Healthy Incentives: Canadian Health Reform in an International Context

Healthy Incentives: Canadian Health Reform in an International Context © The Fraser Institute, 1996 © The Fraser Institute, 1996 Healthy Incentives: Canadian Health Reform in an International Context edited by William McArthur, M.D., Cynthia Ramsay and Michael Walker The Fraser Institute Vancouver, British Columbia, Canada © The Fraser Institute, 1996 Copyright © 1996 by The Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embod- ied in critical articles and reviews. The authors of this book have worked independently and opinions expressed by them, therefore, are their own, and do not necessarily reflect the opinions of the members or the trustees of The Fraser Institute. Printed and bound in Canada. Canadian Cataloguing in Publication Data Main entry under title: Healthy incentives Includes bibliographical references. ISBN 0-88975-165-X 1. Medical care, Cost of. 2. Medical care, Cost of—Canada. 3. Medical policy. 4. Medical policy—Canada. 5. Health care reform —Canada I. Ramsay, Cynthia, 1969– II. Walker, Michael, 1945– III. McArthur, William, 1934– IV. Fraser Institute (Vancouver, B.C.) RA412.5.C2H42 1996 338.4’33621’0971 C96–910378–6 © The Fraser Institute, 1996 Table of Contents Preface ...............................vii About the authors ........................ xxi Part I: Health Care Systems in Europe and Australasia Britain’s NHS—Coping with Change............. 3 Working Class Patients and the British State: an Historical Perspective ................. 15 Lessons from Britain’s National Health Service ....... 27 What Can Europe’s Health Care Systems Tell Us About the Market’s Role? ............... 39 Sweden’s Health Care System ................ 53 Health Care in Germany: Structure, Expenditure, and Prospects ................ 63 Reference Pricing for Pharmaceuticals ............ 85 Reference Pricing: A Sham and a Shambles ......... 91 The Great Debate About Reference Pricing of Pharmaceuticals .................... 101 Part II: The Health Care System in Canada Improving Health Care for Canadians Section I: A brief historical perspective ......... 111 Section II: Remedies for health care in Canada .... 162 © The Fraser Institute, 1996 © The Fraser Institute, 1996 Preface Introduction OR YEARS, POLITICIANS in the U.K., Germany, France, Australia, FNew Zealand, the U.S., and Canada have been extolling their respec- tive health care systems as second to none. They have pictured other countries standing in awe at how their nation had stormed ahead to lead the world in this great endeavour. From this lofty perch, it was difficult to see the deficiencies emerging at ground level. A combination of fiscal developments and systemic shocks has re- vealed deep and widening cracks in the edifice of state-sponsored medi- cine as it has evolved in these countries. The recognition that there are problems has led to an international search for alternatives. This document discusses an approach to the reform of the health care sector in Canada that reflects an awareness of the problems as well as the solu- tions that have been proposed and, in some cases, implemented else- where. The most obvious motive behind the current push for health care reform in Canada is fiscal. Canada’s national debt is high relative to most other OECD nations, and there is pressure from financial markets on both the federal and provincial governments to do something about it. Since health care has been the largest and fastest-growing item in all provincial budgets, it is understandable that considerable attention should be focused on cuts to health care funding. It is equally understandable that this concerted effort to control health care costs should be © The Fraser Institute, 1996 viii encountering a considerable backlash as citizens fear the loss of one of the most cherished services on which they rely. There is another aspect of the problem that is seldom discussed but has broader implications. This is the fact that the health care sector is the largest single employer in the country and the source of some of the most satisfying and rewarding jobs in our society. From “high tech” to the caring professions, from research and development to the most pe- destrian tasks, the health care sector is one of the key elements contrib- uting to the economic prosperity of our country. As the population ages, even more economic activity will reside in this sector. Ordinarily, the prospect of future economic growth of this kind would be a source of great exuberance and rejoicing. However, because health care in Canada is organized as a function of government, the cost of providing it is viewed as a problem. In fact, recent estimates by the Office of the Superintendent of Financial Institutions Canada indicate that there is an unfunded liability associated with Medicare of over $1 trillion.1 That is, with the current system in place, and with the current sources of funding, and given the ageing of the population, there will be a shortfall in current dollar terms of at least $1 trillion. The obvious con- clusion for a government manager is that “we must not permit these costs to materialize.” We find this approach to the health care sector inappropriate. First, it is wrong because it would, if followed, choke off the most important source of economic growth that can be anticipated from the changing structure of the population and the resulting changes in the life-cycle structure of economic demand. Second, we think that government at- tempts to choke off such a natural development and expression of con- sumer needs will not be successful and will lead to an increasing pursuit of health care options outside Canada. Third, to the extent that restraints are successful at slowing domestic spending on health care, they will also slow the growth of the economy and the expansion of the government’s tax base, making the maintenance of health care programs even more difficult. 1 Office of the Superintendent of Financial Institutions Canada, Social Insur- ance Programs Division, “Health Care Cost Actuarial Projections,” June 4, 1996. © The Fraser Institute, 1996 ix And there are already problems with our health care system. Waiting times for many operations and diagnostic tests greatly exceed medically acceptable norms, according to an annual survey of Canadian specialists. Waiting times for cancer radiation treatments are three times longer than those for identical conditions in the United States and significantly longer than oncologists think medically acceptable. The supply of technology in Canada greatly lags behind the United States and there are increasing risks from the loss of some of our best younger physicians and specialists as salary caps become the norm. In many provinces, a health care reform process is already under way. The main objective of the reforms is to save money as noted, but also to attempt to ensure that the economies are permanent. Thus far these reforms, as far as we can determine, have involved alterations, in some cases fundamental, in the structures of institutions delivering health care. While in certain cases some consideration has also been given to incentives, for the most part this has not been done. Regionalization, for example, seems to be the new cost containment grail, but there is little evidence that regionalization of effort has in any way changed the incentives for health care sector participants. However, the debate over health reform is more than a debate about scarce financial resources and horizontal or vertical integration in the structure of costs. It is a debate about patient choice, provider choice, the provider-patient relationship, quality of care, and even type of care. It is a debate about a system which provides all of the wrong incentives to patients, providers, administrators, bureaucrats, and everyone involved. It is a debate about a system which does not cater or adapt to the needs of the people working within it or those being served by it. We are not indifferent to the problems of the public sector deficit. Rather than cut the deficit by simply controlling total health care costs, however, we propose to reduce the public sector cost by creating incentives for those who can afford to do so to opt out of the public sector health care budget. This approach reflects our judgement that the problem is not primarily that too many dollars are being spent on health care, but rather that there is no opportunity for those who would like to spend more to do so. This book focuses on the health care system in Canada along two sight lines. The first is evidence from other countries about how their health care systems are functioning and what reforms they are pursu- © The Fraser Institute, 1996 x ing. The second is the requirements for policy change in Canada, using the province of British Columbia to illustrate many specific policy de- tails. The reform proposals that emerge are intended to provide a re- structuring of incentives to ensure that the choices made by system participants are “economic” in the sense that they reflect the alternative uses to which resources might be put. One outcome of this exercise might be to also reduce the total cost of the system. Cost containment is not our muse, however, and we are con- cerned that such an approach to health care might adversely affect the growth and future prospects of our economy, and is in fact already adversely affecting the quality and quantity of health care available to all Canadians. We believe that the proposals contained in this document address the economic, quality, and quantity issues related to health care in Canada. A solution denied While governments have been cutting back on funding for increasing demands for care, they have made it virtually impossible for Canadians to voluntarily pay more for their own health care.

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