Thoughts on economics and liberty

The proper role of government in health

(Published in Freedom First, January 2010)

A government has three core functions: defence, police and justice. These are vital for ensuring our life and liberty. After these are provided for, we must take on the responsibility, as citizens, to look after our health through appropriate diet, exercise, and risk management – such as by taking health insurance and steps to prevent accidents. There does remain, however, a small (second-order) role for the government in ensuring our health. This month I explore this role and suggest its proper boundaries.

Emergencies and poverty

It is possible that despite our best preventative efforts, we can become involved in a severe traffic accident that makes us unconscious. The free society must ensure that under such circumstances, all of us are able to receive the best treatment without demands being placed on us (when unconscious!) to show our insurance documents. Indeed, the free society cannot turn away even those who have not insured but who land up in critical condition on the doorsteps of a hospital. Other life-threatening events such as natural calamities require a similar emergency response. Indeed, even foreigners injured in accidents should be treated till they recover their senses and can make the necessary payment through their travel insurance.

Then there is the matter of poverty. In my May 2009 article in Freedom First[1] I showed that the state should ensure reasonable equality of opportunity. That would include the elimination of poverty. But providing money for food isn’t enough. To ask the poor, who can barely purchase enough food, to buy their own medicines will force them to go to the village quack and receive dangerous concoctions, or worse: witch-doctor ‘treatments’. They may also sell themselves or their children into bonded labour. No free society can countenance that. Lastly, the government has a role in vaccinating citizens against communicable disease and in providing succor (including healthcare) during natural calamities.

We therefore need a social insurance scheme that would do the following:

a) pay those below the poverty line a small additional sum (as part of the negative income tax payment) to empower them to bear the routine costs of minor healthcare;

b) ensure universal emergency hospitalization, including healthcare in natural calamities; and

c) vaccinate every citizen against dangerous pandemics where such a vaccine is available.

Beyond these interventions, the state clearly has no role in healthcare. Everyone must take out private health insurance, self-insure or depend on charity, for all other health requirements.

The minefield of healthcare

Provision of healthcare is bedeviled with serious problems that need to be understood, isolated, and overcome. Medical ignorance is frightening: doctors and scientists don’t have the correct answer for many serious health problems, and test results suffer from Type I and Type II statistical errors. As a result, doctors can differ dramatically on their diagnosis. Even where they agree on a diagnosis, their approach to treatment can vary significantly. To compound this confusion is the multi-faced problem of asymmetrical and incomplete information. People don’t disclose the necessary information to health and insurance professionals from ignorance, inability: or worse – they sometimes tell lies.

To this game of blind-man’s buff that is known as healthcare we should add normal human error and bad decision-making. In the end, while doctors manage to cure most patients (or rather, the body cures itself in most cases), in some cases they actually exacerbate health problems. This happens through misdiagnosis – which allows simple things to grow into dangerous proportions – or by passing on dangerous germs to their patients, or by operating on the wrong organ or even on the wrong patient! Finally, there is human greed. Health practitioners (like all ‘normal’ humans) have strong incentives to squeeze out profits from others. They may do so by asking patients to purchase irrelevant medical tests and treatments.

If to this mix of utter confusion we add a government bureaucracy, we are certain to get huge cost blowouts and corruption – a Frankenstein that will eat up its creator. Indeed, that is typical of most Western country health systems today. The entire West is now creaking under the weight of its badly designed health systems. Never empower a bureaucracy, and remain focused on the precise outcome at all times: that is the key message.

Delivering universal emergency hospitalisation

The design of universal emergency hospitalization must take into account these insidious incentives and undercurrents of human nature. The right way to ensure this objective is to give this task to the private sector, calibrate its incentives to ensure that it delivers the desired outcomes; and monitor it independently, punishing it for non-delivery and rewarding it for exceeding the requirements.

In my book, Breaking Free of Nehru (Anthem Press, 2008, I suggested an effective model that I will also outline here. As a first step, India’s geographical area should be carved into reasonably sized regions. A contract for the provision of universal emergency hospitalization should then be put out for tender. Emergency coverage during routine floods, minor earthquakes and ordinary cyclones should form part of the contract (vaccination coverage can be added but it is better to do so through a different contract). Private health consortiums capable of providing the prescribed services to everyone who needs such treatment in the region should then be requested to quote a flat (i.e., per capita) price. This per capita price would effectively become the social insurance premium, to be collected through the tax system.

In making their bid, these consortiums would need to consider the local costs of living, local disease patterns, predictable natural calamities, the difficulty of appointing doctors to remote areas, etc. The lowest (or fittest) bid must be awarded the long term (say 30-year) contract. The agreed amounts would be paid annually, indexed to the population size and inflation, and subject not only to agreed outcomes but to a productivity improvement factor.

A long-term contract will allow the successful bidder/s to establish low-cost, innovative hospital networks or to otherwise negotiate with service-providers to ensure the delivery of the contracted services. Making a per-head payment (i.e. not a reimbursement payment) will avoid wasteful debates about actual expenses, and eliminate unnecessary transaction costs and mindless bureaucracy.

Independent private bodies (more than one, each specializing in a different area of health specialisation) should then be funded to assess, monitor, and certify the delivery of the prescribed services. Financial penalties must be imposed on hospitalisation providers for non-compliance with delivery standards.

The administration of the system will, of course, need to be done well. For instance, migration flows (including part-year migrations) will need to be monitored, since these impact on the payments. After the system is fully operationalised, the current government machinery of hospitals and primary health centres can be shut down, and its assets auctioned off.

Freedom Team of India

The Freedom Team (, or FTI) has now completed six months of its formation as a legal entity. It is, however, well short of its target of leaders. Finding genuine citizens in India continues to be a major challenge. I seek your active involvement in helping the team find good leaders. The Team has now opened a bank account. Please donate liberally to FTI if you are not yet in a position to become a leader yourself. Let’s work towards a successful 2010 for FTI and for India.

[1] Available at:


Addendum (notes on health policy)

Some outstanding methods to improve medical diagnoses at low cost: Gut Feelings by Gerd Gigerenzer, Penguin, 2007, p.167

This blog post is related to this subject:



When communism comes to health care (as it has in most parts of the Western world in the name of the welfare state), communist incentives WILL kick into place.
The only way for this rot to stop is for government to ENTIRELY and comprehensively get out of medical care. Only one point of support: for the very poor. By having massive middle class welfare, the West has created huge and unrelenting bureaucracies (I commented on this in Catallaxy Files the other day). [My FB comment on this article]


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Sanjeev Sabhlok

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4 thoughts on “The proper role of government in health
  1. Nitin Gulhane

    Healthcare for everybody is very close to my heart…however, it is almost impossible in a large and poverty struck country like India. I agree with you on most points. Let me think over it.
    Thanks!  I am going over your writings slowly and finding it more and more interesting.

  2. Rahul Agarwal

    Mr. Sabhlok I am undergoing a situation right now, wherein I’m having a hard time purchasing a healthcare policy for my grandmother due to the fact that the various insurance companies refuse to grant her a policy as she has pre-existing conditions. Until last year, we had been paying around 1.4 lacs/ annum as a premium for my 83-year-old grandmother. Due to an outbreak of viral flu in Delhi last September, she had gotten hospitalized for 10 days so that her stay there, incurred a bill of around 3 lacs. The company refused to pay as they claimed they had found a pre-existing condition which I hadn’t disclosed to them during the time of policy purchase a year earlier. Taking this into account, not only did they refuse to pay for the bills, but they eventually terminated my policy. Had I shared the information of those specific conditions during the purchase of the policy, they wouldn’t have given her the policy in the first place. My grandmother after her policy, became uninsured again. We tried other companies for a new policy after this incident, but none of them would let us buy policy from them because of her pre-existing conditions from a couple years ago and some newly developed ones from recent time. How could you have helped as a lawmaker to ensure the purchase? Shouldn’t the private healthcare industry be regulated so that they can’t deny anyone from buying a policy out of his own pocket? By the way, the only conditions undisclosed to the company were a leg surgery and a cataract procedure of both eyes. Couldn’t we introduce and pass a healthcare bill for regulating these companies adequately so as to avoid such a situation? Please repond.

  3. Sanjeev Sabhlok

    Absolutely agree that the health insurance industry will need to be regulated. There are a very large number of issues involved in private health insurance so one will need a position which balances the profit motive of the private companies with the interests of consumers. It is not appropriate to regulate that they can’t deny insurance at all. That would mean that people would not take insurance when they are young and fit but only take insurance when they are old. That is not sustainable. However, one thing is clear – that the government should not run its own health insurance scheme like they do in Australia, which means that many people choose not to be insured at all, thereby unravelling the health insurance industry. Only those desperately below the poverty line should be provided insurance cover (through premiums) by the government. For the rest, if they’ve not taken insurance, they need to sell off all their assets, and only after they fall into desperate poverty should the government pay for their insurance.

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