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Financing Health Care: A Comparison of the Health Care Systems In United States

Introduction

Does Canada’s publicly-funded and single-payer health care system control health expenditure inflation better, distribute health services more equitably, and deliver better quality of care than the private-dominated and multi-payer system of the United States?

Although practically joined at the hip geographically, the health care systems of the U.S. and Canada could not be more disparate. In comparing which model of financing health care is more effective, the two countries are always bases for comparison. Due to the rising unemployment and the increase in the level of economic uncertainty brought about by the recent global financial crisis, health care as a resource has been a contentiously debated one. Then newly-installed President Barack Obama and his Democratic allies in Congress heavily campaigned for universal health coverage and caused a massive stir. However, the idea of universal health coverage had already been floated since the end of the Second World War. Until now, among the most advanced economies in the world, the U.S. remains the only country without universal health coverage. It also has the most costly health care in the entire world. On the other hand, its North American neighbor has followed the equity model in health care provision of Western European countries. Aside from universal health care coverage, Canada is said to have one of the best-performing health care systems in the world.

The global economic situation calls for another look at health care. With the recent economic challenges facing advanced economies, countries are attempting to effectively manage their health expenditure inflation as they simultaneously try to realize their health care objectives. Not all health care models are created equal, though. Each is developed with its own set of assumptions and priorities. Countries design different approaches in the financing, organization, payment, and regulation of health care. This essentially yields also unequal outcomes for all.

But while they may differ in approach, countries generally have three primary objectives in mind. The first objective is equal access. With the exception of the U.S., all advanced economies today struggle hard to achieve universal coverage. The World Bank recognizes that adequate health care is a basic right of peoples; because health is essential for survival and the proper functioning of economies, most countries put a prime on equal access to quality health care. The second objective of health care systems is cost containment. Managing the public costs of health care is another objective of countries and a major target in the overall health reform process. As the population and its needs grow, the costs of health care take up a bigger chunk of the national income. Hence, countries must design policy that will establish effective budget constraints for health by limiting as much as possible the government’s expenditures for health. The third objective of health care systems is to provide high quality health care. Policy regarding the efficient delivery of health services involves a question of how the health care system is organized and structure in order to obtain maximum quality of care (Hsiao 45).

In comparing the performance of a health care system of the U.S. and Canada, this paper uses Hsiao’s three objectives as a framework. First, access in the health care systems of the U.S. and Canada are examined. Second, the cost containment of both countries is investigated with the use of official statistics to compare health expenditures and inflation. Third, a review of studies will be made in order to evaluate the level of quality of care for both countries. This paper argues that in terms of providing equal access, managing health expenditure inflation, and delivering high-quality care, Canada has established a better-performing health care model which the U.S. can learn from.

Models of Public Financing

What influences expenditures in the health care systems in nations is the model or aim of public policy. Governments exist as entities that levy taxes on firms and individuals, spend taxes, and regulate several spheres of economic activity. Governments intervene in economic activities because of two main motives: 1) efficiency, and 2) equity (Rosen 32). In the field of economics, efficiency has a clearer meaning. There is efficient allocation of resources (termed Pareto-efficient) if “there is no rearrangement of resources (no possible change in production or consumption) such that someone can be made better off without at the same time, making someone else worse off” (Stiglitz 14). On the other hand, equity is a rather vague term which has no common definition. The idea of equity is for governments to be able to aggregate the different visions of equity in the population and provide a solution agreeable to all. To most economists, the realization of efficiency is easier than equity. However, equity remains a goal for public policy in many countries.

The role of the government in economic activity has always been a debated issue. Previously, laissez faire economics dominated the discourse, arguing that governments must have a limited role. However, in the wake of the Asian miracle, many countries took a paradigm shift. Some attributed the growth of the Asian markets to a mix of heavy government intervention and an equally heavy reliance on the market.

The precise role that the government undertook in different countries has differed. And the roles were not derived from some abstract set of principles, i.e. they were not based on the kinds of ideological premises that have underlaid both laissez faire economics and socialism. The fundamental theorem of welfare economics asserts that competitive market economies are indeed efficient. Still, many were not convinced: the market economy did not seem to be the Nirvana that advocates of the market economy claim. To many countries, Adam Smith's invisible hand was not only invisible, there was a suspicion that it might, after all, be not there. Hence the argument that government must do something to lead to the Pareto improving.

It is possible to prove, mathematically, that under certain conditions, competitive markets produce efficient outcomes. Under these conditions one could not argue for government intervention in the economy on the grounds that it promotes efficiency. This assertion is stated in the Two Fundamental Theorems of Welfare Economics. First Theorem of Welfare Economics Under certain conditions, competitive markets produce an efficient allocation of resources. Second Theorem of Welfare Economics Under certain conditions, any efficient allocation of resources can be achieved with competitive markets. There are two crucial expressions in the statement of the theorems: i) under certain conditions, ii) competitive markets. Failure of either one, or both, can result in inefficient outcomes, and provide reasons for government intervention in the economy.

Efficiency is not the only criterion used to evaluate resource allocation. Many citizens argue that outcome should also be evaluated in terms of equity; that is in terms of the perceived fairness of an outcome. The problem involved with applying criteria of equity is that persons differ in their ideas about fairness. Economists usually confine their analyses of questions of equity to determinations of the impact of alternative policies on such groups as the poor, the aged, or the children. In the field of public finance, analysis usually try to determine the effects of government actions on both resource allocation and the distribution of well-being, thus providing useful information that citizens can use to judge the equity of alternative policies in their own notions of fairness (Hyman 69).

The American Health Care System

This section examines the voluntary insurance health care model of the United States in terms of access, health care expenditures, and quality.

Access

Unlike other countries, the U.S. does not consider health care a right guaranteed to all (Hyman 354). Because it values individual freedom and choice, the provision of health care does not particularly value equity (Hsiao 45). Health insurance coverage in the U.S. is usually based on employment. Those who do not directly receive insurance benefits from employers or do not qualify for either Medicaid or Medicare may choose not to get insurance. People decide not to be insured because they do not want to bear the burden of the costs of insurance or because the insurance available is not affordable. The U.S. relies on voluntary private health insurance to finance health care. To prevent adverse selection, most private health insurance is sold to employees through their place of employment, which leaves the elderly, unemployed, and the poor - those who tend to need more health care - without coverage. The government has had to finance these uninsured groups: federal Medicare coverage is available for the elderly, and the states fund Medicaid to cover the poor. Due to the voluntary nature of health insurance in the U.S., an estimated 50.7 million Americans in 2009 were uninsured, composing approximately 16.7% of the population (Kaiser Fund).

Health expenditures

Health care in the United States is paid through a combination of private and public funds. Private funds are comprised of insurance, out-of-pocket monies and monies given through philanthropy, while public funds are obtained from Medicare, Medicaid, State Child Healthcare Insurance Program (SCHIP), veteran’s programs, state and local programs and workman's compensation programs. Taken together, the amounts paid out by these sources represent the health care expenditures for the nation (Center for Medicare and Medicaid Services [CMS] 2).

Expenditures on health care in the United States have been rising rapidly. In 1960, we allocated only 5.3 percent of the value of our national products to health care. In 2009, national spending, including hospital care, professional services, drugs, and a variety of other health services including research and the construction of medical facilities, amounted to 17.6 percent of GDP. The share of GDP has nearly tripled since 1960. Total health expenditures reached $2.5 trillion, which translates to $8,086 per person or 17.6 percent of the nation's Gross Domestic Product, up from 16.6 percent in 2008.

Figure 1. Health Expenditures as a Percentage of the Gross Domestic Product 1960-2009

Source: Centers for Disease Control and Prevention, 2011

Total spending on health care per person in the U.S. amounted to $7,538 in 2009. Per capita spending for health care by governments was more than $4,000 in 2004 - and rising rapidly. Expenditures for health care in the US include hospital services; professional services; drugs; health care equipment; administrative costs, and research.

Figure 2. Health Care Expenditures By Service

Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, 2011.

For the year 2009, the greatest chunk of health care expenditures belonged to hospital care (31%), physicians and clinics (20%), others (14%), prescription drugs (10%), dental services and other professionals (7%), administrative costs (7%), investment (6%), and nursing care facilities (6%).

Hospital spending increased by 5.1% to $759.1 billion in 2009 (vs. 5.2% growth, 2008). Physician and clinical services increased by 4% in 2009 to $505.9 billion. Among the most prominent increases in spending over a 10-year period include prescription drugs which have been increasing by an average of 10% annually. Another prominent contributor to health care spending is the high administrative costs of 7% which have since increased steadily since 1995.

The system of health care that has evolved in the US is based mainly on private provision of services with a mix of private and government health insurance programs reimbursing health care providers for their services. Although the private sector has somewhat of a dominant role, the public sector also plays a critical role in the American health care system. Each level of government plays a different part in financing, organizing and providing health care. The state governments also finance health insurance and health care to poor families and this, mostly through Medicaid, which is a co-financed program with the federal government. Much like the federal government, the state governments offer insurance to their employees and their dependents. The local governments are more involved in financing "safety net providers" and in maintaining emergency response services.

Figure 3. Financing Health Expenditures in the United States, 2009

Source: Centers of Medicare and Medicaid Services, 2011.

Even though 60 percent of the American population in 2009 was enrolled in private employment-based health insurance plans, these plans absorbed only 34% of total health care costs. This is because many of those enrolled in such plans are relatively young and healthy members of the workforce. Only 13 percent of Americans' health care bills are paid for directly by the individuals as out-of-pocket household costs. The pie chart (Figure 3) shows how total health expenditures in the US were financed in 2009. Of the total amount spent, 49 percent was paid for by governments, with the federal government accounting for the largest of total government spending in health care. The strong government presence in the market for these services has been growing at a rapid rate as has the overall rate of increased spending on health care in the nation. However, expenditures by governments in the US are low compared to health care spending by governments in other industrialized nations. Most European nations have expensive government provision of health care and governments typically got 70 to 90 percent of the health care bill and finance these cost with taxes. For instance, Norway pays 97.6 percent of all health expenditures of Norwegians. Yet at the same time, Norway allocates only 10.3 percent of its GDP to health compared to 17.6 percent in the US.

Quality of Care

For all its spending, the US has lower life expectancy than most OECD countries (78.1; average is 79.1), and is below average on a wide range of other measures, including infant mortality, potential years of life lost, amenable mortality, and spending on outcomes, as many other factors determine mortality. There are many good things to say about the quality of the US health system. It delivers care in a timely manner, waiting lists are unknown, unlike in many OECD countries. There is a good deal of choice in the system, both in health care providers and, to some extent, the package of health insurance. The system delivers new products to consumers more quickly than in any other country. The United States is the major innovator, both in medical products and procedures.

The Canadian Health Care System

Access

Canada gives priority to universal and equal access to health care. This is accomplished through a national health insurance scheme which offers citizens free medical services (dental and outpatient drugs are excluded). The federal government and provinces jointly fund the cost of national health insurance but the program is established and administered by the provinces. The provincial health insurance plan must meet certain standards set by the federal government: coverage must be universal, comprehensive, portable, and include "all medically needed services." Patients are free to choose physicians and hospitals but must see a general practitioner to be referred to specialists. Physicians are paid on a fee-for-service basis. Expenditure inflation is managed by establishing global budgets for hospitals and for physicians' services. Physicians' fees are set by the provincial medical associations through an internal bargaining process. This process is designed to satisfy the global budget cap. To manage the volume of services, each province monitors the quantity of services delivered by each physician. Because all claim payments are made through one centralized agency, the provinces keep a practice profile on each physician and hospital. Medical associations are responsible for monitoring and disciplining aberrant physicians.

Health Expenditures

Total spending on health care in Canada is expected to reach $191.6billion this year, growing an estimated $9.5 billion, or 5.2%, since 2009, according to new figures released today by the Canadian Institute for Health Information (CIHI). This represents an increase of $216 per Canadian, bringing total health expenditure per capita to an estimated $5,614. After removing the effects of inflation and population growth, health care spending per person is expected to increase by 1.4% in 2010, the lowest annual growth rate seen in 13 years.

When examined as a share of Canada’s overall economy, health care spending is expected to reach 11.7% of the gross domestic product (GDP) in 2010, a decline from the estimated share of 11.9% in 2009, but still higher than it was in 2008, at 10.7%. The figures released today are from CIHI’s annual report, National Health Expenditure Trends, 1975 to 2010, Canada’s most up-to-date and comprehensive source of information tracking how dollars are spent on health care in this country.

Figure 4. Health Expenditure in Canada from 1975-2010

Source: Canadian Institute for Health Information, 2011.

“Jurisdictions have been working to control rising costs, and the slowdown in the growth in health care spending may be, in part, a reflection of that,” says John Wright, CIHI’s President and CEO. “However, health care remains a priority for Canadians, and we continue to see investment in the system, with health spending growing at a faster rate than population growth. It also continues to represent an important share of our overall economic activity.”

In 2010, government spending on health care is expected to reach $135.1 billion, while private-sector spending, which includes both private insurance and out-of-pocket expenses, will reach an estimated $56.6 billion. For more than a decade, public- and private-sector health spending in Canada has been growing at about the same rate, with the public sector accounting for about 70% of the total health care bill and the private sector for 30%.

Figure 5. Source of Health Care Financing in Canada, 2009

Source: CIHI, 2011.

Spending highest on seniors, but impact of population aging minimal over time While Canadians older than age 65 account for less than 14% of the Canadian population, they consume nearly 44% of all health care dollars spent by provincial and territorial governments. In 2008, the latest available year for data broken down by age group, provincial and territorial governments spent an average of $10,742 per Canadian age 65 and older, compared to $2,097 on those between age 1 and 64. Within the senior population, spending varies widely by age group, with health care expenditure on seniors age 80 and older, at an average of $18,160 per capita, more than three times higher than for seniors younger than age 70 ($5,828 per person on average).

However, CIHI figures show that the share spent on Canadian seniors has not changed significantly over the past decade—from 43.6% in 1998 to 43.8% in 2008. “While it is true that care is costlier for people who are 65 and older, we have not seen a rise in the proportion we spend on seniors,” says Jean-Marie Berthelot, Vice President, Programs, at CIHI. “An aging population may have an impact on health care spending, but so far the average expenditure on seniors has not risen faster than for younger Canadians.”

Variations in provincial/territorial spending on health

Total health care spending continues to vary by province, with spending per person expected to be highest in Alberta and Manitoba at $6,266 and $6,249, respectively. British Columbia and Quebec are forecast to have the lowest health expenditure per capita at $5,355 and $5,096, respectively.

Health care continues to represent one of the most important budget items for provinces and territories, representing an average of 39.2% of total provincial and territorial government program spending in 2009, the latest data available. Ontario and Manitoba spent the highest proportion of their budgets on health in 2009 (45.7% and 43.7%, respectively) while Newfoundland and Labrador and Quebec spent the lowest (33.8% and 33.1%, respectively). While health care spending as a share of total program spending grew across Canada between 2000 and 2004, it has remained stable on average for the past four years.

“Health care remains the single largest program administered by provincial and territorial governments,” explains Wright. “Although health care spending has been on the rise for the past ten years, the share of government budgets devoted to health care appears to have stabilized overall, though the situation may vary by province.”

Physicians account for rising share of health dollars

Hospitals, drugs and physician services, in that order, continue to account for the largest share of health dollars. In 2010, spending on hospitals is expected to reach $55.3 billion, spending on drugs will grow to an estimated $31.1 billion and spending on physicians is forecast at $26.3 billion. For the past two decades, there has been an increase in the share of spending on drugs and a decrease in the share of spending on hospitals. However, more recent trends show spending patterns may be shifting.

For the fourth year in a row, growth in physician spending has outpaced growth in hospital and drug spending; it is expected to grow by an estimated 6.9% this year. Spending on hospitals in 2010 is estimated to grow by 6.2%, while drug spending growth is forecast at 4.8%. As a result, the share of total health dollars spent on physicians is forecast to increase this year (up 1.5%) while the share spent on drugs is expected to decrease (down 0.4% this year).

Quality of Care

The hidden costs include the poor quality of services, and the costs imposed on customers (aptly called “patients” in this case) who have to wait in queues.

Quality is subjective and can only be evaluated through consumer choices, but the government won’t let consumers make choices and vote with their feet if they are not satisfied. Anecdotal evidence of questionable quality is everywhere. In a recent piece in Montreal’s Gazette, a Canadian related her own experience, and contrasted the “kindness, discretion and professionalism” of staff in U.S. hospitals, with the frequent rudeness of unionized personnel in the Canadian system.

Long waiting lines are a fixture of the system. The Fraser Institute, a Vancouver think tank, has calculated that in 2003, the average waiting time from referral by a general practitioner to actual treatment was more than four months. Waiting times vary among specialties (and, less wildly, among provinces), but remain high even for critical diseases: The shortest median wait is 6.1 weeks for oncology treatment; excluding radiation, which is longer. Extreme cases include more than a year’s median wait for neurosurgery in New Brunswick. The median wait for an MRI is three months. Since 1993, waiting times have increased by 90%.

Waiting lines impose a real cost, which is approximated by what individuals would be willing to pay to avoid them. Waiting costs include health risk, lost time (especially for individuals whose time is most valuable), pain and anguish. Socialist systems are notoriously oblivious to anguish, discomfort, humiliation and other subjective factors which bureaucrats cannot measure or don’t value the same way as the patient does.

Comparison of U.S. and Canadian Health Care Models

Table 1. United States and Canada: Health Expenditure and Results

Per Capita GNP, on 2009 PPP

Basis

Percent GDP Spent on Health

Level of Health Status

Risk Protection

Total

Public

Life Expectancy

Infant Mortality Rate (per 1,000 live births)

Under age 5 Mortality Rate (per 1,000)

U.S.

7,358

17.6

39

16.7% of population uninsured

Canada

70

Universal

Table 2. Comparison of Performance

Equity in

Cost-effectiveness in producing better health and risk-protection

Expenditure inflation control

Level of Health Status

Equal Access to Service

Degree of Risk-Protection

Strategies and Results

Rating

Strategies and Results

Rating

U.S.

F: Employment-based insurance for working population; General revenue finance for the poor (Medicaid) and the elderly (Medicare)

Unequal level of health status between the uninsured and insured and by income classes

M

F: Ration by price and choice of providers

Uninsured lack adequate access

Multiple tiers of quality

L

Modest: 16.7% of pop. Uninsured but they have some protection from uncompensated care

High spending (high transaction costs), below average in health outcome, 16.7% of population has no at-risk protection

Competition

Correct market failures by structuring powerful purchaser groups. Create competing Managed Care plans

Effective in the earlier years but ineffective in the long-run

Canada

F: General revenue financed national health insurance

Modest difference in level of health by states and by region

H

F: Implicit ration through conservative medical practices

Equal access to equal quality of services

H

High: universal insurance coverage

Medium spending, good health outcome, and universal coverage

Federal gov’t makes provincial gov’t pay medical coverage

Provincial gov’t negotiates global budget with hospitals and medical associations

Effective in managing inflation

Negatives:

The United States health expenditure is much higher than in any other developed countries.

Many believe that the US spending is more than any other develop country due to aging, however is not true.

Health expenditure can be broken down into different categories of spending: in-patient, out-patient, pharmaceuticals, etc. as well as those services allocated to the whole community, such as public health and administration of healthcare.

The administrative costs in the US health system are very expensive and high

Logically, health expenditure must equal the amount of health services multiplied by the price of these services. This is true both in general and for each sub-category of expenditure (in-patient, pharmaceuticals, and so on). If the US spends more on same-day surgery than other countries, this must be either because there is more such surgery, or it is more expensive, or some combination of the two.

Comparing with other countries, the US depend more on the brand name prescription drugs, while ignoring the generic brand which is the same. Driving up the costs of health care expenditure.

Health care expenditures are increasing resulting in the health insurance premiums to increase, rising four time faster than wages, and more than doubling in a decade.

Health care is a scarce resource, and all scarce resources are rationed in one way or another. In the United States, most health care is privately financed, and so most rationing is by price.

Positives:

There are many good things to say about the quality of the US health system.

It delivers care in a timely manner

There is a good deal of choice in the system, both in health care providers and, to some extent, the package of health insurance

The system delivers new products to consumers more quickly than in any other country

The United States is the major innovator, both in medical products and procedures.

Canada (4)

Negative:

Total spending on health care in Canada is expected to reach $191.6billion this year, growing an estimated $9.5 billion, or 5.2%, since 2009, according to new figures released today by the Canadian Institute for Health Information (CIHI).

The last two-year of seniors are known to be the most expensive. So the spending on seniors are the highest, which impact the population aging minimal over time.

Positive:

In 2008,at the national level, hospitals and physicians were mainly financed by the public sector, while drugs and other professionals were primarily financed by the private sector

Since1997,the public-sectors areoftotalhealthexpenditurehasremainedrelatively stable at around 70%. In 2008, the public sector spent $121.1 billion on health care, accounting for 70.5% of total health expenditure. It is forecast to be $128.6 billion in 2009 and $135.1 billion in 2010, accounting for 70.6% and 70.5% of total health spending, respectively.

Empirical/statistical aspect:

Canada is expected to spend $191.6 billion on health care in 2010, up from an estimated $182.1 billion in 2009 and $171.8 billion in 2008.

Health care spending is forecast to reach $5,614 per Canadian in 2010, up from an estimated $5,397 in 2009 and $5,154 in 2008.

Spending on health care is expected to account for 11.7% of Canada’s gross domestic product (GDP) in 2010, a slight decline from the estimated share of 11.9% in 2009.

Since 1997, the public/private split of total health expenditure has remained stable, with governments spending 70% of the total health care bill and the private sector spending 30%.

Total health care spending continues to vary by province, with spending per person expected to be highest in Alberta and Manitoba at $6,266 and $6,249, respectively. British Columbia and Quebec are forecast to have the lowest health expenditure per capita at $5,355 and $5,096, respectively.

Spending on seniors has remained relatively stable for the last decade, accounting for 44% of all provincial and territorial government health care spending.

In 2008, the latest year for which data is available, per capita spending on health care remained highest in the United States (US$7,538), when comparing 26 countries with similar accounting systems in the Organization for Economic Co-operation and Development (OECD). The U.S. was followed by Norway (US$5,003), Switzerland (US$4,627) and Luxembourg (US$4,210). At around US$4,079 per capita, Canada was in the top fifth, with spending similar to several other OECD countries, including the Netherlands (US$4,063), Austria (US$3,970), Germany (US$3,737) and France (US$3,696).

Conclusion:

Canadian health care expenditures are more controlled and if the United States health care system follows the Canadian health care system trends, they might have a better chance at balancing their expenditures allowing them to reallocate their finances to another sector.

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