The political economy of the public/private mix in healthcare: assessing the decongestion effect argument

This paper examines the "decongestion effect" argument, which suggests that the expansion of the private healthcare sector can reduce pressure on the public healthcare system, thereby improving access and quality of care for public sector patients. To this purpose, we develop a probabilistic voting model that endogenizes the public healthcare budget and incorporates a private sector where agents, differentiated by income, can opt out of the public system while still contributing to it fiscally. Our findings indicate that a higher proportion of individuals opting out leads to lower political support for public healthcare and a decline in public healthcare quality, ultimately negating the decongestion effect argument. Using data from 26 European countries, we empirically test our model by examining the relationship between unmet medical needs -used as a proxy for the quality of public healthcare sector- and private health insurance coverage. After controlling for individual and country-level characteristics, our results indicate that as private insurance coverage expands, income disparities in unmet medical needs widen: wealthier individuals benefit more, while poorer individuals face increased unmet needs, providing no evidence supporting the decongestion effect.