How our health system contributes to a more equal society

By Michael Wolfson

New study shows publicly funded health care also a form of income redistribution

A version of this commentary appeared in the Globe and Mail, Guelph Mercury and the Winnipeg Free Press

Wolfson_EqualSociety_000000430434SmallThe Canadian Institute of Health Information (CIHI) today released a new study on the impacts of Canada’s publicly funded health care on income inequality. Overall, health care spending amounted to over $200 billion in 2012. Of this amount, over $140 billion was financed by federal and provincial tax revenues.

While these grand totals are published every year, the latest CIHI study is unique in that it breaks down both health care spending and the taxes used to finance it by income groups. With the trend toward growing income inequality, this study shows the powerful equalizing impact of publicly financed health care in Canada.

Of course in part, this redistribution should not be surprising. Canadians tend to have their highest incomes in middle age, so this is the stage of life when tax payments are also highest, while their health care needs are lower. Health care use is highest at older ages, when incomes and therefore taxes paid are lower. As a result, a considerable amount of the income redistribution embodied in the publicly financed portion of our health care is simply redistribution across age groups. In this regard, health care has some parallels with public pensions — we pay taxes and make contributions during working ages, and draw benefits when we are older.

From another perspective, however, this redistribution may be overstated. Most of us will pass through both middle age and old age. So looking over a longer time frame than a single year, some of the redistribution embodied in the publicly financed portion of our health care is from ourselves when we are young or middle aged to ourselves when we are older.

The new CIHI study is novel because it includes this kind of lifetime perspective. For example, assuming the patterns we observe in the 2011 data were held fixed over our lifetimes, Canadians could expect to use an average of $220 thousand of publicly financed health care.

What’s worth noting is that the top income group — quintile or fifth of the population — has a life expectancy about five years longer than the bottom fifth. At the same time, those in the bottom fifth of incomes not only have shorter lifetimes, they also have more illness during their years of life. The CIHI study takes account of both the fact that higher incomes are associated with significantly longer lifetimes, and that higher incomes are associated with lower rates of disease.

Using this unique lifetime perspective, the CIHI study estimates that the top fifth receives 6.6 times as much income before income tax as the bottom fifth. Switching to disposable income, total income less income and payroll taxes, the gap falls to 5.1 times. And when the value of publicly financed health care is added, the gap between the top and bottom fifths, again using lifetime income, falls to 4.3 times.

The bottom line: even after netting out the age factors and the differences in life expectancy, publicly financed health care in Canada plays an income redistribution role as important as income taxes.

One important limitation of the CIHI study is that it does not look into how much health we are getting for our health care dollars. Unfortunately, there is plentiful fragmentary evidence that many of the dollars spent on health care have no health benefits whatsoever.

Another limitation is that the CIHI analysis draws on only a snapshot of data from 2011. As a result, it is unable to consider a number of important trends. One of these is federal-provincial fiscal transfers. Through programs like Equalization, and the Canada Health Transfer, the federal government provided over $50 billion to the provinces in 2011, much of which was used by the provinces to help pay for hospitals, physicians, drugs and other health care costs.

Recent federal budget changes, though, have shifted the trend line, so that these fiscal transfers will grow more slowly. At the provincial level, tackling budgetary deficits is placing further downward pressure on the growth of spending for health care. As a result, the amount of income redistribution occurring via publicly financed health care could well decline over coming years.

The CIHI study adds important new information we can use to track these changes; the analysis should be expanded. With the broad trend toward increasing inequality in market incomes, the role of the public sector, through both progressive taxation and providing essential services like health care, is fundamental to maintaining a more equitable, healthy and convivial society.

Michael Wolfson is an expert adviser with, and Canada Research Chair in population health modeling/populomics at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada, and has a PhD in economics from Cambridge.

May 2013

This Commentary is from Commentaries, Healthcare Costs and Spending.

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