Canada should consider health-care user fees: OECD
Canadian policymakers need to introduce changes to the health-care system — from user fees to an expanded role for a private parallel scheme — to better contain spending pressures in the face of an aging population, the Organization for Economic Co-operation and Development sharply warned today in its survey of Canada.
The need for health-care reform, often a taboo subject in Canadian politics, is necessary if legislators are to succeed in bringing down deficits and debt levels after they ballooned due to the financial crisis, the survey said.
Provinces administer health care, with a big help from Ottawa through federal transfer payments. But at present, the OECD said the budgets provinces are working with means that “rationing has been necessary, and queues have been endemic, especially as strong concepts of fairness [enshrined in law] prohibit any use of private payment to skip queues or constrain demand.”
Meanwhile, the OECD survey added Canadian governments should proceed, as planned, with budget-cutting efforts starting next year, and the Bank of Canada continue with interest-rate increases — although the central bank could move at a more “measured” pace.
These policy recommendations come in light of OECD findings last week that the slowdown in global economic growth would be more “pronounced” that previously envisaged. Plus, the federal Conservative government has been under growing pressure to maintain some of the stimulus measures it introduced and refrain from scheduled hikes in Employment Insurance premiums as the recovery loses steam.
But the Canadian economy is at enough of an advanced stage to proceed with deficit-cutting plans starting in 2011, as policymakers have previously pledged. And that means getting health care — the largest component of provincial budgets — under control.
“The Canadian system offers high-quality services to all residents, although at relatively high cost,” the OECD said. “Meeting the demographic and fiscal challenges requires bringing down trend growth in public health spending significantly, lest other public spending is squeezed and/or taxes rise.”
The OECD calculated that growth in public health spending has advanced at annual rate of 8% over the last decade. Meanwhile, nominal income — or the tax base from which governments collect revenue — is set to grow an annual average rate of less 4% in the coming years.
Two elements policymakers could embrace are user fees and an expanded role for a parallel private scheme, the think-tank said.
“Excessive waiting times suggest that supply is insufficient to meet demand at a zero price,” it said. “Some form of pricing could be introduced in order to better reveal and ration demand.”
The OECD added such a user fee might encourage healthier lifestyles and reduce a “moral hazard” among households who believe any illness they incur through their behaviour would be covered under Canada’s generous health care scheme.
As for an expanded role for private medicine, the OECD noted Quebec has conditionally allowed private-insurance coverage for core health services suffering from long wait times. Plus, private health care has a role in both Britain and Sweden.
“If even only a small portion of the population chooses to opt out of public insurance and purchase private insurance for core services, the presence of competition from private plans would give politicians and managers of the public plan a strong incentive to operate more efficiently and reduce costs, since otherwise they would lose market share,” the think-tank said.
“Regulation prohibiting both private insurance for core services and mixed public-private contracts for doctors should be eased to spur more competitive service delivery, possibly requiring clarification of the Canada Health Act.”
In reality, however, changes to federal legislation regarding health care are unlikely, as political parties — including the governing Conservative party — would be reluctant to open up a potential hornet’s nest of problems, especially in a minority Parliament.
As part of its deficit reduction plan, the federal government has said it would not cut transfers to provinces. However, the present transfer pact between Ottawa and the provinces expires in 2014, and talk of alternative ways of delivering health care could intensify leading up to that deadline.
As for the country’s overall fiscal health, the OECD believes it is appropriate for legislators to begin withdrawing emergency stimulus measures introduced in late 2008 and 2009, as deficits and debt need to be reduced to free up cash for measures such as health care. The situation is particularly acute with the provinces, most notably in Quebec and Ontario, where budget cutting needs to be “especially vigorous.”
“With the recovery solidly under way, fiscal consolidation should proceed as planned in 2011,” the OECD said. “For all governments, an important first step to restrain spending is to keep temporary economic stimulus measures temporary. Failure to let them expire … would only make fiscal consolidation more difficult to achieve.”
Worries about the Canadian economy stem from weakness in the United States, this country’s largest trading partner. Growth in Canada slowed to 2% annualized in the second quarter, from 5.8% in the previous quarter. Plus, new data indicated Canada’s trade deficit in July widened to a record high as exports to the United States shrunk — a warning slower growth is ahead for the third quarter.
The Bank of Canada raised its benchmark rate last week to 1%, but governor Mark Carney later warned “renewed” U.S. weakness would force the central bank to “chart a careful course” on interest rates.
In its assessment, the OECD said the central bank should continue hiking rates, as monetary policy remains “extremely expansionary.” However, it said the pace of rate hikes should be “measured,” as government budget cutting and the elevated level of the Canadian dollar should act as checks on the economy.
“The bank could pause the tightening cycle at any time if the projected strength of the recovery does not materialize and inflation sags, or accelerate it in the opposite scenario,” it said.