The Great Health Care Squeeze

Media Appearances, Healthcare & Welfare, Frontier Centre


After remaining more or less dormant early in the election campaign, the debate over health-care spending leapt to the forefront over the past week. On Sunday, Liberal leader Michael Ignatieff pledged to convene a first ministers’ meeting on the subject within months of being elected, while on Saturday Stephen Harper decried the Liberals’ "shameful record" of cutbacks. And NDP leader Jack Layton wasn’t to be left out, declaring, "Who do you trust to take on the issue of health care?" to be a key issue in the campaign.
The politicians are finally talking about it, but if you listened to what Mr. Ignatieff said during last week’s English-language debate, you might have found yourself feeling a bit depressed. Perhaps because the Liberal leader effectively argued that if Canadians wanted to keep getting decent medical treatment, they were going to have to learn to live without lots of other things.
"This comes down to a moment of choice," Mr. Ignatieff intoned. Canadians could either vote for personal income tax breaks, planned corporate income tax cuts, new equipment for the Canadian Forces, all promised by the Conservatives, or, he said, "you can support health care."
To be accurate, he used language that was far more politically loaded ( "multi-million dollar expenditure on prisons … big gifts to upper-middle class Canadians"), but his message was the same: affording public health care means sacrificing other possible priorities.
There’s certainly much to suggest he’s got a point.
Today, the Fraser Institute is releasing a study that literally refers to medicare funding as a "bubble" — as unsustainable as Florida’s once-booming real estate market.
At the provincial level, the rate of health spending has outstripped government revenue growth 7.5% to 5.7% over the last decade, and even more so, GDP, which rose 5.2% over 10 years. If your province isn’t already spending a majority of its budget on doctors and hospitals — that would be Quebec, and, by next year, Ontario — it likely will soon: the report projects Saskatchewan, Alberta, B.C. and New Brunswick will hit that tipping point by 2018.
Already, nine out of 10 provinces spend the majority of their own source revenues (which excludes federal transfers) on health care, according to the Fraser Institute’s report "Canada’s Medicare Bubble." Only Alberta is just barely under 50%; Nova Scotia spends 88%.
Former Bank of Canada governor David Dodge and economist Richard Dion made analogous points earlier this month in a C.D. Howe Institute paper. They determined that, after 2014, when the current federal-provincial health funding accord expires, if "health-related federal transfers to the provinces increase at the same rate as Canadian nominal GDP, then the overall budgetary positions of provincial governments could deteriorate significantly over the next decades, ceteris paribus"– the economists’ term for an assumption where all other things remain unchanged.
Both assessments boil down to the inescapable truth that as long as Canadians continue to expect the same expansive suite of publicly funded medical services–from free dental care for children in Quebec to subsidized naturopathy for some B.C. residents — costs will rise at a faster clip than the rate of GDP growth and, by extension, provincial revenue growth.
That, in turn, will force provinces into the difficult choice — all things remaining equal — of having to either raise taxes, or cut back spending in other areas.
But economists also know that never do "all things" truly remain equal. The celebrated free-market economist Friedrich Hayek took specific issue with the " ceteris paribus" expectation when it came to making plans for something as sweeping, yet intricate as government policies. In the real world, other things actually do happen. Thousands of them.
Also, while economists may take special note about the symbolism of certain metrics — more than 50% of budget spending on health; spending on health outpacing GDP growth — Canadians might not care as much. Given the country’s unhealthy obsession with health care, looming large both as a perennial political anxiety and in the very soul of our national identity, ballooning spending may be something we learn to live with.
Just as we spend more money in 2011 on electronics, cars and housing than our parents did, we might just be more comfortable buying ever-pricier health care than other government programs. Michael Ignatieff, for one, already is.
But then, straight-line projections extrapolating 30 years into the future can be pretty dicey, points out says Jack Mintz, an economist and executive director of the School of Public Policy at the University of Calgary.
"It’s like global warming forecasts," he says. "When you’re looking at 20 years, small changes in growth rates and productivity rates can have an immense impact on the ability of affording things or on the cost and how the system responds to it."
There’s also the possibility technological and operating innovations end up thoroughly devastating long-term cost curves. Mark Rovere, Associate Director of the Health Policy Research Centre at the Fraser Institute and coauthor of the report, doesn’t necessarily disagree with that: he explicitly recommends that policymakers accelerate those kind of changes, by suspending the Canada Health Act on a trial basis, to allow provinces to test market-friendly experiments, such as abuse-discouraging user-fees and private health insurance.
"Unfortunately, as governments spend more money on health care, there’s going to be less
pie to go around. It’s the crowding out effect," Mr. Rovere says.
"What you’ll have is less spending on education, transportation and other important government services that I think the public is really concerned about as well."
The success of several European governments in establishing cost-contained, but efficient and fair, parallel public-private systems, he says, proves "we don’t need to go down that road."
These are compelling ideas, but politically, they’re a harder sell than the GST. The average Canadian at rest is, at best, moderately open to minor market-based reforms.
An Ipsos-Reid poll last year found that only 44% of Canadians are okay with the kind of user-fees proposed in Quebec’s 2010-11 budget.
In addition, just 18% were comfcomfortable allowing fellow their Canadians to buy private insurance for private care; 46% said they would "probably" be "willing to accept" it.
That level of tentativeness, though, turns toxic when exposed to politics. When Quebec’s Liberal government floated its user-fee plan, they were instantly scorched by public outrage; "the culture here in Quebec is not ready for it," the province’s finance minister conceded, and hastily dropped it.
In the 2000 election, the Canadian Alliance was skewered over its proposal to introduce user-fees to the health care system as the Liberals ran successful attack ads scaring skittish Canadians with the boogeyman of "two-tier health care." It was the last time it came up in a federal election.
One thing almost guaranteed not to "remain equal," though, is that provinces will be forced at least to continue to experiment within the existing CHA framework, gradually working out improved efficiencies, while also, most likely, incrementally downloading costs for non-urgent, non-catastrophic procedures onto individual families.
"We have to make some fundamental decisions about what the role of health care is in general," says Christopher Longo, a health services management professor and member of McMaster University’s Centre for Health Economics and Policy Analysis. The biggest question in his mind, he says, "is one of scope. In other words where are those boundaries between what governments should be covering and what should be under the private sector?"
On top of that, there remains an immense amount of flexibility, within the current Act, to tinker with provincial reimbursement incentives.
There are improvements to be made in incentivizing doctors to ensure more streamlined care and lower costs, Mr. Longo believes. One hospital physician in Alberta interviewed for this story reports that because doctors get paid well for intravenous drips, "there’s people ordering I.V. s" that are often unnecessary, and he notes that, while ophthalmologists in
the province have simplified cataract procedures from one-hour surgeries to 15-minute operations, they still collect the same old premium fee for their work. Misguided incentives affect waiting times, too: if doctors over-prescribe certain procedures, subconsciously (or even consciously) lured by fee structures, the waits for pricier procedures can only end up needlessly long.
Meanwhile, several provincial parties are exploring restructuring hospital funding, following the U.K.’s model of funding the patient, who then get treated as customers, rather than the current block-funding arrangement, where each additional patient is seen as a budget drain.
Already, last year’s Frontier Centre for Public Policy’s annual Euro-Canada Health Consumer Index reported that Canada had improved its score in four of five measured categories, including patient rights, wait times, outcomes and range and reach of services, though we still have "a long way to go to catch up to Europe’s top performers," not least because we run one of the most expensive systems in the world.
And without effective cost-containment, downloading costs onto the individual, or uploading them to the feds– both Mr. Ignatieff and Conservative leader Stephen Harper have promised to continue funding increases that outpace GDP growth after 2014 — simply shifts disproportionately growing costs around.
It means either the provinces must reduce other spending; at home, families must spend more money on health care than they do now; or the federal government agrees to be the one making trade-offs, having to, as Mr. Ignatieff suggests, give up other costly programs.
Is that all that much to panic about? Health spending, after all, only appears to be completely galloping out of control when it’s measured against provincial revenue. But as Robert
Evans, the University of British Columbia health economist, has pointed out, that’s largely because provincial governments have spent the last two decades cutting tax rates and eliminating deficits, and slowing spending rates on non-medical activities, leaving health care to take up an ever larger share of their budgets.
It means, in other words, that they’ve made a choice to prioritize both economic growth and health care at the expense of more dispensable programs. "Expressed as a percentage of total government expenditures (including money spent to pay down debt), the money spent on health care over recent years represents a relatively flat line," says a 2008 report by the Health Council of Canada, a group set up by the provinces to monitor the condition of universal medicare.
"When expressed as a percentage of the government budget, however, health care shows a sharp increase because the rise in overall government spending, as well as spending in other, non-health sectors, has slowed over time."
Unless and until private alternatives can get a fair hearing here — the Organisation for Economic Co-operation and Development (OECD) already recommends its 30 member countries integrate market-based incentives in their systems — the effect on budgets will be significant, but short of ruinous.
In their C.D. Howe Institute paper, Mr. Dodge and Mr. Dion suggest that provinces would have to find the equivalent to 2.5% to 4.8% of GDP in increased revenue or other spending cuts to keep their health budgets intact, but that’s to be spread out over the next 20 years.
Whether by conservative or "optimistic" projections, "in neither case does the increased spending on health care ‘eat up’ all or even the majority of gains in income," they write. Of course, they maintain, "there will be nonetheless be very difficult choices ahead."
But those are the sorts of choices Canadians have been making all along. Priorities and costs have changed over time. Between 1992 and 2001, according to the Department of Finance, total government spending, as a percentage of GDP, has fallen in housing and community services from 1.9% of GDP to 1.4%; spending on "economic affairs" shrunk from 5.8% of GDP to 3.5%; "recreation and culture" programs fell to 1.0% from 1.3%, and "general public service" dropped from a ratio of 2.4% to GDP growth just 1.9%.
And defence spending today, as a proportion of GDP, is roughly a quarter of what it was the year Stephen Harper was born.
If government shrunk in some areas, relatively speaking, while health spending only rose, it’s plainly because all these other things weren’t, in the collective estimation of the Canadian public, worth trading off for health care.
Voters need not see things as starkly as Mr. Ignatieff: There’s nothing to suggest that Canadians would have to pass on every single new proposal just to keep funding health care.
The C.D. Howe Institute report projects that in the "base case," Canada’s healthcare spending-to-GDP ratio rises, in 20 years, from 12% to 18.7%.
But the "optimistic case" estimates the ratio at 15.4%, a not insignificant increase, but hardly a crippling one, either, Mr. Mintz believes. The U.S., remember, has been spending more than 15% of its GDP on health care for a decade now.
"I think 15 is not a problem," Mr. Mintz says. "We’ll also have an older population by then. You have an aging society and that’s what people are going to want. They’re going to want to have health care … per capita spending on health care is going to rise, no question. And it should."
Where the Liberals broadly agree with the C.D. Howe Institute and Fraser Institute agree is that as long as we resist testing how more private sector efficiencies might help contain costs while maintaining services–perhaps, even enhancing them by eliminating wait times, the one factor not figured into all these long-term projections– we will, almost surely, have to shrink government services in non-health areas.
That may not be as bad as it sounds, if it means that, to afford a prized priority like health care, governments end up having to exercise more fiscal discipline for more questionable schemes: Perhaps Alberta would have to pass on future $2 billion government-funded carbon capture subsidies; Quebec might need to stop buying arenas for imaginary hockey teams.
Meantime, our allergy to privatizing health care doesn’t rule out provinces finding means to fund it by testing more cost-effective, market-based programming in less cherished areas; a bigger private role, say, in education and transportation.
For fans of small government, that’s not quite the same victory that shrinking all public spending would be, of course. But it’s a not a bad consolation prize.