CHAPTER FOURTEEN

How the New Federal Funding for Health Care Should Be Managed

In Volume Five, the Committee stressed its conclusion that, as currently structured, Canada’s publicly funded health care system is not fiscally sustainable.[1]  Accordingly, there is a need to undertake major reform in the way physician and hospital services are funded in order to preserve and enhance the publicly funded health care system, a system to which Canadians are committed and that has served them so well over the last few decades.

In Volume Five, the Committee stated its view that a fiscally sustainable health care system is one upon which Canadians can rely both today and in the future.  When considering the system’s fiscal sustainability, two interrelated constraints must be taken into account. The first is the willingness of taxpayers to pay for the system.  The second is the need for continued economic growth and the corresponding need for governments to keep tax rates at levels that do not diminish Canada’s ability to generate investment, create jobs and keep Canada competitive with other OECD countries, and particularly with the United States.[2]

To address the question about the fiscal sustainability of the publicly funded health care system, the Committee examined, in its Volume Five, current and projected trends in health care spending.[3]  We documented the continuing upward pressures on health care costs due to the rapidly rising costs of drugs and new technology, Canada’s aging population, the high and increasing cost of health care human resources and growing public expectations.  Based on this information and numerous studies and reports on the increasing costs of health care in Canada, the Committee concluded that Canada’s publicly funded health care system, as it is currently operated, is not fiscally sustainable given current funding levels.

This chapter examines the implications of this conclusion.  Section 14.1 summarizes the multidimensional pressures that, in the view of the Committee, will put considerable additional strain on governments’ budgets for health care both in the short and in the long term, and that led us to conclude that more money is needed to sustain the publicly funded health care system and particularly to effect changes to improve its effectiveness and efficiency.  Section 14.2 provides the Committee’s view on the financing role of the federal government in sustaining a national health care insurance system.  Section 14.3 describes a new management system that the Committee believes strongly should be applied to new federal funding for health care.

 

14.1   More Money Is Needed for Health Care

In Volume Five[4], the Committee examined current and projected trends in health care spending.  They are summarized, once again, below.

Data from the Canadian Institute for Health Information (CIHI) show that health care spending in Canada topped $95 billion in 2000, an increase of 6.9% over the previous year.  After adjusting for inflation and population growth, there was a real increase in spending of 4.1% between 1999 and 2000.

Data show also that the pace of growth in health care spending is increasing.  In fact, real spending per capita is rising faster today than at any time since the 1980s.  There are real, continuing upward pressures on Canada’s health care costs:

·        Drug Costs: The cost of drugs currently accounts for over 15% of total (public and private) health care spending.  It is forecast to have climbed to $14.7 billion in 2000, up 9% from the year before.  The Committee noted in Volume Two that, between 1990 and 2000, drug spending per capita increased by almost 93%, more than twice the average increase for health care spending in total (40%).[5]  New, effective, but very costly, drugs are expected to enter the Canadian market in the next decade (vaccine against AIDS, new immunological cure for juvenile diabetes, etc.), further exacerbating upward pressures on overall drug costs.

·        New Technology: Canada needs to invest more in health care technology and health information systems.  The Committee’s Volume Two indicated that every $1-billion capital investment in new medical equipment requires an additional $700 million to cover related operating and maintenance costs. [6]  In fact, an estimated $2.5 billion in capital is required to bring Canada’s investment in health care technology to a level equivalent to that of other OECD countries (see Chapter Ten).  Similarly, estimates suggest that between $6 and $10 billion (over a six- to eight-year period) is required to achieve full implementation of a Canadian health info-structure, or between $1 to $1.25 billion annually (see Chapter Ten).

·        Aging Population: In 1998, 12% of Canadians were 65 or older. That year, more than 43% of provincial and territorial government spending on health care went to services for seniors.  According to Statistics Canada, by 2010 seniors will represent 14.6% of the population, a percentage that rises to 23.6% as the peak of the baby boom generation enters retirement by 2031.  Expensive procedures, rarely if ever previously performed on elderly patients, are increasingly available to them.[7]  Estimates suggest that the impact of population aging will account for an additional 1% of total health care costs each year.  Although this percentage appears to be quite small in the larger scheme of things, in dollar terms it amounts to approximately $1 billion annually in increased health care costs, continuing for decades.

·        Cost of Health Care Human Resources: Labour costs account for about 75% of spending on health care.  According to the report of Premier’s Advisory Council on Health in Alberta (the Mazankowski report), in 2001-02 over half the budget increase for health care went to salary increases in that province.  This trend is likely to be maintained throughout Canada.

·        Health Research: Unprecedented support for health research will lead to the development of many new technologies and drugs.  This year, some US$40 billion will be spent on health research in the G7 countries, leading to effective, but costly, technologies in the fields of genomics, proteomics, nanotechnology, etc.

·        Growing Public Expectations: Many observers have noted that increasing public demand for physician and hospital services will have a major impact on future costs.  In his interim report, Roy Romanow puts this point very well: “One of the most significant cost drivers is how our own expectations have grown over the past few decades.  We expect the best in terms of technology, treatments, facilities, research and drugs, and as a consequence, we may be placing demands on our governments that are not sustainable over time.”[8] Canadians are more like North Americans than Europeans when it comes to public expectations.  More precisely, 64% of Canadians are very interested in new medical discoveries, compared to 66% of Americans and 44% of Europeans.

·        Health Care Restructuring: Restructuring, renewing and reforming health care will cost a considerable amount of money.  For example, it has been estimated that establishing primary health care teams in Quebec would cost, on average, $750,000 per team (see Chapter Four).

·        Gaps in the Health Care Safety Net: As pointed out in Chapters Seven, Eight and Nine of this report, currently there are serious gaps in our health care safety net, particularly with respect to prescription drugs, home care and palliative care.  Expanding public coverage to reduce or close these gaps in insurance coverage will require additional government funding.

The Committee was told that even conservative projections of future health care costs estimate that those costs will increase by at least one percentage point over the increase in GDP for the indefinite future.  Given the publicly funded nature of Canada’s health care system, these cost pressures will put considerable strain on governments’ budgets, both in the short and in the long term.  This has been well documented by provincial and territorial ministers of health in their 2000 report of cost drivers as well as by many reports tabled with the Committee.

For example, a report prepared for the Ontario Hospital Association estimated that close to 38% of total provincial program spending went to health care in 2000-2001, up from 33% in 1992-1993.[9]  For its part, the Canadian Taxpayers Federation projected that this proportion will hit 50% as early as 2007 in British Columbia and New Brunswick.[10]  Similarly, the Conference Board of Canada estimated that over the period 2000-2020, public per capita spending on health care (adjusted for inflation) will increase by 58%, compared to an increase of only 17% in public per capita spending on all other government services and programs.[11]

This increase in the percentage of government spending devoted to health care provides the clearest indication of the financial pressures felt by governments charged with funding health care.  A wide range of witnesses, including health care managers, providers and consumers, expressed deep concerns about rising health care costs and their impact on governments’ budgets, both in terms of crowding out other government programs such as education and social services, and imperilling the governments’ overall fiscal stability.  This testimony and many related reports have persuaded the Committee that, in addition to other necessary reforms, it is essential to invest additional money into Canada’s health care system in order to renew and sustain it.

In contrast, a recent report by University of Waterloo Professor Gerard Boychuk contended that there is no fiscal crisis in health care.[12]  In his view, there is no fiscal crisis in the sense that Canada’s spending on health care has remained relatively constant when taken as a percentage of GDP or as a percentage of overall government revenues.  This analysis, however, is presented with a number of caveats.  First, it does not consider the projections in health care costs that clearly indicate that health care spending will increase at a rate higher than the growth in either GDP or government revenue.  Second, Professor Boychuk recognized the fact that health care is crowding out the provision of other public goods, but considered this as a serious problem only from the provincial perspective, not from the national perspective.  This argument avoids the fact that although there are two levels of government involved in funding health care, there is only one set of taxpayers who, no matter where they live, must bear the burden of increasing health care costs.  Third, Professor Boychuk argued that the federal government took advantage of the switch from the Established Programs Financing (EPF) to the CHST to reduce its share of health care spending.  In his view, publicly funded health care is no longer affordable from a provincial perspective as a result of reduced federal transfers.  The logical conclusion to this argument would seem, therefore, to be that the federal government should provide more money for health care.

The Committee does not support Professor Boychuk’s view that the source of the sustainability crisis is political rather than fiscal.  We received overwhelming evidence to support our conclusion that the publicly funded health care system is not fiscally sustainable given current funding levels and that, consequently, more money is needed to restructure and renew Medicare and to close the gaps in the existing health care safety net.

Some individuals and organizations disagree with this conclusion.  They claim that operating the health care system more efficiently would save enough money so that no new sources of funding would be required.  The Committee has always acknowledged the critical importance of improving effectiveness and efficiency in the management and delivery of health services.  In fact, the restructuring recommendations outlined in Chapters Two, Three, Four, Six, Ten and Eleven are designed to achieve this objective.

The Committee does not believe that there is sufficient evidence to support the hypothesis that efficiency gains alone will be enough to obviate the need for additional funding.  Jack Davis, CEO of Calgary Regional Health Authority and former secretary to the Cabinet in the Government of Alberta echoed this view when he stated:

The belief that some magical efficiency will come along that will generate productivity levels in our health care system that are beyond anything that exists anywhere on this planet is naive and unrealistic.[13]

Canada’s publicly funded health care system must be restructured and made much more effective and efficient.  But the Committee believes, as it has stated previously, that responsible planning of public policy must include additional funding for health care, including funding the cost of restructuring the system.

Given the federal government’s role in the financing of health care, the Committee believes strongly that the government has a critical role to play in sustaining and renewing health care in Canada.  We acknowledge, however, that, given all the competing demands for federal government expenditures (e.g., agriculture, the armed forces, the environment, urban infrastructure and so on), any additional funding from federal sources will have to come from new money, not from revenue transferred into the health care envelope from existing sources.

We turn, therefore, to confront the most difficult health care issue facing policy makers and indeed all Canadians: how should additional funds for health care be raised?  Should these new revenues come from increases in existing taxes, or from new forms of taxation or other levies? Should they come from individuals and/or businesses and flow to government by way of taxes or health care insurance premiums or should they come directly from individuals and/or businesses directly into health care?  Jack Mintz, President and CEO of the CD Howe Institute, raised this question eloquently:

Governments will need more revenues because of the rising public share of health care costs over time. Therefore, we must think carefully about how we want to fund the public provision of health care. What is the appropriate way of financing that? This is an important question that Canadians should be asking themselves, because that will be an increasing burden for Canadians as a whole.[14]

Furthermore, in considering how such additional funding ought to be raised, we must keep in mind that Canada’s personal taxes are the highest of the G7 countries and among the highest in the OECD.  The Committee believes therefore that Canadians must balance their desire for publicly funded health services against both their willingness to pay taxes to fund them publicly and the need for Canadian tax levels to be set so as to maintain our ability to invest and create new jobs, keeping us competitive with other OECD countries, particularly the United States.  The Committee’s recommendations on how to raise additional federal funding for health care are presented in Chapter Fifteen.

 

14.2   The Financing Role of the Federal Government

Many witnesses emphasized the fact that historically the federal government has played a major role in financing publicly insured health services.  Moreover, public opinion surveys show repeatedly that Canadians want and expect the federal government to continue to be a major player in Canada’s publicly funded health care system.

The Committee believes that, to preserve the spirit of the Medicare program that it pioneered several decades ago, the federal government must play a major role in meeting the serious challenges now facing our publicly funded health care system.  We reiterate Principle Three from Volume Five: “The federal government should play a major role in sustaining a national health care insurance system.”[15]

The Committee believes that the federal government, through its financing role, can facilitate, encourage and accommodate the provinces and territories in their efforts to restructure, reconfigure and renew their health care systems.  The Committee is convinced that the vast majority of Canadians are looking to the federal government to collaborate with, support and form partnerships with the provinces/territories and health care providers to effect needed changes in the health care system.  In fact, as discussed in Volume Five, there are many reasons why the federal government’s role is important[16].

First, Canadians strongly support national principles in health care, and they look to the federal government to play a strong role in setting and maintaining them and to ensure their application throughout the country.  As it now stands, the federal government’s ability to participate in the development and application of nationwide standards and to recommend appropriate policies to provincial and territorial governments depends in large part on the size of its financial contribution.

Second, and some would say most important, only the federal government is in a position to make sure that all provinces and territories, regardless of the size of their economies, have at their disposal the financial resources to meet the health care needs of their citizens.  This redistributive role of the federal government is fundamental to what many call “the Canadian way.”  From this perspective, Sharon Sholzberg-Gray, President and CEO, Canadian Healthcare Association, stated:

(…) we would like to add leadership as an additional role for the federal government. After all, the federal government is the only level of government that can ensure access for Canadians to comparable services, wherever they live in this country. No one provincial or territorial government can ensure that. Only the federal government can do that, and it should take leadership in this area.[17]

Third, federal funding for health care is particularly critical to reform and renewal of health care; making changes in the way the health care system is structured and operates will surely result in the requirement of more rather than less money, at least in the short term.

Fourth, interprovincial harmonization with respect to what services are insured and scope of practice rules is an important element of a truly national system.  The federal government has an key role in facilitating such harmonization (such as, for example, using financial means to help provincial or territorial governments to meet national standards).

Fifth, the Committee believes strongly that the money that the federal government transfers to the provinces/territories for the purpose of health care should provide it a seat at the table when the restructuring of the health care system is discussed.  In our view, the federal government should not give money without having a say on how that money is spent.  Canadians rightly expect that, when decisions are made about how their tax dollars are to be spent, the government to which they pay those taxes should be represented.

Finally, the Committee is also convinced that there must be stability of, and predictability in, federal funding for public health care insurance.  No industry can be expected to operate effectively if, from year to year, its revenue is subject to significant fluctuations over which it has no control.  In fact, effective planning, an essential element of an efficiently operated industry, is impossible unless stability and predictability of funding are assured.  In other words, multi-year funding is essential if the publicly funded health care system is to be run effectively and efficiently.

 

14.3   How New Federal Funding for Health Care Should Be Managed

Before turning to the Committee’s recommendations with respect to how new additional federal funds for health care should be raised (see Chapter Fifteen), we first address the issue of how such new federal revenue should be managed.  The Committee believes that Canadians will be willing to contribute more to public health care spending only if they are convinced that the money will actually be spent on health care, and that it will be spent wisely.  This requires that the allocation of any new money that Canadians pay to the federal government for health care be subject to a process that is transparent and by which the government can be held accountable by taxpayers.

The Committee believes strongly that new federal funding for health care should be managed according to four distinct but inter-related parameters:

First, increased federal revenue for health care must go into an earmarked fund that is separate and distinct from the Consolidated Revenue Fund.  We believe Canadians will not agree to pay increased health care contributions to the federal government unless they are assured that the money will be spent on health care, and that the money is truly incremental to the federal government’s existing commitment to health care spending.  This has been confirmed by a recent survey by Pollara,[18] which indicated that 75% of Canadians would be willing to pay more taxes if such revenue were directed to health care, and not flow into general revenue.  Thus, it appears that, for Canadians, health care is unique, different from other publicly funded goods and services: earmarking funds for health care would ensure that public funding remains less susceptible to the vagaries of political decisions with respect to the allocation of government’s financial resources.

Second, increased federal revenue for health care must be targeted.  The Committee is convinced that new federal funding must be used for the purposes outlined in this report, particularly those that would expand public health care coverage (as described in Chapters Seven, Eight and Nine) and those that will improve the effectiveness and efficiency of the health care delivery system (such as service-based funding for hospitals, primary health care reform, health care technology, electronic health records, health research and evaluation, and so on).  In other words, new federal money given to the provinces and territories must buy change or reform; new money should not be used to fund the operation of the publicly funded health care system as it is presently structured.

Third, and as a corollary to the second point, the Committee is strongly opposed to increased federal funding for health care being given to the provinces and territories under the mechanism of the Canada Health and Social Transfer (CHST).  CHST transfers cannot be targeted for specific purposes, nor can the provinces and territories be held accountable for how the money is spent.  Similarly, the Committee is equally strongly opposed to the transfer of additional tax points to the provinces and territories.  In the first place, the transfer of tax points has a very unequal impact on different provinces.  Second, once the tax points have been transferred, the federal government has no authority over how the resulting revenue is spent. Fourth, the Committee is convinced that the federal government should be advised annually on how the money in the earmarked fund should be spent.  This advice should be given in the annual report produced by the National Health Care Council, as recommended in Chapter One.  The advice given to the government should be made public to ensure transparency and accountability. And fifth, it is imperative that all governments be made accountable for how additional federal funding for health care is spent.  It is the view of the Committee that Canadians must be able to see that the money is being spent for its targeted purposes.  Accordingly, both levels of government – federal and provincial/territorial governments – must therefore share accountability.

From a federal perspective, an annual audit by the Auditor General of Canada of the earmarked fund should specify how the money in the fund has been spent; the results of the audit should be made public.  From a provincial/territorial perspective, their use of earmarked federal funds must be coupled with a requirement for transparent accountability to show the public that the funds have indeed been spent for the specific health care purposes to which they were targeted.  In order to do so, provincial and territorial governments should be required to report annually to the Canadian public on their utilization of earmarked health care funds provided by the federal government.

Therefore, the Committee recommends that:

The federal government establish an Earmarked Fund for Health Care that is distinct and separate from the Consolidated Revenue Fund.  The Earmarked Fund will contain the additional revenue raised by the federal government for investment in health care.

Money from the Earmarked Fund for Health Care be used solely for the purpose of health care.  Moreover, such moneymust be used to buy change or reform: it must be utilized exclusively for expanding public health care coverage and for restructuring and renewal of the publicly funded hospital and doctor system.

The National Health Care Council be charged with the mandate of advising the federal government on how the money in the Earmarked Fund for Health Care should be spent. The Council’s advice to the government should be made public through an annual report.

The federal government subject the Earmarked Fund for Health Care to an annual audit by the Auditor General of Canada. The result of such an audit should be made public.

The federal government require the provinces and territories to report annually to the Canadian public on their utilization of federal money from the Earmarked Fund for Health Care.

If Canadians are indeed willing (as we believe they are) to strengthen the investment by their federal government in health care, and if federal and provincial/territorial governments are willing to collaborate in restructuring and expanding Medicare, then the Committee believes Canada’s publicly funded health care system can be made not only fiscally sustainable, but also capable of entering a new era based on its increased efficiency, quality, timeliness, transparency and accountability.

As stated in Chapter One of Volume Five as well as earlier in this report, the Committee has received sufficient evidence, based on both the testimony of witnesses and various reports, to conclude that Canada’s publicly funded health care system is not fiscally sustainable.  It is, therefore, imperative to invest additional money into our health care system in order to renew and sustain it.

Additional funding for health care can come only from the people of Canada, either through the public purse or privately.  As shown in Table 15.1, public funding can be drawn from general taxation (the primary form of health care financing in Canada, Australia and the United Kingdom) or from dedicated payroll taxes paid by employers and employees and based on labour earnings (as in Germany and the Netherlands).  Public funding may also involve public health care insurance premiums (as in Alberta and British Columbia) or an earmarked health care tax (as in Australia).  Finally, public funding for health care could be generated from taxable health care benefits, that is, making publicly funded health care benefits received by an individual subject to income tax.[20]

Private financing sources discussed at the Committee’s hearings include various forms of user charges for publicly insured health services, contributions under Medical Savings Accounts (MSAs) or other similar plans, and private health care insurance.  In contrast to Canada, user charges for publicly insured health services are required in Australia, Germany, the Netherlands, Sweden and the United Kingdom (amongst other countries).  Systems of MSAs are currently in place in Singapore, South Africa and the United States.

TABLE 15.1
SOURCES OF FUNDING FOR HEALTH CARE 

(a)  Some proposals suggest that MSAs be funded publicly or, as proposed by some in Canada, as a mixture of public and private sources.
(b)  There exists also some other plans involving individual responsibility for some costs but not incurred at the point of service.
Source:  Economics Division, Parliamentary Research Branch, Library of Parliament; Brown and Haynes (2002).

Private health care insurance could be used to supplement, complement or replace publicly funded health care.  In the event that additional money is not invested into health care as the Committee recommends in this report, or that government fails to ensure timely access to needed care, it is likely that there would be great pressure and, as suggested in Chapter Five, probably a legal obligation on government, to let those Canadians who can afford to do so purchase private health care insurance to obtain privately delivered health services.

Private insurance would, however, move away from the single insurer model that the Committee strongly favours, and would lead to a parallel private delivery system.  The potential implications for the publicly funded health care system of allowing private health care insurance in Canada are not discussed in this chapter but are reviewed thoroughly in Chapter Sixteen.

 

15.1   The Amount of Increased Federal Funding Required

The Committee believes that the federal government must provide additional funding for the reform and renewal of the publicly funded health care system.  Based on our calculations, implementation of the recommendations given in Chapters Two through Thirteen, when combined with a significant contingency amount that reflects the considerable uncertainty involved in forecasting future costs in the health care field, will require an additional federal investment of approximately $5 billion annually (see Table 15.2).

The amount of $5 billion shown in Table 15.2 is the Committee’s estimate of the annual increase in health care costs that would result from expanding public health care insurance to close the gaps in the existing plans (as described in Chapters Seven, Eight and Nine) and from investing in measures to make the current hospital and doctor system more effective and efficient (as described in Chapters Two, Three, Four, Ten, Eleven, Twelve and Thirteen).  This amount is in addition to the current federal contribution to health care (through the CHST and other programs).  It is also in addition to any increase in federal funding that may be required to support the existing hospital and doctor system, as a transition measure until the changes recommended in this report can come into full effect.

TABLE 15.2
ADDITIONAL ANNUAL FEDERAL INVESTMENT NEEDED TO IMPLEMENT THE RECOMMENDATIONS IN THIS REPORT 

Expansion and Restructuring	Federal Share (in Millions $)	Additional Information
Expansion of Coverage: §         Post-Hospital Home Care(b) §         Catastrophic Drugs(a) §         Palliative Care(b)	550 500 250	Annually Annually Annually
Improving Efficiency and Effectiveness: §         Health Care Technology (AHSCs) (c) §         Capital Costs (AHSCs) (c) §         Infoway (EHRs) (c) §         Capital Costs (Community Hospitals) (b) §         Equipment for Community Hospitals(b) §         Primary Health Care Reform(c) §         CIHI(c)	400 400 400 150 100 50 50	$2 billion over 5 years $4 billion over 10 years $2 billion over 5 years $1.5 billion over 10 years $500 million over 5 years $250 million over 5 years Annually
Promotion and Prevention: §         Health Promotion and Protection(c) §         Prevention of Chronic Diseases(c)	200 125	Annually Annually
Health Care Human Resources: §         Medical Schools(c) §         Nursing Schools and Allied Professions(c) §         AHSCs (Post-Graduate Training) (c)	160 130 70	Annually Annually Annually
Research, Evaluation and Reporting: §         Research Funded by CIHR(c) §         Health Care Commissioner(c) §         National System (CCHSA) (c)	440 15 10	Annually Annually Annually
Contingency (20%)	1,000	Annually
TOTAL	5,000	Annually

(a)         90% federal funding.
(b)        50/50 federal and provincial/territorial cost-sharing program.
(c)         100% federal funding.
Source: See the previous chapters.

The Committee believes that the total amount of $5 billion per year in new funding is a realistic sum and an acceptable amount that the federal government, and indeed Canadians through their taxes, ought to be willing to invest in health care on an ongoing basis.

The amounts shown against each purpose in Table 15.2 are estimates.  The amount spent for the various purposes listed will vary somewhat from year to year depending on the priority attached to each purpose in any given year.  These priorities, and the allocation of funds to each purpose, should be set on an annual basis by the federal government on the advice of the National Health Care Council, as described in Chapters One and Fourteen.

The new federal investment in health care recommended by the Committee must be used to support change.  It is worthwhile noting that about 30% of the proposed new federal funding will be spent on expanding public health care coverage and on health promotion and disease prevention.  About 40% will enhance effectiveness and efficiency of the doctor and hospital system and support increased enrolment in the various health care professions.  Some 10% of the proposed expenditures will be invested in health research, outcome evaluation and performance reporting.  We have incorporated a 20% annual contingency to provide the necessary flexibility in federal investment.

It is also worth pointing that, out of the $5 billion in new federal investment, a large proportion is for transitional costs that will decrease as efficiency and effectiveness changes are put in place.  Once the 5-year or 10-year period is over, the money used during the transition period will be available for other health care priorities.

The Committee acknowledges that some of its recommendations – particularly with respect to post-hospital home care, palliative care and investment in community hospitals – require cost-sharing with the provinces/territories.  In our view, these additional costs will not constitute a significant additional financial burden for provincial/territorial governments under these programs, since the federal 50% investment recommended by the Committee would replace money which some of the provinces/territories are now spending in these areas.  It is not possible, however, given the limited resources the Committee has at its disposal, to evaluate precisely the extent of these savings to the provinces/territories.  Similarly, it is not possible for the Committee to calculate the increased cost to each jurisdiction for the proposed cost-shared programs.

More important, in some of the Committee’s recommendations, the federal money directly replaces funds that the provinces/territories would otherwise have to spend.  For example, the proposed new federal funding in the areas of health care technology, hospital capital, primary health care reform and human resources –which amounts to some $1.5 billion – would entirely substitute for investment that provincial and territorial governments would have to make in order to reform and renew their health care system.  It is thus fair to say that the Committee’s recommendations would generate savings of at least $1.5 billion for the provinces and territories.  This would be in addition to any savings resulting from effectiveness and efficiency gains from our proposed reform, and the Committee expects these savings to be substantial once the changes we recommend are all in place and fully operational.

 

15.2   Potential Sources of Increased Federal Funding

From which source should the new federal investment in health care come?  Should the federal government simply increase the rate of one or more of the existing direct and indirect taxes (general taxation)?  Or should the government employ new taxation measures linked specifically to the funding of health care, such as an earmarked tax for health care, or make health care benefits taxable as income, or use earmarked payroll taxes or a national health care insurance premium?  Should the federal government also consider an increase in private financing for health care through user charges, MSAs or other plans involving individual responsibility for some health care costs?

This chapter examines these questions in detail.  It reviews the advantages and disadvantages of the full range of public and private methods of funding an incremental federal contribution to health care, including general taxation, earmarked taxation, taxable health care benefits, payroll taxes, and public health care insurance premiums.  It also provides a discussion of user charges, MSAs and the concept of pre-funding health care.

In considering each of the potential federal revenue sources, the Committee evaluates each of them according to the same set of criteria.  These criteria are equity, efficiency, intergenerational fairness, stability and visibility:

·        Equity deals mainly with income redistribution and social justice.  It may be defined as the extent to which contributions to the financing of health care insurance are based on ability to pay (income distribution) as well as the extent to which access to such insurance is based on need (social justice).

·        Efficiency is concerned with the optimal allocation of resources.  A system is efficient if it creates minimum distortions and disincentives in the rest of the economy (in terms, for example, of reduced business investment, lower consumption and living standards, damage to the labour market and job creation, deterioration in international competitiveness, and so on).  Efficiency can also encompass cost-effectiveness, that is, the extent to which revenue for health care is generated at the lowest possible administrative and compliance cost.

·        Intergenerational fairness compares the distribution of the cost burden between younger and older people or between workers and retirees.

·        Stability refers to the degree of predictability of future funding levels.

·        Visibility denotes the ability of citizens to link their contributions to government spending on health care (at each level of government) to the benefits that they receive.

These criteria have helped the Committee to decide which source(s) of funding appear(s) to be the most appropriate to raise additional federal revenue for health care.

At the outset, the Committee wishes to emphasize that new financing sources must ensure that the health care system will continue to meet the needs of Canadians in a way that will neither overwhelm other requirements for government finance nor give rise to an unacceptable tax burden on citizens or businesses.  The additional revenue requirements must also be structured so as to do the least damage to the economy in terms of job creation and income growth.  Moreover, the new revenue sources must make Canadians better aware of the link between the public health care benefits they receive and the taxes that they incur to pay for them.

 

15.3   General Taxation

Currently, federal funding for health care is derived from general taxation.  General taxation is very broad and encompasses both direct and indirect taxes.  Direct taxes, which can be levied on individuals, households or corporations, include personal income tax and corporate taxation.  Indirect taxes, which are levied on transactions and commodities, include, for example, sales tax, value-added tax and excise taxes.

Currently, none of the direct or indirect taxes that make up federal general taxation offer much visibility or link between the taxes paid and the services received.  Indeed, this is the primary reason that many Canadians describe Canada’s health care system as being free.  The various federal revenues generated through direct and indirect taxation are currently collected into one single fund – the Consolidated Revenue Fund.  As a result, there is no direct link between taxation and public health care spending, despite the fact that a substantial part of government revenues are used to pay for health care costs.  This contrasts greatly with earmarked taxation (see Section 15.4, below) in which the tax revenue corresponding to the “earmarked” service goes into a designated fund to be used only for that specific purpose.

All forms of direct and indirect taxation have varying implications for equity and efficiency.  Direct taxes levied on individuals are frequently progressive: the amount paid rises with income so that high-income people pay proportionately more than low-income people.  This leads to a redistribution of income from individuals with higher income to those with less.

Indirect taxes such as sales taxes are usually considered regressive, as the payments are related to consumption of the taxed good or service: high-income people pay proportionately less indirect tax as a percentage of their income (although they pay more in absolute terms).  That is, because poorer individuals spend a larger proportion of their income on consumption than richer persons, the burden of a consumption tax falls more heavily on them.  However, over a lifetime, consumption is roughly proportional to income over a broad range of earnings; hence, the regressiveness of a consumption tax is not as large as might be initially thought.  Further, various offsetting measures, such as the GST Tax Credit, can reduce the regressiveness of a consumption tax.

In his brief to the Committee, Robert Evans, Professor of Health Economics at the University of British Columbia, explained:

Taxes are described as progressive if an individual’s tax liability rises more than proportionately as income rises, such that higher income individuals not only pay more, but pay a larger share of their incomes. Conversely, regressive taxation results in lower income people paying a larger share of their incomes in tax.[21]

The implication of general taxation on equity therefore depends on both the structure of a country’s direct and indirect tax systems and the relative amounts of revenue raised by each form of tax.[22]  Studies using OECD data suggest that, in countries in which general taxation funds most health care, the mix of direct and indirect taxes used renders the overall taxation mildly progressive.[23]

In 2000, Canada relied on direct taxes for 57% and indirect taxes for 43% of its total taxation revenue.  Data also suggest that the Canadian tax system has become more progressive over the last decade: in 1993, Canada collected 49% of its tax revenues from indirect taxes.[24]

When compared with other OECD countries that use tax financing for health care, Canada is above average in its reliance on the personal income tax.[25]  In fact, only Denmark, Australia and New Zealand rely to a greater extent on the personal income tax as a percentage of total tax revenues.[26]  In terms of its reliance on the corporate income tax, Canada is again slightly above the average of countries with a health care system funded out of general taxation.[27]  Finally, Canada is below the average in its use of consumption or indirect taxes, relative to all taxes.[28]  Therefore, it could be said that Canada has one of the more progressive tax systems among OECD countries.

From another perspective, however, the fact that Canada has significantly higher personal income tax rates than the United States means that Canada is less attractive for skilled, high-income workers.  The higher personal income tax rates also raise the cost of investment capital in Canada derived from personal savings, and therefore discourage investment, productivity and future growth.  Indeed, the Committee was told:

While a number of factors (higher government debt and social spending) are likely to mean that Canada will continue to have for some time higher personal tax rates than the U.S., it is nevertheless good policy to avoid increasing the spread between US and Canadian rates, and in the long term to reduce these differences. Accordingly, there are major policy reasons for not imposing a significant increase in personal tax rates and widening the personal tax gap with the U.S.[29]

Similarly, the Committee heard that it would be difficult and inadvisable to increase corporate income tax to support the incremental costs of increased federal spending on health care.  The base for corporate taxation is smaller than the base for personal income tax or a payroll tax, and is also much more variable. Furthermore, increasing corporate tax rates would have a very negative impact on rates of return on capital investments in Canada, and therefore would discourage both investment and job creation.  Even existing businesses could be influenced to relocate outside of Canada in response to what would be a very significant increase in tax burdens.  Overall, many witnesses argued that the corporate tax is unsuitable for raising additional revenues to finance health care.

The Committee was told that with an increase in the federal personal income tax there would be significant costs to efficiency, measured in terms of labour supply, savings and investment.  We were told that a tax on income imposes a “double tax” on savings, since the income out of which savings are made is subject to income tax, and then the returns on the savings are themselves subject to additional tax.

Nevertheless, because financing the health care system by general taxation draws revenue from a wide base, it helps to minimize the distortions taxation creates in the economy.  Furthermore, financing health care through general taxation involves low administrative costs.[30]

Under general tax-financed systems, as opposed to those financed by earmarked taxes, decisions about how much should be spent on health care necessarily require trade-offs to be made among other government spending priorities, such as social programs or tax or debt reduction.  As a result, funding health care through general taxation means that the allocation to health care is subject to spending negotiations within government.  While this provides some element of accountability, it also greatly politicizes the decision-making process.

Another disadvantage of funding health care through general taxation is that it can leave the health care system vulnerable in times of economic slowdown or fiscal constraint.  Economic slowdowns result in lower tax revenues and increased pressures to reduce public spending.  This, therefore, negatively affects the stability of health care funding.  It should be noted, however, that all tax revenues fluctuate with the economy and that general revenues tend to fluctuate less than many specific forms of taxes.

Finally, and perhaps most important, witnesses stressed that direct and indirect taxation do not have the same impact in terms of intergenerational fairness.  Personal income tax extracts a greater proportion of government revenues from the younger working population than from retirees.  Thus, Canada’s changing demographics, which reflect a rise in the proportion of retirees relative to the working population, would be associated with a decreasing tax base and smaller revenues for any given income tax rate.  As a result, the use of direct taxation, particularly personal income tax, to finance the publicly funded health care system could involve significant subsidization of the health care needs of the elderly by the younger working population.  In this perspective, Jack Mintz, President and CEO of the C.D. Howe Institute, told the Committee that:

In fact, the OECD has estimated that, as the population ages, the tax/GDP ratio in Canada will fall by 1.5 points. This is because elderly people, once they retire, tend to have lower incomes and, therefore, pay less tax than workers. There may be some taxes that would be better if you were going to fund health care expenditures, because the majority of health care expenditures are weighted heavily toward the elderly in the last years of their lives. Therefore, as the population ages and the benefits paid out to the elderly increase, if you have taxes that are particularly falling on working Canadians they will have to bear a bigger responsibility for those benefits.[31]

In contrast, the Committee was informed that demographic changes have less impact on government revenue generated through indirect taxation, such as a consumption tax.  Moreover, consumption taxes may be preferable, on the grounds of economic efficiency, to corporate income tax.  David Stewart-Patterson, Senior Vice-President, Policy, Canadian Council of Chief Executives, stressed that point when he stated:

In considering tax policy, however, we must remember that not all taxes are equal in terms of their economic impact. As the Department of Finance has estimated, an extra dollar of revenue raised through corporate taxes may do nine times as much damage to economic growth as a dollar raised through sales tax. The more Canada chooses to spend on health care through the public system, therefore, the more it will have to shift its tax mix toward a consumption base in order to remain competitive.[32]

Jack Mintz from the C.D. Howe Institute held similar views:

(…) consumption taxes have been found to have lower distortionary costs to the economy and they tend to be more efficiently imposed. They are smoother than, for example, income taxes over the life cycle of individuals because working income tends to peak during working lives before falling off in retirement years. At the same time, consumption tends to be lower than income during the years in which people are accumulating savings, and consumption tends to be high in retirement years relative to income as that is when people are drawing down assets to consume during their retirement years. Consumption taxes also tend to be proportional to the consumption of individuals over a life cycle. One could make it progressive by having a tax credit, such as the GST tax credits which provides relief, particularly for lower income Canadians.[33]

David Kelly, former Deputy Minister of Health in British Columbia, also suggested that consumption taxes generate less distortion in the economy:

If the decision has been taken to increase funding for health care and the question is what should be the revenue source, I would do exactly what the B.C. government did a few months ago when it discovered that it did not have sufficient revenue to cover rising health care costs – it increased the consumption tax.

(…) I say that for three reasons. First, it raises revenue quickly. Second, we have to keep our income tax, corporate tax, payroll tax and so on within shooting distance of the Americans, which significantly constraints our policy flexibility. Third, it is a visible tax. It would make consumers fully aware of the implications of health care cost increases.  It might bring additional consumer pressure to bear on the cost side of the equation which, from my point of view, would be healthy.[34]

To sum up, the decision to consider direct versus indirect taxation as a means of increasing federal revenue for the purpose of health care will necessarily require that some trade-off be made between equity, intergenerational fairness and efficiency.  The testimony received by the Committee suggests that the objective should be first of all to ensure that any new tax is as efficient as possible so that it causes as little damage to the economy (including job creation and economic growth) as possible, and then subsequently to achieve whatever progressivity is desired in the system through supplementary measures such as low-income tax credits or high-income surtaxes.

 

15.4   Earmarked Taxation

Earmarked taxes are taxes from which the revenue is dedicated to a specific use.  Earmarked taxes can be either direct or indirect.  An earmarked tax for health care has several advantages over general taxation.  For example, it may reduce public resistance to paying the tax because it is clearly associated with a use that provides benefits to the public.  Establishing genuine linkage between taxation and spending makes the funding of health care more transparent and responsive.  Another advantage of earmarking taxation is that it makes people feel more connected to the tax system which, in turn, may increase the pressures on health care providers and institutions to improve quality and access to services.  Earmarked revenues may also be more stable since they are less susceptible to the vagaries of political decisions with respect to the allocation of the government’s financial resources.

Many witnesses presented strong arguments in favour of earmarked taxes.  In the view of these witnesses, earmarking taxes for health care is what Canadians want.  For example, Dr. Les Vertesi, Chief of the Department of Emergency Medicine at the Royal Columbian Hospital (Vancouver), told the Committee:

I believe that the public is prepared to put more money into their public health care system, but not into taxes that go into general revenue. It is a trust issue. The record on governments taxing people and then ensuring that money goes into designated services is not good, or at least certainly the perception is that it is not good. The trust has been broken. People do not want to give money to governments and have it just disappear. They are prepared to do so if they are assured that the money will go into health care, and especially into health care in their local area (…).[35]

There are, however, a number of disadvantages associated with earmarked taxes. Not all taxes that bear the name or appearance of an earmarked tax are strictly earmarked to an identified use in practice.  This is particularly true if the revenue from the earmarked tax is merged together with other tax revenues.  This weakens the connection between revenue and expenditure and consequently undermines the population’s trust that the tax will be devoted to the named purpose.  For a tax to be effectively earmarked, the revenue it generates must go into a specific, dedicated fund, and not into the Consolidated Revenue Fund.

Earmarking taxes also introduces rigidity into the government budgetary process, because expenditure on the program for which the tax is earmarked is determined by the revenue generated and not by policy decisions.  Another disadvantage is that the revenue derived from a single earmarked tax can be cyclical and susceptible to variability in periods of economic expansion or slowdown.

Also, separating health care from other areas of public spending might lead to pressure to have other budget items funded separately by earmarked taxes.  If this happened in a number of areas it would make it difficult for the government to generate a large enough Consolidated Revenue Fund to be able to pay the cost of necessary but less popular government programs, such as foreign aid.  Thus, having a large number of earmarked taxes is simply not workable.

In Volume Four, the Committee presented an option under which the cost of publicly funded health care that an individual receives during a year be treated as a taxable benefit for that year.  Thus, the individual would pay income tax on the cost of the health services provided, subject to an annual maximum.  This method of taxation would raise additional revenue for health care and promote individual accountability for the use of health care.[36]  Under this option, which corresponds to one form of earmarked tax, individuals would be required to add the cost of the health services that they received during the year to their taxable income.  Such an option has been advocated in recent years, particularly by Jack Mintz et al. (1998),[37] Tom Kent (2000)[38] and most recently by Mintz, Aba, and Goodman (2002).[39]

Under the plan proposed by Mintz, Aba and Goodman, individuals would be charged a tax of 40% of the health care costs they incurred during the year, up to a maximum of 3% of the individual’s annual income.  Families with an income of less than $10,000 would be exempt from paying tax on any service they received through the publicly funded health care system.  Under this scheme, the more an individual used the services of the health care system, the higher the individual’s contribution to the system would be in that year, up to the maximum 3% of income.

Mintz, Aba and Goodman argued that, by relating the individual’s contribution to the actual health services that are used, and by encouraging users to consider the costs, efficiency would be gained in the use of health care resources.  The authors also contended that limiting individual health care taxes to a maximum of 3% of annual income would ensure that the costs would remain affordable to the taxpayer and thus no one would be deprived of needed health services.  This would also prevent the costs of health care from imposing a catastrophic burden on any taxpayer.

Using survey data on health care utilization rates, Mintz, Aba and Goodman estimated that 62% of Canadians would pay the maximum contribution of 3% of their annual income in any one year.  Overall, this would generate $6.6 billion annually in tax revenue (or about 16% of total public spending on physicians, hospitals and other health care institutions).  They estimated that it would also lead to a decrease of 13.5% in the use of health services, the value of which they estimated to be $6.3 billion.  The authors believe that additional administrative costs would be minimal since the contribution would be collected through the provincial/territorial personal income tax system.

A number of witnesses discussed proposals such as the one by Mintz et al..  For example, Paul Darby, Director, Economic Forecasting, Conference Board of Canada, stated:

It has a high degree of attractiveness in that it does remove some of the mystery surrounding the cost of health care to various users of the system. It does have the advantage of tying those costs, to some extent at least, to payment. I am not sure it completely gets around the issue of redistribution or the burden perhaps falling on the less advantaged members of society.[40]

The option of a taxable health care benefit would help ensure visibility.  It would also improve somewhat the stability of public health care funding.  Such an option would have an impact that in some ways would be similar to direct taxation in terms of efficiency and distortion in the economy.  However, it would increase Canada’s reliance on the personal income tax, which is already well above that of other OECD countries.

But perhaps most important, the main argument presented to the Committee against a taxable health care benefit is that some people will have the perception that they would be paying for health care twice – once through general taxation and once through the additional income tax they would pay for the specific health services that they would receive during the year.  The argument of “double payment” led the Alberta Premier’s Advisory Council on Health to decide not to support making health care a taxable benefit.[41]

The Committee was told that a relatively efficient way of generating new federal revenue to pay for health care would be to use some portion of a general consumption tax, such as the GST, and have it earmarked for health care.  The GST is the major federal consumption tax in Canada and, according to many witnesses, it is a relatively efficient tax.  Because of its broad and generally non-distorting coverage, many witnesses contended that it would be the most suitable consumption tax to increase to pay for additional federal spending on health care.

The GST option, however, would be somewhat more regressive than personal income taxation.  Nonetheless, the proposal to earmark an increase in the GST for the purpose of health care received very broad support during the Committee’s hearings.  For example, Paul Darby explained that:

(…) the Conference Board's position on how to address the financing issues over the next 30 years tends towards consumption taxes, such as the GST. We would tend to try to avoid taxes on working, which would include income and payroll taxes. We sense that, at this point, taxes on consumption would probably have the least disincentive effects among the various tax options one could consider. (…) We would want to see a specific link between the taxation and the spending on health care, in the hopes that those taxes would, as a result, be much more politically palatable to the general public.[42]

Mr. Darby suggested that rebates for low-income Canadians through income tests, such as the current GST Tax Credit, could be provided for an earmarked and increased GST in order to improve equity and progressivity.  In addition, if the rebates for the increase in the GST were similar in structure to the current GST rebates, they would add little to the scheme’s administrative cost.

 

15.5   Payroll Taxes

In many OECD countries (such as Germany and the Netherlands), public funding for health care is generated from an earmarked payroll tax.  Contributions under this payroll tax are usually compulsory and shared between the employee and the employer.  These contributions are levied on labour earnings and are held by a body operating at arm’s length from government (“Sickness Funds”).  The predominant attraction for earmarked payroll taxes (or “social insurance”) in many OECD countries is the independence of the insurer or agency from government and the perceived greater responsiveness of the insurer to the patient or consumer.

In Canada, both the federal and provincial/territorial governments currently use earmarked payroll taxes in one form or another.  At the federal level they include: premiums for Employment Insurance and Canada Pension Plan contributions (the CPP/QPP is both a federal and provincial responsibility).  Provincial payroll taxes include: workers’ compensation premiums (collected in all provinces) and health care/post-secondary education taxes (levied in Quebec, Manitoba, Ontario, Newfoundland and the Northwest Territories), with the latter not generally being firmly dedicated to any specific use.

An earmarked payroll tax as a means of collecting revenue for the purpose of health care has the advantages previously mentioned for earmarked taxes.  For example, it can be paid into a separate fund.  It is highly visible and transparent and, therefore, usually more acceptable to the public.  In other words, higher levels of transparency under a system of payroll taxes weaken resistance to contribution increases compared with general taxation increases.  In addition, payroll tax revenue is, at least in theory, better protected from annual political interference, since budgetary and spending decisions can be devolved to independent bodies.  Equally important, levying the tax only on labour income avoids distortions to savings and investment.  Finally, revenue generated from payroll taxes also appears to be more stable.  In this perspective, a recent report states:

In Belgium, where health care is financed about equally from taxation and social insurance contributions, the deviation of average annual growth was greater for revenue from government sources than non-government sources.  (…) In other words, annual government spending on health care fluctuated more than insurance-based revenue.  (…) Consequently, relying more on funding from general taxation than on payroll contributions is likely to make revenue less stable.[43]

Earmarking a payroll tax, however, has a number of disadvantages.  Because employers are usually required to contribute to part of the cost of health care insurance, this results in higher labour costs, inhibits job creation and reduces the international competitiveness of a country’s economy.  Moreover, a payroll tax relies on a more narrow revenue base (labour earnings).  Accordingly, it would require a higher rate of a payroll tax to raise a given amount of revenue than would a general income tax on all income.  This may explain why general tax revenue is also used as an important revenue source in countries with health care payroll tax systems.  In these countries, general tax funds are usually transferred to health care insurance funds to cover the contributions of the non-employed population.  General tax revenues may also cover the deficits of public health care insurance funded by payroll taxes.

In contrast to general taxation, a payroll tax may also impede job mobility; employees may be unwilling to move to a non-covered job (such as self-employment) in some systems for fear of higher contribution payments or fewer benefits (as in the United States).

The potential negative impact of payroll taxes on industry was one of the justifications for diversifying funding sources from an employee/employer contribution system to an income-tax-based system under the Juppé Plan in France.  More precisely, France significantly reduced the employee contribution rate (from 5.5% in 1997 to 0.75% in 2000) and dedicated its General Social Contribution Tax specifically to health care (the tax rate was increased from 3.4% to 7.5% of personal income).  Italy and Spain went a step further by shifting completely from payroll tax to a general tax-revenue-financed health care system.

Another criticism of payroll taxes with respect to efficiency is that the various European Sickness Funds, which are responsible for collecting and managing the contributions made by employers and employees, have little incentive to control costs because they have the ability to raise contribution rates.  Also, the existence in some countries of multiple funds and the lack of integration in purchasing health services often results in high administration costs.

It could also be argued that health care financing via a payroll tax system is vulnerable to periods of economic downturn, since reduced revenues from lower employment and freezes in income levels would result in smaller contributions to Sickness Funds.  Furthermore, with the financing burden concentrated on employers and employees, the negative impacts on certain labour-intensive sectors of the economy could be significant.

Finally, with respect to equity, available evidence from Germany and the Netherlands suggests that funding health care through payroll tax tends to be regressive.  This is probably because the design of these two systems allows higher-income earners, who already possess private insurance, to opt out of the public health care insurance plan.

An important element of payroll tax, however, is the smaller impact it has on the overall Canadian economy when compared to other forms of taxation.  Preliminary calculations by the Department of Finance showed that an extra dollar of tax revenue raised through payroll taxes cost the economy 27 cents in real loss of output.  This is compared to $1.55 in loss of output for every extra dollar of corporate income tax and 56 cents for personal income tax.  Sales taxes were shown to be the least distorting source of tax revenue, creating only 17 cents of output loss.[44]  In the context of international competitiveness, there is still some room for payroll taxes in Canada: OECD data show that Canada depends less on this form of taxation relative to other industrialized countries.[45]

However, a crucial factor with respect to payroll taxes is that, in terms of intergenerational fairness, payroll tax has an impact similar to but worse then income taxation: the burden is borne entirely by the younger and working population.

 

15.6   National Health Care Premiums

A public health care insurance premium is a fixed lump-sum amount paid by either an individual or a family for the purpose of financing publicly insured health services.  In some systems, health care insurance premiums are fixed amounts paid regardless of income and independent of usage of the health care system.  This form of premium is currently used in both British Columbia and Alberta, although there are some exemptions for low-income individuals and families in the two provinces.

This method of funding is considered to be quite efficient for two reasons.  First, the financing burden is spread over a wide base (the entire population) rather than just the employed, as is the case with most payroll taxes.  This means that all sectors of the economy are treated equally, and due to the flat nature of premium payments, individuals have little incentive to alter their behaviour (whether to consume more or less, whether to work more or less, etc).  Second, health care insurance premiums do not differentiate between the younger and older segments of the population, thereby ensuring inter-generational fairness.

Whether a person works or not they would still have to pay the amount. This would be the least distortionary of the types of taxes that could be levied, and the one most conducive to the demographic issues we will face down the road.[46]

A flat health care insurance premium does not affect marginal income tax rates, as an increase in personal income taxation would, and therefore has a less distorting impact on the economy in terms of savings and investment.

In terms of equity, flat premiums for public health care insurance would tend to hit low-income Canadians the hardest, although some low-income relief could be used to soften that impact.  Also, middle-income Canadians would have to pay the same health care premium as rich ones.  Therefore flat premiums are clearly regressive, as they benefit most those with high incomes.  They do, however, benefit those with high health care needs, since they pay the same amount of premium as those who use the health care system only slightly.

Overall, the equitable characteristics of a system financed by flat premiums appear to be quite limited.  The Committee was informed that, for greater equity, premiums should be linked to income in some manner and some groups of the population should be exempted from paying them.  The suggestion to use variable premiums adjusted to income levels was recently made in the Mazankowski report, A Framework for Reform, prepared for the Premier of Alberta in 2001.

In his brief to the Committee, David Kelly provided a lengthy statement on the benefits of a national health care insurance premium:

There may well be need for additional federal revenues to support the Canadian health care system, and a federal health care premium would be one means of raising funds in a fashion which provides visibility for the federal financial contribution.

(…) The provincial premiums programs which operate in Alberta and British Columbia raise significant revenue for those provinces. Premiums are fixed amounts applied universally (payment is mandatory), income-related (reduced or eliminated for lower income earners), but unrelated to program eligibility (late or non payment does not result in termination of benefits to an individual or family). Premiums are collected where possible through payroll deduction, with the balance directly billed to provincial residents. The administrative costs of collecting premiums by a process separate from the income tax system are nontrivial.

(…) Were a federal health care premium to be introduced, it would certainly make sense to collect it through the income tax system, rather than through a separate administrative procedure. That is, one could provide for deduction at source, quarterly payments, and annual reconciliation through the existing tax collection structure, rather than invoicing all Canadian families on a monthly or quarterly basis. There are many potential designs for the structure of a federal premium – it could be a flat rate applied equally to all residents, or a flat rate with relief for lower income earners as in the two provinces which levy their own premiums, or a surtax applied proportionally or in some other fashion on top of the income tax. All these options have their own equity implications. It should be kept in mind that there is a very substantial element of income redistribution associated with the financing of Canada’s universal health care program. Any move to finance the system in part through a premium which is less progressive than existing funding sources would affect the nature of that income distribution, and so add to the list of value issues which the Committee must sort through.[47]

In conclusion, premiums could constitute a visible and equitable means of raising the money for the purpose of health care, provided that they are structured in a way to ensure progressivity (that is, premiums should vary in proportion to income).

 

15.7   User Charges

User charges are usually defined as a form of payment (covering a portion of the cost of services) made by a patient at the time a health service is rendered.  That is, they represent an up-front charge to the patient.  In Volume Four of its health care study, the Committee described the different forms of user charges:

·        Co-insurance, the simplest form of user charge, requires the patient to pay a fixed percentage (say, 5%) of the cost of services received.  Thus, the higher the cost of the service, the larger the fee.  Many private-sector drug insurance plans require this method of payment.

·        Co-payment is an alternative to co-insurance.  Instead of having to pay a share of costs, the patient is required to pay a nominal fee per service (for example $5) which does not necessarily bear any relation to the cost of the service.  The same amount is charged, no matter what the cost of the health care provided.  This form of user charge exists in many countries, such as Sweden.

·        Under a system of deductibles, the patient is required to pay the total costs of services received over a certain period up to a certain ceiling, the deductible.  Above the ceiling, costs of services to the patient are covered by the insurance plan.  All users must pay the deductible, which is independent of the quantity of services received.  Again, this form of insurance-based user charge is required in some countries.[48]

Some commentators have suggested that user charges of relatively modest size can be a useful means of discouraging overuse of the health care system, and of creating some personal sense of responsibility for the use of the system.  However, much of the literature with respect to user charges concludes that these charges deter some individuals from seeking necessary as well as unnecessary care, and do so in a way that falls disproportionately on the poor.  Professor Robert Evans told the Committee that user charges raise serious issues of access and equity:

It is well-known and extensively documented that a relatively small proportion of the population use a very high proportion of health care services, both in any one time period and over longer times. A recent study in B.C., now being written up for publication, shows that the five percent of the adult population with the highest use of physicians’ services (measured in dollars of billings) not only accounted for 33.7% of total billings, but made up 43.5% of hospital admissions and used 69.3% of inpatient days. These people were generally quite ill, typically with major and multiple problems. There were on average older – almost half were over 60 – came from poorer neighbourhoods, and had a death rate nearly eight times that of the general population. For most of them, there seems to be no realistic prospect of their paying over half of the costs that they generate, even if such an extraordinarily skewed distribution of financial burden were acceptable to the general population.[49]

It is worth noting that Canada is the only industrialized country that prohibits user charges for publicly insured health services.  Despite their use elsewhere, the Committee reviewed the evidence on user charges in Canada and concluded in Volume Five that access to publicly funded hospitals and doctors should not depend on the income or wealth of individual Canadians.[50]  We explained that most of the spending and waste in the health care system are beyond patient control; the major expenses, and the decisions that give rise to these expenses, are incurred or influenced by health care providers on behalf of their patients.  These decisions are not made by the patients themselves.  Moreover, the Committee was told that implementing modest user charges could incur administrative costs that would nearly equal the revenue generated from such charges.

For all these reasons, the Committee enunciated in Volume Five Principle Eighteen, which states that while incentives need to be developed to encourage patients to use the hospital and doctor system as efficiently as possible, such incentives should not include up-front user charges.

Some form of patient payment, however, could be used in implementing the primary health care reform that the Committee is proposing in Chapter Four.  It should not be labelled as a user charge, but rather as an “orientation fee.”  When primary health care physicians make referrals to specialists, patients do not incur any costs.  Should the patient decide to take an appointment to a medical specialist without any referral, he or she should be liable for part or all of the cost incurred by this visit.  This form of patient payment is required in Denmark.

 

15.8   Medical Savings Accounts

As described in Volume Three of the Committee’s study on health care, Medical Savings Accounts (MSAs) are health care accounts, similar to bank accounts, set up to pay for the health care expenses of an individual (or family).[51]  They are often established in conjunction with high-deductible (or catastrophic) health care insurance.  Money contributed to an MSA belongs to, and is controlled by, the account holder, accumulates on a tax-free basis and is not taxed if used for health care purposes.  Unused MSA funds can be utilized for other purposes to the benefit of the account holder.

MSAs usually involves three levels of payment.  First, money in the account is used for normal medical expenses.  Next, if the account is exhausted and the deductible has not been reached, the user pays the expenses personally.  Third, public health care insurance covers expenses beyond the deductible.

MSA systems are operating in a few jurisdictions, including Singapore, South Africa and parts of the United States.  The general theory behind MSAs is that consumers would make more judicious and cost-effective decisions if they were spending their own money, rather than relying on the “free” publicly funded services.  As a result, MSAs would limit (if not eliminate) unnecessary utilization of health services, reduce the pressures on public health care funding and encourage efficiency.

A number of proposals for MSAs have been put forward in recent years in Canada. [52]  Given the interest of a number of Canadians in MSAs, the Committee reviewed the literature on the topic and held discussions with various individuals and experts.  Based on the evidence received, we believe that, although MSAs have some interesting elements, they would not be appropriate in our publicly funded hospital and doctor system.

First, there is no consensus among experts on the impact of MSAs on a country’s health status and overall health care costs.  On the one hand, some maintain that MSAs increase consumer choice, encourage patients to make more prudent use of health services and reduce health care spending.  On the other hand, others contend that MSAs can realize only small health care savings at best, segment the risk in the insurance market, drive up costs and have an adverse impact on health as people, particularly the poor and unhealthy, cut back on necessary health care.  Moreover, the most recent literature suggests that current knowledge of MSAs is too limited to recommend their incorporation into the Canadian health care system.[53]

However, the impact on equity is certainly the aspect that is of most concern to the Committee.  Like user charges, MSAs transfer part of the responsibility for health care spending from government directly to patients.  Furthermore, they do so in a manner that falls disproportionately on the poor and on those who are sick, whether rich or poor.  In fact, MSAs reduce the subsidy that the well now pay to the poor.  A recent study reports that, if MSAs were implemented in Manitoba for hospitals and physician services, then the sickest 20% of residents in that province would become personally responsible for over $60 million of health care costs.[54]

In Volume Four, the Committee indicated that a system of MSAs might be contemplated for application in a limited sphere, such as paying for long-term care facilities, where there are already significant private out-of-pocket charges.  However, MSAs should not be applied in the broader health care field involving presently insured services.

Therefore, the Committee strongly believes that funding for medically required hospital care and physician services must remain the responsibility of a publicly funded and administered health care insurance program.  This is consistent with Principle Four in our Volume Five, which stated: “Health services covered under the Canada Health Act should remain publicly insured. Other health services should continue to be funded using a mix of public and private sources, as they are now.”[55]

 

15.9   Pre-Funding for Health Care

In the context of an aging population, the option of pre-funding health care is gaining some popularity.  Pre-funding involves setting aside funds today to meet all or part of projected future cost increases in health care, so as to enable Canada to maintain a relatively stable (or at least more stable) annual ratio of health care spending to GDP.  Excess revenues gathered now for such pre-funding would be placed in a special account, to be made available later for stabilization purposes.

Unfortunately, the costs of full pre-funding are high, even when the stabilization is attempted over a period of 30-40 years during which Canada’s population will be getting significantly older.  Accordingly, there may not be the popular will to implement a long term pre-funding plan now when the need to meet immediate cost pressures in the system is seen to be urgent.  And the question could be raised, as with earmarked taxation, as to why health care costs only should be pre-funded – what about other costs that will also vary with aging of the population?

It has been suggested that it may be more practical to consider the pre-funding of only some elements of overall health care costs, specifically those relating to health services for the elderly, such as home and institutional care, that are not now publicly funded.  Such pre-funding might be accomplished through a government plan financed by current taxation or through private health care insurance coverage.  Such a scheme (comparable to MSAs) would assist individuals to save for future health care costs on a tax-efficient basis, especially if the premiums are deductible and earnings on accumulated funds are exempt from tax.  Ultimately, pre-funding would relieve the publicly funded health care system of some costs that it now incurs in subsidizing some of those who need such services.

A variant of this approach was proposed by the Clair Commission in Quebec, which recommended that a separately managed fund be established to pre-fund the costs of both home and institutional care for individuals no longer able to care for themselves.  The Commission recommended that the fund be financed by a mandatory premium (tax) on personal income from all sources, and be for the benefit of those (particularly the elderly) whose inability to care for themselves was long-term (over six months).  Such a plan would provide an improvement in and integration of existing services for long-term disability and yet avoid a rapid rise in health care costs for an aging population.

This approach has a number of advantages: its financing structure is highly visible and the funds generated are wholly dedicated.  The degree of equity of this funding method, as well as its impact on efficiency and intergenerational fairness, would depend on the source of revenue used to raise the money – personal income tax, public premiums or private health care insurance.

Given that the need to raise additional revenue to fund health care is urgent, the Committee does not endorse pre-funding.  In our view, it would be very difficult to justify setting aside funds for future needs while substantial sums of money are required now throughout the publicly funded health care system to undertake its restructuring, renewal and expansion.

 

15.10  Committee Commentary[56]

Sections 15.3 to 15.9 above have described a wide variety of possible options for raising $5 billion annually in new federal government revenue;  they have also presented in some detail the advantages and disadvantages associated with each option in terms of five specific criteria – equity, efficiency, intergenerational fairness, stability and visibility.  On the basis of this information, the Committee reached conclusions about the approaches it favours.

We wish to say, up front, that there is no such thing as a “good” tax.  There are, however, specific objectives that a new tax or revenue-generating initiative designed to pay for a specific public benefit should meet:

·        The tax should be apportioned fairly and reasonably over the groups that will be called upon to pay it;

·        The tax should have the least possible adverse effect on economic activity and growth in relation to the revenues raised;

·        The tax should involve modest administrative costs of compliance for taxpayers and collection costs to government;

·        The justification for the tax should be clearly apparent to the public, preferably by associating the revenue directly with the benefits of the spending;

·        The tax should produce revenues that are stable and robust (in the sense that they will grow at about the rate of GDP), enabling the funds raised to meet increasing costs in the future;

·        To justify its collection, the tax should be perceived to result in some tangible improvements to the system and to health care coverage.

On balance, the evidence available on how different revenue sources affect equity shows that equity is best served when health care is funded through personal income taxation or consumption taxes, rather than through payroll taxes or fixed premiums.  In addition, from an efficiency viewpoint, international experience indicates that payroll taxation may affect the labour market more negatively than general taxation, because contributions are levied only on wages and employers are liable for part of the contribution.  Finally, research shows that, whatever the method of raising revenue, the level of economic activity at any given time significantly influences the ability of a country to raise money for health care (or for any other purpose).  Moreover, spending on health care has an opportunity cost, and other sectors may take priority in times of economic contraction or military conflict.

However, a major advantage of both payroll taxation and premiums over existing income and other general taxation is that they are more visible, transparent and predictable sources of financing.  Earmarked taxation would certainly help in bringing more visibility, and possibly even greater stability, to a tax-funded health care system.

The Committee is of the view that increased federal revenue for hospital and doctor services should not come disproportionately from those who are ill.  These services are now perceived to be “free.”  The method of raising revenue should not be perceived as a “tax on the sick.”  For this reason, the Committee rejects all forms of financing that call for individuals to pay directly on the basis of their utilization of the hospital and doctor system.

Furthermore, the Committee believes that the increased federal revenue should be raised based on ability to pay; that is, to ensure equity, individuals with higher incomes should pay more than individuals with lower incomes.  For this reason, the Committee rejects the option of a flat national health care insurance premium.  But, as we discuss below, we are not opposed to the option of a progressive health care insurance premium structure.

With respect to direct taxation, calculations done on behalf of the Committee by Brown and Haynes indicate that it would be necessary to increase the rate applicable to each taxable income bracket of personal income tax by 1.1 percentage points in order to raise $5 billion in additional federal revenue.  Another way to finance an incremental annual federal spending on health care through the personal income tax would be to impose a 5.7% surtax on all federal tax.  The Committee was told that these two options would, however, reverse approximately one-third of the 2000 federal personal tax cuts provided under the five-year tax plan and raise marginal tax rates significantly.

Calculations by Brown and Haynes also indicate that it would be necessary to increase the general rate of corporate tax by 7 percentage points in order to raise an additional
$5 billion in federal revenue.  This would, however, reverse all present and scheduled future cuts in corporate tax, leaving Canada’s rates uncompetitive internationally.  This would, therefore, severely affect the Canadian business sector, employment and the overall economy.

The Committee is convinced that the changes to the Canadian tax structure that lead to increased revenue should be done in a way that keeps Canada’s tax rates, including personal income tax rates, relatively competitive with other OECD countries, particularly the United States.  In addition, for the sake of intergenerational fairness, we believe that the working population should not bear a disproportionate burden of taxation relative to the retired population.  For these reasons, and based on the estimates given above, the Committee rejects the option of raising funds by increasing personal income taxes or corporate income taxes.

Although there appears to be some room for a payroll tax from an international competitiveness perspective, the Committee rejects this option on the grounds of intergenerational fairness.  It would be unfair to require one segment of the population – working Canadians – to bear the costs of increased investment in the publicly funded health care system.  This is particularly true in the context of an aging population with a reducing proportion of that population in the workforce.

Therefore, the Committee concludes that there are two possible ways in which $5 billion could be raised annually from Canadians and which comply with the set of criteria and objectives listed above.  The first option is a National Health Care Sales Tax.  The testimony received by the Committee suggests that, although this option might be considered mildly regressive, the benefits gained from an efficiency point of view far outweigh the impact on equity.  In addition, expanded tax credit rebates would greatly reduce the impact of sales tax on lower-income people.  The tax would be collected using the same base as the Goods and Services Tax (GST) so that its collection would be straightforward.  Calculations done for the Committee suggest that the rate of tax required to raise $5 billion annually would be around 1.5% (precisely, 1.3%).  Thus, under the National Health Care Sales Tax option, Canadians would pay a national sales tax of 8.5%, which would consist of a 7% GST and a 1.5% National Health Care Sales Tax.  The GST tax credit rebate program would be expanded to parallel the increase in the rate to 8.5%.

The second option involves a Variable National Health Care Insurance Premium.  Under this option, Canadians would pay, through the tax system, a national health care insurance premium the amount of which would vary with the individual’s taxable income as shown in Table 15.3.  For each taxable income bracket currently used for the purpose of calculating an individual’s federal personal income tax, a flat premium would be charged.  The premium would then increase (indeed double) for individuals in the following income bracket.

TABLE 15.3
ANNUAL FEDERAL REVENUE GENERATED FROM A VARIABLE
NATIONAL HEALTH CARE INSURANCE PREMIUM

1.       Taxfilers in the taxable income bracket from $0 to $31,677 with no net federal tax liability (net of non-refundable tax credits) will not be liable for any health care premium.

2.       In addition, taxfilers in this first bracket who do have net federal tax will pay the lesser of $185 or 10% of taxable income not offset by the income equivalent to the amount of the non-refundable tax credits. This provision is designed to prevent the premium payable by taxpayers in this bracket with only modest net federal tax from being disproportionate to their income tax. For example, suppose that a taxfiler has a taxable income of $9,934. The federal tax on this taxable income is 16%, which amounts to $1,590. But this taxfiler also has $9,000 on which he/she can claim the 16% of non-refundable tax credits or $1,440. Thus, the net federal tax for this taxfiler is $150 ($1,590 minus $1,440). For taxfilers in this income bracket, the premium corresponds to 10% of the value obtained from the difference between the taxable income (e.g. $9,934) and the amounts on which the non-refundable tax credits are claimed (e.g. $9,000). The taxfiler in the above example has a $150 net federal tax from taxable income of $934 in excess of the amounts on which the refundable tax credits are calculated; this taxfiler would thus pay a premium of $93.40 (that is, 10% of $934) instead of $185, the normal premium for this bracket.

3.       There is a total of 15.4 million taxfilers with income less than $31,677 of whom only 7.9 million pay net federal tax. The average premium for all taxfilers in this bracket is $71. For the 7.9 million with net federal tax, the average premium is $170.

4.       Individual taxfilers in the 22%, 26% and 29% brackets are subject to “notch relief”, so that their premium will not be more than the premium for the income bracket below theirs, plus 10% of their income exceeding the bracket threshold. This provision is designed to prevent a taxpayer who receives income that puts him/her just over the bottom of the next income bracket from facing an abrupt and steep increase in premium. For example, an individual with income of $33,177 ($1,500 in excess of the 22% bracket threshold of $31,677) would pay $185 (the premium of the previous bracket) plus $150 ($1,500 times 10%) for a total premium of $335, instead of the normal premium of $370 for this bracket.

5.       Calculation based on 2001-2002 data.

Source: Robert D. Brown and Michanne Haynes. Based on data provided by the Department of Finance.

To ensure that individuals with taxable income only slightly in excess of the bottom of their bracket are not subject to a significant increase in their premiums, a “notch relief” provision has been incorporated into the calculation of premiums.  This notch relief provides that the premiums of taxpayers will not be more than the premium of the income bracket below theirs plus 10% of income exceeding the income threshold for the bracket.  Thus, the Variable National Health Care Insurance Premium is progressive across the entire income spectrum, but it is virtually flat within each income bracket.[57]

Although the Variable National Health Care Insurance Premium would be calculated through the income tax, it is not equivalent to an increase in personal income tax.  The premium has some aspects of an income tax (because it is subject to some variation in incomes), but in fact it basically varies by taxable income bracket, not income.  Moreover, the premium would have only a very moderate impact on marginal income tax rates, which would rise only at the “notch points” where the higher premium in the next bracket is phased in.  Therefore, marginal rates would be relatively unchanged and, accordingly, would have much less impact on personal incentives to earn, save and invest than that which would result from an increase in personal income taxation.

The Committee understands that it is up to the federal government to decide which of the two options, either a National Health Care Sales Tax or a Variable National Health Care Insurance Premium, is most appropriate to raise the needed $5 billion annually.  Both options for raising $5 billion annually in new federal health care revenue have advantages and disadvantages. On the one hand, the National Health Care Sales Tax would be simple to administer, as it would be based on the identical tax base to the GST.  In addition, this option has a built-in growth factor, as sales tax revenue grows with the economy.  Since health care spending is forecast to grow at a rate faster than the growth in GDP, having a built-in growth factor is important.  Moreover, the National Health Care Sales Tax would not be significantly regressive, particularly since the GST tax credit rebate program would be extended to the new tax.  Nonetheless, a major barrier to any sales tax increase is strong public opposition to such taxes in general, and the GST in particular.

On the other hand, the Variable National Health Care Insurance Premium has the advantage of being progressive as the amount of premium increases, in stages, with income.  Such a national premium would also be consistent with the way in which individuals usually buy insurance, namely by paying for it through an annual premium.  However, the premium option has the significant disadvantage that the more steps there are in the premium structure, the closer the premium is to an income tax increase and, for reasons stated earlier in this chapter, the Committee is opposed to an income tax increase.  Moreover, the fewer steps there are in the premium structure (hence the less it looks like an income tax), the more regressive this option becomes.

From the Committee’s perspective, the most important issue is for Canadians to agree to contribute $5 billion annually in new federal revenue for health care.  This is the issue Canadians need to seriously consider, debate and then decide.

Which of the two options described above is eventually chosen as the revenue raising mechanism is less important than agreement to raise the $5 billion.  Nevertheless, in choosing between the two options, the Committee recommends the National Variable Health Care Insurance Premium.  Therefore, the Committee recommends that:

The federal government establish a National Variable Health Care Insurance Premium in order to raise the necessary federal revenue to finance implementation of the Committee’s recommendations.

 

15.11  Current Federal Funding for Health Care

The Committee recognizes that the $5 billion in increased spending is not the entire increase in federal health care spending that will be required in the years ahead.  The cost of the hospital and doctor system to which the federal government now contributes will continue to grow.  The increased revenues required to cover these increasing costs will have to be funded out of the efficiency savings that result from the restructuring recommendations proposed in this report, and from the general growth in federal revenues from existing tax sources.

This raises the question of whether, in order to substantially improve transparency and accountability in federal health care spending, the 62% of federal CHST cash transfers that are currently notionally attributed to health care (according to Finance Canada’s estimation) ought to be paid for through an earmarked tax source (as described in Section 15.4 above).  This would help the public considerably in understanding how much federal money is spent on health care.  Canadians would thus see a more direct link between the taxes they pay and the health services they receive.  It would also greatly help to dispel the widely held perception that health care is “free.”

One way to do this would be to earmark some of the seven percentage points of the GST to health care.  Calculations done for the Committee indicate that it would be necessary to earmark 3.1 of the 7 percentage points of the GST (or around 45% of the revenue generated through the GST) to obtain the 62% of current federal CHST cash transfers which are related to health care.

However, given the need for an increase in the current CHST funding (at least until the full impact of the Committee’s restructuring recommendations come into effect), it is probably appropriate that, if an earmarked source is to be used for the current federal cash contribution to health care, and if the earmarked source is to be the GST, then 3.5 (rather than the calculated current 3.1) of the 7 percentage points of GST revenue (or 50% of GST revenue) should be earmarked for health care.  This would increase federal base funding for health care by $1.5 billion.  In addition, transparency would be enormously enhanced by earmarking half of GST revenue to be the federal cash contribution to health care, supplemented by the additional funding required for implementation of the reforms recommended in this report.

A significant advantage of using the GST revenue as the earmarked source is that it has a built-in escalator: as the economy goes, so does the GST revenue.  Thus, using 3.5 of the 7 percentage points of the GST (rather than the calculated current 3.1 percentage points) to fund the federal cash contribution to the existing publicly funded hospital and doctor system would create the stable and predictable source of federal funding that the Committee called for in Principle Two in Volume Five[58] as well as lead to augmentation of this federal contribution.  Therefore, the Committee recommends that:

The federal government determine an earmarked revenue source which would fund the approximately 62% of CHST currently regarded as being the federal annual cash contribution to Canada’s national health care insurance program.

If the GST is chosen as the earmarked revenue source for the current federal annual cash contribution to the national hospital and doctor insurance program, 3.1 of the 7 percentage points of the GST would be required to meet the current funding levels.  In this case, the Committee further recommends that:

If the GST is chosen as the earmarked revenue source for the current federal cash contribution to the national hospital and doctor insurance plan, then in order for the federal government to make a significant additional contribution to funding to the current hospital and doctor system, half of all GST revenue (or 3.5 of the 7 percentage points) should be earmarked for health care. (This would be in addition to the increased federal funding required to implement the recommendations in this report.)

If the above two recommendations are accepted, then the federal government would be indirectly contributing at least an additional $3.0 billion a year to the existing public hospital and doctor insurance program.  $1.5 billion would come from increasing to 3.5 percentage points the amount of GST revenue earmarked for health care, while another $1.5 billion would, as discussed in Section 15.1, come from money that the provinces are now spending and that they would no longer have to spend once the recommendations in this report are implemented.  This amount would then be reinvested in the existing health care system.

If the federal government also decided to invest the $1-billion contingency (as discussed in Section 15.1) as a transitional payment into the existing hospital and doctor system while the efficiency measures proposed in this report are being put into effect, the total additional contribution of the federal government to the existing system would be at least $4 billion.

Finally, CHST transfers are currently distributed to the provinces/territories on a per capita basis.  If the health care portion of the CHST is paid from an earmarked revenue source as recommended above, the Committee believes that a variation should be made to the way a province’s share of the fund is determined.  More precisely, we believe it is important to acknowledge the fact that the health care costs of the elderly are considerably higher than the health care costs of younger people, and that some provinces have a much higher percentage of their population aged 70 and over than other provinces.  Accordingly, the Committee recommends that:

The share of the federal annual contribution to which a province/territory is entitled for the purpose of the existing national hospital and doctor program be not only based on the proportion of its population relative to Canada as a whole, but also weighted in some way by the percentage of its population aged 70 years and over.

A variety of weighting formulae are possible, and should be explored in order to improve the fairness of current federal health care contributions to the provinces and territories.  However, a simple formula would be to give triple the weight to each provincial resident aged 70 years and over.  This would be of significant assistance to smaller provinces while not significantly hurting wealthier ones.

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CHAPTER SIXTEEN

The Consequences of Not Making the Health Care System Fiscally Sustainable

The previous chapter detailed the Committee’s position with respect to how additional federal revenue should be raised and administered in order to implement our recommendations.  We believe strongly that their implementation is essential if health care reform and renewal is to be undertaken, and if this is to be done in a manner that is effective, transparent and accountable.  The Committee is convinced that an additional $5 billion annually must be invested by the federal government to finance the changes necessary to secure a high-quality and fiscally sustainable health care system.

The Committee also realizes, however, that in a free and democratic society, Canadians may not be willing to pay more taxes to the federal government (through the National Health Care Insurance Premium as we recommend in this report) to support their national health care insurance system – Medicare.  Conversely, the federal government may be unwilling to impose a tax increase on a reluctant population, even though the increased revenue would be spent on health care.  In this case, the question then arises as to what the consequences would be.  They would include the following:

·        No proposed expansion of public health care insurance coverage to include catastrophic prescription drug costs, some post hospital home care treatment and out-of-hospital palliative care would occur;

·        No reform and renewal of the hospital and doctor system would take place and major health care cost pressures would continue to erode the system;

·        Nor would the essential investments in infrastructure occur, particularly those in health information management, health care technology and expanded enrolment in medical and nursing schools;

·        This, in turn, would make implementation of the National Health Care Guarantee impossible. Given Canada’s relative deficiency in medical equipment and health care providers to deal with waiting queues, understandably provincial governments would be unwilling to legislate a care guarantee if its implementation meant they would have to pay the cost of sending an ever increasing number of patients to the United States or elsewhere for treatment;

·        A Canadian health infostructure, along with the full deployment of a system of electronic health records and a system of service-based funding for hospitals, would not be developed, thus limiting Canada’s ability to evaluate the cost, effectiveness, quality, performance and outcomes of its health care system or to develop strategies to increase its productivity.

In short, in the absence of the additional investment the Committee recommends, the Canadian health care system will continue to deteriorate.  The “health care contract”[59] between Canadians and their governments will break if Canadians are unwilling to pay an additional $5 billion in taxes (the citizens’ part of the contract) so that government can finance adequately the changes necessary for the sustainability of our publicly funded, universal, comprehensive, accessible and portable hospital and doctor insurance plan (the government part of the contract), expanded to cover, in part, out-of-hospital prescription drugs, home care and palliative care as recommended.

Under these circumstances, it seems highly probable that, for the reasons discussed in Chapter Five, the courts would decide that under the Charter of Rights and Freedoms, government could no longer deny Canadians the right to purchase private health care insurance that would enable them to receive and pay for health services in Canada that are also included in the publicly insured set of services.  Thus, a parallel private health care system is likely to emerge.

This is not the outcome preferred by the Committee.  We have stated on numerous occasions, and we repeat it here again, that we are in favour of a single public funder/insurer for hospital and doctor services covered under the Canada Health Act.  The single, public insurer model was, in fact, the first principle enunciated in Volume Five.[60]  As a corollary, private insurance for publicly insured health services should continue to be disallowed, provided that such publicly insured services are delivered in a timely fashion.

Nonetheless, the Committee believes it is important to consider the implications of allowing private health care insurance to develop, together with its associated parallel privately funded hospital and doctor system.  This is the purpose of this chapter.  Section 16.1 describes briefly the role of private health care insurance in Canada and in selected OECD countries.  Section 16.2 provides a summary of the findings of recent literature on the impact of private health care insurance on costs, access and quality in the publicly funded health care system.  Finally, Section 16.3 sets out the Committee’s view on the possible development of a parallel private delivery system in Canada.

 

16.1   Private Health Care Insurance in Canada and Selected OECD Countries

Currently, the Canada Health Act requires public health care insurance plans to be accountable to the provincial government and to be not-for-profit.  Moreover, the majority of provinces (Alberta, British Columbia, Manitoba, Ontario, Prince Edward Island and Quebec) prohibit private companies from insuring services that are covered under public health care insurance plans.[61]  In these provinces, private insurers are limited to providing supplementary health care benefits, such as semi-private or private accommodation during hospital stay, prescription drugs, dental care and eyeglasses – all services that are not insured under provincial health care insurance plans.

Four provinces do permit private health care insurance for services that are also publicly insured (New Brunswick, Newfoundland, Nova Scotia and Saskatchewan).  Thus, patients of opted-out physicians[62] in these provinces can substitute private for public health care coverage.  However, provincial legislation that prohibits opted-out physicians from practising both in the publicly funded system and privately has meant that few opt out.  Therefore, few people purchase private health care insurance.

For example, in Nova Scotia, opted-out physicians cannot bill privately in excess of the fee specified on the public insurance fee schedule.  This creates a disincentive, as physicians cannot be paid more for equivalent cases working under private insurance than if they worked within the public plan.  As a result, there are very few opted-out physicians and, consequently, there is little need for private health care insurance to cover publicly insured health services.

In Newfoundland, patients of opted-out physicians are entitled to public coverage up to the amount set out in the fee schedule (in other words, patients are entitled to public funds to subsidize the cost of buying their health services in the private for-profit sector).  Out-of-pocket spending by patients is thus limited to the difference between the fee charged by the opted-out physician and the publicly scheduled fee; but few physicians have opted out in Newfoundland and, therefore, there is little demand for private health care insurance.

In New Brunswick and Saskatchewan, patients of opted-out physicians cannot be subsidized by the public plan as they would be in Newfoundland.  Nonetheless, there has been no significant development of private-sector in health care insurance in these two provinces.

Overall, the Canada Health Act, together with provincial/territorial legislation, has prevented the emergence of private health care insurance in Canada that competes directly with public insurance.  It is simply not economically feasible for patients, physicians or health care institutions to participate in a private parallel system.

This contrasts sharply with the situation in other OECD countries, in which private health care insurance can and does compete with public health care insurance, and physicians can work in and receive payments from both the public and the private sectors.[63]  There are two different models of private insurance for health services in these countries.  The first, prevalent in Germany and the Netherlands, involves a system of private insurance and service delivery that is totally separate from the public system.  The second, in place in countries like Australia, Sweden and the United Kingdom, involves competition between public and private insurers and interaction between public and private providers.

In Germany and the Netherlands, private health care insurance is voluntary for those people with relatively high annual incomes (while public coverage is mandatory for those with middle and lower incomes).  The private insurers must accept all those who apply for coverage and must provide benefits equivalent to those offered under the public plan.  Thus, private insurers cannot “cherry-pick,” i.e., restrict coverage to patients who are healthy and wealthy, thereby leaving the public sector to pay for patients who are less healthy and wealthy.  The premiums paid for private insurance are risk-related (but subject to strict regulation) and do not vary significantly for equivalent coverage.

In the United Kingdom, residents can purchase private insurance to cover the same health services provided in private hospitals as are offered in public hospitals.  Although privately-insured patients in the United Kingdom usually obtain their health services outside the NHS; they can also be treated in NHS facilities in which “pay beds” are available.  Physicians are permitted to earn up to 10% of their gross annual income from private practice.

In Australia, private health care insurance, as in the United Kingdom, competes with the public plan.  Moreover, the Australian government actively encourages residents to acquire private health care insurance by subsidizing 30% of its cost.  Premiums required under private health care insurance are strictly regulated and community-rated (i.e., a single premium applies to everyone, regardless of his/her health status).  Privately insured patients may receive care in either a public or private hospital; in both cases, the public health care insurance plan subsidizes 75% of the hospital costs, while the remainder is covered by private insurance.  Specialists working in public hospitals can treat patients privately and receive payment both from private and public health care insurance plans.

Private health care insurance is permitted even in Sweden, which is generally recognized as being amongst the most socialized of European countries.  In Sweden, as in Australia, government legislation requires that premiums charged by private health care insurers must be community-rated.  Private hospitals do not usually obtain payment from the publicly funded plan, unless care is provided through contracts with the county councils.[64]  Physicians in Sweden are allowed to work in both the public and the private sectors.

The evidence summarized in the Committee’s Volume Three, as well as the findings of a Canadian study,[65] show that the vast majority of care delivered in private for-profit health care institutions in countries like Australia, New Zealand, the Netherlands, Sweden and the United Kingdom is funded through private health care insurance.  Also, physicians practising in those countries are usually employed in the public sector and top up their incomes by working in the private sector on a fee-for-service basis.  It should be noted, however, that in all these countries the private for-profit sector is quite small.

The restriction on the role of private health care insurance in Canada as well as on physician opted-out practice is unique among OECD countries.  Pressures to loosen the restrictions and create a parallel system of private insurance and delivery will increase, however, if timely access to needed services cannot be assured in the publicly funded health care system.  This observation was already noted in 1996 by Glouberman and Vining when they stated that:

It is obvious that any significant initiatives (whether implicit or explicit) to further ration publicly-financed health care will encourage increased demand for privately-financed health care.[66]

Jeffrey Lozon, President of St. Michael’s Hospital in Toronto and former Deputy Minister of Health in Ontario, put this question to the Committee:

When you take the notions of a private insurance system (…) out of the discussion, you are left inevitably with the question of tax increases, whether dedicated or not. I would like to raise this: Why not allow individuals to purchase health insurance that would provide them with another level of care (…)? Why not allow individuals who have the wherewithal to say, “I do not want to have to wait six months for my hip replacement”, to buy that service?[67]

 

16.2   Review of Recent Literature on the Impact of Private Health Care Insurance and Private For-Profit Delivery

Advocates for a parallel private system argue that it will ensure the sustainability of the publicly funded system (by reducing public cost pressures), improve access to the public system (by reducing waiting times), and improve quality in the public system (through competition).  They also argue that private health care insurance would give patients access to greater choice and higher-quality services without compromising the public system.

By contrast, opponents of a parallel private system contend that it will create “two-tier” health care, compromise equity, increase costs, and reduce quality and access to the publicly financed system, as those who have the financial means to purchase private insurance exit to private delivery institutions.  They also argue that, with higher pay-per-unit activity in the privately funded system, personnel is likely to be drawn from the public system, making waiting times longer in the public system in the absence of an adequate supply of doctors and nurses.  Moreover, they contend that the private for-profit sector “cherry picks” the relatively routine, uncomplicated (and therefore less expensive) care – elective surgery and the like – and leaves to the public system the complex, emergency and more expensive services, thereby increasing substantially the unit costs of the public system.

The Committee believes that the truth lies between those two extreme views.  What does the international evidence suggest?  A review of recent literature on the subject of private health care insurance and delivery indicates the following:[68]

·        In the United Kingdom (as in New Zealand), private health care insurance has encouraged the development of private health care delivery.  In both countries, physicians can work in the public as well as the private sector; physicians are usually employed in the public sector and top up their incomes by working in the private sector on a fee-for-service basis.

·        In the United Kingdom (as in Germany and the Netherlands), private health care insurers pay much more than does public insurance for the same health service.  For example, physicians can earn three to four times more in the private sector than in the National Health Service (NHS) for providing the same service.

·        Private hospitals are well established in the United Kingdom and are regularly used by the NHS to pick up excess demand when public sector waiting times get too long (just as some provincial governments use the American private health care sector to relieve queues in Canada).

·        Patients holding private health care insurance in Australia can select the physician of their choice for hospital care.  Evidence suggests that these private patients get quicker access to treatments for which publicly insured patients face a queue.  Queue-jumping by wealthy, privately insured patients is also prevalent in Sweden and in the United Kingdom.

·        In Australia, there has been no change in public-sector waiting times following the subsidy policy to encourage private health care insurance.  Similarly, evidence from New Zealand and the United Kingdom suggests that, although long public waiting times tend to fuel demand for private health care insurance, having it does not reduce the length of public waiting times.

·        Evidence from Australia and the United Kingdom suggests that private parallel delivery systems tend to offer a limited range of services for niche markets; they focus on relatively simple, less complex, elective procedures, shifting the burden of the most expensive cases and patients requiring more comprehensive care to the public system.

·        In the Netherlands, the government regulates the maximum fees physicians may charge for the treatment of privately insured patients.  This has reduced the incentives for preferential treatment of privately insured patients compared to those publicly insured.

·        In the Netherlands, two factors help prevent the health care system from becoming a “two-tier” system.  First, those who purchase private health care insurance cannot fall back on the public system for some of their health care needs.  Private insurers cannot just skim off the easier kinds of care like elective surgery (as happens in the United Kingdom); they must cover all needs.  Second, having private insurance does not enable Dutch citizens to jump queues in the public system.  It is seen as contrary to a physician’s ethical code to select patients with private insurance over other patients; patients of both kinds are treated side-by-side in the same hospitals.

·        In Germany, privately insured people tend to receive more comprehensive and faster treatment than do people with public health care insurance.

·        In both Germany and the Netherlands, governments quite extensively regulate private health care insurance in order to ensure affordable premiums and limit risk selection by private insurers.

·        In Australia, Sweden and the United Kingdom, people who purchase private health care insurance do so out of after-tax income and must continue to pay the same rate of income tax.  That is, they pay doubly for health care insurance through general taxation and private premiums.  This contrasts with the situation in both Germany and the Netherlands, where residents holding private health care insurance do not contribute to any Sickness Funds.

·        Data from 22 OECD countries indicate that increases in private spending on health care are associated over time with decreases in public health care funding.  There appears, then, to be some justification for the concern that increasing the proportion of private financing will substitute for and dilute rather than supplement public funding.

On the basis of the evidence from other countries presented above, the Committee has concluded that no country in which a parallel private health care insurance and delivery system coexists with a public health care insurance scheme can serve as a model that should be adopted, without change, by Canada.

Countries in which parallel private systems compete with publicly funded health care coverage exhibit a number of problems, including: risk selection and cream skimming; no reduction in waiting lists in the public sector; queue jumping; and preferential treatment.  These concerns must be appropriately addressed if governments fail, for whatever reason, to provide funding sufficient to assure timely access to care in our publicly funded Canadian health care system.

 

16.3   Committee Commentary

It is the view of the Committee that, in the absence of governments providing adequate funding, and providers delivering effective and timely health services, to paraphrase section 1 of the Charter, it would no longer be just and reasonable in a free and democratic society to deny Canadians the right to purchase private health care insurance.  They should not be denied the right to purchase private supplementary insurance to pay for services they are unable to access in a timely fashion in the publicly funded health care system.

While the Committee would regard such a development as very regrettable, and while many Canadians would strongly oppose it, it is important to recognize two facts:

·        first, as indicated in Section 16.2, Canada is the only major industrialized country which does not have some element of a parallel private hospital and doctor system;

·        second, the current Canadian system is not nearly as “one tier” as popular mythology would have Canadians believe.

As a matter of fact, people who can afford it can, and do, go out of Canada (usually to the United States) to access the health services they want if their only alternative is a long queue for those services in Canada.

There is also strong anecdotal evidence to suggest that the situation in Canada is similar to that in Australia, where, in the words of one of the Australian witnesses who testified before the Committee; “access to public (health) services is usually more easily obtained by wealthier and more powerful individuals who understand how the system works and have appropriate contacts in hospital service delivery and administration.”

In addition, provincial Workers’ Compensation Boards in most provinces receive preferred access to treatment for their clients based on the argument it is necessary to ensure the client gets back to work quickly (which, of course, saves the Workers’ Compensation Board money).  Moreover, in some provinces, Workers’ Compensation Boards have contracts with hospitals for a specified number of beds and diagnostic procedures, thus ensuring quick access to services for WCB patients.  They also make direct payments to physicians for services performed, and such payments do not count toward any provincial cap on a physician’s income.

All these facts are important for Canadians to reflect on as they consider whether they want the federal government to support or reject the Committee’s recommendation for an additional $5-billion investment in health care.

The Committee realizes that some people will be offended by the Committee’s raising the potential development of a parallel private system of health care.  They are likely to claim that it is possible for Canadians to maintain the current publicly funded system without their having to put more money into the system (e.g., the $5 billion proposed by the Committee).  Such critics will probably say that:

·        The current system is inefficient and that restructuring will save sufficient money to cover the increasing costs of the system.  The Committee has repeatedly acknowledged the critical importance of improving the effectiveness and efficiency of the management and delivery of health care (see Chapter 2 of Volume Five and Chapters 2, 3 and 4 of this report).  But the Committee has also repeatedly stated that there is not enough evidence to support the hypothesis that efficiency gains alone will be sufficient to avoid having to put large amounts of new funds into the system, particularly if the growing gaps in the system are to be closed.  Furthermore, there is widespread to near-universal agreement that substantial amounts of additional money are required to achieve the massive and fundamental changes necessary to create a genuine health care system, capable of achieving acceptable standards of efficiency and effectiveness together with the quality of outcomes we in Canada can, and should, demand.

·        In addition, those who hold the view that efficiency measures only are required to refinance the health care system gloss over the key fact that restructuring in any industry costs money - money that has to be spent before the resulting efficiency savings are realized.

·        The argument will also be made that the additional $5 billion can come from the federal surplus anticipated over time.  This argument, however, completely ignores the fact that there are several other compelling demands on any federal surplus, such as agriculture, the Canadian Armed Forces, infrastructure for Canada’s major cities, and so on.  The Committee believes that the majority of any federal surplus should not be devoted only to health care or even primarily to health care.  More important, since surpluses rise and fall (as now) with the state of the economy, it would be irresponsible for government to base the future of the Canadian health care system on the vagaries of the economic cycle.

Therefore, the Committee categorically rejects the position that the problems of Canada’s health care system can be solved in a way that is cost-free to individual Canadians.  We believe that Canadians, through their federal government, must confront head-on the choice between putting considerably more money into the health care system or having the courts rule in favour of the emergence of a parallel private system.