Cut Spending and Get Better Care

Thanks to poor fiscal management, the Government of Ontario finds itself in a difficult fiscal situation. It must find a way to eliminate the significant deficits that are expected until at least 2015/16. Given that tax increases are certain to damage the road to economic recovery, Ontarians should instead begin contemplating reductions in government spending. And there’s no better place to start than health care.

According to the 2009 budget, health expenditures are expected to consume 43 percent of government program expenditures this year. In recent times, health spending has been rising faster than government expenditures or GDP, meaning that share is likely to continue growing over time. The reality is that health care spending will have to be cut to avoid future tax increases.

Any government looking to reduce health care expenditures should expect backlash from a public that is likely to expect increased rationing of health care services. But this need not be the case. A look at the realities of Medicare suggests there is actually a great deal of room to cut expenditures while actually decreasing rationing. The key is to enact sensible health care reform.

Consider that Canada maintains the developed world’s second most expensive universal access health insurance system on an age-adjusted basis. Within Canada, provincial health expenditures in Ontario are only slightly below the national average. In spite of these high expenditures, Ontarians endure relatively poor access to medical professionals and medical technologies, are cared for using far too many old and outdated pieces of medical equipment, and must wait for health care in some of the longest queues for treatment in the developed world.

How other nations are able to purchase more health care for less money should provide a lesson for Ontario. Getting more for less in health care will however require adopting two key health policies that are common in other nations with universal access health care: competition in the delivery of publicly funded care and cost sharing.

Cost sharing, requiring patients to share in the cost of their care, is essential to providing a less expensive and more accessible universal health care system. The reasoning is straightforward: people spend their own money more wisely than they spend someone else’s. According to research and international evidence, when patients are responsible for some of the cost of their care, they use fewer resources (making more available for other patients and saving money overall), and end up no worse off in terms of health outcomes.

Just how much might such a policy save? A 2004 Fraser Institute study of cost sharing in Alberta found that a 25% coinsurance payment in Alberta (with reasonable annual limits for patients, old-age and low-income exemptions, and exemptions for hospital care for children and the elderly) would reduce total Medicare spending (including the additional out-of-pocket payments made by Albertans under the scheme) by some 12 percent, while the reduction in spending for the public budget was approximately 20 percent.

The same approach in Ontario could be expected to reduce the $42.6 billion the province plans to spend on health in 2009/10 by approximately $8.5 billion.

Another way to reduce spending and improve the state of health care in Ontario is to change the way hospitals are funded and allow more competition in the delivery of publicly funded services. To that end, Ontario should scrap its current global budget funding model for hospitals, where the hospitals receive a set amount of money each year and thus see every patient as a drain on their budget.  Instead the province should move to activity-based funding in which hospitals would be paid per patient. This would save Ontarians significant resources, while at the same time providing Ontarians with a greater quantity and quality of services from hospitals that would be operating more efficiently.

The Swedish experience with moving to activity-based funding provides some insight: Gerdtham, Rehnberg, and Tambour studied the move to activity-based funding by Swedish county councils (provinces) in 1993 and 1994 in the journal Applied Economics and estimated that the cost savings of such a reform were approximately 13 percent. For Ontario, that 13 percent cost savings on hospital care adds up to roughly $2.5 billion in 2009/10.
 
In total, a rough calculation shows that by introducing just these two sensible health policies Ontario could have reduced public health spending by an estimated $11 billion in 2009/10. That reduction in spending would have cut the $18.5 billion forecast deficit by slightly less than 60 percent. At the same time, the allocation of medical resources in the system would be improved, actually leading to better access to health care services for Ontarians.

The provincial government’s poor fiscal management is likely to mean a reduction in public spending in the future. But these reductions in spending need not reduce the quality of public services. Indeed, the level of misallocated and wasted resources in health care is high enough to allow the province to substantially reduce spending through sensible health care reform while actually improving access to health care.