Health Care in Chile and the USA

After living 5 winters in Mexico and Chile, I’ve found that expats are surprised by the better quality medical care outside the USA. I expected this in Mexico because expats often are Third Agers stretching their pensions who need more health care than younger people, but I was surprised that younger expats in Chile coming for job opportunities think similarly.

Health care in Chile has advanced the last 50 years, increasing life span from 57 years in 1960 to 78 today, higher than Argentina (77), Mexico (76), and Peru (71), equal to the USA and Denmark, and lagging Spain (81), Canada (81), and Japan (82). Chile has accomplished this and kept healthcare spending at a reasonable level, currently at 7.5% of GDP compared to 18% in the USA and 9-12% in rich countries such as Switzerland, France, and Norway. The report, OECD Health Data 2013: How Does Chile Compare? contains useful statistics.

Health care in Chile substantially differs from the USA:

  • The Chilean government owns and operates a medical system that cares for the indigent and is funded by taxes, while the USA government operates the Veterans Administration for active and retired military personnel that provides no services for the indigent. Instead, the USA government taxes the public to fund a myriad of government health programs, using private providers for some of the indigent, and others are cared for by private charities and hospitals.
  • Health care for most people is funded by a mandatory 7% payroll tax that can be directed by the worker to the government system or to a private insurer. Coverage continues during periods of unemployment.
  • Chileans requiring specialist attention go directly to the doctor because there is no general practitioner acting as a gatekeeper, as in the USA.
  • The Chilean government allows as many students to study medicine as the market will bear, so there is no shortage of doctors like in the USA. Medical students study immediately after graduating high school without squandering time and money on a “pre-med” undergraduate program. Students study for seven years, including a two year internship, and must pass an exam to earn a medical license.
  • Chile rations care for the most effective uses, while the USA operates an almost unlimited fee-for-service model where doctors provide unnecessary treatments, encouraging fraud such as the back surgery scandal in California discovered by the Wall Street Journal, as payment is based on quantity over quality.

Government and Private Health Care Operate in Parallel
Private and public health care systems in Chile are funded by a mandatory 7% payroll tax. The government program, FONASA (Spanish acronym for “National Health Fund), controls 68% of the market and customers suffer long queues similar to the bread lines in the former Soviet Union. The private services, ISAPRES (Spanish acronym for “Health Insurance Institutions”), were created in 1981 to provide an alternative to the inefficient government monopoly, and most customers pay a surcharge, typically 2% of income.

The ISAPRES surcharge depends on the age and health of the customer, and the benefit packages of numerous plan options, while FONASA creates perverse incentives, offering fixed benefits for the 7% payroll tax, so there is no incentive to be healthy or disincentive to be unhealthy. The ISAPRES grew from 2% of the market in 1983 to 25% of the market by 1999, serving customers that are richer, younger and healthier. ISAPRES spend twice as much per customer as FONASA. According to economist John Cobin, private hospitals in Santiago are the best in Latin America, equal to the best hospitals in Brazil.

Government Cuts Private Insurers Down
Threatened by the success of the private insurers, the government imposed onerous regulations to increase administrative costs of the ISAPRES, whose market share has decreased from 25% to 18% since 1999. The government also hinders the ability of the ISAPRES to assess the risks of potential customers and set profitable prices. About 14% of the population is covered by the military or non-profits or has no medical insurance.

Payroll taxes and co-payments cover the entire cost of the ISAPRES, and while FONASA contributors finance their benefits, the government also pays for the indigent, many of the elderly, and those with potentially costly pre-existing illnesses, consuming 50% of the FONASA budget, funded by general government taxes. Co-payments for services in FONASA are determined by the ability of the customer to pay and the service provided, while the ISAPRES charge co-payments based only on services.

Prescription Drug Monopoly
Most of the prescription drug market is controlled by three retail chains who were found guilty of colluding to fix prices in 2008, raising prices of some products on average 48%, and paid a fine to the government. Chileans suffer from lack of competition in many industries, but there are more restrictions on foreign businesses in Argentina and Brazil, while the cost of living in Panama and Mexico is much lower due to the many foreign products and retailers, especially from the USA.

Buying Votes from Women
A favorite tactic for politicians in both major coalitions is buying votes from women by paying them to bear children. President Sebastián Piñera of the supposedly more fiscally conservative party increased the maternity leave handout from 12 to 24 weeks. Only rich women can opt out of being an enslaved baby producer during the first 12 weeks. According to The Economist:

Extra maternity leave would probably not bring many more women into the workforce. Most local economists say that the biggest obstacle to female employment in Chile is the country’s restrictive labour laws. One requires companies that employ 20 or more women to pay for child care. Little wonder that so many Chilean firms have precisely 19 female workers. Another rule prevents businesses from firing women for two years after they become pregnant—creating an incentive to fire them earlier, or not to hire women of childbearing age at all.

The USA is the only rich country where women of childbearing age earn as much as men and maternity leave is not paid by government. Labor laws in Chile are so tyrannical that a foreign investor who managed two companies, and wrote a guest post on this blog, stated that he would never do it again.

Related story:
Chilean private health care costs among the highest in the world

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