The "Unsustainability Myth"

Don’t believe claims Medicare is becoming unaffordable
July 1, 2010

Total health care spending in Canada has been rising in recent years, taking larger shares of government revenues and budgets. It has been accused of “crowding out” government funding of other important public services. Some economists and pundits are now predicting that, left unchecked, public health care will soon be financially unsustainable, if it isn’t already. They point fearfully to Canada’s aging population and the escalating costs for scientific advances in care and treatment. Some suggest that only a greater privatization of health care can bring down the allegedly unaffordable public costs.

“We must have an adult debate about how to deal with this,” former Bank of Canada governor David Dodge told the Liberal Party conference in March.

But an “adult debate” on the sustainability of public health care must start from an understanding of the forces that are driving health care spending.

The central fact is that, apart from periods of recession, spending on Medicare – hospitals and physicians’ services – has remained fairly steady, fluctuating between 4% and 5% of the country’s gross domestic product (GDP) since 1975. After the introduction of Medicare in the late 1960s, these costs stabilized because universal, comprehensive coverage consolidated expenditures on the hands of a single payer.

The cost of health services not covered by Medicare, however, has risen from 3% of GDP in 1975 to 7% in 2009, accounting for most of the increase in our total health care costs in recent years.

Even so, despite the alarmist claims of their “unsustainability,” Canada’s expenditures on health care are no higher than those of other OECD countries, and the public share of our overall health costs – 70% -- is relatively low for high-income OECD countries.

Private health insurance, mainly for prescription drugs and dental care, now accounts for 12.7% of Canadian health spending, the 14th highest in the world. Not surprisingly, the country with by far the highest rate of private health insurance, the United States, also has by far the costliest health care system, now at 16% of GDP.

The pundits in Canada are correct in pointing out that spending on health care by our provincial governments over the past 15 years has taken increasingly larger bites out of their annual budgets. But this is not the result of out-of-control spending on Medicare; it is simply because large cuts in non-health-related programs inevitably inflate Medicare’s share of budget spending. As for the increase in overall health care costs, it has mostly been for drugs, dentistry, and other non-Medicare treatments.

The appearance of escalating Medicare costs has been manufactured by the substantial cuts in personal and corporate income taxes by the federal and most provincial governments, particularly since 1997. Between 1997 and 2004, these tax cuts removed an estimated $170.8 billion from public sector revenues.

As a consequence, provincial revenues are by now roughly $35 billion a year lower than they would be if the tax cuts had not been made – or the equivalent of about half of all provincial spending on Medicare. The provinces, in effect, have deliberately – and unnecessarily – deprived themselves of the revenues they need for all the social programs they fund or co-fund, not just Medicare.

Of course, the provinces’ revenue shortfalls were not all self-inflicted. The federal government’s massive cuts in financial transfers since the mid-1990s also left gaping holes in provincial budgets. Some increases in the transfers have since been made, but fell far short of making up the loss.

These tax cuts were not driven by the alleged need to help poor families or struggling business firms. Most of the benefits went to high-income individuals and highly profitable corporations, not to the neediest Canadians. But the reduced tax revenues gave right-wing governments the excuse they needed to slash public programs and services. It was politically unpopular to target health care, so instead they cut funding to education, unemployment insurance, and other programs. This created the illusion that mounting health care costs were “crowding out” other services and were thus becoming “unsustainable.”

*     *     *

What are the real motives behind these claims of financial unsustainability? Two motives stand out.

First, under Canada’s universal, tax-funded Medicare, higher-income people contribute proportionately more to supporting the system, without receiving preferred access or a higher standard of care. Any shift to more private financing would ease the relatively larger burden on those with higher incomes and allegedly offer better or more timely care for those willing and able to pay for it.

Second, every dollar of health care expenditures is also a dollar out of someone’s income. The Ontario government’s recent proposed change in druggists’ reimbursement for generic drugs made this clear when the shares of Shopper’s Drug Mart fell 10% overnight.

Privatization is a way to avoid cost containment, re-opening greater income opportunities for providers of care (and private insurers) outside public control. Expenditures would inevitably rise, as in the United States, but public budgets might, in the short term, be contained. “Unsustainable” public spending magically becomes sustainable when shifted from taxpayers to patients.

Yes, it is indeed time -- long past time -- for an “adult conversation” about these motivations, and for a clear identification of the winners and losers from eroding or dismantling Medicare. (Economists who evade this issue should be ashamed.)

It is also time for an adult conversation about the real drivers of health care cost escalation. Researchers have known for decades that population aging, though real, is a minor factor. Its impact will increase, but it will always remain secondary to increases in both the intensity and costliness of care.

This is the real issue: Where is the money going, both public and private, and are we getting value? Again the Ontario generic drug plan makes the point. Rising expenditures are not an unstoppable law of nature. Simply cutting the cost of generic drugs will reduce overall costs by several hundred million dollars at a single stroke. The real issue is political: those millions are also cut from the incomes of pharmacies.

Are there other opportunities? Yes. Medical imaging and laboratory tests are currently the major causes of cost escalation. What are the benefits? No one really knows. Ultrasound for low-risk pregnancies is up 50% in 10 years. Why? Patterns of medical practice and hospital use vary widely across the country, for no apparent reason. Toronto’s Institute for Clinical Evaluative Science, among others, has tracked some of these large unexplained variations, but their findings are largely ignored.

These are the kinds of questions we need to discuss, not making “stark choices” about relieving the cost burden on high-income taxpayers and improving their benefits. (And, incidentally, opening up new markets for private insurers.)

Panic-mongering about a “gray tsunami” is yet another distraction from the real health care problems and solutions that should be concerning us.

Canadians consistently demonstrate that they support public health care. The most recent national poll by Nanos Research, in May, confirmed that 90% of Canadians support public solutions to the problems in our health care system.

They are right. Medicare is as sustainable as we want it to be.

It is also as comprehensive as we want it to be. Tommy Douglas, renowned as “the father of Medicare” in Canada, always maintained that covering doctors’ services and hospital care was only the first step. His vision was ultimately to extend Medicare to cover drugs, dentistry, vision, and most other aspects of health care.

Such an expansion of coverage, of course, would necessitate substantial spending increases. But Canadians might quite rationally accept such a bargain. Under public insurance, the higher costs would fall mostly on high-income taxpayers, while the benefits would go to all patients, even the poorest.

To say such increases would be “unsustainable” boils down to saying that improved health care should be confined to the people rich enough to pay for it privately, while everyone else should be denied care they can’t afford.

“Sustainability” is actually a moral issue in that it defines the mutual obligations of the members of a community to one another. Public choices are private morality writ large.

There is a wolf at the door of Canada’s Medicare system. But it is a political wolf dressed in phony economic attire to deceive the sheep.

(Robert G. Evans is a University Killam Professor in the Department of Economics at the University of British Columbia and a member of that university’s Centre for Health Services and Policy Research. He is an officer of the Order of Canada, and a fellow of the Royal Society of Canada and the Canadian Academy of Health Services.)