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CAUT Bulletin Archives

October 2004

How the Feds Dropped the Ball on Medicare

Robert Chernomas
Prime Minister Paul Martin was elected on a promise to fix health care for a generation. The medicare deal struck in September between Ottawa and the provinces stipulates that over the next 10 years there will be $41 billion in new federal cash transfers. It is highly unlikely this deal will fulfill Martin's promise or that it will provide needed and promised access to cost-effective and timely surgery, drugs and homecare. This deal has serious implications for the health of all Canadians, as well as implications for how Ottawa will meet its obligations in other sectors such as post-secondary education.

Conservative Leader Stephen Harper has made it clear this is a deal the Conservative party can support. Why? Martin is offering the money without any real commitments from the provinces. There is no mechanism in the agreement that ties the funding to results. Nothing in the Martin deal guarantees the outcomes Canadians were promised. After repeated promises by the prime minister and the federal health minister to stem the tide of private, for-profit health care, the new medicare deal means billions more in transfers without doing anything to stem the tide.

If the Liberal government is prepared to abandon meaningful guarantees or guidelines for health care, there is little likelihood it will introduce adequate funding for post-secondary education with guidelines to ensure every Canadian, no matter where she or he resides, will have equal access to a high-quality education and that federal funds will promote public institutions, accessibility, comprehensiveness, collegial governance or academic freedom.

As for health care, as recently as 2002, the federal auditor general noted the provinces were breaking the Canadian Health Act. Federal money earmarked for health care has been used for everything from tax cuts to lawn mowers. With no more strings attached to this health agreement is there any guarantee of reduced wait times for cancer surgery or home care?

Three issues must be at the forefront of the discussion around the "medicare deal" - sustainability, cost-drivers and reforms.


Can we afford our health system and remain competitive in the world? A nation's capacity to finance its public health expenditures can properly be measured by the share of public health expenditures in its gross domestic product. Canada spends about the same percentage of GDP (10 per cent) as the Germans and French and significantly less that the United States (14 per cent). That 10 per cent is about the same amount we spent a decade ago. Part of that 10 per cent is public and part is private (insurance and out-of-pocket). The public share (out of taxes) is about the same for Canada (6.8 per cent) as the rest of the G7 and interestingly, about the same as the U.S.

Why is it important to hold on to our single-payer system? Implicit in the question of whether we can afford our health system is the assumption that what matters to a nation's capacity to maintain its health care spending is, everything else being equal, not who pays, but rather how much is spent. However, everything else is not equal if a single-payer public system such as Canadian Medicare can raise financing, administer claims and spread risks over he population more efficiently than a multi-payer private system.

University of British Columbia professor Bob Evans has pointed out that a tax-financed single-payer system "combines in one authority both the incentive and capacity to contain costs, to a greater degree than that is possible in any of the other financing mechanism." Moreover, there are no marketing expenses, no cost of estimating risk status in order to set differential premiums or decide whom to cover, and no allocations for shareholder profits.

A comparative analysis of the health care costs in the OECD countries suggests total health care expenditures are lower on average in systems predominantly funded through general taxation. Indeed, the larger the private share of health care financing, the more difficult it is to control health care expenditures. The overhead cost of administrating a multi-payer system, for both reimbursing agencies and providers, is generally much larger than a single-payer public system.

In 1999, the estimated cost of prepayment and administration accounted for 13.6 per cent of total payments to private insurers in Canada versus only one per cent in the public sector. The administrative cost differentials between Canada and the U.S. are also found to be large, accounting for nearly half of the difference between the share of resources allocated to the health sector in the two countries. The real question is, can we afford to provide health care in any other way than our current system?


Canadians need to be clear about what the health system has and hasn't been set up to do. The Canadian health system is mandated by the Canada Health Act (CHA) to control three sub-sectors: hospitals, physicians and administration, and not other sub-sectors such as dental care, pharmaceuticals, vision care, long-term care, high-tech equipment and so forth.

While overall health care costs rose as a proportion of the economy in the 1980s and the late 1990s the share of resources allocated to CHA-covered services was stable or declining, thus the increase in cost reflects the rising costs of non-CHA services.

Research from the Canadian Institute for Health Information demonstrates government spending on hospitals and on physician services as a share of total health expenditures has declined over time. In 2003, 30 per cent of total health expenditures went to hospitals (down from 45.2 per cent in 1976), and 12.9 per cent of expenditures went to physician services (down from 15.4 per cent in 1991).

While there is no indication that spending on CHA-covered services is getting out of control, non-CHA services costs have been growing. Expenditures on non-CHA services accounted for 37 per cent of the total health spending by the provincial and territorial governments in 2001, up from 23 per cent in 1975. The increase in the cost of non-CHA services has become particularly pronounced in the case of prescription drugs, whose share of total health care costs almost doubled, from seven per cent in 1987 to 12 per cent in 2001.

The disproportionate rise in prescription drug costs among all items of health care expenditures over the period 1987-2001 alone accounted for about 53 per cent of the rise in the share of resources allocated to the health care sector. Since 1997 drug costs (prescription and non-prescription) have exceeded expenditures on physicians by a growing margin. In 2003, spending on drugs is expected to represent 16.2 per cent of the total health expenditures in the country, up from nine per cent in 1984.

It is often argued that higher drug costs pay for themselves by saving on hospital costs - at least for those health conditions for which surgery and management with pharmaceuticals are competing therapies. But according to a recent study of 1,035 new drugs applications that received approval by the Food and Drug Administration in the United States for the 12-year period from 1989 to 2000, in 85 per cent of the cases the new drugs did not provide significant improvement over currently marketed therapies. According to the National Institute for Health Care Management, brand manufacturers have flooded the market with product line extensions (known as "evergreening" in the industry) in response to perverse incentives related to changes in patent laws and advertising regulations. Toronto physician Joel Lexchin tells us that of the 455 new patented drugs introduced into Canada from 1996 to 2000, only 25 - or just over five per cent - were major improvements.

Canadian governments used to focus on providing Canadians with among the lowest cost drugs in the OECD. But a series of Liberal and Conservative administrations rewrote patent laws and regulations extending the period of patent protection and restricting access to lower-priced generic drugs. The extension of patent protection was justified on the grounds that we needed to encourage the multinational drug companies to do more research and development in Canada. In other words, the cost of higher drugs would be offset by the multinationals willingness to increase Canada's role in the "knowledge" economy. But if these new drugs drive costs up without improving our health or saving resources this is the equivalent of paying corporations to dig holes and fill them in again.

By not banning for-profit medicine, the federal government also continues to ignore other evidence. In 1999, a New England Journal of Medicine article revealed that no peer-reviewed study has ever found that for-profit hospitals are less expensive than nonprofit hospitals. On the contrary, those studies have found for-profit hospitals are three to 11 per cent more expensive than the nonprofit hospitals. The facts show for-profits spend more on administration, marketing, executive salaries and dividends to shareholders.

If for-profit health care is not more efficient then the question becomes, is the more costly service worth it because it delivers higher quality care? A Journal of the American Medical Association article in 1999 found that an examination of the quality of care, for everything from heart attacks to diabetes to eye examinations, showed investor-owned health maintenance organizations deliver a lower quality of care than nonprofit plans. A June 2004 study in the Canadian Medical Association Journal concludes for-profit hospitals result in both higher mortality rates and greater payments for care than nonprofit hospitals.


There are three things our federal government could do. First, it needs to begin to do technical assessment of new drugs to determine their clinical usefulness relative to other much less expensive drugs and interventions. Second, the government should set up a bilateral monopoly relationship so that it becomes the single buyer, enabling Canadians to get a better deal from multinational drug companies. And third, patent laws need to be changed to provide more appropriate incentives and regulations for drug companies to receive patents only for drugs that have significant clinical usefulness.

Analysis of the recent for-profit health care experience of the U.S. suggests it is more expensive, of relatively poorer quality and less accessible than single-payer, nonprofit systems like Canada's. It is therefore unlikely to reduce waiting lists for surgery or the number of patients lying in beds in the halls of our hospitals. Spending a dollar on the less efficient, for-profit sector means we get less service for the same dollar. As an alternative to the American experiment Canada could expand its public sector to include drugs, long-term care and public health care in the community and at home in an effort to improve efficiency, quality and accessibility.

Without policy changes for drugs and for private, for-profit medicine our health and fiscal outlook will suffer.

In a speech before the Canadian Medical Association (Globe and Mail, Aug. 19, 2004) former royal commissioner Roy Romanow noted that since 1996 spending on health care has increased by $108 billion while during the same period federal and provincial governments cut taxes by $250 billion. Tax cuts plus rising health care costs could result in a fiscal crisis for other areas of the public sector. An increasingly wasteful health system undercuts Canada's capacity to properly fund a range of other services, including post-secondary education.

The federal Liberal government failed Canadians in its recent deal with the provinces. While promising badly-needed money, it failed to address the real problems in the health system and it failed to achieve an accord with meaningful federal guidelines. This bodes ill for how the Liberal government is likely to deal with the needs of post-secondary education - if it addresses them at all.

Robert Chernomas is a professor of economics at the University of Manitoba.

The views expressed are those of the author and not necessarily those of CAUT.