32.          However, a particularly vexing principal-agent challenge that I wish to highlight today is moral hazard – a common occurrence in behavioural economics. If health insurance completely covers my hospital bill, I will use more expensive treatments and drugs, and I do not mind undergoing more tests and diagnostics, even though they are not all necessary or the benefits do not justify the cost. We would have had the experience when we visited a doctor and they asked us if we were covered by insurance. Such behaviour is as expected as over-eating at a buffet table.

33.          I do not know of any Chinese translation of ‘moral hazard’. But there is a concept called ‘大锅饭‘. It is used to describe an economic system where everyone eats from the same bowl. But when that happens, everyone tends to work a little less and eat a little more.  

34.          When every insured patient behaves the same way and is afflicted with moral hazard, the collective action will push up national healthcare costs unnecessarily and with a lot of wastage. Sooner or later, the bill still comes back to all of us in the form  of higher health insurance premiums. In economics, all healthcare costs will ultimately be paid by the people, in one way or another. In this case, the wastage will come back to us in terms of higher healthcare insurance premiums. In a market-based system, those with lower incomes may decide to forgo their private insurance coverage.

35.          Moral hazard is particularly challenging in healthcare. Because it is  combined with emotions such as love and concern for our family members. When that happens,  moral hazard is on steroids. We will opt for whatever treatment that may work, however small the chance of success because we love the patient. However high the cost, especially when someone else, in this case my insurer, is paying the bill.

36.          There are other aggravating factors. Pharmaceutical companies practise differential pricing for drugs across geographies. That is just how it works. So when there was a single MediShield Life claim limit of $3,000 per month and for all cancer treatments previously, there was little reason for pharmaceutical companies to charge us anything less than $3,000 even though the cost of the drug is far less in many other countries. But in Singapore, the minimum we paid was $3,000, even though it can cost hundreds of dollars.

37.          Another aggravating factor is that in a litigious environment, doctors will order more tests to cover all bases and avoid lawsuits. In healthcare, we call this defensive medicine.

38.          Insurance companies rightfully want to rein in moral hazard. In the US, certain insurance companies expanded their business to also run hospitals, where they can build in stronger clinical discipline. Economists recommended setting insurance claim limits and requiring consumers to co-pay part of their hospital bills, so that they have skin in the game and will think twice before over-consuming healthcare services.

39.          But some of the responses of insurance companies end up counter-productive as well. They know that customers will always seek greater peace of mind. Ceteris paribus, a customer will prefer first dollar coverage and higher claim limits. To meet this demand, insurance companies will offer policies to compensate beyond the claim limit or cover the co-payment. So as healthcare authorities, we can set certain claim limits and co-payment to bring in moral hazards. The insurance providers will say fine, but I have this special product that if you buy, you go above the claim limit, you don’t need the co-payment. We have witnessed many instances where winning market share and pushing sales get the better of insurance companies.

40.          Our conclusion is that to moderate the excesses and wastage of healthcare, there will likely need to be tighter rules on healthcare insurance. With much effort, MOH has implemented a new regime governing the use of cancer drugs. We are working with all stakeholders on other possible changes to reduce moral hazard, moderate healthcare cost increases, and make health insurance affordable and fair.

Private behaviour, social good

41.          Around the world, a consensus that has emerged amongst health authorities, as a simple way out of all the complexities of managing healthcare systems, is to make the population healthier and we solve all the problems.

42.          Given that human beings are genuinely concerned about their own health, we can put our faith in the Chicago School, and count on individual motivations and self-interested action, to exercise, eat healthy, quit smoking and go for regular health screenings.

43.          Unfortunately, things are not that straightforward. This is the third economic challenge in healthcare, which is that many individuals are not motivated to do what is good for ourselves and society.

44.          It is a classic problem in life and economics. Rationally, the individual knows he should adopt a healthy lifestyle. But the benefits are far into the future because health habits accumulate, and the benefits only come in the future. Meanwhile, he has to give up on steaks, desserts, cigarettes, wine, beer and binge watching on his digital device. If he is healthier in the long run, society will benefit from a lower disease burden, but this is a positive externality that the individual attaches insufficient value to now.

45.          That is why we have to incentivise a healthy lifestyle even more. This is the idea behind Healthier SG, to which we are spending about $400 million a year to encourage healthier living. We have made annual preventive care consultation with doctors, nationally recommended health screening and vaccinations, free of charge. We reward exercise using digital health apps.

46.          This may not be enough if we want to sustain healthy lifestyle for the long term and become a Blue Zone 3.0. We are thinking of other ways, such as differentiating insurance premiums between those with and without appropriate lifestyles. We are considering regulatory measures to reduce the consumption of sodium, which is found in regular salt.

47.          For some seniors, their biggest enemy is loneliness. So we are investing in another national programme, called Age Well SG, to help them build social circles and live an active lifestyle in the community, in their current home. We hope to delay or avoid institutionalisation of as many seniors as possible.

48.          We have to treat population health as a social good. Healthcare spending is mostly an expenditure to repair our sick and injured bodies. But spending in preventive and aged care bears some characteristics of investment, as these can avoid significant future healthcare costs and burden on families and society.

A focus on healthcare economics

49.          In conclusion, let me summarise the following as the key economic principles of healthcare.

50.          First, rely on different ways to support healthcare. Markets have a role, governments have a role, people have a role. Where it is basic and essential, we rely  on government subsidy. Where it is advanced, occasional and alternatives are available, we rely more on insurance, including market-based insurance products, to risk-pool. For the low income and vulnerable, there should be further safety nets including philanthropy. That is why we also have MediFund, making it S+3M.

51.          Second, create a clear gradient of market signals. Acute care is most expensive and susceptible to abuse and wastage, so always maintain an element of personal responsibility. Step-down and rehabilitative care eases the load for acute hospitals and should enjoy stronger support. Most terminally ill patients would wish to pass on at home in familiar surroundings in the presence of their loved ones, and I am glad that with the support of our palliative care providers, home hospice in Singapore is provided free to these patients.

52.          Third, do not make an enemy of medical technological advances. Technological advances such as digital health are helping people practise preventive and holistic care in an easy, convenient and fun way.

53.          It has its uses but be mindful that in healthcare, there are also new drugs and treatments that can be beneficial to some patients with certain diseases, but at a very high price. Technological advancements in healthcare are quite different from other sectors. New drugs and treatment can be beneficial to some patients but at a very high price. Subsidising these treatments carries a significant opportunity cost because the money can be spent elsewhere – in education, public transport, defence, etc.

54.          It is in human nature to make advances. We need to embrace scientific advancements in healthcare, but we must always maintain clinical discipline to use technology the right way, and a strong system to evaluate cost effectiveness of drugs, treatments and procedures. In many instances, existing care options are actually good enough. That is why Singapore has now set up such a robust system of Health Technology Assessment.

55.          Fourth, have time on our side. This means being prepared to invest in holistic and preventive care and build up population health for the long term. The interventions to shape better lifestyles are always simple and much cheaper than running hospitals.

56.          Healthcare runs the length and breadth of economics. Every economic phenomenon, distortion and challenge that has been studied can probably be found in healthcare.

57.          A good healthcare system is fundamentally about the skills and passion of doctors, nurses and healthcare workers, and a culture of good health amongst the population. These are things that cannot be measured through our GDP, through dollars and cents, and which money cannot buy. For everything else, there is healthcare economics.

58.          It is therefore my hope that our economists devote more time and attention to healthcare economics, by explaining some of the intricacies and complexities. You can help in strategising the allocation of scarce resources in demand, resolving principal-agent problems between payers, providers and patients, or using behavioural economics to nudge people to adopt healthier lifestyles. There are endless possibilities, so much so that MOH is thinking of setting up a health economics office to achieve health economies. This is still in the works.

59.          Economics and economists have much to offer in healthcare. It will be a fulfilling and rewarding endeavour that can help shape the future of a super-aged Singapore to bring quality of life to Singapore beyond our GDP. Thank you.


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