The wrong health-care model. Is Canada's health-care system really cheaper?

National Review, Feb 17, 1992 by Jacques Krasny

NO MATTER how we view it, the U.S. health-care system is in crisis. At more than $6 billion annually, the cost of providing health care continues to outrun the growth of the economy, and yet 31 million citizens lack adequate insurance, and many middle-income insurees fear that their savings could be wiped out by a catastrophic illness. In the glare of these facts, it is not surprising that the Canadian health-care system is being touted as an alternative. It provides universally available health care at lower cost - 11.1 per cent of Gross National Product (U.S.) compared to 9 per cent (Canada) in 1987. The Canadian system, however, is less attractive than it appears at first.

Is It Cheaper?

TO BEGIN with, is it really cheaper? Take, first, the cost of capital. In the U.S. health-care system, as in any other business, the cost of working capital is included as an expense. Hospitals, provider networks, rehabilitation facilities, insurance plans - all must raise money either through the equity market or through debt financing instruments - and investors expect returns. But Canada's 1,400 hospitals were built, for the most part, through a combination of local funds and matching federal contributions. This is not to say that capital comes free in Canada, but rather than the capital cost of the health-care system is buried i the total financing costs of the Canadian government (contributing significantly to Canada's national debt, which is roughly 50 per cent higher per capita than the United States'.)

To estimate this hidden cost, we extrapolate the U.S. ratio of capital employed to annual operating costs for health-care institutions (67 per cent), multiply it by the percentage of total health-care expenditures attributable to institutions (47 per cent), and further multiply by a 10 per cent cost of money (a conservative estimate until recently). This calculation adds 3.15 per cent to total Canadian health expenditures, increasing the Canadian health-care-to-GNP ratio by 0.3 percentage points.

Consider, next, the cost of employee health benefits. In both the United States and Canada, the health-care systems are major employers - and labor costs constitute approximately 75 per cent of all health-care expenditures. Since every U.S. employer recognizes employee health benefits as a significant incremental payroll cost, benefits for the health-care labor force are included in the operational costs of U.S. health-care facilities. In Canada, however, the cost of employee health benefits is absorbed by general taxation, and therefore excluded from calculations of health-care expenditures.

To get a best estimate of labor costs in Canadian health care, we multiply the percentage of labor costs in overall health-care expenditure by 10 per cent, for a conservative approximation of benefits as a percentage of payroll. This figure is then multiplied by 83 per cent to allow for the 17 per cent of health benefits paid for by government-levied health-insurance premiums. The product of these numbers, 6.3 per cent, indicates the amount by which Canadian expenditure should be increased to make it comparable to U.S. figures. Canada's health-care costs as a percentage of GNP thus increase an additional 0.6 points.

Population mix comes next, for health-care demand is highly dependent on the demographic profile of the served population. In the United States, it is estimated that the 12 per cent of the population that is elderly accounts for well over 50 per cent of health-care consumption; an increase of 1 percentage point in the 65-and-older population can raise health-care costs by 4.4 per cent. The U.S. cohort of 65-plus, which is 1.2 per cent larger (proportionately) than the Canadian, accounts for a full 5.3 per cent of U.S. health-care costs. In other words, were the Canadian system required to care for a population demographically equivalent to the U.S. population, it would face a 5.3 per cent increase in its health-care costs. This adjustment adds a further 0.5 points to the percentage-of-GNP figure.

Finally, if Canada were to spend the same proportion of total health-care costs on R&D as the U.S., it would face a 2.4 per cent overall increase in costs, and a resulting 0.2-point increase in health care's percentage of GNP.

The net effect of these adjustments for costs of capital, health benefits for health-care workers, population mix, and R&D is to increase Canada's share of GNP spend on health by 1.6 points. That in turn reduces an apparent 2.1-point advantage over the U.S. system to a modest 0.5. Even then, we have made no adjustment for other factors which heighten both cost and demand for medical care in the United States (and which have no parallels in Canada). They include the large number of Vietnam veterans; inner-city phenomena resulting from more intense urbanization (violent crime, substance abuse, sexually transmitted disease, teenage pregnancy); substantially greater costs of malpractice liability and insurance; and administrative costs of the health-care system, which in Canada are absorbed into general government expenditures, with little of the real cost allocated back to health care.