Economics 101: Why GCC healthcare costs are a special case

The unique features of the Arabian Gulf healthcare market pose a tough challenge for the region’s health ministers. What lessons can GCC governments learn from the Trumpcare-versus-Obamacare drama?

Donald Trump wants to dispense with Obamacare’s 'individual mandate'. Olivier Douliery / AP Images

In 2015, the GCC healthcare economy was valued at US$40 billion and that figure is expected to grow to US$71 billion in 2020. The prevailing system of heavily subsidised health care needs reform because of rising medical costs – what lessons can the Arabian Gulf governments learn from the Trumpcare-versus-Obamacare drama?

Health services are a highly complex issue, which leads us to the most obvious – albeit unsatisfying – lesson to be drawn by GCC policymakers: even the best health systems suffer from major flaws and the unique features of the GCC healthcare market pose a tough challenge for the region’s health ministers.

Most GCC citizens would agree that people should be responsible for paying for their own apples, laptops and haircuts and that these goods and services should be purchased from private suppliers. Competition among retailers will help keep prices low.

Yet, at the same time, the same citizens are likely to favour health care being paid for by the government, and possibly even provided by the government, via public hospitals and clinics.

Why do people think that health should be different?

First, some forms of health care, especially emergency treatment for life-threatening conditions, are incredibly costly to deliver – most people could never save up enough money to pay for their treatment after a serious car crash. However, since it is very unlikely to happen to be needed by any one individual, we can use an insurance scheme, whereby you pay a small premium and all the small premiums paid can be used to pay for the treatment of those unlucky few who suffer a car accident. So far, the government does not need to get involved – the insurance can be completely private, just like house insurance.

Car crashes are special in that if 100 people apply for health insurance, the company cannot predict who will suffer from an accident in the following year. The same is not true of medical conditions that are known to the insurance company when you try to buy the insurance but that are still essentially an accident, such as leukaemia. When someone known to suffer from the disease tries to purchase insurance at the low premium, it is profitable for the insurer to reject that person, since it knows that they will require a lot of expensive treatment, unlike the future car accident victim, whom it cannot identify – and exclude – in advance.

If these conditions are still rare, then in principle, private insurance can still provide a cost-effective solution. However, how can you prevent private insurers from turning away sufferers? There are two options. The first is legally preventing them from conditioning premiums on the pre-existing medical conditions of customers, which is what Obamacare does. The second is for the government to become the healthcare provider, taking out the profit motive.

The problem with the latter choice is that you forgo the benefits of competition. Government providers have very little incentive to offer a dynamic and innovative service; relying on the moral integrity of doctors and nurses will only get you so far. That is why Obamacare prefers forcing competing private insurers to insure the unwell.

The problem that creates is that the customer base will be skewed toward people with conditions that require expensive treatments. Every time one of them becomes a company’s customer, it has to raise the premium on all its customers, which may make some of the super healthy ones drop out, preferring to keep their money and take their chances. This further decreases the revenue with which to fund the treatment of the sick, forcing the company to raise premiums even more, and so on, until it may even become too expensive for anyone, and the market collapses.

One solution, embodied in Obamacare, is to force people to buy insurance, no matter how healthy they are, to prevent this process of market unravelling. This “individual mandate” helps maintain the benefits of competition.

Republicans oppose this, however, because they regard it to be an infringement by the government on individual liberties – it is forcing you to buy something against your will. Trumpcare partially tries to dispense with the individual mandate.

Matters become a lot more complicated for proponents of Obamacare, Trumpcare and government provision when you factor in that as people get old, they all start to require expensive treatment and we keep discovering increasingly expensive ways to keep people alive for a little longer. Unlike car crashes, or rare genetic illnesses, there are not enough young, healthy people to balance the insurance market, especially as birth rates decline. While societies easily accept that not everyone can have a Ferrari, it is much harder to accept that not everyone can live.

One thing that Obamacare does do is expose how expensive health care is.

Since Gulf citizens are not taxed in the traditional manner, many would prefer to avoid this cost and require the government to bear it, even if it means lower-quality service. But falling oil prices and demographic changes mean that such a system is unsustainable in its present form.

And therein lies one of the unique challenges for GCC policymakers. US policymakers are trying to structure the market in a way that allows those willing to pay a reasonable fee for health care to be served.

In the GCC, there is the added difficulty of getting people who have never paid for health care to understand the need for them to start contributing, either directly via private insurance, or indirectly via value added tax.

Throughout the month of April, in my columns on this page, I will dig deeper into why solving the healthcare conundrum is a Herculean task.

We welcome economics questions from our readers via email ([e-mail]) or tweet (@omareconomics).

Omar Al Ubaydli is programme director for international and geopolitical studies at the Bahrain Center for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University.

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