Myths about health spending

The Canadian Institute for Health Information recently published a report showing that total health spending in Canada was growing faster than GDP. The reaction of some experts to the report showed that a number of misguided notions continue to dominate health policy thinking in Canada.

One misconception is that spending more on health care is a bad thing. To the contrary, research shows that wealthier societies tend to spend proportionally more of their income on health care. This is because wealthy countries have proportionally more disposable income to devote to health care after paying for other necessities like food, clothing, housing, transportation, education, etc. As people become wealthier, they simply have the capacity to spend a higher percentage of their income on improving their health and extending their lives without sacrificing their other needs and preferences.

The real issue regarding the growth rate in health spending is whether it is sustainable.

Concerns about system-wide sustainability only apply to publicly financed systems because the growth in private spending on health care does not pose a systemic sustainability problem. Sustainability is about the capacity to pay when health spending faces no built-in incentives that will automatically contain growth in consumption.

Under traditional private insurance plans, demand for health care is naturally constrained because a person’s own premium costs and out-of-pocket expenses are directly affected as they consume insurance benefits. By contrast, under the redistributive tax financing of public insurance plans, individuals pay taxes to fund their neighbors’ consumption of medical goods and services. The result is that patients can use increasing amounts of health care without bearing a proportionate increase in their own costs. Public insurance typically lacks direct financial incentives for people to constrain their demand for non-catastrophic medical goods and services; to pre-select realistic lifetime expenditure limits for catastrophic care, or for patients and providers to make cost-efficient substitution choices between alternative types of treatments.

Therefore, the only statistic that matters is the rate of growth in government spending on health care relative to the rate of growth in government revenues. This measures our ability to pay for health care through public means alone, and therefore the sustainability of maintaining the current Medicare-monopoly over health insurance.

Provincial government health spending has grown at an average annual rate of 7.7 per cent over the past 10 years. Over the same period, the average annual growth rate for total available provincial revenue (all sources, including federal transfers) has been only 6.3 per cent. Six provinces are on pace to spend more than half of all revenue on health care within a generation. This means that government health spending has been growing faster than the ability to pay for it through public means alone. The sustainability crisis is real.

However, unsustainable health care costs are not caused by spending on prescription drugs. Even if governments spent nothing on drugs, spending on all other medical goods and services would still be rising at an unsustainable rate.

According to a recent study, all types of prescription drugs accounted for only 9.3 per cent of total federal-provincial-territorial government spending on health in 2006. More specifically, patented prescription drugs accounted for only 6.3 per cent of total government health spending in 2006. This means that 90.7 per cent of all public health spending went to hospitals, health professionals, and categories other than prescription drugs.

Notably, annual public spending on hospitals, health professionals, and other categories has been growing at an average at 6.9 per cent, 6.5 per cent and 7.2 per cent respectively. This strongly suggests that efforts to contain health care costs by targeting prescription drugs are misguided.

Government-run health systems typically use monopoly power to restrict access to publicly insured benefits in a misguided attempt to contain spending growth. It is a mistake for policy makers to engage in centrally planned cost containment strategies targeting the individual components of health care spending. Unsustainable growth in public health spending is caused by the flawed design of public health and drug insurance programs, not the price of medical treatment or the invention of new medical technologies like patented drugs.

It would be more efficient for government to directly support financially needy people with a means-tested income subsidy dedicated to the purchase of private insurance coverage, than to maintain huge government-run health programs through taxation and centrally planned rationing. A regulated competitive private sector insurance market would be more sustainable, while providing better access and respecting consumer choice.