Is Healthcare An Economic Problem?

By Gerrit Van Wyk.

As Rich as Croesus.

There is a myth about Midas washing his hands in the river Pactolus to rid himself of the Midas Touch, which turned its sand into gold. King Croesus later became super rich from mining the gold, which gave him an inflated self-opinion. Solon the sage warned him against this, but he ignored the warning, which is why he misinterpreted a message from the oracle at Delphi not to start a war against the Persians, which lead to his downfall.

Reports about a health care system in serious trouble is now an almost daily occurrence, and the refrain is we need more money, doctors, and nurses to save it. Provincial premiers regularly ask for more Federal money, and within provinces many hungry chicks are screaming for the dollar worms. For many years I believed, wrongly, the health care problem is a lack of money.

A health care need is something you must have to prevent suffering harm, disability, or death, whereas a want is nice to have, with no serious consequences if we don’t get it. The first economic problem is health care has finite needs but infinite wants, which in economic terms means there is infinite demand. It means even if every single dollar in the country’s budget is spent on health care, it will never be enough. In others words, pumping more money into health care doesn’t solve anything.

In some countries budgeting works differently. They determine how much money it can afford to spend the next year, and leave it to the health care system to divide it equitably. Oregon State in the US came up with a plan to do just that in the early 2000’s. They struck a committee representing a wide spectrum of interests, including patients and physicians, who ranked diseases in order of needs and then wants. The average cost per treatment and number of cases are known for previous years, and based on that, a decision can be made at which lines funds will run out, which is adjusted up or downwards on succeeding years. It turns out doing this leaves no needs unfunded. There is a socio-cultural issue at stake determining whether the approach works; if there is no political and decision making will, and people from different interest groups can’t sit down and talk things out, the approach fails, which is an indictment of that society.

Based on the economic theory of supply and demand, the argument is more doctors will lead to more competition which will drive costs down. That shows a complete lack of understanding of the health care system. Every new provider creates more demand, and given infinite wants, it drives up the cost to the system. Secondly, health care is a service industry, hence payroll makes up about 80% of expenses, and adding to that drives up the biggest cost item. We don’t need more human resources; we need to use what we have better, and to do that requires a fundamental rethink of the industry.

A third problem is economic theory assumes health care is a free market which it isn’t, it’s a monopoly, hence free market principles don’t work in it. In Canada, there is only one company in the market; the provincial governments, no one else can enter the market, and there are no product substitutes. Many argue the solution is private health care to break the monopoly, but private companies compete by driving up wants which drives up cost. Physician supply is also monopolistic; it’s difficult to get into medical school particularly if you are disadvantaged and a medical education is very expensive, and regulating Colleges serve to protect physicians from competition. Efforts are made to substitute physicians with nurse practitioners and pharmacists, but there is no evidence they contribute to lower costs.

After the financial crash in the 1970’s driven by the oil embargo, the idea arose that to control escalating health care costs, managers are needed to manage the industry, which changed its face (some may say defaced it). Providers should stick to what they do best, and university educated managers would think for them concerning everything else. That spawned generations of leaders and decision makers hammering away at the square pegs taught at business school, trying to force them into the round holes of a health care system that cannot be understood as a simple management problem.

As Mintzberg pointed out, modern technology is a bigger problem to health care than money. We now have the technology to fulfill many health care wants, but the cost of researching and manufacturing that technology and selling it at a profit drives up cost. The trouble is, there is little if any evidence the technology is of any benefit, and that remains undiscussed and unchallenged. We keep making things we cannot afford for fulfilling wants we don’t need. That’s fine and dandy for a consumer society but doesn’t work in an industry to which the model doesn’t apply.

If you take just 6 health care cost drivers; budget constraints, physician supply, unlimited demand, high-technology hospital-based care, over servicing, and the ageing population into account, and consider their interactions as part of a complex entity driving cost, it looks like the diagram below.  Note the list is incomplete and the actual complexity therefore significantly more.

I challenge all academically trained managers, leaders, consultants, bureaucrats, etc. to convince me their simplistic solutions to tame costs will work on something as complex as this.

There is a saying that if all you have is a hammer everything looks like a nail. The oracle says if the only way we look at the health care problem is from an economic management perspective, like Croesus, we’ll fail. As we speak, this is what decision makers are doing, and until they change, we won’t fix the problem.


The Vancouver Sun reported on October 31, 2022 that the Government of British Columbia in Canada announced a historic increase of 54% in compensation for family practitioners in response to the ongoing doctor shortage. In other words, the thinking is if we pay more, more doctors will stay, delay retirement, or migrate here from other provinces.

But health care is a system and complex, and it doesn’t appear as if the BC government and physician leadership considered the consequences of this decision. If you look at the attached system dynamic diagram, this decision could play out as follows.

Increasing compensation also means a budget increase for the province. It means taxes must increase, or, alternatively, other services or health care services must be forgone to make up for the shortfall. The Doctors of BC President was quoted as saying the new fee structure could attract doctors from other provinces, which would aggravate their own shortage. Alberta already indicated it may respond by increasing physician compensation there to counter that threat, which other provinces are likely to follow. Since the net effect is the same everywhere, it means the cost of health care Canada-wide may increase, to which provinces are likely to respond by pressuring the Federal Government for more money. Which means the increase of Federal taxes or curtailing of Federal programs.

The underlying economic model here is of provinces in competition with each other for a scarce resource, namely family practitioners, which, by definition, drives up cost. We would have been better off had we cooperated in solving the problem differently.