TOPIC I: Health & Education

TOPIC I:Health & Education TCD M.Sc.(EPS) – Ronan LYONS – EC8001 Irish Economic Policy ISSUES & Context

Module Outline

Reading & Data • Economy of Ireland: Ch. 12, 13 • Other readings • OECD, Health at a Glance: Europe 2014 • OECD, Education at a Glance 2014

Topic I: Structure Health & Education • Context • Health: Financing • Health: Delivery • Education: Financing • Education: Delivery • Future-proofing

Bulk of Public Consumption • GDP = C+I+G+NX • Government spending in three parts • Transfers (redistribution), ~35% of all spending • Capital (part of I), ~5% • Consumption, ~60% • In Ireland, about 2/3s of “G” is accounted for by two departments • Health • Education Source: Dept of Finance / Budget 2015

Structure for Analysis • Headline outcomes • Role of the Government • Funder • Regulator • Service provider • Dimensions of the system • Financing • Delivery • Issues arising • Common themes

Headline Metrics Life expectancy at age 65 (in years) Early school leavers (% 18-24 NEET)

What Kills People? Death rates per 100,000 Ireland, 2001-2010 Death rates per 100,000 EU15, 2001-2010

Deaths in Ireland vs. in EU • Deaths rates in Ireland fell by 25%, 2001-2010 • Vs. 17% fall in EU-15 • Rate now ~4% above EU-15 average, vs. 18% in 2001 • More than three quarters of all deaths in Ireland fall into one of three broad categories • Heart disease (36%), cancer (29%), and lung disease (13%) • Death rate due to these three has fallen from 1.1% to 0.8% - account for almost all the decline in Irish death rates • Heart/cancer death rates ~8% above EU average • Lung disease deaths 56% above EU15 average • Was 130% above, as of 2001 • Accounts for Irish-EU15 difference

Headline Education Metrics % of 25-34 cohort with tertiary education Pre-primary school enrolment (%)

Education: Ireland vs. Elsewhere • Four levels of education: • Pre-primary • Primary • Post-primary / secondary • Tertiary • Ireland’s relative performance – measured through enrolment rates – varies by sector • Worst at pre-primary • Best at tertiary

Why is Health A Public Service? • Cf. discussion about why regulation at all • Intervention in healthcare typically justified due to asymmetric information and uncertainty • Asymmetric information • Principal/agent problem – patient/consumer must rely on service provider to act in their best interests • Knowledge-intensive good, cannot sample • Uncertainty • Lack of predictability means role for insurance… principal/agent problem reversed: adverse selection • Also moral hazard: change in behaviour once insured – limits to user fees?

Why is Health A Public Service? • Other reasons for state involvement… • Externalities • Socially under-provided goods, e.g. vaccinations • Socially over-provided goods, e.g. cigarettes, alcohol • Equity and distributional concerns • Equality of access? (E.g. based on need, not income) – issues of measurement • Equality of health outcomes? • A natural monopoly? • How prevalent are economies of scale in the sector?

Four Main Ways of Paying • Government grant/general spending • Limited price information – impact on resource allocation? • Public insurance / social security • Services priced but collective taxpayer funds • Role of society in pooling risk • Private insurance • Typically regulated to prevent cherry-picking • Or supplemented by public ‘safety net’ • Out-of-pocket • Can be as per private sector: pay-as-you-go • Also, capped user charges (prevent wasteful demand)

Public Insurance-LED Health Systems most common in Europe Of 35 countries, 22 have health system financed largely through social security – most of the rest (e.g. UK, DK, SW, IT, FI, ES, IE) are financed mostly through direct government spending

Private Health Insurance • Current principles in Ireland: • Open enrolment (insurers cannot refuse anyone) • Community rating (all face the same premium) • Lifetime cover (policy cannot be terminated) • Issues – community rating & risk equalisation • Transfers to the VHI: what incentives does this create?

Simple Schema of Irish Health Hospitals In-patients Day-patients Primary Care Public & Voluntary Hospitals Public monies as % of revenue Low  High GPs, Dentists, Pharmacists, … Private Hospitals

Delivery of Health Services • Current Irish healthcare system dates from 2005 • Funder: Central Government (DPER) • Regulator: HIQA (monitoring and enforcement; D/Health: strategy) • Service provider: HSE (plus non-gov organisations) • Spend on “Health Vote” in 2015: €13.5bn • Dept of Health: €202m • Of which regulatory bodies (incl HIQA): €56m • HSE: €13.3bn (gross; €11.9bn net of social insurance) • €9bn: grants to 4x HSE regions and voluntary hospitals • €2.4bn: primary care reimbursement schemes • €0.9bn: long-term residential care

Structure of Hospital Services • Three types of hospitals • Public (run by one of four regional bodies within HSE) • Voluntary (run not-for-profit, typically by religious bodies) • Private (typically for private insurance consumers) • Public and voluntary hospitals may take private patients • Conflicts in resource allocation? • Caps for 20% of in-patients and 30% of day-patients • Of €13.3bn spent on healthcare… • €0.5bn in capital services • €5.5bn on 96,600 employees • €0.5bn on 41,000 pensioners

Issues Arising… • Ireland’s health conundrum: • Significantly fewer retirees as % of population • Relatively high health spending per capita • How are resources allocated within the system? • Concerns about black box of gov spending

IS Irish HealthCare Over-Staffed? • Why is Ireland’s healthcare system so expensive? • HSE is the country’s largest employer • More (professional) nurses per capita than any other EU country • But “excess labour” does not appear to be an issue in all parts of the system • Fewer doctors than most EU countries

…Or Understaffed?

Reforming Healthcare • Four major health reforms in 2011 Programme for Government • Free GP care • Universal Health Insurance • Replace HSE with independent hospital trusts • ‘Money follows the patients’ • Items (1) and (2): equality of access – is there a conflict in funding mechanisms? • Moving towards general gov funding in one, away in other? • Items (3) and (4): efficiency and resource allocation • Just because risk-pooling is needed, black-box spend need not follow

Active Policy Debate…

As before, why a Public Service? • Rationale for government intervention in education typically has two components • Incomplete capital markets • Despite large private returns, inability to borrow against future higher earnings (e.g. due to lack of collateral or perhaps moral hazard?) • Positive externalities • Regardless of the scale of private returns, large social returns means that the sector should be heavily subsidised

Does Balance of Spending match Balance of Benefits?

Returns may vary by level • Pre-primary • Increasing evidence that inequality stems from earliest years • Primary education • Almost entirely free and universal • Basic interaction with society • Post-primary education • Largely free and increasingly universal • Ability to work • Higher education • Significant private returns – financing the issue Overview of Heckman research findings

Signalling vs. SKills • Correlation vs. Causation • Extra year’s education should not just signal higher ability – it should cause higher ability • What is the causal impact? • A much studied topic in economics • In the UK, estimated male/female returns are 13%/11% for GCSEs, 17%/19% for A-levels and 10%/30% for degree The usefulness of twins • A 2002 study used 400 sets of identical female twins to measure the effect of education on earnings • Their best estimate was that one extra year of education boosted earnings by 7.7% Source: Bonjour et al, 2002

Rationales for Intervention… Source: Psacharopoulos & Patrinos, 2002 • Incomplete capital markets • Banks could offer you loans with 5% interest... But they don’t • Behavioural economics • People have “debt aversion” • Social returns • What if society benefits from individual education?

Third-level fees: the trade-off is fairness versus competitiveness Fairness Why should those who don’t go to college pay for those who do to earn significantly more than they will? Competitiveness But if those who don’t attend college also benefit, e.g. through FDI or a smarter electorate voting in better government, maybe they should also pay?

Ireland’s highly skilled young people...

... Are one of Ireland’s main selling points to FDI

3rd-level fees: four main options • Fees for none – the status quo, taxpayer pays • Pro: no “barriers to entry” at age 17 • Con: barriers may exist long before that; taxpayer also sets price (underfunding); not progressive • Fees for some – below certain means, no fees • Pro: progressive • Con: means-testing difficult to do fairly; any threshold arbitrary

3rd-level fees: four main options • Fees for all with cheap credit: e.g. 1% loans, conditional on earning over a certain amount • Pro: very fair – unlikely that people will earn less deliberately; allow colleges to set fees that reflect costs • Con: debt aversion, a “barrier to entry” • Fees for all with no debt: a graduate tax • Pro: fair, allows realistic fees (tax could vary by course) and overcomes debt aversion • Con: emigration; marketing/PR – taxing something good • What about the government taking an “equity stake”?

An equity stake Debt versus equity • Debt: a commitment to repay a certain amount • Equity: a share in profits, no return if losses • “Debt-for-equity” swap: if a large business runs into trouble – but has a viable long-term future – its creditors may agree to a debt-for-equity swap • Similar to “a bondholder haircut” Equity in education • Debt aversion comes down to the fact that we live in an uncertain world • Why take on debt (i.e. have to repay) if your return is not certain? • Instead of lending, perhaps the government could take an equity stake • Outcome would vary individual by individual… but cohort should see 10% return

Example from Social entreprise

An Absence of Economiesof Scale Globally? Source: Education at a Glance, 2014

Higher Education in Ireland: Resource Allocation

Third-Level Resources: Teaching • Two core activities • Teaching (undergraduate and postgraduate) • Research (applied and basic) • Issues at undergraduate level • Very little connection between resources required to teach and the price signal (cf. reliance on “registration fees”) • Next to no control over quantity or price • Issues at postgraduate level • E.g. of proposal to double intake for a TCD school’s MSc… hiring freeze means extra admin could not be supported • Incentives: Where does money from postgraduate enrolments go? (And what impact does this have on recruiting effort?)

Third-Level Resources: Research • General staffing • Decisions go from DPER > HEA > TCD > Faculty > School > Discipline • E.g. of TCD Dept of Economics: demographics and “flight of Asst Profs” during austerity • Research • Career progression is based on research (more than teaching) • Travel, research assistance, hosting conferences… • (Cf. ERC!) World’s smallest violin

Common Issues #1: No Free Lunch • Much of post-war welfare state – in particular pensions and health – was based on implicit demographic assumptions • Systems are now creaking as populations age • Move from liabilities-driven to asset-driven system • Use lifecycle to amass resources required (mean) • Use society to pool risk (standard deviation) • E.g. of Lumni: ‘law of large numbers’ • Average returns enough to attract capital • At individual level, decision reflects costs and benefits

Singapore’s Medisave system • Complicated system – but with a few core principles • Compulsory family savings through payroll deductions • No healthcare service provided free of charge – resource allocation • Savings subsidize treatments • Can choose one of three levels of subsidy • Similar to a PRSA/pension fund… for health • Young have less need to draw down

Common Issues #2: Agglomeration • Move to independent hospital trusts means health landscape likely to be similar to education • Large-ish (10-30) institutions of scale competing with each other • To what extent are there increasing returns to scale in health and education? • E.g. cancer centres of excellence • E.g. cluster in nanotechnology • Specialization requires some element of ‘market power’ • How will this manifest itself in Irish health and education sectors?

Link Between costs and benefits Who pays for the hospital if it is kept open?

Common Issues #3: Tradeability • Technological progress consistently redefines what is tradable • E.g. of steamship & 1870s grain invasion: previously only high value-to-weight goods • More recently, “servicization” and services trade • Health and education are both information-intensive goods • The Internet is (almost exclusively) about the exchange of information in its many different forms • E.g. of “robot surgeons”

TOPIC I: Health & Education