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The Health of Canadians – The Federal Role

Interim Report

Volume Four – Issues and Options

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Chapter Eight:

Issues and Options for the Financing Role

8.1 Introduction

Funding for health care in Canada, and indeed in all OECD countries, is the subject of intense debate around a number of questions. What is the appropriate level of public health care funding? What role should the private sector play in the financing of health care? What would be the best public/private mix for funding health care? In countries with federal political systems like Canada, there is also the question of how to balance the spending on health care between the various levels of government.

All health care systems are hybrids: they have a combination of public and private financing. During phase three of its study, the Committee was made aware of the substantial differences among OECD countries in terms of what they each cover under their public health care insurance schemes and how these are funded.

Our international comparative study indicated that the most comprehensive publicly financed systems are currently found in Germany, Sweden and the United Kingdom. The public share of total health care spending is greater in these three countries (with 84% in Sweden and the United Kingdom and 75% in Germany) than in Canada (70%). Many countries with a similar share of public health care spending to Canada – such as Australia and the Netherlands – also provide coverage that is much broader than is available in Canada.

In contrast to Canada, however, user charges for publicly insured services are required in Australia, Germany, the Netherlands, Sweden and the United Kingdom. Furthermore, private health care insurance that covers the same benefits as public insurance is available in these countries, while it is not in Canada. This raises the possibility that it is the way the participation of the private sector is organized in these countries that has enabled them to achieve broader levels of public coverage for health care.

In Canada, the debate over the affordability and sustainability of the publicly funded health care system is intertwined with the broader issues of which services should be deemed "medically necessary" and therefore subject to public coverage, who should be entitled to publicly funded health care and how these services should be paid for. The federal role in transferring funds for the provision of health care to the provinces and territories and in administering the Canada Health Act is central to this debate.

With respect to health care financing, the Committee has identified the following four broad issues:

1. What changes can be made to the way health care is delivered that could have an impact on the level of funding required?
2. What should be the form of federal funding for health care?
3. How should government raise revenue for the purpose of health care?
4. What services should be covered and who should be covered under public health care insurance?

The options presented in this chapter are not intended to be exhaustive. Nor are they to be seen as mutually exclusive; elements from the various options can each be reconfigured in many different ways.

 

8.2 What Changes Can be Made to the Way Health Care is Delivered that Could Have an Impact on the Level of Funding Required?

In considering the future financing structure of health care, it is important for readers to reflect on the question of whether new financing sources are needed to make the system economically sustainable in the long run, or whether sufficient changes to the system can be made so that the resulting efficiencies will generate enough money to pay for future cost increases (caused by, among other things, demographic aging and increasing drug costs).

Many options for change were presented throughout the Committee’s hearings during the first three phases of its study. While these options do not necessarily relate directly to the federal financing role, they may nonetheless enable savings that would have an impact on the overall level of funding required to sustain the system.

Several options for improving the efficiency of the current system are outlined in sections 8.2.2 through 8.2.5 below. The Committee believes that most, and probably all, of these changes ought to be made in the near future.

 

8.2.1 Improving Efficiency and Effectiveness

There are two schools of thought on the question of whether new financing sources are needed to make the health care system sustainable. Proponents of the first school contend that operating the health care system more efficiently will save enough money so that no new sources of funding are required. This view is reflected in the recent Fyke report on health care in Saskatchewan, and in reports and newspaper articles by many observers, including Dr. Michael Rachlis.

For example, the Fyke Commission concludes that, "changing the delivery of primary health services, carefully planning the delivery of specialized care, continuing to invest in wellness, and making a commitment to quality improvement are the keys to an effective and sustainable health system." For his part, Dr. Rachlis has suggested that it is by generalizing best practices, in particular in the area of primary care reform, that the system can best be sustained. Among the examples he has cited are group practices in Beechy, Saskatchewan, and Sault Ste. Marie, Ontario, that have allowed the number of patients served per physician to increase dramatically, by integrating nurse practitioners and others into a comprehensive primary care group.

While many analysts recognize that the effectiveness and efficiency of Canada’s health care system must be improved, there is no agreement on the extent of the savings that this would generate. Moreover, there are currently two major barriers that hamper our ability to improve effectiveness and efficiency. One relates to the lack of performance indicators, while the other concerns the difficulties involved in bringing about behavioural change.

The scarcity of indicators for measuring improvements in health status and the lack of information on the effects of medical treatments make it difficult to assess the effectiveness of care and the overall performance of the health care system. Hence, there is, at present, insufficient evidence to demonstrate that improved efficiencies alone would be enough to bridge the gap between increasing health care costs and government funding.

This leads to the second school of thought on the issue of the need for new funding sources. This school agrees that in a $90 billion health care system some economies are certainly possible and that every effort must be made to implement such efficiency-driven changes.

Proponents of this argument contend that it will be difficult to implement changes to enhance efficiency and effectiveness because both the attitude and the behaviour of a variety of vested interests in the health care system – ranging from patients, to service providers, to drug companies and so on – have, over the years, proven to be very difficult to change. Indeed, if many of the proposed changes were as easy to put in place as proponents of the first school imply, then one has to ask why they have not already been implemented.

The Committee therefore believes that it is important to be prudent and to develop policies and plans that will be effective, should sufficient efficiencies not be gained from changes to the way the system works. To do otherwise is to put all our eggs in one basket. This would mean betting the future sustainability of the health care system on making changes when there is not yet enough evidence to demonstrate that they are actually achievable, and there is no reliable indication of the amount of money that can be saved through such changes.

In saying this, the Committee realizes that there is an important advantage inherent in the approach advocated by the first school of thought – it allows most of the tough financing questions, outlined in the rest of this chapter, to be avoided. While it is tempting to adopt the first school’s point of view, and thereby duck the most controversial health care issues, the Committee believes that responsible public policy planning requires that the view of the second school prevail, and that Canadians should now pursue the discussion on how to raise additional funds, at the same time as efforts are made to organize health care delivery more efficiently.

We look forward to hearing the views of readers on the critical issue of which school’s approach should be the basis of health care policy.

 

8.2.2 Reforming Primary Care

The way in which primary care reform can be used to make health care delivery more efficient was described in section 5.1. As noted earlier, primary care refers to the initial point of contact that people have with the health care system. Currently, primary care physicians are the "gatekeepers" of the system, and are the ones who must refer patients elsewhere in the system for further treatment. There is unanimity among provincial and territorial governments that primary care reform needs to be undertaken. Reforming primary care means encouraging the use of the most appropriate health care providers (not necessarily physicians), having providers work in multidisciplinary teams, and adopting new ways of remunerating physicians – either through some form of capitation or salary or a blended payment system such as mixed capitation and fee-for-service. Many experts believe that primary care reform can generate substantial benefits for the following reasons:

• First, since physicians would not be paid solely on the basis of fee-for-service, the current incentive for physicians to want to see every patient who comes into their practice is eliminated. It therefore becomes possible for a patient to receive service from a health care professional who is qualified, but not necessarily over qualified. Thus, in many cases in which a doctor now furnishes care, service could instead be provided by a triage nurse, a nurse practitioner or another health care provider.

• Second, under a primary care capitation system, the doctor who is responsible for a patient gets a fixed amount of money to provide the patient’s care for a year. Thus, for example, there is an incentive for a doctor only to order tests which are genuinely required, since the payment for the tests comes out of the fixed amount of money the doctor has received for the patient’s care. When tests are no longer "free" to the physician, as they are now, behavioural change in the way tests are ordered occurs.

• Third, the multidisciplinary teamwork which forms the basis of primary care reform allows for more appropriate and efficient use of human resources in health care.
• Fourth, a reformed primary care system could also allow more time and effort to be devoted to wellness promotion and illness prevention, thereby helping to reduce the quantity of health services that would need to be provided in the longer term.

Primary care reform could therefore potentially generate considerable savings for the health care system. It would, in all likelihood, bring about a decline in the rate of increase of health care expenditures, if not an absolute decrease in expenditures. Such "savings" could be ploughed back into the system by providing additional services which are not now included under the public health care system in some or all of the provinces.

For example, health services by non-physicians, such as physiotherapists, speech therapists, occupational therapists could be covered (at least for those patients who do not now have these services covered under a private health care insurance plan). In addition, some diagnostic services (e.g. a PSA test for screening for prostate cancer) could be added to the list of covered services, as could rehabilitative care and certain medical devices. Again, presumably, these services would be added only for those people for whom they are not now covered.

The two service areas for which there appears to be the greatest public demand for coverage expansion in Canada are drug therapy and home care. Given their significance and potential cost we have treated them separately in Sections 8.9 and 8.10.

 

8.2.3 Regionalization of Health Services

Regionalization has been an important part of the restructuring of health care that has taken place since the beginning of the 1990s. Regionalization usually encompasses both decentralizing and centralizing elements. Decentralization usually entails moving planning, budgeting and decision-making authority from the provincial or territorial level to regional bodies. Centralization involves moving the planning and governance of health care and medical services from individual institutions or agencies to the regional level.

All provinces and territories, except Ontario and the Yukon Territory, have implemented some form of regionalization. The objectives of regionalization include streamlining the provision of health services and providing care according to the needs of the community. Regionalization also offers the flexibility to bring responsibility and accountability for health care delivery closer to the people who depend on these services.

A major advantage of regionalization is that it enables planning to be done, and money to be moved, across the traditional silos of the health care system. The cross-silo governance, management and planning which regionalization makes possible has allowed considerable savings to be made in several provinces. For example, in Calgary, by spending money for flu vaccination for the elderly, curtailing the number of flu patients who came to the emergency ward generated considerable savings. This kind of juggling of funds across silos was usually not done before regionalization.

Many experts believe that regionalization has provided the opportunity to integrate and better co-ordinate the delivery of the full spectrum of health services, ranging from health protection and prevention, through primary care, to acute care, and finally incorporating rehabilitation and chronic care services. They also point out that significant benefits can be gained by integrating, at the regional level, hospital and medical budgets which otherwise would remain separately funded. For example, the Edmonton Regional Health Authority integrated all the budgets devoted to the provision of laboratory services. Estimates suggest that this enabled lab costs to be reduced by almost 40%, as regional managers (using the capacity of their hospital labs as a bargaining lever) drove much harder bargains with private labs than had been possible for the provincial health care insurance plan.

Regionalization, like primary health care reform, is a key element in improving the integration of health services, even if it is not the whole answer.

 

8.2.4 Contracting Private For-Profit Health Care Facilities

In order to save the public sector from having to pay the capital cost of specialized delivery units (often called clinics), one option might be to have such clinics built and operated by the private sector, but have the medically necessary health services they perform paid for by the public health care insurance plan, in the same way that the Shouldice Hospital in Toronto (which specializes in the treatment of hernias) is remunerated.

The Alberta government (under Bill 11, 2000) allows regional health authorities to contract out to private for-profit facilities for the provision of some publicly insured health services (non-major surgical procedures). Other countries, notably the United Kingdom, allow private health care insurance that enables patients to be treated in private for-profit health care facilities.

Advocates suggest that contracting out to the private, for-profit sector offers a number of advantages over investing the same amount of money in the existing public or private not-for-profit sector. In their view, contracting out leads to improved access, declines in waiting times/lists and increases in efficiency by reducing the demand on public or private not-for-profit hospitals. They also suggest that the prospect of facing competition could encourage the public hospitals to become more efficient in managing their resources and that the resulting cost savings could be used to improve quality and access to care.

Opponents contend that contracting out to private facilities reduces the funding allocated to existing public hospitals, thereby possibly lowering the quality of care they provide. Public hospitals could also lose some of the other revenue they currently earn through the provision of uninsured services (cosmetic surgery, Workers’ Compensation Board, etc.) if their private for-profit competitors decided to deliver these services.

If specialized privately owned delivery clinics are permitted, it is widely acknowledged that they would have to be closely supervised in order to ensure that adequate quality standards were maintained, much as they are in other countries with parallel public and private systems.

 

8.2.5 Devoting More Resources to Health Promotion, Disease Prevention and Population Health

A number of experts contend that no additional public funding should be devoted to health care delivery. In their view, some of the funding from health care delivery should rather be redirected towards health promotion, disease prevention and to implementing population health strategies.

During Phase Two of its study, the Committee was told that health promotion and disease prevention can generate substantial long-term benefits, both by reducing costs to the health care system overall and by improving quality of life for Canadians. Experts in this field argue that it might be possible to achieve a better return on the health care dollar by promoting healthier lifestyles than by spending the same amount of money on the treatment of illness.

Similarly, evidence suggests that investing in population health strategies, such as early childhood development, improving levels of education and ensuring a fairer distribution of income, can bring greater benefits in the long run than does spending more on health care delivery. In the longer term, this could significantly reduce pressures on health care costs.

It is clear that decisions concerning the allocation of public resources necessarily involve important trade-offs and the balancing of competing interests. In the final analysis, Canadians must decide what portion of public resources should be devoted to health promotion and prevention and how much on the treatment of illness. Similarly, we must determine whether government resources should be directed towards other health-related uses, such as electronic patient records, the health infostructure, health research and so on, rather than on the direct delivery of health care services. These issues and options will be further developed in Chapter 11 that deals with the population health role of the federal government.

 

8.3 What Should be the Form of Federal Funding for Health Care?

As explained in the first report of the Committee, federal funding to the provinces and territories for the purpose of health care has a long history, and federal transfers have taken many different forms since the first health care insurance program was negotiated in the late 1950s.

Early federal transfers were cost-shared. Federal contributions matched provincial/territorial levels of health care expenditures and these transfers were to be used specifically for health care. As indicated in the Committee’s Phase One report, cost-sharing arrangements had a number of disadvantages. They were unpredictable for the federal government, cumbersome to administer and perceived as a federal intrusion into an area of provincial jurisdiction. They were also considered inflexible, as they tended to stifle innovation in the delivery of health care by the provinces.

The introduction of Established Programs Financing (EPF) in 1977 converted the form of federal transfers to a block funding program for health care and post-secondary education. EPF had four major characteristics. First, the federal contribution was no longer tied to provincial/territorial spending and the federal government alone determined the amount of EPF funding to be transferred. This solved the problems related to the unpredictability of federal costs and of cumbersome administrative procedures. Second, a notional proportion was allocated to the two EPF components (about 70% for health care and 30% for education). Third, EPF was split between cash transfers and tax transfers. The second and third measures resolved the problems of perceived federal intrusion and the discouragement of provincial innovation. At the same time, however, they also contributed to reducing federal visibility in health care financing. And fourth, EPF transfers were to grow in line with an escalator that took into account both GDP and population growth. This escalator prove difficult to sustain, particularly in periods of fiscal restraint, and was modified on several occasions in the 1980s and 1990s in order to reduce and even freeze the rate of growth of EPF transfers.

In 1996, the federal government merged EPF and the Canada Assistance Plan (CAP) in order to create the Canada Health and Social Transfer (CHST). Like EPF, the CHST is a block funding mechanism; it provides federal transfers for health care, post-secondary education and social assistance. Unlike EPF, the legislation governing the CHST does not designate, either specifically or notionally, what proportion of the total entitlement is to be allocated to each of these fields. Nor does it indicate how the provinces should make use of the federal funding. Unlike EPF, there is no escalator associated with the CHST transfer.

As in the past, the five principles of the Canada Health Act apply only to the cash portion of the CHST. The federal government has the authority to withhold the cash transfers to provinces/territories that do not comply with these principles. However, the federal government cannot decrease the tax transfers because it does not have the power to require the provinces/territories to reduce their income tax rates. For this reason, it has often been observed that federal cash transfers would have to be retained if there are to be national principles guiding public health care insurance in Canada. Otherwise the federal government would have no leverage for persuading the provinces to abide by the national principles.

The current funding arrangement suffers from three major weaknesses: a lack of federal visibility, a lack of federal and provincial accountability, and a lack of stability in federal funding. Federal visibility is weak under the CHST because it is no longer possible to identify, even notionally, the actual level of the federal contribution to health care. Moreover, since the amount of the federal contribution to health care is unknown, it is not possible to trace how the provinces and territories use federal funds, which leads to a lack of accountability.

Finally, federal transfers have been subject to a great deal of variation over the past 40 years. From the late 1950s to the mid-1970s, under the cost-sharing arrangements, the federal contribution was 50 percent of eligible provincial/territorial spending on health care. During the EPF era, the federal government unilaterally restricted the rate of growth of EPF transfers. When the CHST was introduced in 1996-97, federal transfers were systematically reduced. Since then, the federal government has halted cuts to the CHST transfers and even allowed them to grow once again. However, according to the provinces/territories, the federal government has failed to restore the cash portion to its previous levels.

Provincial and territorial governments claim that the overall impact of federal measures to restrain the growth of transfers and then to reduce them has been to generate a "funding gap". This gap represents the increasing difference over time between what the federal government has contributed to the health care system by way of its transfers to the provinces and territories, and what these jurisdictions have had to spend in order to meet rising costs.

Provincial and territorial governments have repeatedly called on the federal government to restore the CHST cash transfer to its 1994-95 peak level and to include an escalator in order to ensure appropriate growth in the CHST. In their view, this additional investment is necessary just to maintain the current health care system, while extending public coverage to other health services would require even more federal funding.

More recently, some provinces have suggested that more tax transfers be provided as a means of increasing the provincial/territorial share of growing government expenditures on health care. Moreover, in a recent news release, the provincial/territorial Finance Ministers stressed that "Canadians cannot wait 18 months until Commissioner Romanow presents his report to the Prime Minister. The health care system requires urgent and immediate action towards a more equal sharing of increasing costs."

Against this background, a number of options for the design of federal transfers have been suggested in recent years.

 

8.3.1 Return to Cost-Sharing Arrangements

Under this option the federal contribution to health care would be specifically designated as a fixed proportion of provincial/territorial government spending on health care, which would have the effect of increasing federal visibility in health care and enhancing federal accounting and accountability. It would also bring more predictability and stability to federal funding and improve accountability at the provincial/territorial level. Moreover, it could enable the "funding gap" to be reduced, which would assist the provinces/territories in dealing with increasing cost pressures. However, as explained in Section 8.3, when cost-sharing was used in the 1960s and 1970s, it had such significant disadvantages that it was abandoned.

Tom Kent made one variant of this proposal. He suggested that cost-sharing not be restored to its original form (a 50/50 split), but rather that a form of "cost-sharing with a difference" be implemented that would have a ceiling of 25% for the federal contribution. The advantage of this ceiling is that, by placing a limit on the overall federal contribution to health care, it gets round the issue of unpredictable costs.

 

8.3.2 Retain Current Block Funding

Other analysts argue that all forms of cost-sharing represent a step backward. They claim that the benefits gained by block-funding federal transfers, namely enhanced provincial flexibility, must be maintained, even to the detriment of federal visibility. In their view, the explicit tracking of the use of federal dollars is unnecessary, since conformity with the Canada Health Act is sufficient to ensure provincial accountability.

However, it is difficult for the public to understand why the federal government is unable to determine whether the funds transferred to the provinces and territories for specific objectives (such as the $800 million for primary care reform, and $1 billion for new medical equipment, such as MRI machines) are actually spent on those objectives. This lack of provincial/territorial accountability for targeted federal transfers leads many people to question their value.

 

8.3.3 Improved CHST Block Funding

A major issue with regard to the CHST relates to the impossibility of determining the exact federal contribution to health care. This problem could be solved by designating a notional portion of the CHST for the purpose of health care as was done under EPF. This would ensure recognition of federal funding, while not affecting provincial flexibility.

Another concern often raised by the provinces and territories is the absence of an appropriate escalator under the CHST to ensure continual growth in federal transfers. While some mechanism that allows for annual growth appears desirable, it is still necessary to design an appropriate escalator. There are a number of possibilities.

The original EPF escalator was a compound three-year moving average of nominal GDP per capita applied to per capita cash contributions and cumulated year after year. Others have suggested that the total CHST cash transfer be indexed to reflect not only an expanding population and economic growth, but also the incidence of disease and the cost of new drugs and health care technologies. However, while all these considerations are certainly relevant, the complexity of such a proposal would make it difficult to operationalize.

Another alternative proposed by the C.D. Howe Institute in response to demographic aging is to convert part of the CHST into a grant per person age 65 and over (the "seniors’ health grant"). This grant would escalate at the rate of GDP growth (real growth plus inflation) per person. The extra money the seniors’ health grant would provide to each province would, by construction, be proportional to the growth in its elderly population. For those provinces whose elderly populations grow relatively quickly, the grant would have an appreciable impact on their finances.

 

8.3.4 Medical Savings Accounts (MSAs)

A number of proposals for MSAs have been put forward in recent years in Canada. MSAs are health care accounts, similar to bank accounts, set up to pay for the health care expenses of an individual (or family). Under a system of MSAs, some part or even the totality of the current CHST transfer would be transformed into separate individual health care accounts. Each account would be set up by depositing an amount equivalent to the average amount the federal government now spends per capita on health care, and everyone would control their own account.

MSAs usually incorporate aspects of private finance – each individual is responsible for covering a portion of their health care costs up to a ceiling. In addition, MSAs are usually set up to cover those health care costs that are amenable to individual control (such as routine or minor medical expenses). They must be combined with a high-deductible, catastrophic insurance plan to ensure payment of extraordinary, high-cost care.

The general theory is that consumers would make more judicious and cost-effective decisions if they were spending their own money, rather than relying on the public purse. There are several different ways of structuring these accounts, and each approach must be assessed on its merits.

However, in general, the arguments supporting the introduction of MSAs include their potential to promote personal responsibility and accountability, to help reduce "unnecessary" use of services, to stimulate price competition and to encourage forward-looking financial planning. Those in opposition to the idea caution that these accounts are unlikely to control expenditures or utilization effectively, and insist that they would disadvantage the poor relative to the wealthy.

It is generally acknowledged that any MSA proposal would require careful scrutiny. However, it is not unreasonable to expect that a plan could be developed that avoids the possible pitfalls. Such a plan might first 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.

 

8.3.5 Convert all CHST Cash Transfers into Tax Point Transfers

Another option suggested by some experts would be for the federal government to abandon entirely its first role of transferring funds to the provinces and territories for the purpose of health care. This could be achieved by transforming the whole of the CHST into tax transfers.

Such a complete withdrawal of the federal government from financing health care would eliminate the uncertainty and instability relating to the level of cash transfers to the provinces. This option would provide a clearer division of responsibilities and would probably reduce the likelihood of friction between the federal and provincial/territorial governments. It would also provide provinces with greater flexibility in allocating health care funds and in reforming and renewing their systems. Provinces would establish the type of health care delivery system that is best suited to their population. With time, Canada would have a diversity of health care systems.

However, since tax points are less valuable in the poorer provinces, these provinces would likely encounter difficulties in maintaining their current level of health services. Furthermore, the Canada Health Act would become irrelevant as its enforcement mechanism is tied to federal cash transfers. Overall, this option would exacerbate discrepancies between the provinces in the level, quality and accessibility of health services. It would therefore not appear to be consistent with the objectives the Committee has enunciated for the financing role of the federal government.

 

8.4 How Should Government Raise Revenue for the Purpose of Health Care?

There are two basic sources for revenues collected by government to pay for health care: (1) general revenue and (2) various forms of direct payments.

With respect to general taxation, there are two possible ways of increasing the amount of money that is spent on health and health care: spending more of existing dollars on health care or increasing general revenue and devoting the additional revenue to health care.

The second route that is available for raising additional government revenue is to introduce some form of payment by consumers for health services. This could be done in a variety of ways, all of which fall into three broad categories: user charges, income tax on the value of health care received, and annual health care premiums.

In considering the options of user charges and premiums, one must also decide if individual Canadians should be allowed to purchase private health care insurance to protect themselves against the risk of having to make these payments. Moreover, the option of purchasing private health care insurance can be extended to having such insurance pay the cost of receiving health services in private facilities, and even for health care that is also insured by public health care insurance. This introduces a further option: private health care insurance for services delivered in private institutions that competes with public insurance for services received in public institutions.

All these options are discussed in further detail below.

 

8.4.1 Spend More of Existing Tax Dollars on Health Care

This means increasing the share of federal and provincial budgets that are devoted to health care and decreasing public spending in other areas. This option has two main defects. First, it is clear that, on the one hand, governments have other important spending priorities (such as roads, the environment, etc.) and that, on the other, the amount spent directly on health care is only one of the determinants of an individual’s health status. Second, health care expenditures are rising at a substantially faster rate than the rate of growth of government revenues. Indeed, it is projected that provincial spending on health care will increase by an average of 5% annually if current trends with respect to population growth, aging and inflation continue. Thus, there are limits to how much of a contribution this option can make to bridging the funding gap.

 

8.4.2 Increase General Revenue (through income tax or sales taxes) and Devote the Additional Revenue to Health Care

This option is influenced by the capacity and political willingness of governments at all levels to raise additional revenue and on the willingness of taxpayers to pay to generate this extra revenue. The review of public opinion polls conducted in Phase One of the Committee’s study showed that Canadians have mixed views on whether they are prepared to pay higher taxes for the purpose of health care. While cuts to personal income tax are important to Canadians, reinvesting in health care is also rated as a very high priority. However, regardless of what public opinion polls say, this option runs counter to the tax reduction strategies undertaken at both provincial and federal government levels in recent years.

 

8.4.3 User Charges

User charges are usually defined as a form of payment made by a consumer of a health service at the time the service is rendered. That is, they represent an up-front charge to the patient. There are 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 flat 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 this ceiling, costs of services to the patient are covered by the insurance plan. All users must pay a standard minimum deductible, which is independent of the quantity of services received. Again, this form of insurance based user charge is required in some countries.

In Canada, the literature with respect to user charges tends to conclude 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. In view of these studies, experts told the Committee that user charges raise issues of access and equity and, depending on how they are implemented, they could violate some of the patient-oriented principles of the Canada Health Act. Part of these problems related to user charges could be circumvented if the level of the user charge varied according to income, or if low income groups were exempted from paying these charges.

It is worth noting that Canada is the only industrialized country in the world that prohibits user charges for publicly funded health services. Even in Sweden, which is generally recognized as being among the most socialized of the European countries, user charges are regarded as "essential in order to make people choose the most economical service". Swedes pay between $15-20 for each visit to the doctor and about $12 a day for hospital stays. The total amount which an individual can pay in any one year is capped at around $135 per year.

In Sweden, user charges are not perceived as impeding access. Nor are they designed to raise money. In fact, the cost of administering the user charge scheme (collecting the fees and keeping track of how much an individual has paid so that the cap is not exceeded) is almost as much as the total amount collected in user fees. The system of user charges in Sweden is designed to change consumer behaviour. Swedish public policy is based on the principle that individuals should be aware that a decision to use the health care system costs the government, and hence all taxpayers, money and that, therefore, they should use the system only when they genuinely need it.

Thus, if user charges were to be implemented in Canada, they could be applied in a manner that minimizes the risk of impeding an individual’s access to care, while at the same time encouraging an individual to make appropriate use of the system. One important issue would be to decide whether user charges should apply to existing publicly insured health services (physicians and hospitals) or if they should be considered only for services that would expand public coverage.

 

8.4.4 Income Tax on Health Care

In this option, patients are required to add the cost of the health services which they receive each year to their taxable income. This proposal has been presented both as a means of raising revenue and as a means of promoting individual accountability for the use of health care. This type of payment was proposed in 1961, at the start of the debate on a publicly funded health care program, and subsequently was revived in 1991 by the government of Quebec and in 2000 by Tom Kent.

This system has a number of advantages over the application of user charges. First, an income tax on health care is progressive: for equal use of services, a patient with a higher income pays relatively more than one with a lower income. Second, such a payment does not apply to those who do not pay income tax. And third, it avoids the problem of an up-front means test, thereby addressing the issues of access and equity referred to in section 8.4.3.

It has also been suggested that a cap could be applied to the amount of increased income tax an individual would have to pay in any one year and over a lifetime. This would be in line with the third objective that the Committee identified for the financing role of the federal government (the avoidance of undue financial hardship). However, such an option is not currently possible because the health care system is not structured to enable the tracking of the costs incurred by the system for each individual patient. This problem could possibly be solved with a system of electronic patient records (see Chapter 10).

One of the arguments against an income tax on health care is that some people will contend that they are paying for health care twice, once through general taxes and once through the additional income tax they would pay for the health services which they received during the year. One way around this problem would be to have a tax which everyone pays, such as the GST, earmarked for health care, with the income tax element being essentially a top up to the core GST generated amount. It should be recalled that when Medicare began it was funded in some provinces (e.g. Nova Scotia) through a provincial sales tax which was called a hospital tax.

 

8.4.5 Annual Health Care Premiums

A health care premium is a payment by residents that helps government defray the costs of publicly financed health care. In essence, it is an insurance premium paid by everyone for the right to be covered under a public health care insurance plan. Health care premiums are currently required in two provinces, Alberta and British Columbia. Current monthly rates in Alberta amount to $34 for single coverage and $68 for family coverage (two or more people). In British Columbia, premiums are set at $36 for a person without dependants, $64 for a family of two and $72 for a family of three or more. In both provinces, there are subsidies that reduce the amount of the premium for some low income people and eliminate them for the very poor.

In contrast to user charges or the income tax on health care, premiums are not related to the amount of health services consumed by individuals during a year. Nor are premiums in Alberta and British Columbia related to income. As a result, most lower-income individuals pay the same flat amount as higher income people. Health care premiums are not prohibited under the Canada Health Act.

 

8.4.6 Private Health Care Insurance is Allowed to Compete with Public Coverage

Currently, the Canada Health Act requires provincial health care insurance plans to be accountable to the provincial government and to be non-profit, thereby effectively preventing private health care insurance plans from covering medically required services. Moreover, the majority of provinces (British Columbia, Alberta, Manitoba, Ontario, Quebec, and Prince Edward Island) prohibit private insurance companies from covering services that are also guaranteed under public health care insurance plans. Private insurers are limited to providing supplementary health care benefits only, such as semi-private or private accommodation during hospital stays, prescription drugs, dental care and eyeglasses.

This contrasts sharply with a variety of practices in other industrialized countries. For example, in Germany and the Netherlands, private health care insurance is voluntary for those people with an annual income over a certain level. In those countries private insurers must accept all those who apply for coverage and must provide benefits equivalent to those offered under the public plan. In Australia and Sweden, government legislation requires that premiums charged by private health care insurers be community-rated (i.e. a single premium structure applies to everyone regardless of their health status). The Australian government actively encourages residents to acquire private health care insurance by subsidizing 30% of its cost. In the United Kingdom, as in Australia, residents can purchase private insurance to cover services provided in private hospitals as well as in public hospitals.

The evidence from the Committee’s international review of health care systems highlighted the fact that a number of benefits can be generated by allowing private insurance in health care, including enhanced patient choice, increased competition, and improved efficiencies in the public sector.

Permitting private insurers to provide coverage similar to that offered under public health care insurance in Canada would require amending federal and provincial legislation that currently prohibit them. With respect to federal legislation, this would necessitate a revision of the public administration (or single payer) principle of the Canada Health Act.

Advocates of private health care insurance suggest that safeguards could be put in place in order to ensure that: 1) private insurance is administered on a non-exclusionary basis (take all comers, not only the healthiest ones); 2) queue jumping is avoided by treating all patients side by side; and, 3) private insurance does not "skim off" the easier kinds of care and falls back on the publicly funded system for the more difficult cases.

 

8.5 The Impact of Financing Options on Behavioural Change

In considering various financing options, it is important to keep in mind that each option has a behavioural impact as well as a financial impact. Three examples will illustrate this.

First, as explained above in the section on the Swedish care guarantee (section 7.4), when hospital administrators were faced with a financial penalty if patients exceeded the maximum time on the waiting list, changes were made in the way the hospital was run and waiting lines dropped dramatically. Conversely, when the care guarantee was dropped, waiting lines increased again. Clearly, the behaviour of hospital administrators and staff was affected by concern about their institution suffering a financial penalty if waiting lines became too long.

Second, evidence suggests that a switch from a fee-for-service remuneration scheme to a population-based payment system changes the incentive structure for physicians. They are no longer pushed to maximize services delivered but are instead encouraged to provide only the amount of care their patients actually need. For example, there is an incentive for a doctor working under a capitation system to only order tests which are genuinely required, since the payment for these tests comes out of the fixed amount of money the doctor has received for the patient’s care. When tests are no longer "free" to the physician, as they are now, behavioural change in the ordering of tests occurs.

Third, consider the requirement of user charges in Sweden. As mentioned above, Swedes pay some $15-20 for each visit to the doctor and $12 a day for hospital stays, with an annual threshold of $135. According to witnesses who appeared before the Committee, the cost of administering the system of user charges is almost as much as the total amount collected in user charges. In Sweden, user charges are not designed to generate revenue but to change consumer behaviour. Swedish public policy is based on the principle that individuals must be aware that a decision to use the health care system costs the government, and hence all taxpayers, money, and that, therefore, they should use the system only when they genuinely need it.

Unfortunately, as many witnesses stressed, the current system in Canada contains few incentives for health care providers to reduce costs or to strive for better integration (through, for example, primary care reform). Similarly, the Canadian system has no incentives for consumers of the health care system to use the system in a responsible manner.

Not only does the Canadian system not provide incentives for providers to achieve cost savings through integration, it actually contains an incentive for providers to use what is often the most expensive service. The Canada Health Act requires that medically necessary physician and hospital services be provided without patient charge, but the Act does not contain any similar obligation with regard to the provision of cheaper (and often more effective) alternate ways of treating a patient, such as drugs administered outside hospitals, home care, or assisted living services. Most provinces do provide some payment for these kinds of services. Nevertheless, the incentive for the provider, who is acting in the best interest of the patient, is to overuse high cost, but government paid, hospital and medical services, rather than resort to lower cost, but relatively unsubsidized, alternative services.

With regard to incentives designed to encourage users to reduce costs, a number of facts are clear. First, it is essential to remember that in any given year 80% to 90% of health care costs (depending on age/sex group) are attributable to catastrophic (acute or chronic) illness. Thus, under any insurance system, public or private, modest annual user charges do little or nothing to offset costs.

Second, there does not seem to be an administratively simple way to deal with the problem of overuse of health services by patients other than by excluding certain services from coverage (or limiting the number of times a service can be used by a specific patient in a given time period).

Of course, the other way to control overuse of services is to levy relatively large user charges. User charges can generally be set at higher levels for those services thought to be subject to overuse rather than for those services dealing with uncontrollable or catastrophic illness. The problem with significant user charges for medically necessary services is that they reduce claims on the public system by pricing poorer sick people out of the system rather than by curtailing "abuses". No doubt "abuse" exists; all insurance systems are subject to moral hazard. But what is equally clear is that any insurance system which relies on large user charges to ration medically necessary services will be a system that denies access to the less well-off who have the misfortune to require expensive services.

However, user charges can play a very useful role in diverting demand from high cost to less costly health services without impairing access to medically necessary services. But this is only possible if less costly service is available and is an insured service.

The examples and comments given above, along with the experience from other countries with universal health care systems, illustrate the fact that the way a health care system is financed can help to achieve the overarching public policy objective of delivering the best health care possible at the lowest cost. This raises the following questions concerning the structure of health care financing in Canada:

• Should the financial structure be such that everyone involved in the system – consumers, providers, health care facilities administrators and so on – has an incentive to use the system as efficiently as possible?
• Should incentives be used to help patients understand that along with their perceived right of universal health care there is also the responsibility to use that right reasonably and judiciously?

Readers’ responses to these questions will have a direct impact on their choice of system for financing health care in the future.

 

8.6 Two-Tier Health Care

In its Phase One report, the Committee defined the various meanings of the concept of two tier health care. In the broad sense, a two-tier system refers to two co-existing health care systems: a publicly funded system and a privately funded system. This definition implies that there is a differential access to health services based on one’s ability to pay, rather than according to need. In other words, those who can afford it may either obtain access to better quality care or to quicker care in the privately funded system, while the rest of the population continues to access health care only through the publicly funded system.

Some of the options presented above – namely user charges for publicly funded health services, MSAs and private health care insurance – may raise concerns over the possible impact of two-tier health care. Three suggestions have been put forward as ways of circumventing the negative aspects of two-tier health care systems, while maintaining the quality of publicly funded ones:

• all doctors would be required to work a certain number of hours in the publicly funded system, meaning that they would not be permitted to work exclusively in the privately funded system;
• the publicly funded health care system would provide a guarantee that waiting times for various procedures would not exceed a certain level and, if the maximum time was exceeded, the government would be obliged to pay for the required treatment to be performed in the private sector system;
• an independent body would be mandated to ensure that health care technology in the public sector is as good as in the private sector.

The Committee would like to obtain the views of Canadians on the issue of two-tier health care based on the assumption that the three conditions just outlined could be met.

 

8.7 What Services Should be Covered and Who Should be Covered Under Public Health Care Insurance?

The Canada Health Act covers hospital and physician services that are deemed to be "medically necessary." The concept of medical necessity, however, is not defined in the Act. Moreover, the Act does not set out a process for determining which health services are medically necessary. Therefore, each province and territory (in collaboration with their respective medical associations) is responsible for determining what specific services are to be insured under the public health care insurance plan. Because provinces/territories do not use a uniform method for determining the provision of comprehensive health care, there is uneven public coverage for certain health services across the country.

Furthermore, the Act remains focused on hospitals and physician services. When the Act was put in place in 1984, many additional services – such as drugs, rehabilitation, convalescence and palliative care – were provided in hospitals. However, this is no longer the case. Increasingly, these services are being delivered in the home or in the community by a broader range of health-care providers (such as nurses, nurse practitioners, physiotherapists, occupational therapists, etc.). They therefore fall outside the scope of the Canada Health Act. As a result, there are wide variations among provinces in terms of public coverage for home care, prescription drugs, palliative care, institutional long-term care, dental and vision care, etc.

Given this shift toward less institutional care, the 1997 National Forum on Health suggested that public coverage should be refocused to "follow the care and not the site." Others have also explicitly recommended that the federal government expand coverage under the Canada Health Act to include additional services, mostly home care and prescription drugs.

Overall, there are two broad options that are available with regard to the services that can be included in the publicly funded basket:

 

8.7.1 De-Listing Some Services

Some people argue that, if it is to be sustainable, the publicly funded health care system cannot be all things to all people. In their view, it is not realistic to expect unlimited service provision, even for only hospitals and doctors, in a context of constrained government budgets. It has therefore been suggested that some health services that are currently publicly financed be de-listed as a means of saving money.

There is, however, little agreement on the process that could be used to select the services to be de-insured. Moreover, there is evidence from Oregon, where attempts were made along these lines, that suggests that de-listing does not generate substantial savings. There are also studies that have concluded that there is a real danger that this option would lead to making decisions about what services should be covered based more on economic considerations than on medical necessity.

Nevertheless, in light of the Committee’s view on the need for new financing sources, it follows that if Canadians do not agree to explore new sources of financing, then some reduction in services is inevitable, either by continuing with rationing via waiting lines (the approach currently being used by governments), or by moving to explicitly de-list some services.

 

8.7.2 Expanding Coverage

Other analysts, by contrast, stress the need to expand public health care coverage. As stated previously, the Canada Health Act is applied mostly to medical and hospital services. Many Canadians believe that the scope of the Act should be broadened to encompass more services. The two service areas into which there appears to be the greatest public demand for coverage expansion are prescription drugs and home care. Given their significance and potential costs, the issues and options that relate to these areas are discussed in more detail in Sections 8.9 and 8.10 below.

 

8.8 Prescription Drugs: Reducing Their Cost

In recent years, prescription drugs have exhibited the most rapidly escalating costs in the health care system. During Phase Two of its study, the Committee learned that:

• Data reported by Canadian Institute for Health Information (CIHI) indicate that spending on drugs in Canada has grown continually over the last 25 years, from $1.1 billion in 1975 to $14.7 billion in 2000.
• During this period, drugs accounted for an increasing portion of total health care spending: in 1975, drugs represented about 9% of total health care expenditures; by 2000 this share had increased to almost 16%.
• Since 1997, expenditures on drugs have been the second largest category of health care spending in Canada, behind hospitals but ahead of spending on physician services.
• Spending on drugs in Canada, expressed in dollars per capita, continues to increase at a rate faster than spending in other key health care sectors such as hospitals and physicians. In fact, between 1990 and 2000, drug expenditures per capita increased by almost 93%, more than twice the average for all health care expenditures (40%).

Prescription drugs make up the largest component of spending on drugs (77% in 2000, up from 72% in 1975). In 1975, the private sector (employer-sponsored drug insurance plans, individual private insurance companies and out-of-pocket spending by consumers) accounted for 80% of prescription drug expenditures. By 2000, private sector spending had decreased to 57%. During the same period, the share of prescription drugs financed from public sources (provincial and territorial governments and the federal government) increased steadily from 20% in 1975 to 43% in 2000.

The question therefore arises as to what steps, if any, can be taken to contain the rate of increase of prescription drug costs on publicly funded health care programs. The following options were presented to the Committee:

 

8.8.1 A National Drug Formulary

The idea of a national drug formulary surfaced on a number of occasions during the Committee’s study. A drug formulary usually refers to a list of drugs that are supplied under public drug insurance plans. A "national" drug formulary, as advocated by experts, does not mean that the federal government would be the only party responsible for determining which prescription drugs would be on the formulary. Rather, the concept of a national formulary is best conceived in terms of federal, provincial and territorial collaboration along with the participation of interested stakeholders.

In considering this question, it is important first to understand the process for including a new drug on the list of drugs that will be paid for, whether by provincial drug plans, or by the federal drug plan for those for whom the federal government has the responsibility for providing health care services (the service delivery role of the federal government as described in section 3.5).

Whenever a new drug comes on the market, the officials responsible for a government’s formulary receive a request to put the new drug on the approved list. These officials must then evaluate the new drug and determine whether or not the drug will be listed. Getting the drug on a formulary is critical for pharmaceutical companies, since without it, sales of the drug in the jurisdiction covered by the formulary will be very limited. Therefore, not unreasonably, drug companies lobby hard to have their new drugs added to the formulary.

The Committee was told that two situations arise with this system. First, once a drug is approved for the formulary in one province, it is difficult (indeed almost impossible) for another province to refuse to add the drug to its formulary. Second, many provinces, particularly the smaller ones, lack the staff to be able to assess in detail whether new drugs have sufficient new benefits to warrant being added to the formulary (with the possible consequence that an existing drug on the formulary would have to be removed).

A potential solution to this problem would be to have a single national (as opposed to federal) formulary, an idea that was advocated by many witnesses who testified before the Committee. In general, the benefits of a national drug formulary include the following:

• The elimination of the potential for log-rolling, or pressuring one province to add a drug to its formulary because another has already done so;
• An enhanced ability to do the research needed to understand whether the benefits of a new (and costlier) drug genuinely represent a significant improvement on existing (and cheaper) drugs, since such research would be done at the national level, rather than by different provincial governments.

The establishment of a national drug formulary could lead the way to the creation of a single national buying agency – one which covers all provincial and territorial governments as well as the federal government. The buying power of such an agency would be enormous. This would likely strengthen the ability of public drug insurance plans to receive the lowest possible purchase price from the drug companies.

During its Phase Two hearings, the Committee was told that the idea of a common drug formulary was being discussed at the provincial and territorial level. More specifically, following their conference in August 2000, Provincial Premiers and Territorial Leaders agreed to work together and "mandated their Health Ministers to develop strategies for assessing and evaluating prescription drugs. These strategies could include the creation of a common inter-provincial/territorial advisory process to assess drugs for potential inclusion in provincial/territorial drug plans."

The Committee welcomes opinions on the feasibility of a national drug formulary as well as on its potential impact. It is particularly interested in ideas on how the administration of a national formulary could be organized so as to ensure its independence from government (note that federal participation would be by virtue of its responsibility for the delivery of health care services to specific groups, and not as a result of any federal constitutional role). Moreover, in the course of discussions about a national drug formulary, the Committee is interested in asking whether consideration should be given to a national drug purchasing agency and, if so, how such a purchasing agency would work?

 

8.8.2 Requiring the Use of the Lowest Cost Therapeutically Effective Drug

Faced with limited public health care resources it is necessary to consider the need for aggressive drug cost-benefit management, particularly in terms of listing only the most cost-effective prescription drugs on formularies. For many years, hospitals that have operated with global budgets have had to make difficult choices about what drugs to make available on their internal formularies. Hospital Pharmacy and Therapeutics (P&T) Committees have made these decisions, and physicians have accepted them because they were made by their peers. Some have suggested that extending this concept of a P&T review to limit prescription drug listings for all drugs would be difficult for physicians to accept.

Nonetheless, in recent years, provincial drug insurance plans have begun to use their reimbursement policies to encourage doctors to make substitutions among alternative drug therapies. In some cases a drug is simply not listed on a formulary when it is more expensive than alternatives that are equally effective in treating particular medical conditions. In other cases, a drug benefit plan (for example the Ontario Drug Benefit Plan) requires special authorization before it will pay for more expensive drugs if these drugs are chosen over less expensive alternatives because they are uniquely required for one, but not all, of their indications. British Columbia’s reference based pricing policy has been used for this same purpose. Under that policy, the province only reimburses up to the price of a reference drug in a particular therapeutic category, unless there is a specific need for the more expensive product demonstrated by the physician and it is approved, in advance, by the drug plan.

In short, reimbursement policies that encourage physicians to make therapeutic substitutions already exist in some provincial drug insurance plans. The difficult policy questions are:

• to what extent should governments adopt a program of mandatory therapeutic substitution to the lowest priced therapeutically equivalent drug?
• and, how aggressively should such a substitution policy be used?

The better and more accepted the process of scientific/clinical advice supporting decisions about which drugs are therapeutic alternatives for each other, the more likely they are to be accepted by physicians and tolerated by the public.

This raises the further question of whether all the key players, including public and private drug insurance plan managers, doctors and pharmacists, Health Canada (as the federal regulator of drug safety), patients and the pharmaceutical industry, should be required to work together to generate consensus advice that would be used both by insurers and by prescribers to determine which drugs can be therapeutically substituted for each other. The goals of this kind of the collaboration would include not only more cost effective prescribing and drug benefit management, but also improved quality of patient care through better identification of the best treatments, the elimination of inefficient treatments or those with avoidable risks of adverse reactions.

The overall objective of such collaboration would be to achieve: i) effective, timely, national guidance to formularies (or a national formulary); and ii) timely, relevant, accepted national prescribing guidance that could be adapted to local requirements.

The proposed collaboration could be supported by, and integrated with, a strengthened system of post-market surveillance of prescription drugs run by Health Canada and by a national drug utilization information system that would provide a detailed analysis of drug prices, how they are utilized and what the cost drivers are for each of the various classes of drug therapies needed to make better formulary management, prescribing, and regulatory (drug safety) decisions.

 

8.8.3 The Advertising of Prescription Drugs

A third issue related to prescription drug costs concerns the ways in which pharmaceutical companies should be allowed to advertise prescription drugs. Currently, Health Canada bans direct advertising to consumers and limits the advertising of prescription drugs to health care providers. Direct-to-consumer advertising of prescription drugs is not permitted in most industrialized countries. In the United States, where the advertising of prescription drugs is allowed (the industry spends hundreds of millions dollars a year on advertising in the U.S.), studies have shown that a very significant percentage of prescriptions issued by physicians, particularly family practitioners, arise because patients ask for a specific drug because they have seen it advertised. This is hardly surprising since the purpose of advertising is to increase demand.

It has been suggested that in order to avoid a corresponding increase in demand for prescription drugs in Canada, the federal government should maintain its current ban on prescription drug advertising. However, three arguments against continuing the advertising ban are usually made:

1. Consumers have a right to know what prescription drugs are available;
2. Under the Charter of Rights and Freedoms, companies have the right to communicate with their consumers; and
3. Since drugs can be advertised in the United States, and since Canadians can see such ads when watching U.S. channels on cable television or on the Internet, a Canadian ban is meaningless and therefore the current ban should be lifted.

With respect to (a), the question is the extent to which a consumer’s right to know should be traded off against the increased cost of drugs, which will be the inevitable result of allowing the advertising of prescription drugs in Canada.

With respect to (b), constitutional lawyers have expressed mixed opinions on whether the current advertising ban is constitutional. However, it has been suggested that if a decision is made to establish a national formulary, then the constitutional issue could be avoided by having the national formulary adopt as a policy that any drug which is advertised in Canada, other than to physicians, would not be included in the formulary.

With respect to (c), the leakage at the border through U.S. cable television stations can be eliminated by having the federal government use its directive powers to order the CRTC to require that Canadian cable companies use mandatory advertising substitutions wherever a U.S. station they are carrying puts on an ad for a prescription drug.

An emerging issue is the widespread health-related information that is now available on the Internet. By all accounts, it would seem to be virtually impossible to stop the flow of such advertising across the boarder.

These are important federal policy issues on which the Committee seeks the opinions of readers of this report.

 

8.9 Prescription Drugs: Expanding Coverage

Most Canadians have some form of insurance coverage for prescription drugs from one source or another, including government programs, private plans through their employers and individual plans. However, since the Canada Health Act does not deal with prescription drugs used outside the hospital setting, public coverage varies considerably from province to province. Similarly, private insurance plans for prescription drugs provided through employer-sponsored plans or individual insurance policies are significantly different in terms of design, eligibility and out-of-pocket costs.

Information provided to the Committee by the Canadian Life and Health Insurance Association suggests that some form of prescription drug insurance protects about 97% of the Canadian population:

• employer-sponsored group plans are the primary source of insurance for Canadians providing coverage to 57% of the population;
• provincial drug insurance plans for seniors and social assistance recipients account for 12% and 10% of the population respectively;
• provincial programs for the general population (i.e. not limited to seniors or social assistance recipients) cover another 15% of the population;
• Various other plans (individual policies, affinity groups, etc.) account for a further 1%.
• programs for status Indians and eligible Inuit and Innu account for about 2%.

Some 3% of the Canadian population appear to have no insurance coverage at all for prescription drugs. The Committee learned that most of these people are working age adults. Qualitative data also suggests that people in this group have the following employment profile: they are primarily unskilled workers, low paid employees, part time employees, seasonal employees, and short term unemployed. Moreover, among those with some form of coverage, there are substantial variations in the nature and quality of coverage.

The Committee learned that there are significant inter-provincial disparities in the level of drug insurance coverage. Table 1 shows that five provinces (British Columbia, Saskatchewan, Manitoba, Ontario and Quebec) achieve 100% coverage for prescription drugs in the sense that provincial government programs provide a minimum level of coverage for all residents. In Alberta, the provincial government offers a premium-funded public drug insurance program – the Alberta Blue Cross – to all residents. The 17% of Albertans who do not have drug coverage do have a public plan available to them but have decided not to join it and hence do not pay the premium. The Atlantic provinces stand out as having much lower levels of coverage than the rest of Canada. In fact, there are no public drug insurance programs available that cover all residents in the Atlantic provinces.

Table 1

Proportion of Population with Drug Coverage

	% Covered
Canada	97
Newfoundland	65
PEI	73
Nova Scotia	76
New Brunswick	67
Quebec	100
Ontario	100
Manitoba	100
Saskatchewan	100
Alberta	83
B.C.	100

These inter-provincial differences in drug insurance coverage rates reflect significant differences in provincial drug programs, particularly with respect to what is available to groups other than low-income seniors and social assistance recipients, who are virtually entirely covered in every jurisdiction. The inter-provincial differences also reflect different levels of coverage from private plans. The Committee learned that all provinces currently levy taxes on premiums and, in the case of Ontario and Quebec, retail sales taxes on private health insurance plans. The resulting tax burden of $1 billion a year is an important disincentive to gaining coverage under private plans, which are the major vehicle for drug insurance coverage.

Such inter-provincial differences clearly raise public policy issues in and of themselves, as do the tax provisions noted above. However, their public policy significance comes into sharper focus when seen against the goal of avoiding "undue financial hardship" which has played such a fundamental role in forging Canadian health care policy. Despite the generally high levels of drug insurance coverage that prevail throughout Canada, many Canadians are not protected against the possibility of "undue financial hardship" due to high drug expenses.

Modern drug-based therapies can – and with increasing frequency do – require extremely high expenditures on drugs. Only those drug costs incurred in a hospital setting are covered by the Canada Health Act. As a result, financial hardship due to high drug expenses outside the hospital context is increasingly a real risk – indeed, it is a reality – for many Canadians.

Information provided to the Committee suggests that those currently protected from such financial hardship generally include:

1. Canadians who belong to private drug insurance plans which protect plan members against high drug expenses by effectively limiting the maximum amount a plan member must pay;
2. Canadians on social assistance and low income seniors, as these groups are eligible for public coverage which protects them against high prescription drug expenses in all provinces;
3. Canadians residing in provinces where public drug benefit plans are available to limit the overall amount any plan member must pay for prescription drug costs (Alberta, British Columbia, Manitoba, Ontario, Quebec and Saskatchewan).

The protection available from the various plans noted above is, however, by no means uniform or absolute. For example, access to the kind of provincial plan coverage described above is not automatic in all of the provinces noted above and, only a small minority of private plans caps the financial exposure of plan members.

In the four Atlantic provinces, there is no generally available public program to limit exposure of individuals and families to high prescription drug costs. Moreover, private plan coverage of any kind is less common in the Atlantic region. In fact, a recent study funded by Health Canada’s Health Transition Fund found that over 25% of the population of the Atlantic region are without catastrophic coverage for prescription drugs and that another 25% might be considered under-insured. It is clear that the residents of Atlantic provinces require substantial improvement in their drug insurance coverage.

These general findings were put into a specific human context through the real-life experience of one Atlantic Canadian whose circumstances became known to the Committee. Although a professional librarian and a member of a good quality employer-sponsored plan, the individual in question faces personal out-of pocket costs of $17,000 annually due to his wife’s requirement for prescription drugs costing $50,000 a year. This example clearly illustrates that even people with excellent drug insurance plans are not fully protected against the risk of undue financial hardship arising from catastrophic drug costs.

 

8.9.1 A National Pharmacare Initiative

The issue therefore is how to improve coverage for prescription drugs. In recent years, a number of experts have recommended that the federal government develop, in collaboration with the provinces and territories, a national Pharmacare initiative as a means of broadening insurance coverage to medically necessary drug therapy. A national Pharmacare initiative would expand coverage to those who are uninsured or under-insured and provide more uniform prescription drug benefits for the entire population.

There is no single model for a pan-Canadian Pharmacare initiative and a number of complex issues can influence the design of such a program. These include deciding:

• who should be covered (e.g., everyone, or specific groups of the population such as seniors or social assistance recipients, etc.);
• what is covered (e.g., all prescriptions, or specific categories of prescriptions, etc.);
• whether the focus should be on paying for all drug costs or on protecting against high drug expenses;
• how it should be financed (e.g., public financing only or a mix of public and private funding with deductibles, co-payments, etc.); and,
• how it should be delivered (e.g. through provincial drug programs and/or private plans and/or a new federal program).

Different experts offer different answers to each of these questions. There is also considerable controversy concerning the costs of setting up a national Pharmacare program and ensuring its long-term viability. In 1997, Palmer d’Angelo Consulting Inc. estimated the cost of funding several models of a national and universal Pharmacare program. Here is a summary of the major findings of this study:

• A fully funded, comprehensive, publicly administered, national Pharmacare plan that conforms with the principles of the Canada Health Act would increase public expenditures on prescription drugs by an estimated $4.3 billion.
• Other publicly administered and funded plans that require patients to pay user charges (15.9%) and dispensing fees would increase public expenditures by $2.1-$2.5 billion. These plans would in essence "nationalize" current private plans.
• With a national Pharmacare plan similar to the drug plans that exist in Saskatchewan and Manitoba (which require very high user charges), public expenditures would fall by almost $0.5 billion. However, expenditures by individuals would increase by $0.9 billion.
• The impact on the public purse of a mixed public/private plan is considerably less than that of a public-only plan. The incremental increase in expenditures range from $0.1 billion with a plan similar to that currently in Quebec, to $1.5 billion for a plan that provides true first dollar coverage.

Clearly, the cost of funding a national Pharmacare program would vary according to how it is designed. A recent study by Dr. Joel Lexchin suggested that although such a system would increase public spending, it would nonetheless save money by reducing administrative costs.

As a basis for Committee consultation and dialogue, four possible options for a national Pharmacare initiative are set out below, each offering a different focus and design.

 

8.9.2 A Comprehensive Public Program

A fully public national Pharmacare program could be financed by both the federal government and the provinces/territories either through increased CHST transfers or through a new cost-shared funding arrangement involving 25%, 50% or more in federal money. Such a program could provide first dollar coverage and therefore comply with the Canada Health Act. Or it could require user charges, in which case federal funding could be subject to a "revised" Canada Health Act or to a set of new conditions. This would be a "greenfield initiative", replacing all current federal and provincial public drug insurance programs and would also likely make current private drug insurance plans largely redundant.

 

8.9.3 A Comprehensive Public/Private Initiative

Like Option 8.9.2, this initiative would focus on providing universal access to coverage for all drug expenses. However, it would do so through a partnership effort among the federal government, provincial governments and the private sector in order to expand the coverage that is currently offered under both public and private plans.

Federal cost-sharing could be provided to the provinces for the expansion of provincial drug program coverage. A special focus in this regard would be the Atlantic provinces, where there are currently no drug plans that are universally accessible. At the same time, however, equity would require providing federal assistance to those provinces which have already put in place broadly accessible programs. Such assistance could serve to encourage these latter provinces to maintain and even expand their coverage.

Recognizing that some provinces might not respond well to the cost-sharing incentives, and that therefore such programs might not reach the entire population, federal financial incentives could also be made available to private plans to encourage expansion of coverage to those who are currently un-insured and under-insured but still have some connection to the world of work (e.g. part-time workers, workers in transition between jobs, etc.).

Federal assistance to the provinces could be made subject to a number of conditions, including elimination of the major disincentives to private drug coverage posed by current provincial taxes on insurance premiums and retail sales taxes on supplementary health insurance premiums. It should be noted that Quebec used a hybrid public/private model to implement its Universal Drug Program, which has been in effect since 1997.

 

8.9.4 Public/Private Initiative to Protect Against High Drug Expenses

Unlike Options 8.9.2 and 8.9.3, which seek to pay for all or virtually all prescription drug costs, this option would focus on ensuring that all Canadians are protected against undue financial hardship arising from high drug expenses. This option would focus on protecting Canadians, including those who now have private drug insurance coverage, from the type of catastrophic situations described in the example in the last paragraph of Section 8.9. As such, this option is a safety net option.

Like Option 8.9.3, this option would involve a shared effort among the federal government, provincial governments and the private sector to build upon and expand protection under provincial public plans and private plans against high drug expenses. Substantial federal cost-sharing would be available to universally accessible provincial programs that capped individual exposure to high drug costs at an appropriate limit. Such a limit might be a specified percentage of income (e.g. 4% or lower, as in some current programs) or a dollar amount (e.g. $1000 per year).

As in the previous option, a special priority would be placed on inducing the Atlantic provinces to introduce provincial programs of this nature. However, cost-sharing would also be available for existing provincial drug insurance plans which already have this kind of protection.

Moreover, as in Option 8.9.3, recognizing that some provinces might not respond to the cost-sharing incentives and that hence such provincial public programs might not reach the entire population, federal financial assistance could be made available to private plans to induce them to cap the out-of-pocket expenses of individual plan members at a specified limit (e.g. $1000/year). As under Option 8.9.3, the federal-provincial dimension could include conditions, such as the removal of the provincial tax disincentives on private drug insurance coverage.

Option 8.9.4 is likely to become increasingly important as drug costs rise and as high priced biotech drugs become an increasing part of drug utilization. There is a risk that such rising costs could cause some employers to discontinue prescription drug insurance plans. However, if employers knew that financial assistance would be made available from government once their plan had reached the limit of an employee’s drug coverage, this might well persuade them to keep their existing drug plans.

 

8.9.5 Tax Initiative to Protect against High Drug Expenses

Like Option 8.9.4, this option would focus on capping an individual’s exposure to high drug expenses. However, the tax system, rather than public and private drug insurance plans, would be the delivery mechanism.

Under this option, Canadians with expenses for "medically necessary" prescription drugs above some threshold (e.g. a percentage of income, probably in the range of 2% to 4%) would receive a tax credit for the excess amount. This credit would reduce taxes otherwise payable (for higher income taxpayers) or be paid out as a refundable tax credit (for lower income earners owing no tax). It could be designed by modifying the current Medical Expenses Tax Credit or by introducing a new, separate tax credit. Such an option would require the development of an official drug formulary listing all the "medically necessary" drugs.

One drawback to this approach is the retrospective nature of tax filing – it only helps with last year’s high drug expense. This coverage could be rendered virtually irrelevant due to the prior death and/or prior personal insolvency of the intended beneficiary. This option would be more readily adaptable to meeting the needs of those with chronic high drug cost problems.

 

8.10 Home Care

Home care is generally defined in terms of services provided to individuals in their homes. Home care does not include care provided privately or publicly in a residential facility for long-term or continuing care purposes. There is no agreement about what services should be included in the definition of home care. Home care services can cover some types of acute care such as intravenous therapy and dialysis, long-term care provided for individuals with degenerative diseases such as Alzheimer’s or chronic physical or mental disabilities, as well as end of life care for people with terminal conditions, or personal support services such as attendant services and technical aids. Home care can include both health care and social support services such as monitoring, assessment, co-ordination, nursing, homemaking, nutritional counselling and meal preparation, occupational and physical therapies, pain control, emotional support and self-care instruction.

Thus, home care services can extend along a continuum that incorporates medical interventions as well as societal supports. Home care can be provided by formal providers who are predominately nurses, therapists, and personal support workers, or by informal caregivers who are usually family members or friends.

The 1998/99 Population Health Survey found that the majority of those who report needing care in the home due to aging, chronic illness or disability, received no formal, publicly funded care whatsoever. Between 80% and 90% of all home care in this group is unpaid. The survey did not report to what extent needs that were not being met publicly are met by private payment, by informal caregivers, or simply go unmet.

During its Phase Two hearings, the Committee heard that the need for home care will become a major challenge as the baby boomers age, average life expectancy rises, health care delivery becomes both more de-institutionalized and more technologically complex, and as work and social patterns decrease the availability of informal care-giving by family members.

Currently, each province and territory offers some form of home care program. But because home care is not considered a "medically necessary" service under the Canada Health Act, publicly funded home care programs vary greatly across the country in terms of eligibility, scope of coverage and applicable user charges. All jurisdictions cover services such as assessment and case management, nursing care, and home support for eligible clients. But only some provinces include various types of therapy (such as physiotherapy, speech therapy, respiratory therapy) in their publicly funded home care programs. If home care clients want services beyond those covered, they typically have to pay for them. Although home care provision has increased in most provinces in recent years, public spending on home care still represents a small proportion of overall provincial health care budgets.

Recent studies suggest that home care is cost-effective in some cases, although it seems clear that in many cases institutionalized care remains more efficient, particularly for the frail elderly. In addition, institutionalized care is always easier for service providers. However, cost and the ease of service delivery are not the only factors to be taken into account – many people want to be able to receive care in their homes, rather than in institutions. At the same time, this does not mean they want to be at home without the benefit of adequate care.

Effective home care can contribute to lower long-term costs for the health care system for a number of reasons:

• it reduces the pressure on acute-care beds by providing medical interventions in a lower-cost setting and making use of hospital resources only when really needed (that is, home care acts as a substitute for keeping the patient in an acute-care hospital);
• it reduces demand for long-term beds by providing a viable choice for aging Canadians to maintain their independence and dignity in their own homes (that is, home care acts as a substitute for nursing-home care);
• it enables palliative care patients to spend their final days in the comfort of familial surroundings (that is, home care acts as a substitute for palliative care institutions).

Many witnesses contended that when home care substitutes for acute care, it should be treated in the same way as acute care delivered in other settings and, accordingly, it should fall under the parameters of the Canada Health Act.

With respect to home care that substitutes for long-term and palliative care, the issue was raised as to whether patients should be required to contribute a larger co-payment to help cover the cost of these services as long as they have the necessary financial resources. Such a larger co-payment is already required in some provinces but not in others. Where it is applied, many long-term care patients are obliged to exhaust most of their personal resources before their care is fully paid for by the government.

This issue can be summed up in the following question: is it reasonable for tax dollars to be used to pay the cost of long-term and palliative care for an individual who has the personal resources to be able to pay for their care, even if that care is provided in a long-term care institution, such as a nursing home? In other words, should individuals be subsidized by government so that they can leave a larger legacy to their children? The Committee welcomes the views of readers on this question.

Many witnesses suggested that the federal government presently has several financial avenues for influencing home care outcomes in Canada. These are outlined below:

 

8.10.1 A National Home Care Program

Under this option, the federal government would increase its transfers to assist the provinces and territories in developing home care programs in their respective jurisdictions. This could be done either through the CHST or through a new cost-sharing arrangement.

The program could provide first dollar coverage and therefore comply with the Canada Health Act, or it could require user charges, in which case federal funding could be subject to a "revised" Canada Health Act or to a set of new conditions.

This program could be either universal or targeted to selected population groups (e.g. the elderly or the mentally ill) or to some types of home care services (e.g. palliative care).

The federal government would have to work closely with the provinces and territories to develop national home care standards, including agreement about core services and human resource supply. The elaboration of national standards is a critical issue if home care is ever to become an integrated part of Canada’s health care delivery system. The question of human resource supply is also front and centre, given the shortage of trained home care service providers, and is discussed in more detail in Chapter 11.

 

8.10.2 Tax Credit and Tax Deduction to Home Care Consumers

The federal government could offer enhanced financial assistance to home care consumers through tax changes. Presently, such assistance is offered through a variety of measures:

1. The Medical Expense Tax Credit (METC) is available to all taxpayers with above average medical costs. For the year 2000, the METC reduced the federal tax of an individual by 17% of qualifying medical expenses in excess of the lesser $1,637 or 3% or net income. There is no upper limit on the amount of expenses that may be claimed.
2. The Refundable Medical Expense Supplement provides increased tax assistance for low-income individuals in the paid labour force with higher-than-average medical expenses. The supplement is calculated as 25% of the allowable portion of eligible medical expenses determined under the METC, up to a maximum of $500. It is available only to individuals with at least $2,535 in earned income and is reduced by 5% of net family income above $17,663 to ensure that only low- and modest-income individuals receive benefits.
3. The Disability Tax Credit (DTC) recognizes the effect of a severe and prolonged mental or physical impairment on an individual’s ability to pay tax. For 2000, the DTC equalled about $730. It should be noted that this is unlikely to be of much help considering the real costs of home care;
4. The Attendant Care Expense Deduction (ACED) is intended to reduce barriers to work. The ACED permits a patient or disabled person to deduct up to two-third of earned income for the costs of attendant care expenses that are required to enable the individual to participate in the labour force.

Suggestions for tax changes could include increasing the Medical Expenses Tax Credit on federal income tax and expanding the Attendant Care Expenses Deduction to include a deduction from the caregiver’s income and to allow a deduction from all income sources, not just earned income.

In addition, consideration should be given to potential tax incentives to encourage people to put money aside for their long-term care needs. Such incentives could be structured in a fashion similar to RRSP and RESP incentives. However, individuals with low income would either be unable to contribute or would receive a smaller tax deduction than higher income Canadians.

 

8.10.3 Creating a Dedicated Insurance Fund to Cover the Need for Home Care

An insurance fund approach has been suggested by the Clair Commission in Quebec to cover long-term loss of autonomy. Such a fund would be separated from general government revenue and be administered on a non-profit basis by a financial institution like the CPP or QPP pension boards. The plan would be funded through a mandatory contribution based on personal income from all sources (or it could be financed through both employer and employee contributions). The plan would be capitalized (at a rate to be determined) in order to decrease the foreseeable financial impact linked to the cost of these services for the younger generation.

Home care could be offered through benefits in kind or monetary benefits. Monetary benefits for home care would be determined, as needed, through the care plan. They would be non-taxable in the hands of the beneficiary or recognized caregivers, depending on levels and circumstances to be determined.

 

8.10.4 Specific Measures aimed at Informal Caregivers

In Phase Two of our study, witnesses expressed concern that the reduction in in-patient hospital services has increased the burden of care on families and friends of patients. The Committee was told that the majority of informal caregivers are women who support their family members and who must often simultaneously manage responsibility for aging parents, for their own children while holding down full-time paid work.

Currently, more than 3 million Canadians – mostly women – provide unpaid care to ill family members in the home. The Committee’s Phase Two report indicates that, up to age 75, women are much more likely than men to have provided health care support to a family member. In addition, more women are being conscripted into unpaid health care work and do so without training and with little support. This combination of pressures can lead not only to stress-related illness and loss of work time for the caregiver, but can also increase the risk of neglect and mistreatment of the care recipient.

In the view of the Committee, it is very important to consider the support given to informal caregivers. The recent introduction of the caregiver tax credit (in 1998) is an encouraging sign of the federal government’s awareness of the important role played by informal caregivers. Under this tax credit, Canadian taxpayers providing care to an elderly parent or a family member can reduce federal tax by up to $400 annually. However, it must be recognized that the current limit of $400 is inadequate to compensate informal caregivers for the time and resources that they provide.

Therefore, there is a need for further financing support for Canada’s informal caregivers. The National Advisory Committee on Aging has recommended that the Canada Pension Plan (CPP) and Employment Insurance be adjusted to accommodate individuals who leave the workforce temporarily to provide informal care:

• The CPP currently allows people who have left the workforce temporarily to care for their children to drop these periods of little or no income from the calculation of CPP benefits. These CPP drop-out provisions could be extended to support informal caregivers who have left the workforce to care for ailing relatives.
• The EI system covers temporary disruptions of an individual’s participation in the workforce. Providing EI benefits to persons leaving the workforce to care for an ailing relative would ease the financial burden of informal care-giving. It has been estimated that this option would increase the overall cost of the EI system by about $670 million per year.

The Committee was also told that the current respite needs of informal caregivers in Canada are significant. However, informal caregivers face a number of challenges in accessing respite care:

• Respite care is targeted for situations where the caregiver is seen to be on the verge of burn-out, rather than being offered early and on an ongoing basis to enable caregivers to take on the extra work of care-giving. In other words, respite care is often used as a service to address burn-out and not as a way to prevent burn-out or illness.
• When a respite program is put in place, the services offered usually focus on replacing the caregiver while he/she has time away, rather than providing a good menu of respite choices.
• Respite programs are set up and funded separately from other community/home care and long-term care services. There is a need to better integrate respite care with the range of existing services available through institutional long-term care, hospital care, home care and community agencies.

The Committee would like to hear from readers on these options and welcomes any other options not mentioned in the report.

 

8.11 Summary

The issues and options related to the financing role of the federal government in health care are complex, multiple and interrelated. The table below lists the options presented in this chapter.

Decisions must be made about the form and the size of federal funding for health care. If the level of federal funding is to be maintained or expanded, we must consider whether the government should continue to generate revenue through general taxation or whether other revenue could be raised through some form of direct payments by consumers. If direct consumer payments are permitted, it needs to be decided whether they should apply to all publicly funded health services, including physicians and hospitals, or only to an expanded scope of services. Allowing direct payment of publicly funded health services would require that the accessibility principle of the Canada Health Act be revisited.

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