The Sustainability of Medicare

Executive summary

In the past few months several politicians, journalists, and private sector organizations have claimed that Medicare is unsustainable. However, we need to be constantly on guard for those who claim the sky is falling and then rush us to their claimed pet remedy. In fact, a closer examination of the numbers reveals that apocalyptic future forecasts for Medicare are seriously flawed. Furthermore, the best cost-control options are likely to come from improved public-sector management not privatizing costs or delivery of care.

Health care costs have been increasing and the healthcare sector has increased its share of the overall economic pie since 2000. This was a deliberate step taken by the Federal government and the provinces when they negotiated the 2003 and 2004 Health Accords which raised federal health spending by six per cent per year for ten years.

Even so, the real explanation for health’s taking a larger share of our economy, or GDP, is due to the severe economic downturn of 2009. In 2009 overall healthcare spending only increased by 4.3 per cent but the rest of the economy shrank rapidly and there was a large jump in health’s share of GDP from 10.8 per cent to 11.9 per cent. However, if the economy had grown at the same rate in 2009 as 2008, overall health spending would have only been 10.9 per cent of GDP in 2009.

The situation is even less apocalyptic if one focuses on public spending. Public-sector health costs increased from 7.6 to 8.4 per cent of GDP in 2009. But if the economy had grown at the same rate in 2009 as 2008, public-sector healthcare costs would have been 7.6 per cent of GDP, identical to the year before.

The economy has been growing since the summer of 2009, provinces have implemented various healthcare cost control maneuvers, and it is unlikely that healthcare’s share of GDP will continue to increase.  In 2010 public sector healthcare costs were estimated to have held steady at 8.3% of GDP[1].

Even though publicly-funded healthcare has not particularly increased its share of the economy, it has increased its share of government spending. However, this is in part because governments have implemented major tax decreases in the past decade. In total, the three levels of government cut their revenues by 5.3 per cent of GDP from 2000 to 2008, which amounted to roughly $85 Billion in foregone annual revenue. To put this in perspective, public sector health budgets increased by $52.6 Billion during this period. There are additional corporate tax-cuts scheduled which will continue to pressure government spending.

Finally, Canada’s healthcare costs are similar though at the high end of other wealthy countries (and much lower than those of the United States). According to the latest data from the Organization for Economic Cooperation and Development (OECD), Canada spent slightly more than ten per cent of its GDP on healthcare which was slightly less than Belgium, Germany, Switzerland, and France and slightly more than about ten other countries including Sweden and the Netherlands. The United States leads the pack by a long way, spending 16 per cent of its GDP on health in 2007.

Canada’s population is aging and per capita healthcare costs increase with age. Many political commentators have put these two facts together to predict a massive cost crisis related to population aging. But closer analysis indicates that aging in itself will be responsible for a modest increase in healthcare costs.

A recent analysis concluded that aging of the population increased healthcare costs by roughly 0.8 per cent per year between 2001 and 2010 and will increase costs by about one per cent per year from 2010 to 2036. The major factor raising healthcare costs are the increasing utilization rates across all ages and particularly the mix of goods and services provided. For example, studies of the costs of prescription drugs in BC has shown that aging raised costs by less than two per cent per year while growth in utilization increased costs by six per cent and the use of more expensive but equally as effective drugs had increased costs by five per cent.

When we look across countries there is no relationship between aging and health spending. The US has one of the youngest populations of industrialized countries and Japan has the oldest, yet the US spends the most on healthcare, by a long way, while Japan spends amongst the least.

Canadians’ biggest concern with their healthcare system is waiting times and access to care. While sometimes more resources (e.g., more staff) reduce wait times, evidence suggests that many issues contribute to wait times and several approaches exist for solving them. For instance, accurately recording wait times is an important first step in reducing wait times, while ensuring appropriateness of care (is this MRI necessary?) is another.  Further, many long wait times are due to a failure to use appropriate management tools rather than insufficient resources.  Work that has been done changing management practices in Alberta and Ontario has rapidly reduced wait times without increased resources.  Sometimes of course, more resources do help.

Although it may be counter intuitive, private for-profit alternatives don’t seem to work very well in healthcare. Privatizing the funding tends to increase overhead costs. Each health insurance company needs actuaries, managers, clerks, computer systems and lots of marketing and sales people. That’s one of the main reasons why public insurance costs so much less to administer than a system of private insurance. There’s less overhead. In fact, that’s one of the main reasons Supreme Court Justice Emmett Hall recommended public medical insurance in his 1964 Royal Commission.† And, a single purchaser can negotiate lower prices with suppliers than many small purchasers. That’s one of the main reasons why Canadian healthcare costs are lower than US costs (Anderson et al., 2003).

Delivery of healthcare by private corporations can result in a ‘win-win’ situation if savings result from strong economies of scale or better management. However, savings frequently arise from more contentious measures, including freedom from labour agreements (and different wage levels and skill mixes), evasion of cost controls, cream skimming, or even dubious practices.  In theory, these problems can be minimized if performance is monitored, but this adds additional costs, and may be difficult where outcomes are not easy to measure.  If performance cannot easily be monitored, not for profit delivery is more likely to provide high quality outcomes than is for profit delivery, with corporate for profit delivery being the most vulnerable to poor outcomes.

Some people think that charging patients when they use the health system would help control healthcare costs and ensure that people were getting just the right care. However, the evidence shows that user charges discourage patients from seeking both necessary and unnecessary care. When preventive care is discouraged and effective drug prescriptions are not filled, user charges can promote higher costs and poorer health.  Medical savings accounts, another approach to making the patient pay, don’t work.  They don’t work for services that the sick need and they don’t work for the services that the healthy need.

It is easy to assume that the real problem with the health care system is “not enough”—not enough physicians, not enough MRIs, not enough money in the system.  But the evidence suggests something different. More healthcare is not always better and the more expensive drug is not necessarily the right choice.

The key to Medicare’s sustainability, as unexciting as it sounds, is better management of the system in the public interest.

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[1] Public-sector Health Expenditure in current dollars found in table B3.1 page 145 of report. See http://secure.cihi.ca/cihiweb/products/NHEX_Trends_Report_2010_final_ENG_web.pdf “GDP figures for 2010 found in Appendix A.1, titled “Gross Domestic Product at Market Prices, 1975 to 2010 — Current Dollars ” from CIHI’s National Health Expenditure Trends, 1975-2010 report. To access a copy of this appendix please contact [email protected].”

† “Hence, the decision which Canadians have to make…is whether they wish to pay $1.020 million…in 1971 for a programme administered by the insurance industry, or $837 million for a programme administered by government agencies” “In our opinion it would be…uneconomic…to spend an extra $193 million. We must choose the most frugal method.”Royal Commission on Health Services. 1964.