Current Influences and Pressures on the Health Care System
Current Financial Realities
Health Care Costs Are A Drain On Other Public Activities
In Canada, actuaries are already active in the management of the Canada and Quebec Pension Plans and in social insurance programs, as well as in health care and demographic studies. Of course, actuaries are also very involved in the design and management of private health care programs.
Actuarial techniques have played a role in the costing of many of the health care reforms that have been proposed in the U.S. over the last several years. They include: assessing the risk of an insured population; designing the scope of coverage; analyzing utilization; setting premiums and cost-sharing limits for individuals; and evaluating the advantages and disadvantages of standard plan designs.
Actuaries played a key part in designing and implementing the Oregon State model for its Medicaid population. The services to be covered by the model were chosen on the basis of a comparative, cost-benefit analysis. Estimating cost factors, such as the basic cost of services, differences in severity of disease across the population, trends in costs to providers, savings through managed care initiatives and cost-benefit ratios for alternative procedures, was critical to the success of the model.
This report represents the CIAs initial contribution to the Canadian debate about the reform of health care financing.
With health care expenditures now consuming a significant and growing portion of combined federal and provincial spending capacity, the question of how to finance health care and how much health care to finance preoccupies the public policy agenda.
However, the public purse is not the only source of funds for health care in Canada. The private sector - employers and individuals - pay about 28% of costs directly, and that proportion is expected to continue to grow. There are several reasons for this trend, principally: total health care costs are increasing and at a rate that is faster than the growth in Gross Domestic Product (GDP); and governments are shifting costs between themselves and to the private sector in an effort to off-load some of the financial burden and the responsibility.
The major issues in this equation are the distribution of costs between governments, industry and individuals and, even more fundamentally, how to bring total costs under control. The current situation in which costs are rising faster than our collective capacity to pay cannot continue. The price is literally too steep.
Never before has there been a greater need for a rigorous review of alternatives and disciplined costing. There must also be a serious rethinking of the decision-making process around health care delivery. Without the appropriate tools and processes, the current system will still change, but with little likelihood that it will produce optimal results. In this regard, accessing health data for even crude analysis is extremely difficult.
Table 1: Health Care Costs as a Percent of GDP in 1990 Turkey 4.0% New Zealand 7.2% Netherlands 8.1% Greece 5.3 Norway 7.2 Germany 8.1 United Kingdom 6.1 Luxembourg 7.2 Austria 8.4 Denmark 6.2 Switzerland 7.4 Iceland 8.5 Japan 6.5 Finland 7.4 Sweden 8.7 Spain 6.6 Belgium 7.4 France 8.9 Portugal 6.7 Australia 7.5 CANADA 9.0* Ireland 7.1 Italy 7.6 United States 12.4 * By 1993, this percentage had risen to 10.0%. Source: OECD - CREDES Health DataThe trend is unmistakable. Health care costs have been rising faster than virtually any other index or comparative cost base and are absorbing an ever larger portion of our financial resources. At the same time, there is increasing political resistance to the financial implications of this domination of scarce public resources, a resistance that may be making some inroads with the general public. However, despite this relatively new determination by governments to curb, if not reverse, the rate of growth of health care costs, demographic changes over the next few decades will frustrate the achievement of this objective.
Table 2: Life expectancy in Canada (Years) At Birth At Age 65 At Age 75 Year Male Female Male Female Male Female 1921 58.8 60.6 13.0 13.6 7.6 8.0 1941 63.0 66.3 12.8 14.1 7.5 8.2 1961 68.4 74.2 13.5 16.1 8.2 9.5 1981 71.9 79.0 14.6 18.9 9.0 11.9 1991 74.6 80.9 15.7 19.9 9.6 12.5 Source: Statistics Canada, Life Tables, Canada and the Provinces, 1990-92.The baby boom is at the heart of the anticipated rise in the proportion of the population age 65 and over. Figure 1 shows the number of live births in Canada this century. The baby boom and subsequent baby bust have clearly created a tidal wave of shifting demographics.
The aging of Canadas population is easily understood. It is the result of a number of well-entrenched trends: declining fertility rates; slow population growth; and healthier lifestyles, which, together with medical advances, are leading to longer life expectancies. The transition from a young population to an old one will have profound consequences for our society and our institutions.
Table 3 Expenditure Depency Ratios (1991 = 1.000) Year Expenditure Dependency Ratio 1951 1.103 1961 1.266 1971 1.159 1981 0.982 1991 1.000 2001 1.039 2011 1.057 2021 1.294 2031 1.594 Source: Canadian Institute of Actuaries, Task Force on Health Care Financing, 1995.The public policy implications of this table are very disturbing. It is all the more so with the realization that the present time is really optimal for deficit reduction and financial restructuring of the health care system because dependency ratios of both young and old Canadians are comparatively low. The majority of Canadians are in their productive, working years. The birth rate is lower than in the 1950s and 1960s and the elderly are a relatively small cohort born during the depression. Yet health care costs and government budget deficits have risen to levels that many deem unacceptable.
Unfortunately, as the baby boom ages, the circumstances for this kind of course correction will become much less amenable, the demands on the system for service will be stronger, and the productive, wealth-generating resources will be fewer. Use of health care resources increases dramatically with age. See Figure 4. In fact, the aging of the Canadian population alone will allocate almost 1% more of GDP per year to health care costs without any new treatments, procedures or technologies. Canadian governments must act now to bring deficits and health care costs under control. In this case, pain delayed will result in significantly more pain.
In the short run, until about the year 2000, the earning power of the baby boomers will go a long way towards supporting existing spending patterns. Until then, health care costs as a percentage of GDP are not expected to rise any higher as a result of an aging population than they have in the recent past.
However, just after the turn of the century, the situation will change significantly. The leading edge of the age bulge reaches 55 in the year 2000 and begins to retire. That will have the two-edged effect that the productive base will begin to shrink and the high health care user group will expand. This effect will continue to be felt for about 25 years, at which point the rate of change will stabilize at a new, high-cost plateau.
The relative rates of inflation, growth and investment return will determine two things: the severity of the demographic pressures in the first quarter of the twenty-first century; and the ongoing economic environment as we move to the middle of the century. But they will not change the fundamentals of future health care financing which are described below.
Just to maintain the current level of health care costs as a percentage of GDP during the next 25 years, the rate of growth of health care costs in Canada must be kept from 0.5% to 0.75% below the rate of growth in earnings. This level of performance will allow growth in earnings to offset the increased cost of a more elderly population. If the two rates are approximately equal, the demographically-driven cost of health care will rise another two percentage points above the current level of 10% to 12%, a 20% increase in the share of GDP absorbed by health care by 2020. Figure 5 shows the result graphically.
Health care in Canada is financed on a pay-as-you-go basis. This creates huge potential intergenerational transfers as the current work force pays for the health benefits of the elderly. Using todays age-specific costs, the estimated cost for future health care of all persons currently over age 65 is $369 billion, or about 55% of the current annual GDP. If all working people in Canada were putting aside sufficient funds to pay for their own health care in their retirement years, that fund would have over $1 trillion in it, or 150% of current annual production. That is the amount that will have to be met by the next generation.
As Canadians pursue this undertaking, it is important to remember the defining characteristic of the our health care system that has become an integral part of our national identity: universal access to publicly funded health care. However, the demographic and deficit pressures described above dictate that the days of unrestricted access to unlimited health care resources must soon end, indeed, have already ended.
With 28% of health care costs now paid for privately, either through third party insurers or directly by individuals, the Canadian system is already a mix of public and private payment for the delivery of health care. This ratio of private to public funding is close to the average for other developed countries and, with the exception of the U.S., the level of public funding is falling in all of them. See Table 4.
Table 4: Degree of Public Payment (% of total cost) Country 1980 1990 Change Germany 75.0 72.7 -2.3 Canada 74.7 74.1* -0.6 Denmark 85.2 84.2 -1.0 France 78.8 84.2 -4.6 Italy 82.1 77.7 -4.4 Netherlands 74.7 72.6 -2.1 United Kingdom 89.3 84.9 -4.4 United States 42.0 42.4 +0.4 * By 1992, this percentage had dropped to 72.0%. Source: OECD - CREDES Health DataThe principle that Canadians can retain is that universal access to basic health care services will continue to be guaranteed at public expense. With this principle entrenched, Canadians should be prepared to investigate options that will allow us to allocate health care resources most efficiently and effectively.
These options include mechanisms that are the norm elsewhere in the industrialized world such as user fees, copayments and deductibles, so-called insurance principles, which provide consumers with a cost-related incentive to use health care resources efficiently and appropriately. Other health care delivery options include the development of a private delivery alternative for services not considered part of the basic, universal program. Indeed, some forms of these options already exist in Canada, for example, copayments and deductibles in private drug plans; private payment for medical services and drugs delisted for reimbursement by government benefits plans; private hospital accommodation; most dental care; vision care; and most preventive and alternate care services (e.g., chiropractors and naturopaths).
The critical issue for Canadians to resolve is what the optimal distribution of services and costs should be between public and private funding. Evidence-based actuarial analysis provides the basis for a decision-making model that can address this issue.
The Canadian Institute of Actuaries proposes that Canadian decision-makers adopt this approach to health care resource allocation. Every possible procedure, every drug, every therapy, even non health-specific social initiatives would be evaluated on the basis of its ability to improve quality of life. The system in place in Oregon State is based on this model for deciding which procedures will be covered by the Medicaid program. To be effective, it requires an historical database to which current and prospective information is continually added.
While an adequate database may not currently exist in some Canadian provinces, there is enough available information to begin the process of determining which procedures and initiatives provide the greatest beneficial impact on health per dollar of expenditure. The process would include consideration of procedures and services which are outside the domain of traditional health care, such as an anti-smoking program, which might be shown to have more positive impact on health for dollars spent than, for example, the purchase of a diagnostic machine.
The result would be the beginning of an objective, measurable, database which would provide the elements essential for public policymakers to define a new public health care system for Canada. As the database grows, it will provide the information required to revise the system as needed. However, while analysis of health outcomes may demonstrate that a particular service should not be part of the public program, that would not affect its availability to consumers who wish to pay for the service directly or are covered by private insurance. All services should continue to be available as long as there is consumer demand. This is the case for many services today.
Because managed care is an integrated systems approach, administrative efficiencies can be achieved on a system-wide basis. Treatment procedures and protocols can also be developed based on performance measures and standardized across the system, or tailored to meet the needs of a specific region. This is an important feature, especially in light of studies that have shown wide differences in use of certain procedures from region to region, even from hospital to hospital, without significant differences in health effects but often with substantial variations in cost.
Most people believe that there are benefits for health from prevention, education, lifestyle and diet. These need to be documented and measured so that education and incentive programs can be designed and refined on an ongoing basis. Awareness programs might then have a highly care- and cost-effective impact on the well-being of Canadians and their health care resources.
While managed care has tended to be considered within the context of private sector benefits plans, it is clear that governments in Canada must adopt managed health care principles in the administration of public health care plans.
Cost-shifting is clearly the direction in which governments in Canada have begun to move. Therefore, it is important to remember that even private sector money spent on health care is money that is unavailable for other economic purposes. In fact, by reducing the overall capacity to generate new wealth, even future health care - particularly the development of new technologies, alternate delivery mechanisms and services - may be inhibited.
A continuing emphasis on traditional health care could actually be detrimental as scarce resources are diverted from general social and economic security programs that might have a more positive impact on public health (i.e., school breakfast programs versus more high-tech equipment). The financing of health care overall represents a trade-off with other public services from defence to education. Spending more is not the answer from any point of view. Spending better is.
Demographic changes over the next 25 years mean that we will have to restrain our appetites for health care services just in order to maintain today's level of spending relative to economic growth. But the situation is not that simple. The demographic shift to an aging population means the inherent demand for health care services will actually increase significantly. At the same time, there is a growing consensus that todays level of spending on health care is already excessive.
The challenge facing Canadians is to rethink our health care needs and priorities and to reinvent the system so that it delivers the best health care possible for all Canadians at a price we can afford. A managed care approach, which uses evidence-based actuarial analysis and the measurement of specific outcomes to provide a continuous assessment of the current value and benefit of the system, is essential to this process. The creation of a comprehensive database is a critical first step to objective management. You cannot manage what you cannot measure.
The need to plan better, to use health care resources more efficiently, to measure outcomes more rigorously and to use these performance measures to allocate human and financial resources more effectively is now imperative. Demographic realities mean that making the necessary changes will only get harder with time.
The Canadian health care system must be fixed to be saved. This can be done without compromising its quality, which is among the best in the world. Governments, providers and users must all be encouraged to participate fully and to exercise fiscal responsibility. Although financial pressures are clearly increasing, with thoughtful, fair and responsible action from all stakeholders, the excellent health care enjoyed by Canadians will continue.
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