"Healthcare is close to the heart of the community," says Chief Executive Donald Tsang in his latest policy address. Indeed healthcare reform should be a priority for Hong Kong.

The healthcare financing model that the people of Hong Kong ultimately choose will have to address several problems:

First, it has to provide timely reliable quality care at an affordable cost.

Second, it has to be financially sustainable.

Third, it should allow choice as far as possible.

Fourth, it should not stifle private sector ingenuity in providing better care.

Healthcare reform has become a priority because it is on the verge of failing badly. Cut-rate health care is worthless, if it comes available after the patient has died, or after the critical point of a patient's illness.

It is gratifying to see that the SAR government has promised to commit 17 percent of its recurrent budget to healthcare by 2012, up from 15 percent.

What is most encouraging to me is that the government is inviting the proponents of alternative proposals to come together in a symposium, to present their proposals and to answer questions. This is the first time that the government has done this. It is a far superior model when compared to the earlier one, with the government first hiring a consultant, and then waiting for the consultant to come up with a report, and then soliciting public views on the recommendations. The new arrangement saves time, so that each proposal can be examined in detail and can be challenged. Only in this way can we find out the best proposal. I very much hope that this will be the model for other policy areas as well.

The chief executive indicated in his policy address that the government is working on a supplementary financing option based on voluntary participation. This suggests that no mandatory contributions will be imposed on the public. I welcome this approach. Mandatory contributions amount to a tax, even if the contributions go to a personalized account. This is because mandatory contributions distort choices. The distortion generates what economists call "deadweight loss" because whenever people are required to do something other than their preference their welfare falls, and nobody gains as a result of this loss. Mandatory contributions potentially can improve welfare if the contributions are pooled to provide insurance benefits, but will always lead to a loss if the money simply sits in a personalized account.

The current tax-funded healthcare system is already providing risk pooling, since anyone who benefits from it is being supported by a common pool of funds. The problem is that the user charges are non-existent or too low in most cases. In general, any user fees charged and collected go to the treasury, and the treasury then allocates funds to the public hospitals and clinics based on projected patient "casemix" data. The low charges tend to induce waste, over-utilization and misutilization, while requiring bigger allocations from taxes.

Mandatory medical savings will not help finance our resource-short healthcare system, because the money sits in personal accounts and will not benefit the public healthcare system until it is spent. Without raising charges to more reasonable levels, mandatory medical savings actually do nothing in terms of "financing" healthcare. However, with money sitting in mandatory savings accounts, it becomes more likely that patients will draw and spend it on uses that carry low benefits. With no alternative use allowed, patients are more likely to listen to their doctors' advice to spend it on useless tests, medications, and consultations. This is wasteful.

I am not a fan of mandatory medical savings accounts and am glad the chief executive has decided against it. Mandatory Medisave is Singapore's way. Hong Kong can find its own course.

The author is professor of economics and director of the Centre for Public Policy Studies, Lingnan University

(HK Edition 10/16/2009 page1)