TO MANY supporters of the Workers' Party (WP), its performance in the Punggol East by-election was a result beyond their wildest expectations.
Its candidate Lee Li Lian, 34, a trainer in the financial industry, won the single-seat ward with 54.5 per cent of the vote and a convincing margin over her main opponent, the ruling People's Action Party (PAP) rookie Koh Poh Koon.
Yet at the post-result press conference last Saturday, WP chief Low Thia Khiang had a sombre expression. The only substantive answer he gave during the 20-minute press conference was even more intriguing.
Workers' Party chief plays down big vote swing in Punggol East victory
By Leonard Lim
EVEN as Punggol East residents woke up yesterday to the start of life in an opposition ward, Workers' Party (WP) chief Low Thia Khiang cautioned against reading too much into last Saturday's by-election result.
The sizeable vote swing from the People's Action Party (PAP) should not be seen as a harbinger of things to come in Singapore's political scene, according to the man whose party has enjoyed growing support since the 2011 polls.
"You can't take the by-election result as one that is going to be the trend in the future," he told reporters before joining his party colleagues on a thank-you parade around Punggol East with MP-elect Lee Li Lian, who won with 54.5 per cent of the vote.
"It is a by-election, it is not a general election."
Mr Low, an MP for Aljunied GRC, said voters were not worried that they may "accidentally throw out" the government of the day even if they vote for the opposition.
Raising the same theme, Defence Minister Ng Eng Hen said at a community event that by-elections are prone to "big swings". He added that last Saturday's results will not affect the PAP handling of national issues.
The ruling party's by-election handicap was also cited by Prime Minister Lee Hsien Loong last Saturday after the result was announced.
Yesterday, Mr Low sought to inject a further dose of reality, bringing up a point that he had made throughout the campaign.
His party, he stressed, is not ready to form an alternative government and come up with a full set of policies.
Rather, at this stage of its development, it will point out problems in existing policies and offer policy suggestions.
"I think we have a competent Government... we need to allow time for the Government to work, and I hope, eventually, the policies will take effect on the ground, people's lives will be improved and we have a better Singapore."
He added that while the WP will keep the Government on its toes, "it's also not productive to politicise everything".
The WP's team in Parliament now totals nine, with the addition of Ms Lee after her 10.8 percentage point win over the PAP's Dr Koh Poh Koon. Her victory is the WP's third in as many years, after it captured Aljunied GRC in 2011, and extended its two-decades-long hold on Hougang in a by-election last year.
Observers have attributed the win to lingering unhappiness with national issues such as the rising cost of living, transport woes and stubbornly high housing prices - themes the WP tried to keep front and centre in voters' minds during the hustings.
Yesterday, in a poll of 50 Punggol East residents, such big-picture issues emerged as the top reason they plumped for the WP.
Administrative and procurement officer Catherine Lim, 40, spoke for many when she said: "The cost of living is very high. Many are trying to use the result to send feedback to the Government."
Meanwhile, the soul-searching has begun within the ruling party.
PAP MPs yesterday said that with the rising desire for more opposition and criticism that the ruling party is losing its connection with Singaporeans, re-establishing rapport with voters has become even more crucial ahead of the 2016 General Election.
Mr Alex Yam (Chua Chu Kang GRC) said: "This is a reminder we need to hunker down, and work as hard as we can to get things right. As a party committed to Singapore, we have to make decisions for the long-term future of the country, but ensure we do whatever we can to help the most vulnerable.
"Hard work, common touch, gentle heart - we cannot not have more of those for the years ahead."
Co-payments are sacrosanct in Singapore healthcare. Since the debut of co-payments in government polyclinics in 1960, the application of co-payment has been extended to virtually all healthcare services.
28 Jan 2012, Today
Co-payments are sacrosanct in Singapore healthcare. Since the debut of co-payments in government polyclinics in 1960, the application of co-payment has been extended to virtually all healthcare services.
Why co-payments? The economic literature is rich with insights on the utility of co-payments and there are very good reasons for co-payments, but not in every healthcare setting and definitely not as an unthinking blanket policy.
In the Singapore setting, the most important objectives are probably mitigating moral hazard and optimising limited government monies. Let us examine them and explore whether and how co-payments can be re-looked.
UPSIDES AND DOWNSIDES
Moral hazard is the phenomenon where patients consume more than they should because someone else is paying. The 1993 White Paper on Affordable Health Care states emphatically: “To avoid the pitfall of ‘free’ medical services stimulating insatiable demand, patients pay directly for part of the cost of medical services which they use.”
As for targeting scarce subsidies, even the richest governments have finite resources, and Singapore is no different. Imposing co-payments enables some degree of cost recovery.
In Singapore, cost recovery has been substantial with government spending on healthcare today making up roughly a third of total system spending, and private monies comprising the other two-thirds.
This is the reverse of many developed countries, which, while critics decry as economically regressive, likely in no small measure contributes to the Singapore Government’s healthy finances — especially when contrasted with many European countries struggling to meet pension and other public service obligations.
Are there downsides to co-payments? Ultimately, co-payments are a tool, a means to an end. The “end” here would be appropriate, financially responsible health service utilisation.
Co-payments should dissuade over-consumption, burdening of the state and extending waiting times for everyone else, but should not discourage medically necessary care and definitely not cause patients to fall into the crevice of medical bankruptcy.
Easier said than done. Co-payment application must evolve as society evolves and as policy makers understand better behavioural sciences and their applications in public policy.
One way to conceptualise health services is to categorise them in five areas: Preventive care, acute ambulatory care, hospital services, long-term care and palliative care. Are co-payments as a policy instrument equally relevant in all five areas?
In acute care and hospital services where patients are in pain, co-payments make sense for the reasons cited above, and genuine patients generally would not defer care for financial reasons.
Co-payments also help to discourage over-consulting which can be seen in comprehensive insurance schemes. In countries with very low co-payments, physician consultations per citizen are significantly higher than in countries with higher user fees.
In preventive services such as cancer screening and regular diabetic follow-ups, co-payments are less useful and perhaps even detrimental. Citizens are already reluctant to seek healthcare due to the “silent” nature of their conditions and in screening, we are trying to motivate perfectly asymptomatic people to subject themselves to uncomfortable measures such as mammograms and Pap smears.
In Singapore, only 40 per cent of women undergo regular mammograms, a far cry from the 70 to 80 per cent needed for effective national screening. Co-payments are arguably not needed here as the inherent behaviour is already avoidance, and the financial outlay just adds one more “reason” to defer care.
Is it then to conserve subsidies? That would be penny-wise and pound-foolish. Screenings and good control of chronic conditions are meant respectively to detect disease early and prevent complications, which save individuals and society money in the long term.
What about long-term care? Poorly utilised and delivered long-term care services simply drive patients into hospitals with complications such as bed sores and lung infections. Again, blunt imposition of co-payments is being penny-wise and pound-foolish.
Some degree of co-payments is useful to reinforce responsible service utilisation and appreciation of the true costs of services, but co-payments cannot be so high as to deter appropriate care and encourage cutting corners.
Finally, let us look at palliative care. Often patients would have spent much of their life savings by the time they reach this stage, and co-payments may impede acceptance of such services.
In palliative care which emphasises so much holistic care and dignity, conserving subsidies through an intrusive means test involving siblings and children and detailed inspection of family incomes is simply bad practice.
As for moral hazard, can a dying man over-consume palliative care services? St Christopher’s Hospice in England, the birthplace of modern palliative care, has not imposed co-payments. Why not? Surely it would make the service more efficient and help the staff spend less time fundraising?
Founder Dame Cicely Saunders, spiritual leader of the palliative care world until her death in 2005, said: “You matter because you are you, and you matter to the end of your life. We will do all we can not only to help you die peacefully, but also to live until you die.”
Co-payments in healthcare are a powerful policy tool. Applied appropriately, they drive economic and operational efficiency, enabling services to function well with reduced wastage and over-consumption. Applied blindly as a matter of ideology, they can be ruinous to the humane functioning of our healthcare system.
Dr Jeremy Lim has held senior executive positions in both public and private healthcare sectors. He is currently writing a book on the Singapore health system. This is the third in a series on health policies in Singapore.
One quality I've always considered integral in the Singaporean identity is an ironclad sense of entitlement.
Whatever we are given, we always want to know why we didn't get more. Maybe our schools have taught us too well that critical analysis is the only appropriate response to any statement.
And the most entitled people in this entitled population are Singaporean parents. They're fuelled by a potent mix of martyrdom and self-pity, salted over by a lack of sleep and intense body anxiety.
Because the national discourse is so relentlessly self-flagellating about the low birth rate, they are simultaneously self-congratulatory about having given their lives to something "noble", while intensely aware of how they are "losing out" by choosing to have kids in a childless nation.
This is like a multiple personality disorder, which they cope with by being convinced that they should be compensated twice over for starting a family.
Canvassing reactions to the enhanced Marriage and Parenthood Package for the news stories published last week was like taking a museum tour of Middle Class Entitled Parents. Those in this group seem to live by the creed that "to those whom much has been given, much more should be given".
In Singapore, primary and secondary school education is already almost free, and there are subsidies for pre-school for low-income families.
But the Entitled Parent seems to think that I, a childless taxpayer, should also pay for their childcare and kindergarten costs.
That's fine with me actually - as long as we also split your kid's pay cheque when he starts work.
And when told that they can rent subsidised flats from the Government while waiting for their own, some wondered why the flats couldn't be free, or why they couldn't be given priority for private housing.
I can hear it now, the favourite riposte of the childbearing: You don't understand because you don't have a kid.
It's true that I don't have personal knowledge of starting a family while running the Singapore rat race.
And I don't mean to denigrate the miracle of childbirth. In fact, I actually do want to be a mother one day.
But I don't see why the passage of another human being through my birth canal would magically entitle me to special treatment.
I respect parents and all the sacrifices they make for their kids, but come on, they're not amputees running a marathon, or quadriplegics painting watercolours with a brush in the mouth. I don't feel sufficiently moved by the plight of Singaporean parents to donate to their cause, which they seem to expect me to do. A tuition arms race and "overly hard exam papers" somehow do not arouse in me the sadness and desire to help that abused animals or victims of natural disasters do.
I must have a heart made of stone. (By the way, examinations are supposed to be difficult.)
When Singaporean parents ask for more, what I hear are people expecting to be paid for their adult choices.
But if that were the way the world works, then I am waiting on reimbursement for the holidays I've taken and the books and DVDs I've bought to fill up all my child-free time.
These won't even pay off in the future, as kids will. They're supposed to grow up and take care of you in your old age, right? My shoe collection won't do that.
But when I choose to buy a pair of shoes, I don't whine about a heels-unfriendly environment, or the lack of adequate shoe storage space in my flat, or shifting social mores that discourage shoe ownership.
The choice is mine, as are the consequences.
Don't get me wrong. I do think that improving the country's birth rate is an important societal goal.
But it isn't a pure public good that the state has the responsibility to pay for, like national defence.
It's more like tertiary education - there is some public benefit to society, but a lot of it is private benefit. Just like the way a university degree will pay for itself (unless you're an Arts student) in future income, kids will also pay you back.
Literally, like when they send the monthly cheque to the old folk's home. Or figuratively, in joy and hope, so on and so forth. Laughs and life lessons, et cetera.
Parents can certainly look forward to a meaningful, fulfilling life when they embark on the child-rearing journey, and I look forward to it one day too.
But that's about all they should feel entitled to.
Everything else is a bonus, and the least us childless taxpayers should get is a thank you.
The US political system seems incapable of solving many of the problems the country faces
By Chua Chin Hon Us Bureau Chief In Washington
From a lonely field in Pennsylvania where one of the hijacked Sept 11 planes crash-landed to the small Illinois city where Mr Barack Obama launched his presidential ambition, my job has taken me to some uncommon parts of the United States in the last four years.
The one place I remember above all is a quiet corner of West Virginia called Huntington.
In June 2010, my wife and I spent a week there in an attempt to understand why it had come to be known as the "fattest city in America".
What struck me as our interviews wore on was not so much the severity of the problem - a third to about half the adults were obese, depending on which report you believe - but the sense of resignation in the community.
Even Pastor Steve Willis, one of the city's staunchest health advocates, was conflicted about whether Huntington could genuinely do anything about the larger socioeconomic forces driving the problem - local poverty, entrenched social habits and problematic national policies (government subsidies for corn instead of vegetables or fruit), to name a few.
"I would say that we are not divided on the fact that something needs to be done," he told us in an interview at his church. "I think we are divided on whether there is something we can do to make it better. And many people have told me there isn't something better we can spend our time on because we can't fix this."
This "can't do" attitude that Pastor Willis talked about strikes a deep chord with me because it resonates with much of what I've experienced in Washington, where political dysfunction has sunk to new depths.
Congress and the White House, for instance, somehow cannot agree on new or even modest ways to jumpstart the economy despite four years of unacceptably high unemployment and knowing that at least 12 million Americans are out of work.
A jobs Bill proposed by President Obama in September 2011 went nowhere. Republicans appear to have no new ideas beyond their standard proposals to cut taxes and reduce government regulations.
Meanwhile, efforts to rein in the country's worrying fiscal deficit have become a farce. Mr Obama commissioned a high-powered bipartisan panel in February 2010 to find new ways of addressing the problem, only to distance himself from the report when it was released later that year.
A "super committee" was later formed to produce legislation that would cut government spending by US$1.2 trillion (S$1.5 trillion) over 10 years. The effort failed, and in turn triggered a series of automatic spending cuts due to kick in from this year.
But fearing a new recession, lawmakers passed new measures on New Year's Day to postpone the cuts by two more months. It is unclear what they will eventually do about the spending cuts.
The most frustrating example of this "can't do" attitude in America is the one involving gun control. Even after 20 children and six adults were gunned down in cold blood in a Connecticut school last month, the prevailing view is that Mr Obama's efforts to rein in gun violence will go nowhere.
The National Rifle Association, the pro-gun lobby group, is simply too powerful, many say. Others insist there is insufficient public support for a ban on assault weapons or that Republicans and right-wing groups can never be persuaded to go along with putting a limit on Americans' constitutional rights to bear arms.
A similar vein of excuses runs through other tough issues on the horizon, from climate change to immigration reform.
Yes, democracy is slow and often messy in a big and complex country. I also realise that the US political system is designed precisely to prevent big changes from being rushed through.
But isn't America the country synonymous with the "can do" spirit? I had assumed so.
In fact, I moved from Beijing to Washington four years ago precisely because I was drawn to the idea of travelling around America to cover stories about how the country would reinvent itself following a deep recession and a historic election.
I found the reality check all the more jarring, given the country's undiminished strengths and relentless drive elsewhere, such as in top-class research.
Between 2008 and 2012, arguably the rockiest patch for the US economy in recent memory, the country still managed to produce a total of 31 Nobel Prize winners, more than several of the next best performing countries combined.
The top American companies, from Apple to Google to Facebook, also continued to be fiercely competitive and innovative, churning out products like the iPad that consumers around the world crave.
So what makes Washington uniquely incapable of solving problems?
For starters, that is not what preoccupies both parties most of the time.
When I was covering the presidential campaign last year, it quickly became apparent to me that the cutting edge of American politics was not in the business of governance but in electoral warfare.
Take Mr Obama's campaign team, which faced a near-impossible mission of helping to get an incumbent re-elected in the face of four years of high unemployment and rising public disgruntlement.
They responded by bringing in some of the country's top behavioural scientists to help the campaign figure out how best to counter malicious rumours about Mr Obama and compel their own supporters to turn up at the polls.
A crack team of 300 digital, technology and data experts was assembled in the Obama campaign's Chicago headquarters to try to predict the behaviour of millions of American voters, develop in-house software, and analyse a growing mountain of electoral data.
By some accounts, the Obama campaign's analytics team ran 66,000 simulations each night to try to predict who would prevail in the battleground states.
The Romney campaign did not do any of this cutting-edge technological stuff. But it was exceedingly adept at raising big dollar donations.
Both campaigns raised a record US$2 billion to wage round-the-clock political battles on the airwaves and the Internet, a Herculean feat considering the tough economic times.
Some thought things would change for the better after last year's election since Mr Obama could not run for a third term, thereby removing a key source of anxiety for the Republicans.
Mr Obama famously said last year that he thought the Republicans' all-out opposition to his agenda would break like a fever after the election.
But the signs are that temperatures in the Republican camp are going up, not down.
At a private luncheon last Tuesday, just a day after Mr Obama's second inauguration, Republican House Speaker John Boehner said: "We are expecting here, over the next 22 months, to be the focus of this administration as they attempt to annihilate the Republican Party.
"I do believe that is their goal - to just shove us into the dustbin of history."
Translated, this means Mr Boehner and his Republican colleagues are already gearing up to protect their turf and perhaps launch new offensives for the 2014 and 2016 elections.
This bodes ill for the Obama administration's plan to introduce immigration reforms and tighter gun control laws, to say nothing of even tougher tasks such as entitlement reform.
These days, I wonder whether Washington is still the best place to observe the future of US power and influence, given the endless rounds of futile political posturing and brinkmanship.
As a result of Mr Obama's decision to "pivot" towards Asia - a new foreign policy strategy whose success will depend much on whether the US can get its own fiscal house in order - the view of Washington from Singapore, Beijing or even Naypyidaw might prove far more interesting.
I am looking forward to testing this proposition when I return to Asia. If nothing else, it would be a welcome return to a part of the world where election politics hasn't become a permanent fixture.
firstname.lastname@example.org The writer and his wife, Tracy Quek, have been based in Washington for The Straits Times since 2009 and end their term this month.
Singaporeans' poor social graces a result of a weak sense of community
By Han Fook Kwang
I couldn't find any public dustbins in Taipei where I was visiting about a week ago.
The city was clean and as well kept as any I have seen elsewhere.
But nobody throws rubbish here? What happens if you've a piece of tissue paper you want to get rid of?
Leave it in the pocket?
That's what the Taiwanese do, said my guide. They dispose of it when they get home so they can separate what can be recycled from the rest.
That's really impressive, I thought, especially considering how difficult it is to get Singaporeans to recycle their waste, let alone carry it home with them.
I had to remind myself I was in Taipei, not Tokyo where you expect the Japanese to be ultra civic-minded.
It was one of several surprises about Taipei and its people, which overturned my previous preconceptions about the place.
Truth is I didn't know very much about Taiwan, not having visited for more than 20 years - I was last there on a brief news assignment.
Much of what I knew came from reading the papers and watching the news on television, and it was mostly negative - the unruly politics, fist fights in Parliament, and headline-grabbing melodramatic elections (remember the mysterious shooting of then President Chen Shui-bian a day before the 2004 presidential election?).
There were other revelations from my visit.
At Taipei's MRT stations, commuters waited in orderly, single-line queues for trains, a sight you don't see here in Singapore, and their trains are just as crowded.
(Second reminder - it's not Tokyo.)
But the stand-out observation of my four-day visit was the service at restaurants.
It was better than Tokyo's.
These were not fine-dining places that I visited, where you expect service to be good, but popular ones such as Din Tai Fung and T.G.I. Friday's, both of which are also in Singapore.
I have never experienced such personal, enthusiastic and know-ledgeable service anywhere in the world - and from very young waiters barely out of school.
It was packed in Din Tai Fung, so you couldn't say the exceptional service was because it was a slow day there.
The issue of how to get Singaporeans to be more civic-minded has been an evergreen one because there are too many examples of bad behaviour which have gone uncorrected for too long.
Commuters blocking the way of those getting off the trains, diners not returning their trays at hawker centres and foodcourts, residents not recycling their waste, moviegoers using their mobile phones in cinemas. Many visitors have also commented that the city isn't as clean as it used to be and more people have been caught littering in public places.
The list goes on.
That's not even including how motorists behave on the road - top of my hate list being the way they accelerate instead of giving way the moment they see another driver signalling to get into their lane.
It's often said we're a First World economy but without the accompanying social graces, and that it'll take another generation before we get there.
It was such a refreshing change to visit a city where you could see a qualitative difference in social behaviour and attitude towards one another, and which was not so culturally or economically different from Singapore that it seems like an alien place.
It's how I feel about Japan - it sets a very high standard for courteous behaviour and public-spiritedness but Japanese society is hard to fathom and the social codes are so opaque to outsiders it seems like a world apart.
Singaporeans will never be like them, so there's no point studying how they do it.
But Taiwan is predominantly Chinese, and much more similar to Singapore.
It disproves the point that some people here have made that one reason for the mediocre service in retail shops and restaurants is that Chinese people are not known to be service-oriented, unlike say Thais or Filipinos.
Taiwan proves this wrong.
But if it was just about service, it wouldn't be such a big issue.
A Gallup survey put Singaporeans right at the bottom of 148 countries for lacking emotion and for being the least positive.
You could argue with the flawed way the survey was done, as many critics have done, but it still sucks to be bottom of the class.
More disconcerting was the finding of the World Giving Index two weeks ago that Singaporeans were one of the least likely people in the world (140th out of 146) to have helped a stranger in the past month.
As for giving money to charity, the score wasn't great either - 53rd, and way behind other South-east Asian countries such as Indonesia and Thailand.
I couldn't think of a worse dampener to the year-end celebrations.
Many reasons have been given for Singapore being so far behind in these softer aspects of our development.
Among several: Because we're a fast-paced, competitive economy in a densely populated urban city, people here have less time to be nice to one another. And that we're a society in which just a generation ago, many among our parents came from some of the poorest villages in China and India and who might not have grown out of their peasant habits.
But Hong Kong is just as compactly populated with immigrants from a similar background, yet it ranked 19th in the overall index, 95 places ahead of Singapore.
America is one of the most competitive economies in the world and was rated fifth.
I believe there is a common thread running through societies that do so much better than others in this area.
It has to do with having a strong sense of community and identity among the people, that they are in it together and so have to look out for one another.
It's like being part of a family, no one needs to be told to do his or her part for the other - it should come naturally because the ties that bind are as strong as Mother Earth.
When I asked a colleague who has worked in Taipei what accounts for the behaviour I observed there, she said there were many reasons, one of which was that things became noticeably better as a result of the civic movement during the years leading to the lifting of martial law in 1987.
Those were the years of political and social awakening in Taiwan when the people became more involved and participated more actively in the issues that mattered to Taiwan.
As a result, they developed a stronger sense of Taiwanese identity.
Their politics is often ugly and the economy has been sluggish for some time, but they appear to have made greater strides on the social front.
For Singapore, the challenge is greater than in a homogeneous society like Taiwan.
It is why all those top-down campaigns to get people to return food trays, stop littering, or move to the back of buses will have only limited success because Singaporeans don't feel strongly enough that they are one community and will look after one another.
That's the painful truth and acknowledging it is necessary before progress can be made.
Forging those bonds requires action, not words, from as many people as possible doing things for the common good, and not for themselves and their families. That means a much more vibrant civic society, one where Singaporeans truly believe they have an active part to play in shaping the future of this place.
The more civic organisations, interest groups, non-governmental organisations, charities and volunteers there are doing their bit in whatever area they are interested in, the greater will be this sense of community and ownership.
Conversely, if it's all done by the Government, the weaker the bonds.
But it also requires the Government to respect and support the work done by these groups.
There's clearly much more at stake than just uncleared food trays.
Singapore is to embark on a major review of health-care costs this year. In a new book out next week, David Goldhill analyses what ails America's health financing system, and explains why cost-plus funding leads to higher prices for medical services all round.
IN 1983, the Ronald Reagan administration enacted one of the most significant cost reforms in Medicare's history. The prospective payment system switched inpatient hospital reimbursement from open-ended fee-for-service to fixed fees, paid per diagnosis.
In theory, this would give hospitals the incentive to treat patients as quickly and economically as possible.
The new rules did drive big changes. Since 1983, the total number of days spent by Medicare patients in hospitals has fallen 40 per cent, even as the number of Medicare enrollees has risen 60 per cent. The average inpatient stay is now just over five days, down from 10.
But even an improvement in efficiency of such magnitude failed to slow the cost train. As the number of hospital days declined, the daily charge to Medicare rose to US$1,800 (S$2,200), from US$300.
The prospective payment system is only one obvious example of a long trend.
Most of the major developments in health care - higher doctor productivity, diagnostic scans, new pharmaceuticals, minimally invasive surgery - could be described as increasing health-care productivity. None of these achievements have lowered prices.
WHY not? Strange as it seems, cost is only mildly relevant to the price of care. In the world of health care, cost control is based on the fallacy that there is a fixed amount of care we need. Presumably, the more efficiently it's performed, the cheaper it will be. This ignores how providers actually respond to changes in their business. By focusing relentlessly on the cost of care, we actually drive it up.
To understand why this is inescapable, ask yourself: What would you rather pay for the items you buy - whatever price a retailer charges; or a small amount, say 5 per cent, above the retailer's cost?
Take your time; it's a trick question.
The cost-based pricing seems like the better deal. We imagine going into a store, learning that the merchant paid $10 for a sweater, and buying that sweater for only $10.50. But this assumes that, once you opt for cost-based pricing, the costs will stay the same. In reality, the cost-plus-5 per cent system will change the merchant's economic incentives - so the next sweater the store buys will "cost" far more than $10.
Imagine the impact cost-plus would have on the world's simplest business. Your daughter sets up a lemonade stand outside your house and charges a dollar a cup. (That number just seemed right to her.) She sells 50 cups to people passing by each day.
One day the mayor comes along. He's running for re-election, and he wants to buy a cup of lemonade every week for all 1,000 residents of the town. He doesn't want to pay $1,000 a week, though, so he suggests paying your daughter a "fair" profit of 50 per cent. He knows each cup contains about 10 cents worth of lemons and sugar, so he figures he'll be paying 15 cents a serving.
The moment your daughter agrees to this deal, however, she will try to increase her costs, because higher costs mean bigger profits. She is better off with more expensive lemons and sugar, larger cups (maybe even glasses), an assistant to run the stand and a new Lemonada 5000 mixer, which guarantees a perfect mix of sugar and lemon in every glass.
The mayor is no idiot. He sees what is happening, so he renegotiates his deal. From now on, he'll pay her costs plus 5 cents a cup. Unfortunately, this also creates perverse incentives. Your daughter can make more money by reducing the size of each cup. Or she can cut back on customer service, hygiene or speed. Or she can cut side deals with her vendors: The lemon seller can raise his prices - passed on to the mayor - and share the proceeds with your daughter.
The cost of manipulation
BIZARRELY, a cost-based pricing structure actually adds a new major cost: the effort it takes to track, manipulate and justify costs. In a US$2.5 trillion industry such as health care, these activities are a big reason that administrative costs exceed US$300 billion a year.
An Economist article on dialysis perfectly illustrates the inflationary impact of cost-plus pricing. Because United States clinics are paid on a cost-plus basis, they prefer expensive drugs to cheaper ones. In fact, many appear to order drugs in units that exceed what a standard dosage requires, because they can charge the government for the waste. The article noted that many clinics preferred an injected drug with a price of US$4,100 a year over the identical drug in oral form, priced at only US$450 a year.
Not surprisingly, the manufacturer of the oral drug responded by increasing its price above that of the injected version, to make it more competitive.
America's entire health-care system suffers from what I call the cost illusion - the idea that a service has a long-term fixed cost. But every cost is merely someone else's price. And over time, costs themselves are also determined by prices.
What is the cost of orthopaedic surgery? It is the sum of all the costs of the underlying components - the surgeon, anaesthesiologist, nurses, hospital, device, tests and drugs.
But how are these costs determined? Let's look at the orthopaedic surgeon. We may believe there is some objective way to measure the cost of his time - a fair return on his years of education or training, say. In reality, the cost of the surgeon's time depends on the value of orthopaedic surgery to patients. If more patients need it, the surgeon's time becomes more valuable. In a free market, there are two ways the cost of his time could decline: more orthopaedic surgeons fighting for business, or patients benefiting less from orthopaedic surgery.
In an administered market such as health care, on the other hand, our surrogates - insurers and Medicare - substitute their calculation of cost for the workings of supply and demand. This has the strange effect of preventing costs from ever falling.
Let's say Medicare sets the reimbursement rate for a hip replacement at US$15,000. Now say a new drug is invented that makes hip replacements less useful. In a free market, the price would decline. But in an administered system, these prices are viewed as costs, and once set, there is no mechanism to lower them. A hip replacement still takes the same amount of time from surgeons of the same degree of expertise, so the cost must still be $15,000.
In health care, America's system is designed to shield patients from even knowing the prices. Unfortunately, a world without prices is also one that can't achieve the purpose of prices: the allocation of resources to match what consumers want.
Five weeks after my father died from a hospital-borne infection in the intensive care unit of a New York City hospital, my mother received a bill for his treatment - US$635,695.75! The bill was broken down into 17 items. Had I booked dad a room at the most expensive hotel in town for the five weeks of his illness, filled the room with a million dollars' worth of hospital equipment leased for US$15,000 a month, given him round-the-clock nursing care, and paid a physician to spend an hour a day with him (roughly 50 minutes more than at the hospital), it would total roughly US$150,000.
That leaves US$500,000 left over for, say, drugs (billed at US$145,431), oxygen (US$41,695) and blood (US$30,248).
This comparison with actual prices is absurd, of course, because it assumes that the prices on my father's bill were real prices. No one was actually supposed to pay that bill. The prices didn't even bear a relationship to the exchange of funds for dad's treatment. The hospital billed my mother for her share (US$992), which she wisely didn't pay and the hospital wisely didn't try to collect. Medicare paid the hospital according to its concept of the hospital's cost. Of course, there's no question what the competitive price would be for the service of killing my father: zero.
A STUNTED price system also distorts investment in new treatments. US pharmaceutical companies spent roughly US$67 billion in 2010 on research to develop new drugs. But many of these new drugs target conditions for which perfectly good drugs already exist. It is the lack of consumer prices that explains their me-too approach.
Once a new drug is approved, it enters the marketplace at a high reimbursement rate, compensating the manufacturer for its expensive research. So what's the punishment for entering a crowded market? Very little. Furthermore, even with a promising new entrant, the prices of the existing drugs don't decline; they have already been set to compensate for their "costs". In any normal market, a new entrant would bear not only the risk of being rejected, but also the risk of a price war.
Administered pricing also explains why America's health-care industry has spent far too little on information technology. Your dry cleaner computerised his inventory system because losing a shirt may mean losing a payment or even a customer. But a doctor who invests in state-of-the-art patient data management can't charge higher prices; insurers won't pay. Nor is there a market mechanism to force hospitals that use paper records to accept lower prices - they don't benefit from being more efficient. So the investment is never made.
If we, the consumers, saw and paid prices, we would be looking at a very different industry. My guess is that many of us would pay only for doctors who spend more time talking to us, providers who invest in computerised records, genuinely better treatments rather than me-too drugs for chronic conditions, and hospitals that kill fewer patients. The writer is president and chief executive of cable TV network GSN. This is an excerpt from his new book, Catastrophic Care: How American Health Care Killed My Father - And How We Can Fix It, to be published on Jan 8 by Alfred A. Knopf.
The ST reprint above was just part 1. The whole series are here: