An economist analyses health costs

TheStar.com – Opinion
Published On Mon Apr 19 2010.   By Carol Goar, Editorial Board

Troubled by the rising level of panic over Ontario’s burgeoning health-care bill, economist Dale Orr is trying to get a few facts on the table.

He doesn’t profess any medical expertise. Nor does he claim to have a sophisticated understanding of the internal workings of the health-care system.

But he can crunch numbers. And he thinks they contain important lessons for policy-makers.

“In spite of the urgent need to better understand this dilemma, we have not made the progress we should in really understanding the quality and quantity of health care Canadians are receiving, nor the level of efficiency of health-care delivery,” Orr says. “This information is essential to make an informed choice about how much restraint in costs is appropriate, where the restraint should be applied and who should do the restraining.”

It astounds him, for example, that Canadians have never been offered an adequate explanation for the wide variation in per-capita health spending across the country. Are the provinces with higher-than-average expenditures delivering health care inefficiently? Or are the ones that spend less than average compromising on quality?

So Orr did his own analysis.

First he ranked the provinces by per-capita health spending. Newfoundland was the biggest spender at $4,490 per person; Quebec was the lowest at $3,490. Ontario — which may surprise its citizens — was the second lowest at $3,712.

Next he looked back for changes over the past decade. Manitoba, the top spender in 2000, had fallen to fourth place. British Columbia, also one of the big spenders, had dropped to third smallest.

Then he investigated possible causes:

Knowing health-care spending rises sharply with age, he looked at demographics. But the provinces were very similar. When spending was adjusted to account for age differences, the rankings barely changed. (Alberta, which has a younger-than-average population, displaced Newfoundland as top spender.)

Suspecting federal transfers might play a role, he tested that hypothesis. He was right. Provinces that receive large transfers from Ottawa (equalization payments and enriched health funding) spent Ottawa’s money on health and used their own revenues for other priorities, shielding them to some degree from the stark choices Ontario faces.

Reasoning that economies of scale could work to the advantage of larger provinces, he investigated that theory. It, too, proved fruitful. Ontario and Quebec do benefit from their market clout. The Atlantic provinces have to spend more to provide comparable services.

Thinking Ontario might be constrained by the nature of its tax base, he checked that out. The answer was positive. Unlike provinces that can count on a steady stream of royalty payments, Ontario must raise income or sales taxes if it doesn’t keep a lid on health costs. This may account, in part, for its relatively low per-capita health spending.

Orr did not compare provinces that pay private health-care providers with those that deliver all or most health services within the public system. But he has looked at that question in the past. As a general rule, he says, contracting out health services drives up expenditures.

There wasn’t enough evidence to draw any clear link between the level of provincial spending and the quality of health care, he says. Nor could he pinpoint inefficiencies with sufficient accuracy to draw useful conclusions.

His analysis is far from exhaustive. But it puts Ontario’s health budget in perspective; shows how federal transfers create, rather than correct, inequities in provincial health spending; and suggests that policy-makers need to look beyond doctors, hospitals and pharmacies for answers.

Orr doesn’t have a prescription. But he makes a strong case against hasty ones.

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