Abstract

Externalities, asymmetric information, and free-riding are three market failures to be concerned with in an insurance-based healthcare system. Switzerland has tried to address them through a mix of private and public forces, where healthcare producers mainly consist of private companies, while the government and Swiss people influence the market through regulations and subsidies. This paper assesses the concerns and impact of market failures in the healthcare system of Switzerland, and suggests that it adequately addresses some of the market failures’ inefficiencies.

Introduction

Healthcare in Switzerland

Switzerland is a relatively small and wealthy country that, despite not being a member, has strong connections and is somewhat integrated within the European Union. In terms of GDP per capita, Switzerland is ranked fourth in the world and has been amongst the world’s most prosperous countries for many decades. The Swiss population of 8.7 million people is similar to that of Sweden, although inhabitants are more geographically concentrated as Switzerland is much smaller in size (World Bank 2022). Switzerland’s economic system is largely based on a private market economy, where the portion of public spending is well below the OECD average (OECD 2021). Both historically and currently, Switzerland has had a unique decentralized political system, where the people have direct influences over policies through their direct-democracy approach. Decentralization characteristics are also found when studying their healthcare system. For hundreds of years, local cantonal governments have been the core providers and funders of healthcare in Switzerland. This extensive decentralization in healthcare has been diminishing over the years due to national policies. For instance in 1994, the Swiss government adopted the Federal Law on Health Insurance, providing the foundation to the now mandated national health insurances and resulted in a more homogenous healthcare sector within the country (World Health Organization (2011). 

There have been two major comprehensive reports published on the Swiss healthcare system by the World Health Organization (2015) & OECD with the World Health Organization (2011), that assess the institutional arrangements and performance of their system and describe their system similarly. Switzerland’s healthcare system consists of a mix of private and public forces. At its foundation, it is a health insurance market approach. While most of the financing of the healthcare sector in Switzerland is through private means, the conditions for the market are significantly determined through a variety of public institutions. According to the World Health Organization (2015), these institutions consist of: (1) Three levels of government (the confederation, cantons, and municipalities); (2) Private organizations representing the interests of insurance- and healthcare providers; and (3) the Swizz people who can vote and veto reforms through their direct-democratic voting system. The main characteristic of Switzerland’s healthcare system is the insurance market approach, as opposed to many other European countries’ (including Sweden) systems of providing healthcare primarily through the government. While most of the insurance costs are privately funded, the government ensures basic healthcare access to everyone by mandating everyone to have at least the basic health insurance, while additional insurances for further coverage are voluntary.

Literature on health insurance and market failures

The economic literature provides a number of concerns regarding potential market failures in the healthcare sector. Externalities, i.e. the lack of incentives for individuals to account for economic consequences forced upon others, make the healthcare sector suboptimal regardless of what system is in place. One example of a physical externality provided by Zweifel et al. (2009) is the positive externalities of vaccination results in under-consumption by people, compared to what would be socially optimal. Since many diseases and viruses spread from person to person, infected people’s decision of getting treated or not affects the utility of others. Another potential externality comes from the tendency for some countries to struggle with matching the supply and demand of healthcare, which results in shortages. Hence, the fact that healthcare is a rival good could induce an externality effect, since the occupation of a hospital bed could hinder another, potentially more severely ill, from being treated. The socially optimal would be for people to treat diseases and prioritize the most severely ill patients to a  greater extent than induced from a rational utility-maximizing behavior. If people have altruistic preferences and their utility depends on the utility of others, the negative economic effects of externalities on social welfare would decrease.

Perhaps the most concerning market failure in private healthcare insurance systems is adverse selection through asymmetric information, and covers the situation in which some participants on the market have greater information available than others. The magnitude of the problem with adverse selection could be enormous, as it may cause the healthcare market to not work at all unless sufficiently addressed. According to Zweifel et al. (2009), since patients have private information regarding their own health status, insurance companies will not be able to distinguish between healthy people and those more prone to illness. However, patients themselves will act upon that, and there will be a bias towards unhealthy and costly people in the group who buys insurances. Insurance companies realize this, and may have to increase the price to account for it, which would further discourage healthy people from buying insurances and a vicious circle is formed. There could also be asymmetric information in the other direction, due to what is referred to as Casemix. Casemix is the categorization of patients into groups with similar characteristics, where some groups are more costly to treat than others. Health care providers know their value of the Casemix estimation, while patients/payers do not. Healthcare providers may exploit such information advantage to the extent that it essentially becomes a rent on information forced upon those paying for healthcare (Zweifel et al. 2009). However, as opposed to the former example of asymmetric information, there is not necessarily a welfare loss here, but a problem of the distribution of gains from trade in the healthcare market.

A market failure as a result of government intervention could arise if a group of people (e.g. based on income) are entitled to subsidies. The problem is that such policies may cause people not intended for the subsidy to mimic lower-income groups in order to free-ride on other people’s funding of the healthcare system. People that are just outside the group entitled to the subsidies may have incentives to deliberately decrease their income when getting sick, rather than continuously paying for healthcare insurance (Zweifel et al. 2009). The group of people the subsidies were intended for may also lose incentives to increase their productivity and risk losing that entitlement. 

These market failures, and the opportunities to address them, should be taken into account when considering healthcare systems, and will be problemized later in the paper.

The individual utility-maximizing problem of determining consumption is usually constrained by a budget. In the healthcare sector, out-of-pocket payments represent a part of such budget constraints, especially when looking at the problem in the short run. According (to Culyer & Newhouse (2000), if out-of-pocket payments are a minor fraction of individuals’ healthcare costs, and the government covers a large part of it, the budget constraint may be less important on the individual level, but more binding on the aggregate level. They also conclude that the demand for preventive care services is particularly sensitive to pierce changes, and that the demand is a declining function of out-of-pocket prices.

Results and analysis

This section will present findings from the healthcare sector from Switzerland’s perspective, where the United States and Sweden are used as benchmark values. The United States is another country that, as Switzerland, has a health insurance market approach (defined broadly), making the comparisons between the countries interesting. Comparisons to Sweden, a country with a drastically different approach, illustrate the heterogeneity in healthcare systems and to what degree Switzerland’s data differs from a country with a universal health care approach.

Switzerland, the United States, and Sweden are all amongst the most prosperous countries in the world. In  terms of GDP per capita, the countries rank in the same order. The differences between the countries found in Table 1 below are reduced when accounting for purchasing power parity. Both Switzerland and the United States spend well more resources on healthcare than Sweden, but as a share of GDP, the US stands out. Switzerland’s government covers about a third of healthcare expenditure, much lower than the government of the United States. Perhaps surprisingly, the share of out-of-pocket payments differ greatly between those countries (World Bank 2022), suggesting that the healthcare system of Switzerland and the United States may be quite different, despite both of them opting for an insurance market approach. 

Table 1. Data from World Bank (2022).

Switzerland’s out-of-pocket payments are not only extraordinary in this setting. Few developed western countries are even close to spending a quarter of its healthcare expenses through out-of-pocket payments, and the portion is over 80% larger than the OECD average. Hospital beds per 1000 people is a decent measure of quantity output in the healthcare sector. Switzerland is way ahead of the United States and Sweden in this regard, but is on par with the OECD average. 

Switzerland has performed well in international healthcare indexes, such as HAQI (GBD 2015 Healthcare Access and Quality Collaborators 2017) and Euro Health Consumer Index (Health Consumer Powerhouse 2019). In the latter, Switzerland has the best performance amongst the EU countries. As shown in Appendix 2, they do especially well in the Accessibility and Outcomes parameters, but have relatively poor results regarding the range and reach of services. I will analyze how they perform in different areas and to connect it to the characteristics shown by the data below, focusing on market failures.

The accessability refers to how available healthcare is, where factors such as waiting times are included. It is not surprising that they score well in this category, given that they have many hospital beds per person. I think this achievement can be partly explained by their private market system. According to the most basic economic thought, the presence of a price mechanism incentivizes production and decentivize consumption during periods of shortage (through increased price), and vice versa if healthcare production is excessive. Many other healthcare systems do not have such a price mechanism to the same extent, meaning the concerns for long-term shortages are greater.

Switzerland does not spend extraordinary amounts on healthcare, as the portion of GDP is below many similar countries and the OECD average. However, they do produce a lot of healthcare, at least in terms of hospital beds per capita, where they have over double the amount of Sweden for instance. This indicates that their cost-efficiency is relatively good when it comes to quantity of output. The quality of healthcare output is more difficult to measure in detail, but the Euro Health Consumer Index gives Switzerland the highest score in the outcomes category, which accounts for how healthy the people are after treatments for instance. I think they are reasons to expect Switzerland to have quite a cost-efficient healthcare system, and this is likely connected to how they have dealt with market failures. Their large share out-of-pocket payments could mean that they reduce moral hazard problems, but could induce underprovision of healthcare because of the liquidity requirements. This could explain why Switzerland does poorly in the Range and reach of services, as that parameter captures the distribution of healthcare, both geographically and economically. The generally large share of private funding, including high out-of-pocket payments, makes it not profitable to have healthcare providers in all parts of the country. As Switzerland has subsidized mandatory basic health insurance available to everyone, the affordability concerns are somewhat dealt with, although it could induce inequality in further healthcare coverage.

There are probably less free-riding inefficiencies in the Swiss healthcare system than in countries with public provision. Some free-riding situations are connected with their subsidies, but this is almost inevitable if any equality of healthcare is to be ensured. A more interesting issue is how to efficiently price in externalities, as I think it may be the biggest disadvantage to private insurance systems in general. There are usually positive externalities in healthcare, and public provision and funding of healthcare limit the underprovision due to externalities. I think there are some incentives for sufficiently large private health insurance companies to account for some externalities in the pricing of insurance. Some of the costs from an underprovision of for instance vaccines will be forced upon the insurance company itself if its customers fall ill because of it. Given that the insurance company is large enough, there could be some incentives for them to reduce the spread of viruses and put a lower price on the prevention of it. However, this requires monopoly-like markets and will probably only cover a small part of externalities, meaning that this is a general issue for countries like Switzerland. Further government involvement and subsidies could help to address it.

Conclusion

I think Switzerland has a relatively efficient healthcare system. They have probably managed to limit some market failures quite well, but sometimes one policy could improve the system in one way, but worsen it in another. For instance, greater subsidies could reduce externalities and inequality, but increase free-riding and moral hazard inefficiencies. Whether Switzerland’s healthcare system produces better social welfare than others depends on how to weigh equality in the social welfare function. My picture, given sources in this paper, is that Switzerland does relatively well for the representative person, but when weighing the consumption of low-income groups sufficiently high, there are probably better systems out there.

Sources

Culyer, A. & Newhouse, J. (2000) Handbook of health economics. Vol. 1A [Elektronisk resurs]. Amsterdam: Elsevier.

GBD 2015 Healthcare Access and Quality Collaborators. (2017). Healthcare access and quality index based on mortality from causes amenable to personal health care in 195 countries and territories, 1990–2015: a novel analysis from the global burden of disease study. 2015. Lancet. 2017; 390:231–66.

Health Consumer Powerhouse (2019). Euro Health Consumer Index 2018

OECD (2022). National Accounts Statistics (database). [2022-11-03]

World Health Organization (2011). OECD Reviews of Health Systems: Switzerland 2011. OECD Publishing.

World Health Organization (2015). Switzerland: Health system review. Health Systems in Transition. European Observatory on Health Systems and Policies. 

World Bank (2022). World Bank Databank. World development indicators, The World Bank Group. [2022-11-03]

Zweifel, P., Breyer, F., & Kiefmann, M. (2009) Health Economics, Oxford University Press, 2nd edition. 

Appendix

Appendix 1

Figure 1.1 Healthcare Access and Quality Index (HAQI). The figure is limited to the ten best performing countries. Source: GBD 2015 Healthcare Access and Quality Collaborators (2017)

Appendix 2

Figure 1.2 Euro Health Consumer Index. Source: Health Consumer Powerhouse (2019)