Ken: When I was in Brazil I was talking with someone about the "problem" of wealthy people leaving the SUS [the public health system] for private options and then coming back to the state system for expensive treatments. It got me thinking.... Why not put a special sales tax on private health care plans (like a higher VAT or something like that), and earmark the money for public health system. After all, if the rich people are leaving public sector for basic stuff, that actually could be good as it allows public resources to be used on smaller number of people, and the point that the rich people come back to public sector for expensive stuff is sort of irrelevant, because they'd be covered in the public sector anyway if they didn't leave. So those who want to go can go, but at a higher price, so there are not just fewer people left to treat in the pub sector but there's more money to treat the with too.
Diego: I think you are totally right and it is something that can be expanded to education. Expanding taxes on the private option is a way to expand revenues (although we had not thought about earmarking and I think it is a great idea) and reduce demand. However, this is much easier to do if the only ones leaving are the top 10% (or 15%) than if large parts of the middle class (say the top 40% of the population) are both in the private and public sector. In those cases, a tax on the outside option will be rather unpopular and very difficult to implement. At the end that is why confronting the outside option requires a commitment of the middle class to public services, which also require that those services are of relatively high quality.
Ken: I understand what you write, but if the top 40% of the population is leaving that suggests that the pub sector needs to be improved, which only makes a tax to acquire the revenues that much more important. I’m less sure about this line of reasoning for education, because the effects of segregation on those left behind less clear in education. The poor people in the public health system may benefit from the rich people not being there consuming doctors’ and nurses’ time and resources, and, provided the resources are available, the poor people left can be treated well. In contrast, the poor people in the public education system do benefit from having the richer people in their classroom, and the quality of education being delivered in a public education system that is almost all poorer kids will be worse. So here I think everything is different. To put it simply, I don’t think exit from the public system has to damage the system in health, but I do think it does so in education.
Diego: I agree that in terms of the delivery, the exit from the middle class is worse in education than health. Yet it is also quite problematic in health for two reasons: (a) The creation of tax specifically for these services will become politically challenging. The middle class will argue that "not only the public health is weak but we also need to pay for our private insurance! It is double payment!" If this tax affects the middle class, then it may be impossible to implement it. (b) Much of the argument about involving the middle class in public services is about voice: if public health care is poor, they are more likely to protest individually and collectively than the poor. This is why letting the middle class simply leave is quite problematic (the very rich are likely to leave almost by definition in much of Latin America).