October 2004: Our Manufactured Health-Care Crisis

Governments cut taxes to deny themselves Medicare Funding
October 1, 2004

Canadians can be excused if they thought the healthcare “crisis” was over, what with the Romanow Report telling us it’s as sustainable as we want it to be, and the federal government pouring billions of dollars into public health care.

They can be excused if they are getting a little testy and confused with political leaders and pundits, high on ideology and short on facts, who still insist the sky is falling and health care is unsustainable—in spite of all the evidence to the contrary.

The facts show that the problem is not with our ability to pay for public health care over the long run. The problem is with our willingness to manage rising costs through the types of reforms recommended by Romanow.

The recently-released OECD health database shows that 29 of 30 OECD nations saw a larger share of their Gross Domestic Product going to spending on health care between 1997 and 2002. Fifteen nations saw health’s share of GDP increase more quickly than Canada’s, including the United States, Britain, Norway, Sweden, the Netherlands, Ireland, Italy, and Japan. That’s total health-care spending, both public and private.

When you look at public spending on health care, Canada’s performance is more impressive. Compared with a decade ago, Canada’s public spending on health care as a share of GDP has fallen—from 7.4% of GDP in 1992 to 6.7% of GDP in 2002—a dramatic decline that has been matched only by Finland.

So where’s the crisis?

Public spending in this country is growing less rapidly than private spending, pointing to important efficiencies—something we should be paying attention to if controlling spending growth is the objective.

At less than 7% of the economy, even if public spending on health care continues to grow, it is in no danger of crowding out other spending priorities, such as education, child care, or public housing.

A recent and well-buried study by the federal Department of Finance noted that the current system, even if not reformed, is sustainable well beyond the peak use years of our aging baby-boomers.

Why, then, are rising costs more of a problem today than a decade ago, when they were rising even faster? Two words: tax cuts.

Since the mid-1990s, tax cuts have become the universal policy initiative of choice in Canada. The result has been to constrain the growth of tax revenues and thus governments’ ability to pay for all the services they used to provide.

Tax cuts have cost public coffers a cumulative total of almost $250 billion in forgone revenues since 1996.

At the same time, cumulative increases in public spending on health care—about $108 billion—are being portrayed as a fiscal threat.

Canada is not facing an unmanageable financial problem. What started out as macro-economically induced pressure turned into a budgetary nightmare created by politicians themselves. It is a fiscal crisis effectively of their own making.

To resolve this problem today would only require reversing a small portion of the tax cuts of the past decade. For example, simply reclaiming part of the federal income tax cuts (both personal and corporate) amounting to one percentage point across the board would yield well over $6 billion a year—far exceeding the amount needed to close “the Romanow gap.”

But the federal government does not need to do this, since its annual budgetary surpluses have exceeded $6 billion for the past four years. This year’s surplus is expected to be at least as large: in late March the 2004 federal budget foresaw $20 billion in fiscal surplus over the next five years; but by June the cost of the federal Liberals’ election promises added up to between $39 billion and $41 billion, all funded by the apparently revised Finance Department surplus forecasts.  

Provinces feeling the pinch of tax cuts may not face the luxury of budget surpluses, but they have the same revenue levers at hand. In Ontario, as at the federal level, simply restoring one percentage point to each personal income tax bracket—which is merely a fraction of the reductions since the mid-1990s—would yield about $2.5 billion in new revenues. This is exactly the amount raised by the new Ontario health premium.

Historically, we relied on the progressivity of the income tax system so that people would pay in direct proportion to their means. What the new public finance mechanisms have in common is that health premiums, user fees, or sales taxes are all more regressive ways of raising revenue. The point is that there are many ways to raise revenues, some more fair than others—but we don’t need to raise a lot more. We are not facing an unmanageable financial problem.

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Elected officials of all political stripes are now facing an unappetizing choice: maintain tax levels and cut services, or maintain services and increase taxes. There are no free lunches. Hanging on to what we’ve got is going to cost us more, publicly or privately, and nowhere is that more true than in health care. Governments will find it unsustainable to keep their promise to freeze tax rates, let alone cut them further.

The choice is unpalatable, but it is real. Protecting health care requires more revenue. But, instead of increasing revenue in the fairest way—through personal and corporate income taxes, which are designed to address ability-to-pay issues—we see a shift towards revenue-generating gimmicks like health premiums, deductibles, and delisting services, which redistribute resources away from those who already have the least. And, notwithstanding politicians’ commitment to enforce the Canada Health Act, these policy choices also compromise two of the key principles of public health care: accessibility and universality.

It has been repeatedly shown that people on limited incomes who can’t afford to pay for drugs or eye exams often opt not to “consume” such goods and services. The current range of provincial options to pay for health care offloads costs onto people who can’t afford them—in the same way that the federal government offloaded costs onto the provinces.

If governments feel that we, collectively, can’t afford public health care, what makes them think that we, as a society, can better afford private health care by paying for it individually?

Yes, the costs are rising for health care. But how we pay for these rising costs is a political, not an economic, choice.

The fact is that not only are health costs manageable, but they are also more affordable as a share of GDP in most parts of the country than they were a decade ago. But it would be foolish to rest on this argument. We can and must do more. Rising costs can be managed wisely, and our public dollars stretched much further.

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Average provincial spending on health care increased from 33% to 38% of all program spending between 1990 and 2003. Ontario is now spending 43% of its budget on health care. But there’s more to this story. Since the mid-1990s, budgetary constraints have forced provinces to cut funding to programs that do not have the same visibility or support as health care: housing, social assistance, transfers to municipalities, and environmental programs.

Cutting back other programs means that health care looks more like the monster that ate everyone’s budget.

Given the priority placed on tax cuts, governments’ capacity to re-invest in health care, plus a wider range of programs, has been deliberately limited. That has nothing to do with the sustainability of increases in health care. It has to do with the unsustainability of a major tax cut agenda.

Obviously, the tax base must be renewed, as the Ontario government has done. But the ability to manage is not just about replacing the loss of tax revenue. It should be about controlling the cost drivers in the system—something our political leaders have been loath to do.

We need to manage the soaring costs of pharmaceuticals; come up with a labour strategy to prepare for the next wave of retirements; and we need to find lowest-cost ways of financing the current phase of capital investments in public infrastructure.

The so-called crisis in health care was manufactured by the omission of federal leadership over the past decade and the commission of a few ideologically-driven provinces bent on creating a thirst for two-tiered health care by starving their respective systems.

Following last month’s First Ministers’ meeting on Medicare, a few premiers may continue to use the specious “unsustainability” argument as a smokescreen for more privatization, contrary to the public’s overwhelming support for a single-tier, public-supported and delivered system. We can only hope that Prime Minister Paul Martin’s claim during the election campaign to be Medicare’s “saviour” will morph into the kind of tough national leadership that will be necessary. Together with the strong leadership of a few pro-Medicare provincial leaders, this could put us firmly on the Romanow pathway, so that Medicare can be improved, strengthened, and sustained for generations to come.

(Armine Yalnizyan is an economist and CCPA Research Associate and Charles Pascal is executive director of the Atkinson Charitable Foundation.)