Researchers: Sani Ziv¹

Background: Increasing the provision of the private healthcare sector, especially in hospital services and second-tier healthcare, has been a subject of extensive debate in Israel as well as in other countries that have a dominant public healthcare system. The backdrop is the rising demand for healthcare services in the past two decades without a similar rise its supply.

Objectives: The paper weights the economic benefits of deregulating the healthcare system that promote efficiency and minimize losses from health tax, with the social welfare lost from the reduction in public healthcare.

Method: To assess this, we develop a general equilibrium model that focuses on the healthcare sector. The model is calibrated to Israel's national accounts data with special attention to the private and public healthcare sectors.

Findings: We find that without considering social welfare, the additional economic benefit of extending the provision of private healthcare is 0.13% to 0.45% of GDP (depending on the substitution elasticities assumed) alongside a substantial increase in demand for healthcare consumption. However, when considering various levels of the social value, the marginal increase in total welfare (economic and social) begins to fall to a point whereby the system is indifferent between the regulated and deregulated healthcare systems.

Conclusions: Based on the model's calibration, it is highly likely that the social welfare lost outweigh the economic welfare gained by deregulation. Furthermore, deregulating the healthcare system while subsidizing the public sector will not solve this.

Recommendations: Strengthen the public healthcare system, raise the health tax earmarked for the public system, and conduct a detailed analysis for specific healthcare services before deregulation.

Research end date: 04/2017