*What’s Wrong with Medicare and How to Fix It

Dennis Owens, Healthcare, Speech (historic), Uncategorized

Good afternoon, ladies and gentlemen. Thank you for thank you for inviting me here today, and thank you for the free lunch. A classic bromide of libertarian economics goes, "There Ain’t No Such Thing As A Free Lunch". The fact that I just had one is evidence that such sweeping statements are not always true.

The words "free lunch" lead into unpleasant territory, though, when they are applied to my topic today. The words "free lunch" have special meaning for our failing health care system because they describe the economic consequences of a state of zero price. It is a basic economic law that when the price of a good to its seeker is nothing – at least nothing directly paid out of the pocket, because even if you’re paying through the back door, by some other means like taxes, it seems to you when you consume the good that the price is zero – if it seems to be free, they you get what is called the "tragedy of the commons". It’s the same reason why the buffalo almost disappeared, because everybody stampeded to capture a value that was free. That’s the first, and most important thing that’s wrong with Medicare.

You can’t act as if you can have something for nothing without economic consequences, and those consequences are as immutable as the rotation of the earth. In this case, the sorry consequences are well known. Jammed clinics and emergency rooms, patients performing the most intimate routines of life in beds shuffled into hospital hallways and closets, waiting lists that stretch to years for elective surgery and joint replacements, months for non-vital cardiac repair and for the treatment of even highly progressive cancer, and much, much more. It is an unpleasant task to keep up with the negative data about Medicare. The predicted consequences of zero price are there for all to see.

The common explanation for this – it’s handed to the public through the media as a constant mantra — is, "They’ve cut the funding." That’s an absolute myth. According to the Canadian Institute for Health Information -which is Statistics Canada’s medical section – government funding for Medicare has gone up an average 8% a year since 1967. In only one year, during the recession of the early 1990’s, did it ever actually go down, and then by a very small amount. It is true that the federal government’s share of the total spending on health care has declined, from 50% in 1967 to 14% now. But provincial governments have pumped in more than enough dollars to keep the system growing. It’s not a question of how much money we’re spending; it’s a question of how we spend it.

That leads me to the next major problem with Medicare, which is its complete lack of a customer focus. The way it works is pretty commonsensical. The system – that is the Departments and Ministries of Health, the Regional Health Authorities, the hospitals and clinics, the practioners – for the most part, all these people get paid whether or not they achieve successful outcomes, whether or not they actually meet the needs of their clients. Many of them, despite the lack of any structural incentive that forces them to do it, still do very well by their patients. I refer here to the thousands of dedicated doctors and nurses who, for reasons of professional pride or dedication, work hard to keep us well.

But if any of you have experienced the culture of the bureaucracies that administer Medicare, you’ll know what I’m talking about. They spend money as if it were shredded lettuce. I once pointed out to a supervisor at the Health Sciences Centre’s Finance Department that one of their programs was a waste of time and money. I knew it was, because I had been hired to do the job and it soon became clear to me that it was a complete duplication of an existing, less expensive system. She laughed. "That’s nothing," she said, "you should see the money we waste around here." All the while, people were jammed into the emergency room two blocks away and suffering at home because surgeons had been limited in the use of operating rooms, to save money. Just two years ago, the whole second floor of the Thorlakson Building at the Health Sciences was remodeled and wards with hospital beds were converted into offices for more paper-shufflers, with one small clinic thrown in, as a gesture to the enterprise’s declared mission, I suppose.

The providers won’t necessarily use resources wisely unless they have to. They won’t pay attention to outcomes unless structural reform demands it.

The third item on the problem list is the fact that medical budgets have no insulation from interference and mismanagement by the politicians who allocate the funds. One of the cardinal virtues of good public policy is the concept of separation, where policy makers stay out of the nuts and bolts of offering a service. Medicare has almost no separation. Two examples, both of them recent. First, if you remember, one of the key constituencies in the last New Democratic election victory in Manitoba was the aboriginal community. One of the thorny issues for natives in Northern Manitoba, and rightly so, was the high rate of kidney collapse among their people, a result of an epidemic of diabetes. One of the IOU’s they cashed in with the new administration was the acute need for more kidney dialysis machines up North. The provincial government bought seven, I believe, and shipped five of them up to facilities in the hinterland. Trouble is, they didn’t have the technicians in place to operate the machines, and so they still had to keep flying the critical cases back to Winnipeg. Where we still send people every day by taxicab to Morden for dialysis because there aren’t enough machines in the city to handle the load. I would guess that a lot of you are in private businesses of some sort. I ask you, what would happen to your firm if it invested in capital assets without budgeting for their best use? You’d go broke.

Political interference imposes huge costs on the system. About two weeks ago, I participated in one of those dog-and-pony shows, the public consultations that are all the rage. You’ve seen the advertising; the provincial government is seeking your opinion on how to fix Medicare, and spending a lot of money to do it. These exercises, in my opinion, are entirely worthless, essentially public relations campaigns cloaked in democratic rhetoric. In his opening remarks, the Minister of Health, Dave Chomiak, told us an appalling story that reminded me of the dialysis debacle. We’re figuring out new ways to save money, he said. For instance, we’ve just purchased eighty new ambulances, and because we bought them as a bulk purchase, we saved a lot of money.

Aren’t there just sixteen public ambulances in total in the City of Winnipeg, I thought? Even for the whole province, do we use eighty? And what about the trained medics to man the units? Are they in place, or will the new ambulances sit in garages while we train the workers? My background in business was in trucking, and we would never have replaced the entire fleet in one year, no matter how big the bargain. That’s not the best way to do it. You maximize efficiency by replacing your vehicles according to an optimal standard of depreciation; as repair costs to older vehicles rise, there comes a point at which it makes sense to spend the capital on new ones. The standard that was used for this "economy of scale" was its contribution to the political wind. It makes for marvelous headlines and pompous ribbon-cutting ceremonies, not the best ambulance service at the best cost.

One caveat before I hit the next problem. Lest this talk sound partisan, let me assure you that it is not. The health-care policies of the NDP are bankrupt, but so are those of the Liberal Party, the Progressive Conservative Party, the Alliance Party and any other two-legged creature running for office, with a few obscure exceptions. No matter what province, no matter what stripe the party in power, they are almost all making the Medicare mess worse. They all run it like the Bulgarian post office. The trouble will continue until we stop playing political football with Medicare.

The next value the system in its present form cannot deliver is transparency. Defenders of the classic monopoly model always crow that it is a proven fact that single-payer models have a much lower cost of administration than multiple systems. They are right. Every country that has funded health care with public money under the umbrella of universal access has enjoyed great savings, in terms of no need for bills, or mailings, or collections, or receipts. But flip the coin and look at what you lose in the bargain. We don’t track or calculate unit costs, so we have no way of measuring costs against benefits. We save the money that a diverse market-based system might spend to perform that vital task, but in the process we lose the information needed to make basic rational decisions about allocating resources.

How can you possibly discover best practices or most efficient uses of capital when you don’t add up the fully loaded costs of existing activity? It’s a typical public sector problem. I recall fondly one occasion when a government department decided that they had overpaid me $18. Over the next five years, I received at least one hundred letters and at least twenty phone calls about the missing money, which by the end had doubled to $36, to penalize me for my neglect. I figure that when you add up the cost of labour, stationery, the capital tied up in the offices and equipment being used, the government had spent at least $1,000 to collect a small debt. These people aren’t idiots; they can’t economize because they serve in a process-driven framework that doesn’t track costs. The technical term is transparency; and in a monopoly there isn’t nearly enough.

The frustrations experienced by conscientious providers in these circumstances are acute. The finger pointing is ubiquitous when the question of health-care personnel comes up. We don’t have enough doctors, we don’t have enough nurses, we don’t have enough technicians because those other folks in that other party didn’t make provision for the future, that’s how the debate is framed. But every nursing position now going begging could easily be filled if we could convince those who got out because they’d had enough of a collapsing system. The providers of health care have almost no influence over the allocation of resources, and their professional pride is regularly trampled by decisions made by faceless strangers who spend no time at on the front lines. Our doctors and nurses leave Manitoba and Canada because they are powerless to make a difference, and because both they can make a lot more money in greener pastures.

There are ways out of the box we’re in, and there are a variety of angles from which all these problems can be reasonably attacked. I’m going to give you a few real-life, concrete examples where these problems have been reasonably attacked.

Before I do that, a few words about the concept of universal access. The best system by strictly economic standards for delivering any service, including health care, is that the user should pay the full cost. Most countries that fund health care publicly – that is, of course, most of the countries in the Western world – have some form or other of user fees or premiums. But I do not support such a solution for Canada. I think it is politically impossible. Some provinces like Alberta and Ontario still charge premiums, but the prospect of success in getting the rest of the country to start paying is close to zero. The provision of "free" Medicare has assumed a sacred position in our political dialogue. You’d have as much luck as if you suggested that we drain the Great Lakes and sell the water to Libya.

So from a realistic perspective, I start from a position of retaining universal access and zero price. What kind of framework is possible that can accommodate these economically inefficient concepts and at the same time get rid of the waiting lists, the shoddy service, the abuse of resources, the ignorance of costs, and the discouragement of the workforce? At the Frontier Centre, we specialize in the construction of what we call halfway houses, policy models that bring us closer to high quality public services delivered in a timely way, despite all the obstacles I have discussed.

The first option I want to present is called Medical Savings Accounts. That term is slowly seeping into the public mind in Canada, mostly due to the efforts of think tanks like ours, the Fraser Institute, the Montreal Institute and the Atlantic Institute for Market Studies. Medical Savings Accounts were mentioned in the Mazankowski Report that recently recommended reforms to Alberta’s health care system, and I’m sure you’ll be hearing more and more about them in years to come. Many American corporations underwrite their employees’ health-care systems by means of Medical Savings Accounts, but the best example of a national commitment to this method is the country of Singapore.

The Singapore system has developed in pieces over a long time, and includes three elements. Every employed citizen pays a certain percentage of his wages into a Medical Savings Account, the level of payment depending on age. That account is the property of its holder, and any funds not spent remain in the account and revert to the account-holder’s estate after death. The first immediate effect is to corral the tragedy of the commons. Because the foolish use of medical facilities carries a penalty – a loss of value in a personal account – people ration themselves and the pressure on providers is immediately tempered by a costs versus benefits calculation entered into by everybody. Many of the MSA systems run by American companies allow account holders to cash in their unspent funds at the end of each calendar year. Similarly, Singapore allows account holders to use the money in their accounts in other ways, for capital to fund things like higher education or building a new house. Either way, a structure of incentives immediate works to contain the negative effects of zero price.

The second Singapore innovation attacked the problem of paying for major or catastrophic medical events. Called Medishield, and funded in the same way as MSAs, it is paid into premium pools offered by competing insurance companies. With these two integrated mandates, Singapore solved the problem of health-care access for working people. But what about the unemployed who have no income stream from which to pay premiums, or those with long-term disabilities, or those with pre-existing conditions that no insurance company would touch? Singapore’s answer, and the most recent leg of its comprehensive system, is called Medifund. The government puts a portion of all national budget surpluses into a special endowment that pays for those who are left out. At the outset, about ten years ago, the Medifund received an initial lump sum of 200 million dollars, and Singapore’s government has over that time experienced no loss of value in the account.

The results speak for themselves. In terms of outcomes, the population of Singapore has rates of personal health, longevity and infant mortality that are superior to Canada’s. Everybody is covered and nobody is denied. There are no waiting lists, and their facilities are loaded with all the latest modern, high-tech gadgets needed to deliver high quality medicine. The frontline providers enjoy salary and benefit levels equal to those in the United States, in other words the highest in the world. The latest evaluations from the World Health Organization say that Singapore the third best system on the planet, in a ranking that placed Canada close to 30th. Most remarkably, Singapore is spending just over 3% of Gross Domestic Product on health care, compared to our 10% and the American rate of 15%. It’s seems like a miracle of public policy, but all they did in Singapore was pay serious attention to incentives.

About ten years ago, the Communist Chinese decided to modernize their health care system. They traveled around the globe, studying what different countries had done to solve the problem. Their famous trip to Canada was very short. The delegates took one look at what we do and packed their bags, complaining that our system was "too socialistic". They liked what they found in Singapore, and started pilot MSA projects in two cities. The results were immediate and favourable and the system has now been extended to about 50 cities, including the largest, Shanghai and the capital, Beijing. The Chinese system differs from Singapore’s in a few respects – premiums started out lower, and insurance for major and catastrophic health events, as well as disability, is extended through the country’s government-controlled social pool. But the basic principle of individual control of medical spending was retained, and that’s the most important reason the Chinese MSAs have been as successful as Singapore’s. We hear a lot of rhetoric in Canada about one tier and two tiers. To paraphrase Mao Tse-Tung, why not let a thousand tiers bloom?

But how do we get to Medical Savings Accounts in Canada when we don’t think we can return to a system of payment through premiums? I thought hard about this, and I think I came up with the answer. (For those of you who want to hear more about it, my paper about a Universal Medical Savings Account system for Canada is available on our website, at fcpp.org.) Why can’t we still pay for MSAs through our taxes, but instead of handing the money to providers through a system of block funding, pay budgets out by dividing the total up by the number of citizens and putting that sum into individual medical accounts? They would be controlled by the account-holders, who would pay prices to providers of incidental services in competition with other providers. The old problem of huge administrative costs has largely evaporated, because providers can be inexpensively equipped with scanners that read smart cards, a sort of ATM card for health care. If you don’t spend all the money in your account, you get to roll it over and build up a pool of capital to hedge future risk. More importantly, you would now be in control of your medical service. If you weren’t happy with a hospital or clinic, a nurse or doctor, a pharmacist or an alternative practitioner, you’d take your trade elsewhere. Providers that failed to perform would lose their trade, and the need to keep that revenue would build in a constant incentive for improvement.

What would the size of the account be? By rough calculations, the government now spends about $1,900 a year per person (total spending per capita is closer to $2,600, the difference being what we now pay out of pocket in addition to what’s spent in the public system). My model proposes that the cost of insurance to cover long-term or catastrophic care also be drawn from the account. By averaging the cost of a wide range of such insurance offerings in the American market – essentially the only one left that has such an industry – we calculate that such insurance would cost under $900 per person. It would be better to run those insurance pools through the private sector, because I believe that it is intrinsically more efficient than the public sector, but I am not dogmatic on that point. If we wanted to wash those premiums through health bureaucracies in a form of social pooling like the one the Chinese use, that would still be preferable to what we have now. Whatever the framework for insurance for expensive health events, paying it out of an MSA would leave each person with about $1,000 in his or her account per year for discretionary spending.

What about people who through foolishness or undue circumstances spend all the money in their accounts before the year is up? There’s a way to handle that, but I want to relate an anecdote that leads into it. A year and a half ago, the Frontier Centre approached Manitoba Health with a small but ambitious project. We wanted to try to calculate the market value of the physical health-care assets owned by the government. Nobody was more surprised than us when they not only agreed to the proposal, but said they were interested in our sharing the results. We sent over a good-looking young summer intern who charmed the bureaucrats. They even gave him a free office and access to what information they did have on the subject, which was sparse at best. No large enterprise should fail to keep track of the value of its fixed assets, but they don’t. And they wanted to know. We haven’t published the results of the research yet – figuring this out with hindsight is very complicated and experimental task fraught with minefields and we’re being very careful and conservative in our estimates – but one thing is already clear. If the government were to capitalize these assets, it would capture a huge pool of money totaling many billions of dollars.

Somewhere in the middle of this, the idea hit me. Why not do that, and use the money to underwrite our own Provident Fund? If people were unlucky or wasteful with their accounts, if they had pre-existing conditions that excluded them from eligibility for insurance, if they were too old to have built up their MSA accounts when their medical costs just begin to spike – 90% of a person’s lifetime health-care needs occur in the last few years of their lives – the Provident Fund would kick in to pick up the slack. Wouldn’t that just water down the benefits we expect from personal control of medical spending? Perhaps a bit, but don’t forget the big incentive that would remain, if you spend less you get to keep what’s left over.

And the biggest real benefit would be to the system. Most of the major problems I identified earlier would disappear overnight. Zero price would remain, but would be contained much more than now by the incentive not to spend. Not only would we restore a customer focus, it would a total one. What politicians want or promise wouldn’t matter any more, beyond tinkering with the amount of the annual MSA allotment. Costs in the system would become completely transparent as providers started to discover what they are in order to charge prices. We know from the experience of other public sector monopolies that have had transparency forced upon them that the reduction in costs possible from this exercise alone is in the range of 25 to 50%.

The system that results would in essence become a fully developed market system for delivering Medicare, one that would combine the virtues of free markets with the values of universal access and zero price. I believe that Medical Savings Accounts are the best way to square this public policy circle. But I do not underestimate the task of persuasion that would be necessary to convince the public of this. The level of disinformation out there about Medicare is intense, and as I said, couched in rhetoric that is politically appealing, if naïve.

For a good example, look no further than the Op-Ed page of the Winnipeg Free Press on Saturday, February 2, 2002. There, an economist at the University of Manitoba, Robert Chernomas, argued that nothing is wrong with Medicare except neo-conservative government cost-cutting and evil drug corporations. Chernomas claims that all the fiscal pressure on Medicare can be attributed to an explosion of spending on drugs. The evil private pharmaceutical companies, motivated by greed, are using their patent protection to make windfall profits at our expense. His prescription is to expand Medicare by nationalizing these corporations, and short of that, to cancel their rights to their intellectual property and to set price controls on drugs.

This is not economics talking, it’s ideology. Chernomas is right about the vastly increased spending on drugs under Medicare. But he’s wrong about the reason why. It’s a proven fact that, dollar for dollar, the most effective strategy to combat illness is to treat it with pharmaceuticals. If you can reverse or contain someone’s symptoms with a pill, that’s much less expensive than treating the patient in an acute care ward. That’s why we’ve vastly increased spending on pills, because they offer the best bang for the buck. If we hadn’t spent the money that way, we would have spent a lot more, and had lower rates of success. But I recognize that, despite its demagoguery, the drumbeat we constantly hear from defenders of Medicare like Chernomas resonates with the public. It offers the old-time socialist religion, couched in inflammatory anti-capitalist rhetoric, and it’s appealing to the unthinking masses.

The way these people want to frame the debate over Medicare presents a classic case of false alternatives. It’s either our way or the American way. What they don’t tell you is that the American health care system is just as dysfunctional as ours and for much the same reasons. About half of health care spending in the United States is socialized. Medicaid, Medical, and other programs that cover benefits for people on welfare or the elderly represent the bulk of this spending, but the rest of it is consumed on the same basis as ours, by meant of our old friend, zero price. Most people who are covered through their employers’ health care programs have no deductibles. What it adds up to is this: for every dollar that is spent in the U.S. on health care, only five cents is paid out-of-pocket. So most Americans, like us, have no disincentive to waste resources, and neither do the providers.

It’s not a choice between Canadian Medicare, with all its problems, or the American system, which is normally described as "for profit". In most countries with Canadian-style Medicare – with universal access and government support – they would never forbid private hospitals or clinics operating in tandem with the public system. Most European countries allow private providers to take the pressure off the public system. There is a bewildering variety of public-private partnerships in place, some of which are discussed the Frontier Centre’s recent column on the subject in the Winnipeg Free Press. In Australia and Brazil, for instance, governments have contracted out the construction and operation of hospitals to the private sector. Under this scenario, the government’s role is to make sure the public’s needs are being met, to set high standards for care and to monitor the providers to make sure levels and quality of service are being met. Performance standards are set, and if the private contractors fail to meet them, they can be liable for financial penalties, or the loss of the contracts on the next round of bidding. In these cases, the government simply steers. It doesn’t row.

The most unique of these public-partnerships is taking place in Sweden. Starting in 1992, the Greater Council of Stockholm embraced what is called, in the parlance of the public-policy business, a split between the purchaser and the provider. Public health authorities pay for service – except for a basic $20 user fee, a long-time feature of the Swedish system – but they allow, in fact they encourage doctors, nurses and medical technicians, to set up businesses and bid into the public system in competition with the providers who still work for the government. This experience has had very positive outcomes, which the Swedes have meticulously documented. Private doctors on contract see patients for longer times and deliver a higher quality of care. Nurses who compete for business are trying harder to please their patients, because if they don’t, they can’t make a profit. The largest hospital in Stockholm, sold into the private sector in 1998, is reporting much higher rates of efficiency than its public counterparts, and more hospitals are on the block. Most importantly, health-care providers have seen their wages go up much faster than they did under previous monopoly arrangements, and they have much more to say about the allocation of resources. They have been empowered beyond measure. One of the most fervent supporters of the breakaway from a Canadian-style system is the largest nurses’ union. The increase in provider efficiency the Swedes have engineered has reduces waiting lists so far by 73%. The authorities in Stockholm remain just as committed to government funding of health care as they ever were. They’ve simply found a better way to do it.

That’s the kind of thinking we need in Canada, outside the box. It doesn’t matter who delivers service to the public, it matters more whether the service is timely, of high quality, and at a reasonable cost. It doesn’t matter that the government owns all the providers, it matters more that the public’s needs be served. In this country, more than in any other part of the developed world, we’ve locked ourselves into a system that guarantees mediocrity, rationing of services and delays. The only way out is to shatter the framework of the debate by understanding the economic laws that operate in the field of medicine just as surely as they do in every other field, and to use them to your advantage, not to pretend that they’ve ceased to exist.

The importance of events like this is that they represent the first step towards restoring first-class medical care to our country. Think about the issues I’ve raised. Debate them with your families, your friends and your neighbours. It’s a complicated and dirty task, surrounded by rhetorical minefields and lots of disinformation. The politicians in Canada are locked into a dynamic that forbids them to repair the system. The only way to fix it is for the people themselves to learn about the difference. It doesn’t matter who provides health care services or how they do it. It matters that the service is there. And if it isn’t, to demand that the government do something about it.