John McManus: Are we about to bail out the private hospitals?

It is hard to believe that we have created a private hospital system that is too big to fail

The proposed solution to under-capacity in a broke public health system is to avail of over capacity in a private health system that faces its own financial challenges (PHILIPPE HUGUEN/AFP/Getty Images)

The proposed solution to under-capacity in a broke public health system is to avail of over capacity in a private health system that faces its own financial challenges (PHILIPPE HUGUEN/AFP/Getty Images)

 

Taken at face value, the proposal from the Private Hospital Association for a public-private initiative to help reduce waiting lists looks like a good idea.

The PHA has come up with a five-year plan that would see diagnostic equipment and beds in private hospitals used to take the pressure off the public system.

But leaving that aside, you would have to wonder how we managed to contrive a situation whereby the solution to undercapacity in a broke public health system is to avail of overcapacity in a private health system that faces its own financial challenges.

The really interesting question is who is bailing out whom here? Is the taxpayer in effect being asked to subsidise a private health system that no longer makes financial sense? And is the rub that the creation of this system over the past 20 years or so is one of the contributing factors to the failure of the public system?

The first thing to get your head around is that private hospitals are businesses. Some of them may be associated with not-for-profit hospitals that are part of the public system but they are – or at least are meant to be – separate commercial entities.

Commercial healthcare

Like any business they need customers and, in the case of Irish private hospitals, this means people with health insurance. This is why you hear ads on the radio from private hospitals telling you that their services are covered by the health insurers. Companies only advertise when they are looking for customers.

Over the last 20 years or more, a huge, privately-owned health infrastructure was built up in Ireland, with government encouragement. The main boost came via tax breaks, the most significant being income tax relief on private health insurance premiums.

Irish health spending is very close to the European average but, unlike most of our peers, one-third of it is channelled through the private healthcare system. The thinking behind all this – if there really was any – was that the private sector would deliver hospital care more efficiently and that better-off people could pay for it via health insurance rather than making everybody pay more tax. It was liberal market economics at its best or worst, depending on your perspective.

Of course it didn’t work out that way. The overlaps between the two systems – both in terms of ownership, personnel and infrastructure – created all sorts of perverse incentives. The worse the public system, the more profitable the private system.

The wheels came off when the economy crashed in 2007 and people abandoned health insurance in their droves because they lost their jobs or just could not afford it any more. The consequences of this influx of people for the public system has been manifestly obvious.

The consequences for the private health system were less obvious. But every person who gave up their health insurance was one less potential customer for these expensive facilities. The number of people covered by private health insurance fell from a peak of 2.3 million in 2008 to 2 million in 2014 and that does not take into account people who reduced the value of their cover and the private hospitals they could attend.

Few industries can absorb a 13 per cent fall-off in customers. Private hospitals felt the pinch. Some closed. Several were restructured, but if the PHA’s proposal is any guide there is still overcapacity.

When you have overcapacity you don’t get profits, or the sort of profits you want and need. According to the free market doctrine that capitalists like to operate under – until things go wrong – there should be further restructuring of the private hospital sector until capacity matches demand.

The State could well be a winner in this scenario, taking over surplus facilities, employing staff that have been let go and so on.

Capitalists protected

The five-year term proposed by the PHA is interesting in this context as presumably the numbers with health insurance should have recovered by then.

For a Government under the cosh over waiting lists, the PHA’s suggestion is a tempting way out. And the alternative of further restructuring in the private hospital sector is not without risk. It is hard to believe that we have created a private hospital system that is too big to fail.

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