Dr. Hance Clarke is the director of Pain Services and the medical director of the Pain Research Unit at the Toronto General Hospital. Imran Abdool is a lecturer in Economics and Finance at Western University and member of Western’s Network for Economic and Social Trends (NEST) research unit.
The first step to fixing a problem is to correctly identify it. While much has been written about fixing Canadian health care, the national conversation should move beyond operational and system tweaks and instead examine the very heart of our social contract – i.e., the outdated expectation that a single high-quality public-health system can be funded out of general tax revenues.
Much research has been done on the idea of “expectations formation,” especially in the field of behavioural economics. Over decades, Canadians have formed an expectation that a public payer – specifically, the provincial and federal governments, using general tax revenues – should fund our health care.
That idea is in line with most forms of government spending: When most taxes are levied on Canadians, there is no specific expenditures that those tax receipts are restricted to. (In contrast consider the example of a fee-based or toll highway where the income is restricted to road-related expenditures.)
The expectation of health care being funded through general government funds arose after premier Tommy Douglas introduced public health care to Saskatchewan in 1959. However, the conditions that enabled the long-standing and favourable expectations of a health care system funded through general tax revenues have rapidly changed.
According to Statistics Canada data, average life expectancy increased from approximately 66 to 84 years from the early 1960s to 2011. It is also well accepted that health care costs and age are highly correlated; the older we are, the more complex and expensive care we require.
Second, over the past several decades, major breakthroughs in health care have occurred, including transplantations, vascular prosthetic grafts and cutting-edge gene therapies. But these procedures have come with extremely high costs. The price of medical equipment continues to increase steadily, with PET scanners and MRI machines now costing tens of millions of dollars. Expensive treatments and procedures, once rare, have become mainstream.
There is a threefold takeaway from all this: a) when public health care was first rolled out, there were limited complex interventions available; b) what could be done was relatively inexpensive; and c) given shorter lifespans, there was simply less time for a patient to require the higher-cost care commensurate with advanced age.
In that context, funding health care out of general tax revenues has become increasingly hard – and will eventually be unsustainable.
Canadians are already among the highest taxed citizens in the world. Considering the variety of ways we are taxed – income tax, capital gains taxes, dividend taxes, property taxes, tariffs, sales taxes, etc – a highly remunerated Canadian could easily see their effective marginal tax rate soar past 50 per cent. Labour economists have long known of a “backward-bending labour supply curve,” technical parlance for saying if someone is taxed enough, they will reduce their contributions to the labour force. That would have a wider impact on the economy: If income is representative of talent, then the full contribution of the most talented is lost.
Finally, health care is funded out of not just general tax revenue but also current tax revenue. This aspect of our analysis is important.
Broadly, social programs can be divided into two categories. Many public pensions are pay-as-you go, with tax revenues from the current working population funding the pensions promised to its current retirees. Costs for such models can rise uncontrollably if, for example, there is a decline in the proportion of those working to those who are retired.
In contrast, some pension plans, notably the defined-contribution types, are fully funded. That would mean that a person’s retirement income is drawn from their own contributions to the plan – assets have already been set aside in a dedicated fund to match what the program needs to pay out (its expected liability). Compared with the former, pay-as-you-go model, the costs of fully funded programs are more manageable and predictable.
Canadian health care funding is unfortunately based on the pay-as-you-go model. There is no endowment fund set aside to match its upcoming liabilities. That means today’s taxes must pay for it. More so, it is primarily general tax revenue – as opposed to a specific tax or set of taxes – which funds our health care.
This leads to a hard truth: To keep the Canadian health system going, and for the public’s expectations of high quality to be realized, a significant increase in taxes would be required. Canadians must ask themselves what upper tax rate they are willing to pay for an entirely public health care system. Is a 70-per-cent marginal tax rate too high? What about 80 per cent?
Alternatively, we can realize that the purely public model is no longer sustainable and undertake the hard work of integrating some aspects of a private health care model – for example a means-based co-pay, creating financial incentives for private capital to fund ancillary and diagnostic services, etc. – alongside a high-quality public system.