Improving Health Care for Canadians

William McArthur, Cynthia Ramsay, and Michael Walker

SECTION I

From 1867 to 1984-a brief historical perspective

The BNA Act of 1867 (and the Constitution Act of 1982) gave the federal government responsibility for national health concerns such as quarantine, marine hospitals, and health services for aboriginals and the armed forces. [This section draws on numerous documents. Important among these are: The Royal Commission on Health Services, vols 1 and 2, Ottawa: Queens Printer, 1964 and 1965; A. Crichton, D. Hsu, and S. Tsang, Canada's Health Care System, Ottawa: CHA Press, 1994; Michael Walker, "Anatomy of a Conundrum: Canadian Health Care in the 1980s," in Policies and Prescriptions, Australia: The Centre for Independent Studies, 1986, pp. 23-43.] The provinces were given control over local health matters such as hospitals, asylums, and charities in and for the province. Since health care was identified with hospitals, it was considered to be a provincial responsibility.

In the 19th and early 20th centuries, Canadians paid doctors, hospitals, pharmacists, and other health care providers out of pocket when they received a treatment or service; user fees were the method of payment. The government funded public health services only. For those people who could not afford to pay for their care, there were three types of social safety net: philanthropy, social assistance, and mutual aid. In larger cities, voluntary organizations proliferated, giving aid to specific groups of low-income people.

Despite the availability of alternative forms of aid, municipalities assumed most of the responsibility for looking after the poor. By 1914, they also monitored infection control, set up sanitary services, and provided some public nursing. Many offered part-time public health work to doctors. Because of the benevolent nature of their work, many people thought that these doctors should be guaranteed work as personal practitioners for the rest of their time, and, in 1916, the Municipal Doctors' Scheme was introduced in Sarnia, Saskatchewan; doctors were paid from taxes to provide clinical services to residents. The scheme was soon introduced in other provinces as well: in rural areas, mining towns, and heavily industrialized towns. About the same time, municipalities began seeking to join together to become hospital funding authorities so that they could set up hospitals to attract doctors (whose incomes would be guaranteed by the Municipal Doctors' Scheme).

During the Depression in the 1930s, there was general financial hardship, and the medical profession was not exempt. Organized medicine responded to the situation by pressuring both the federal and provincial levels of government to provide some type of first-dollar health insurance for low income persons and the unemployed. The Depression prompted the growth of medically sponsored prepayment plans and non-profit hospital insurance sponsored by provincial hospital associations.

Universal health insurance was first proposed in 1919 by Mackenzie King as part of the Liberal party campaign platform. It was recommended by organized labour on a regular basis thereafter. The government of British Columbia actually passed an Act to Provide for a Provincial System of Health Insurance in 1936 but it was rejected by the medical profession and, in the end, it was never implemented. In Ontario, the entrepreneurial spirit was stronger than the spirit for government intervention. Doctors in Ontario were forming prepayment schemes, customarily offering first-dollar coverage and providing direct payment from the plan to the practitioner. In Windsor, doctors formed the Essex County Medical Society and began a non-profit medical services prepayment program for hospital care that was adopted by Toronto doctors (the Blue Cross). During the 1940s, as economic growth in Canada continued, more people contributed to these types of plans for both hospital insurance and medical care. In 1943, privately operated hospital insurance began in B.C., and by the early 1950s most Canadians had some form of hospital insurance, whether publicly provided, non-profit or commercial.

In 1945, there was a federal-provincial conference (the Dominion Provincial Conference on Reconstruction) to consider programs of social reform. The conference produced a draft health care bill for the provinces, modelled partly on the U.K. National Health System which was influenced by Britain's main reformer of the time, Lord Beveridge, who advocated that the state provide social security programs for its citizens from cradle to grave. Patients were to register with family physicians in health regions. These family physicians would be responsible for their patient "lists" and would be paid on a capitation basis administered under the direction of a commission representing both consumers and the professions.

The plan was not enacted because it was seen by the governments of Ontario and Quebec as a federal encroachment on the provincial authority granted them in the BNA Act, and many provinces favoured free market insurance. Instead of a full health insurance plan, the federal government made grants available to the provinces for planning and hospital construction through the Hospital Construction Grants Program (HCGP) of 1948. Under this legislation, the federal government completely funded the building of hospitals virtually anywhere in Canada. It is not surprising that over the next 12 years the number of hospital beds in Canada increased at double the rate of the expansion in population, and thereby created a bed surplus, the need for which had not been established.

By 1950, Saskatchewan (1947), British Columbia (1948), and Alberta (1950), had enacted universal hospital insurance plans. Other provinces followed suit. As a result of the HCGP, the number of hospital beds in Canada increased, costs increased, and the provinces soon asked the federal government to legislate the nation-wide universal hospital insurance it had offered them back in 1945. Instead, in 1957, the Hospital Insurance and Diagnostic Services Act (HIDS) was passed. Prior to 1957, Canada's health prepayment system was a composite of public and private plans: provincial medical and hospital coverage for low income individuals, universal hospital insurance provided by a number of provinces, private medical and hospital insurance on a non-profit basis sponsored by provider associations, and a limited amount by for-profit private insurers. By 1961, however, all of the provinces had adopted universal hospital insurance because the federal government was paying 50 percent of the average provincial costs.

The main problem with HIDS was that services were insured and eligible for cost-sharing only if they were provided in hospitals; there were no incentives to use less expensive sites (i.e., home care). Also, there were no organizational framework impositions on hospitals-there was no accountability for the funds required. If a hospital did not spend its entire allotted annual budget, the province would reclaim the unspent funds. However, if a hospital needed additional funding, the province would provide it. This created disincentives to run a hospital efficiently. The number of in-patient beds increased by a further 34 percent from 1960 to 1970, while the Canadian population increased by only 19 percent.

In 1964, the Hall Commission made its report, recommending that the federal government cost-share a universal medical insurance model and that medical services delivery should be reorganized. The Medical Care Act of 1966 (implemented in 1968) did not incorporate the reorganization recommendation. However, it did provide federal-provincial cost-sharing for services provided by physicians (only). To qualify for funding, a province's program had to be:

•universal-it had to cover all residents of a province,

•portable-it had to cover residents of one province requiring medical services in another province,

•comprehensive-it had to cover all medically necessary services, and

•publicly administered-a non-profit program.

Saskatchewan and British Columbia qualified for funding immediately. B.C. had initiated the B.C. Medical Plan in 1965. Alberta and Ontario were slow to join because there was strong lobbying by private insurance interests, and Quebec endured a specialists' strike. By 1971 though, all provinces and territories had joined the plan.

Hospital costs continued to grow, in part because the federal government had no control over total provincial expenditures, and in part because the provinces had little incentive to contain costs. As a result, the cost-sharing agreement was replaced in 1977 by Bill C-37, the Federal-Provincial Fiscal Arrangements and Established Programs Financing Act (EPF). The EPF reduced the direct federal contribution to health care and tied any increases in federal payments to GNP growth. To compensate, federal income and corporate taxes were decreased to create "tax room" for the provinces. The conversion from a federal-provincial cost-sharing agreement to one based on block funding had little if anything to do with any desire by either level of government to improve medical or hospital care delivery. The EPF allowed the federal government to limit its health care expenditures and it gave the provinces greater control over how the money for education and health was to be spent.


The Canada Health Act

In 1984, in spite of much opposition from both organized medicine and from provincial governments, the federal government passed the Canada Health Act (CHA) which reiterated the requirements of the 1966 Medical Care Act and added another: accessibility. Federal payments to the provinces would be reduced, on a dollar-for-dollar basis, by the amount of user charges by hospitals and extra billing by physicians. Direct federal prohibition of these fees was impossible because, constitutionally, health care is a provincial responsibility.

As table 1 indicates, there has been a steady decline of federal financial support for health care since the late 1970s. In 1995, the federal government announced that it would cut federal transfers to the provinces further. As federal funding decreases, these funding arrangements will become less and less binding, and provinces will find themselves with more freedom to reform their health care systems.

Click here to view Table 1: Provincial Funding as a Percentage of Total Federal and Provincial Funding of Health Care

Much of the recent debate about health care has focused on the sanctity of the CHA and its principles, rather than whether or not adherence to these principles actually creates a healthy population or permits health care delivery systems to adapt. The federal government and some provincial governments are defending the act as an essential pillar of the future health care edifice. Others, including Premier Klein of Alberta, have expressed concern that the CHA is now an impediment to the kinds of changes that the provinces must make to respond to both the fiscal and the health needs of their citizens.

The ideological divide, of course, is the Alberta premier's idea that there may be an increased role for private clinics and other private health providers in the health care system of the future. Echoing the long-expressed opinion of The Fraser Institute, critics of the CHA note that the act is a kind of Great Canadian Myth honoured largely in the breach. Here we explore the sense in which such an assessment might be accurate, and why the Canada Health Act ought to be abandoned in favour of a modern, relevant alternative.


Universality

The principle of universality "requires" that 100 percent of the residents of a province be entitled to insured services. In spite of the fact that low income residents are exempted from the modest premium which must be paid in B.C., it is estimated by the B.C. Ministry of Health that only 97 percent of the residents of the province are actually covered by the Medical Services Plan, the provincial insurer. Therefore, contrary to the "requirement" that every British Columbian be insured, over 100,000 people are not publicly insured in B.C. A testimony to this situation can be found in the emergency departments of some downtown Vancouver hospitals, where about 10 percent of the British Columbians coming in for emergency care have no medical coverage. [W. McArthur, Personal communication with Dr. J.M. Etherington, Head, Emergency Department, St. Paul's Hospital, Vancouver, B.C.] In provinces that charge insurance premiums, the poor, the mentally challenged, and a significant number of healthy young adults who reject the thought of illness or accident have no coverage. Universal medical insurance is not a reality in Canada.

However, this does not mean that people are denied care. An uninsured person arriving at a hospital or in a doctor's waiting room with an urgent condition is treated. The universality provisions of the act are unimportant in that they are not being met, and there are few individual consequences as a result.


Accessibility

The existence of premiums neither hinders nor guarantees a person's access to medical care. There are data showing that access to service in Canada is not equal. For example, much of the queue jumping in British Columbia is for non-medical reasons. Politicians, health professionals, and the influential often obtain care more rapidly than most other citizens. [D.H.A. Amoko, R.E. Modrow, and J.K.H. Tan, "Surgical Waiting Lists II: Current Practices and Future Directions Using the Province of British Columbia as a Test Study," Healthcare Management FORUM, vol 5, no. 4, 1992.] As well, any wealthy Canadian has the option of receiving more expedient treatment in the U.S. or in another province with shorter hospital waiting times. Contrary to the belief that within Canada there is equal access to health care services, a Fraser Institute study has shown that waiting times for surgical procedures vary greatly across the country, with wealthier provinces tending to have shorter hospital waiting lists. ["Waiting Your Turn: Hospital Waiting Lists in Canada," Fraser Forum Critical Issues Bulletin, various editions.]

An Ontario cancer treatment study has shown that waiting times for cancer treatment in Canada are substantially longer than in the U.S. and longer than the time radiation oncologists consider to be the medically acceptable maximum. [W.J. Mackillop, "Waiting for Radiotherapy in Canada and the U.S.," presented at the 36th Annual American Society for Therapeutic Radiology in San Francisco, October 3, 1994.]

While unequal access is a fact of the Canadian health care system, controlling costs through the use of waiting lists, i.e., through rationing, is not accepted by the public as a satisfactory cost containment measure. This was revealed in British Columbia when the government, in response to pressure from vociferous patients waiting for treatment, allocated more than $25 million towards cutting waiting lists for surgery and to reduce waits for publicly funded magnetic resonance imaging (MRI) machines. [Office of the Premier of British Columbia, "$25 Million to Reduce Cancer Treatment and Surgery Waitlists," News Release, April 4, 1996.]

The latter development reflected the fact that there are two private MRI clinics in Vancouver charging $595 to $750 a test. They are open 6 days a week and guarantee test results within 48 hours. They are evidently fulfilling demand for diagnostic testing which is not being met by the public system.


Portability

The Canadian who gets sick in Florida or California rapidly discovers that effective portability ceases at the Canadian border. Quebecers who find themselves requiring medical services in another Canadian province must pay out of pocket for those services. Upon returning home, they will be reimbursed only for the amount these services would have cost if performed in Quebec. This occurs because there is no reciprocal billing agreement between Quebec and the other nine provinces.


Comprehensive

The list of services covered by the CHA is not comprehensive by any means. Hospital insurance only covers services performed in a hospital, and medical care insurance covers services performed by a restricted set of primary providers; they both only cover services designated as medically necessary and there is no consensus on what constitutes medically necessary services. Since health is a provincial responsibility, different provincial insurers cover different procedures.

Although B.C. ostensibly would like to "preserve Medicare," earlier this year it was considering de-insuring non-essential services. For example, the removal of warts may no longer be covered by the Medical Services Plan. This procedure is no longer covered in Alberta, Saskatchewan, Manitoba, or New Brunswick. Across the nation, coverage varies widely in the areas of cosmetic surgery, reproductive services, and general health maintenance. For example, reversals of tubal ligations and vasectomies are always covered in Ontario, Quebec, New Brunswick, and the Yukon; they are sometimes covered in Nova Scotia, Newfoundland, and the Northwest Territories, while patients in B.C., Alberta, Saskatchewan, Manitoba, and P.E.I. must pay for these procedures. Another example is electrolysis, which is covered only in B.C. and in three other provinces or territories. [Vancouver Sun, March 23, 1995, pp. B1 and B12.]

Some people argue that de-insuring services would not save money, while others claim that de-insuring would make it harder for the government to control the quality of services, and thus leaving procedures to the private sector could cause the public sector more expense in the end. Health economist Robert G. Evans from the University of British Columbia gives the following example to support these claims. Even if in vitro fertilization is not covered publicly, "a couple's sickly quadruplets will end up, at public expense, in the hospital." [Ibid, p. B12.] All of this will cost the public system more money in the end, presumably.

Evans's comment betrays the implicit controversy about medical necessity that underlies the debate about the boundaries of the public health care system. It also shows how shallow are the arguments against private sector participation in the delivery of health care services since there are all sorts of activities that might increase the number of medically necessary procedures-from skiing accidents to excessive consumption of alcohol, fats, and some vitamins. This does not mean that the public sector ought to be the exclusive operator of ski hills, bars, restaurants, or health food stores!

The problem is that, as has recently been determined in Oregon, while it is possible to rank medical interventions according to their efficacy and necessity, the ultimate question of how far down the list the public sector will go is not a medical question but a fiscal one. In the end, all questions about medical care are questions about economics. It is the denial of this central fact which is the Achilles heel of the Canada Health Act and the main reason it is proving to be an impediment to the smooth and effective adaptation of the health care sector in Canada.


Publicly Administered

This provision of the CHA, reflecting the British Beveridge Report which inaugurated socialized medicine in the U.K., is a purely ideological manifesto. There is nothing about the principles of universality, accessibility, portability, and comprehensiveness that require health care to be publicly administered. Indeed, it is increasingly believed by some analysts that the publicly administered principle is incompatible with the others and that it is the single biggest impediment to achieving them. Nevertheless, it is the central belief of those who support the status quo.

The main argument in favour of government administration of the health care system is that it will minimize the cost of administration which would otherwise be involved. A multiplicity of insurers would entail duplication of billing and administrative functions, as occurs in the United States. Indeed, studies have shown that great administrative savings can be achieved if duplication is eliminated. What is not often appreciated is that there are also costs involved when there is only one supplier-something which has been recognized by economists and others with respect to the markets for all other goods and services. In fact, in most democratic countries, regulatory agencies exist to prevent monopolies from occurring. The reason monopoly is feared is the deterioration which typically occurs in the markets it visits-including higher prices, lower quality of service, lagged innovation, and loss of consumer satisfaction.

The same problems typify the markets for health care. For example, government is the monopoly employer of health care personnel. When labour negotiations break down in a monopoly system, there are no other sources of care available, and the patients pay the consequences. Strikes, such as the 17-day B.C. nurses' strike in 1989, effectively shut down most of a province's health care system. [Michael Walker, Wall Street Journal, October 18, 1991, p. A15.] As a result, treatments are delayed and patients suffer unnecessarily. This type of cost is difficult if not impossible to measure and is never reported by the proponents of monopoly health care.


Summary

The post-World War II history of health care in Canada is one characterized by a constitutionally constrained federal government exercising its fiscal powers, with taxpayers' money, to make itself a major player in the health care system. Initially, federal funds were used to build hospitals, the need for which had not been proven. Universal insurance for hospital care ensued-insurance for care which in many cases could and should have been provided in less expensive and more effective environments than hospitals. Having paid for the construction of the hospitals and for the care provided in them, it remained only for the federal government to pay doctors to work there, and this it accomplished with the Medical Care Act. The Canada Health Act merely reaffirmed the leading role the federal government had cast for itself as the main provider and funder of health care in Canada.


Canadian health care and the OECD

Canada is a member of both the Group of Seven (G7) and the Organization for Economic Cooperation and Development (OECD). It shares many commonalities with the other countries in these groups. While there are many ways of examining and comparing the health of similar populations, a few generally accepted measures help to place Canada within the context of its OECD partners. [Much of the information here is drawn from OECD data released in May 1995, which provide statistics to the end of 1994. Comparative information is sometimes incomplete. Thus, it is sometimes necessary to use data from different years. The most recent available data have been used throughout.] By placing Canada in an international context, one can see how myths have come to define the Canadian "health care crisis." Working from these myths, the authors will now show why recent attempts at health care reform in Canada may be misdirected.

Myth: Health Expenditures are Directly Related to Health Status

The Japanese have the longest life expectancy, at 82.2 years for females and 76.1 years for males (see figure 1). These figures are much lower for Mexico, where the average life expectancy of females is 74.4 years and for males is 68.4 years. In most OECD countries, however, females can expect to live 79 to 81 years and males 72 to 75. Canada is no exception: life expectancy for females is 81.2 years and for males 74.9 years. Perhaps surprisingly, life expectancy is not directly related to amount of money spent on health care. The percentage of gross domestic product (GDP) spent by OECD countries on health care varies considerably (see table 2). [Figures for total expenditure on health as a percentage of GDP are 1993 OECD data.] For example, Denmark spends 6.7 percent of its GDP on health care while the U.S. spends 14.1 percent; yet life expectancy data are quite similar for both countries. Japan, at 7.3 percent, has one of the lower expenditures on health as a percentage of GDP but has notably longer life expectancies.

Click here to view Figure 1: OECD Life Expectancy at Birth (1992)

Click here to view Table 2: Total and Public Expenditure on Health Care Expressed as a Percentage of GDP (1993)

A more detailed examination of life expectancy information for Canada reveals some interesting trends. Both males and females can expect to live, on average, about five years longer than they did 20 years ago, but the progressive increase in life expectancy observed over the last 50 years appears to have halted, and the OECD reports that the number of years Canadians can expect to live in good health actually declined by 2.3 years for females (see figure 2) and 0.4 years for males between 1978 and 1991. At least part of this decline appears to be statistical artifact, since data collection criteria changed between 1978 and 1986. However, the same standards applied in 1986 and 1991 and the data show that overall life expectancy at birth for Canadians declined in that time. [Statistics Canada, Health Reports 1995, vol. 7, no. 1, p. 56. Preliminary reports indicate that this downward trend was not maintained in 1994. See Statistics Canada, The Daily, May 24, 1996.]

Click here to view Figure 2: Female Good Health Life Expectancy From Reporting OECD Countries

The reason for this change is not obvious. However, there is a consistency between this development and the recognition in recent surveys that there is an increasing amount of rationing in the health care system. ["Waiting Your Turn, Hospital Waiting Lists in Canada," Fraser Forum Critical Issues Bulletin, various editions.] It has long been known that when rationing emerges in a health care system, those most likely to feel the impact are the elderly. [E.A. Binney and C.L. Estes, "The Retreat of the State and Its Transfer of Responsibility," International Journal of Health Sciences, vol. 18, 1988, pp. 83-96; A.L. McKinnon, "`We've Got the Best Cared For Seniors in the Country': Impacts of Health Care Cuts and Reforms on Older Albertans," Canadian Association on Gerontology Meeting, Vancouver, B.C., Oct. 28, 1995; O. Agbayewa, "Suicides Among Elderly Linked to Societal Factors," Medical Post, vol. 7, no. 26, Oct. 10, 1995.] The reason is that in a classic triage system, since those who are older benefit less (i.e. for fewer years) than those who are younger, older patients tend to be placed at the end of the queue.

Myth: A Publicly Funded and Controlled Health System is the Most Efficient and Effective Way to Ensure Quality Health Care

In terms of total health purchasing, the U.S. and Canada both spend in excess of 10 percent of GDP (see table 2). Other countries with reputations for excellent care, however-including Japan, New Zealand, and the U.K.-all spend less than 8 percent of their GDP on health care. A review of public expenditures on health care reveals a slightly different picture. Big spenders in this category include Canada, France, Belgium, and Norway, for which more than 7.0 percent of GDP represents taxpayer financing of health care. Canada's public expenditure on health care exceeds that of the U.K., Australia, and New Zealand by 1.5 percent of GDP or more, and the U.S. by 1.2 percent of GDP. These four countries, all with substantially different health care systems, provide a comparable level of care to Canada, and spend a substantially lower percentage of tax dollars to achieve it. [OECD data for 1992.]

Only the public sectors of Iceland, Canada, New Zealand, and Ireland spend more than 4 percent of GDP on in-patient care. [Treatment is classified as "in-patient" when the recipient is resident or remains overnight in a hospital or other facility, as opposed to "ambulatory care" where the patient goes to a facility or office for treatment.] Canada's 4.3 percent of GDP spent on in-patient care is high when compared with that of countries such as Australia (2.9%), Germany (2.7%), the U.K. (2.7%), and the U.S. (3.6%). [OECD data for 1992.] These countries are among the technological leaders in the world, providing quality care in the in-patient setting, and they do so at a lower public cost than Canada. And Canada's public expenditure exceeds that of most of the OECD countries in other areas of health care as well. For example, Canada's spending on ambulatory care is triple that of New Zealand, Norway, or Ireland, without demonstrable differences in the quality of care being provided. [OECD data for 1990.]

Myth: There are too Many Physicians in Canada and not Enough Other Health Care Professionals

Canada, with 5.5 percent of total employment composed of health care personnel, employs a larger percentage of health care workers than the U.K., Italy, or Spain. However, Canada is not a large employer of health care personnel when compared to Australia, France, Norway, Sweden, Switzerland, the U.S., and other countries (table 3).

Click here to view Table 3: OECD Medical Manpower (1989-92) Numbers are for personnel actively employed

Canada has more physicians as a percentage of its population (0.22%) than the U.K. (0.15%) or Japan (0.17%), about the same percentage as New Zealand and the U.S., but less than Germany (0.32%), Norway (0.32%), and Switzerland (0.3%). [OECD data for 1992.] It appears that in the developed world, medical considerations such as life expectancy, and cost considerations such as public expenditure on health care, are not directly related to the numbers of practising physicians or other health care personnel in any particular jurisdiction.

Nursing employment figures provide some of the most striking contrasts in the data reviewed. Canada reports that 1.12 percent of its population are employed as certified nurses, a figure exceeded only by Norway, Iceland, Finland, and Switzerland. The other G7 countries, however, report nurses as constituting less than 0.8 percent of their populations. [OECD data for 1988 to 1993.] Furthermore, as table 3 shows, Canada joins Ireland, Japan, and New Zealand in having nurses constitute more than 40 percent of the total health care workforce. Other health care professionals whose percentages vary widely among OECD countries include dentists and pharmacists. Practising dentists range from 0.7 percent of health employment in Mexico to 8.2 percent in Greece. Most of the OECD countries are in the 1.0 percent to 3.0 percent range, and Canada lies in the middle at 2.2 percent. Pharmacists range from 0.7 percent of health employment in the Netherlands, to 10.5 percent in Portugal. Germany, Australia, Iceland, the U.K., the U.S., and Canada all report that practising pharmacists make up between 2.0 and 3.0 percent of health employment.

Myth: Canadians Overuse Their Health Care System

Information on primary care use is incomplete; there is little internationally comparable information regarding the use of diagnostic radiology, laboratory, and immunization services. However, significant information is available for physician use. Patient contacts with a physician range from a low of 1 contact per person each year in Turkey to a high of 12.8 visits per person a year in Germany. As figure 3 shows, Canada, with a rate of 6.9 contacts per person each year, has a considerably lower rate of use than Australia (9.4), Germany (12.8), Japan (12.9), and Switzerland (11.0), but a higher rate than the U.S. (5.6) and the U.K. (5.8). New Zealand reports only 3.8 contacts per annum, but this does not account for patients seen and paid for through the accident compensation commission, and it includes an estimate for those who pay their doctor's bill privately. Nevertheless, this figure raises the question of whether the sizable user fee of $30 to $35 paid by non subsidized patients to general practitioners in New Zealand is a disincentive for people to visit their doctors-a matter that requires further evaluation. Despite the information from New Zealand, however, it is apparent that Canadians come in contact with physicians much less frequently than Australians, Germans, Italians, and Japanese-at about the same rate as the French and Irish, and slightly more often than the British and Americans. Arguments that Canadians abuse their health care system by visiting their doctors too often, and that they must be encouraged to use the system "properly," are simply not supported by the data.

Click here to view Figure 3: Physician Contacts per Person, per Annum

Myth: If Hospital Funding is Cut or Left to the Private Sector, Canadians Will Suffer; Some May Even Die

The average length of stay (ALOS) in acute care hospitals in OECD countries varies from a low of 4.2 days in Turkey to a high of 12.4 days in Germany. Canada (8.6 days) has a longer length of stay in acute care hospitals than France (6.5), Sweden (5.5), the U.K. (5.1), the U.S. (7.1), and Australia (5.0). [OECD data for 1991 to 1993.] In terms of efficiency, Canada has a bed occupancy rate of 78.6 percent, while Denmark, Belgium, Ireland, and Germany all have rates in excess of 80 percent. Canada does, however, fare better than the U.S., which has a bed occupancy rate of 66.2 percent, and the U.K., which has an occupancy rate of 76.2 (1986 data). OECD bed occupancy figures are not reported for New Zealand. [OECD data for 1990 to 1993 unless otherwise indicated.]

The preceding comparison of hospital use statistics is important because hospitals account for approximately 38 percent of expenditures on health care in Canada. Since staffing hospitals accounts for approximately 75 to 80 percent of their costs, an international comparison of hospital staffing ratios is also interesting. Here again, there is enormous variation between countries. Japan has a staff-to-bed ratio of 0.8, while Mexico exceeds all other countries with a ratio of 6.1 persons per bed. The U.S. has the second-highest ratio of 3.6 persons per bed, while Canada reports 2.8 staff per bed. [OECD data for 1990 to 1994.] The Japanese have the longest life expectancy, yet they are among the lowest public money spenders on health care, and provide hospital care with a staff-to-bed ratio just over one-third that of Canada.

The number of acute care beds per 1,000 population provides another insight into hospital expenditures (see figure 4). Canada, with 3.9 beds per 1,000 population, has slightly more than half the number of acute care beds per 1,000 population as Germany and New Zealand, which both have over 7 beds per 1,000 people. The U.K. (2.2), the U.S. (3.5), and Norway (3.6) provide hospital services with significantly fewer acute care beds per 1,000 population than Canada. These data, like others, change with time, and British Columbia presently has under 2.5 beds per 1,000 people.

Click here to view Figure 4: Acute Care Beds per 1,000 Population (1991)

Canada, along with the U.K., Finland, and Turkey, are the only OECD countries that report private hospital beds as less than 5 percent of the total number of beds. In most countries, private hospitals play a significant role in the provision of care: Belgium reports that 61.8 percent of beds are private; Germany, 47.8 percent; France, 36 percent; the U.S., 81.6 percent; Australia, 39.1 percent; and New Zealand, 35.5 percent. [OECD data for 1989 to 1993.] It must be emphasized that private ownership of hospitals does not imply that only patients with private insurance are treated in these facilities, but it does mean that these facilities are managed and run as businesses, with proper accounting procedures (accrual) and concern for efficiency and profits.


Conclusion

The direction of recent health care reform in Canada shows that the policy makers have bought into the myths rather than into what the data show. The myths have come to define the problems that the provinces are attempting to resolve. Their solutions will not be effective because the problems are ill-defined. Reducing expenditures on health care, closing hospitals, cutting the number of hospital beds, restricting doctors' billing numbers, and prohibiting private clinics are unproven "shoot from the hip" attempts at reform. The OECD data indicate that such measures will not necessarily improve Canada's health care system. On the other hand, some changes, such as increased privatization, do not create a threat to health care delivery as is often claimed and more often believed.


Primary care in Canada

Primary care services are those to which users have direct access without referral from another provider. Table 4 and figure 5 provide the 1992 figures for the numbers of professional and technical personnel actively employed in their fields and give some idea of the diversity of people and skills that go to making up the health care field. These figures represent total active health care employment and are not broken down between employment in primary care and employment in other areas. Many people in the categories listed work almost exclusively in direct contact with the public, and therefore are primary care workers. These include chiropractors, dentists, opticians, optometrists, pharmacists, and public health inspectors. Others, such as most nurses, laboratory and radiation technologists, and respiratory therapists work in hospitals or other secondary care facilities and come into contact with patients by referral from other health workers. They, therefore, are part of the secondary or tertiary care environment. Still others who assist primary care providers see patients by referral but are nevertheless part of the primary care environment; dental assistants and dental hygienists fall into this category.

Click here to view Table 4: Professional and Technical Employment (Canada 1992)

Click here to view Figure 5: Canadian Health Occupations Employing more than 10,000 People

Other health care workers may seldom see patients but are still important providers of health care. Biomedical engineers and health service executives are representative of this category. Veterinarians treat animal disease and in so doing play an important health care role by preventing and controlling the spread of disease through animal vectors. Rabies (hydrophobia) and hydatids (echinococcus granulosus) are examples of potentially fatal human illnesses for which veterinarians provide primary control.

Physicians are almost equally divided between generalists who specialize in providing primary care, and consultants whose practices are confined to discrete and carefully circumscribed areas of medicine or surgery. The role of the consultants is to provide advice or technical expertise to help the primary care physicians fulfil their responsibility for the co-ordination and management of overall patient care. In 1992, approximately 30,000 Canadian physicians provided primary care and approximately the same number were consultants who saw patients on referrals from primary care physicians.

Patients who elect to pay their own bills, as opposed to having them paid by the provincial insurance scheme, can, in theory, proceed directly to a consultant physician at their own expense. However, most consultants in Canada will not see a patient without a referral from a primary care physician, regardless of who is paying the bill. This is because the decision as to what consultant can most appropriately assess and treat a particular disorder is in itself a complex decision, one often beyond the ken of the best-informed lay person. For example, the investigation of headache is often performed by otolaryngologists, ophthalmologists, general internists, neurologists, rheumatologists, oncologists, and neurosurgeons. However, selecting the particular field of expertise and the particular individual with the most appropriate knowledge and training to assess a case is an exquisitely individual matter, and one of substantial importance since the selection of the appropriate consultant can have a profound effect on the outcome for the patient. This type of decision making is the domain of the specialist in general medicine, the family practitioner.

Primary care in Canada is organized in a variety of different ways. Most providers, including physicians, dentists, opticians, optometrists, chiropractors, veterinarians and many physiotherapists, establish independent practices, either solo or in some form of association with one or more of their peers. As in most countries, these individuals or groups of individuals are generally paid on a fee-for-service basis. In some circumstances, communities or provincial bodies have established clinics that incorporate a variety of different health care workers operating under one roof. Payment modalities are variable in these circumstances, but are often based on hourly or sessional rates. In some industrial settings, company clinics have been set up to provide on-site primary care to employees. The nature and extent of care varies greatly according to the circumstances; Stelco and Dofasco in Hamilton, and the "Big Three" automakers in Ontario offer examples of different types of primary care provided by industrial employers. Care providers in these circumstances are normally salaried. In many remote northern communities, initial primary care is provided by skilled registered nurses who have extra training in diagnosis and treatment, and who are salaried.


Issues in primary care

The notion exists in some quarters that the root problems in the Canadian health care system stem from two sources. First, the superabundance of approximately 30,000 primary care physicians who see too many patients too often for the purpose of increasing their individual incomes, and second, pharmaceutical companies making enormous profits from the illness and misery of the sick and disabled. Neither of these concepts withstands scrutiny.

Earlier we revealed that Canadians come in contact with physicians less often than Australians, Germans, Italians, and Japanese, about as often as the French and Irish, and slightly more often than the British and Americans. Yet Australia, Germany, Italy, Japan and the U.K. all spend proportionally less on health care than Canada, while the U.S. spends more. These and other data reported above belie the suggestion that the primary care system in Canada needs to be dismantled and rebuilt. There are ways in which it can be improved, however, and these will be the focus of a later portion of this document. But efforts to enhance the present system usually tend to focus on the way primary care providers are remunerated, and this deserves a brief discussion at this point.


Payment modalities

As noted above, the mechanism for payment of primary providers varies considerably according to profession, place, local custom, and a variety of intangible factors, and has been the subject of extensive discussion and debate for many years. Several different systems exist and each comes with benefits and drawbacks.


Fee-for-service

Under this arrangement, the practitioner is paid a specific fee for each individual service rendered, and the fee is generally the same regardless of the complexity of, or time spent on each case. Fees are set by the practitioner, by the applicable professional organization, by the insurer, or by negotiation between the parties. Proponents of fee-for-service note that it promotes efficiency in service and provides an incentive for handling a large number of patients. Critics claim that there is a strong financial incentive toward a high volume, low density practice which is best described as treating a large number of patients with little or no illness. It is claimed that there is a strong financial disincentive to care for patients with complicated and time consuming complaints. Opticians, optometrists, dentists, chiropractors, veterinarians, physicians, and many physiotherapists tend to be paid on a fee-for-service basis.


Salary

Some practitioners work on contractual arrangements which may range from time-limited hourly contracts known as sessional fees to permanent annual salaried positions with agreed upon sickness, holiday, and pension benefits. Salaries may be supplemented by performance bonuses, and in permanent positions performance is usually rewarded with promotion. Proponents of salaried doctors point out that salaried arrangements permit professional providers to concentrate on the quality of service while liberating them from the pressure to treat large numbers of relatively healthy individuals in order to maintain a satisfactory income. Critics claim that salaried provision promotes inefficiency, laziness, and reduced productivity because of lack of incentives to increase work effort or quality. Health executives, nurses, laboratory and x-ray technicians, academic physicians, and many pharmacists are paid on a salaried basis.


Capitation

A capitation system is one in which a provider is paid according to the number of patients on his or her roster. A primary care physician might provide care for 1,500 to 2,000 patients and be paid a set amount for each patient from which to provide all of the patient's primary medical care. A practical variation of this approach is known as "weighted capitation." Here, the funding provided for each patient is weighted according to his or her age with a higher per capita payment for infants and the elderly, both of whom require more attention than the age groups in between. Table 5 reveals the average provincial health care expenditure for 1994 broken down by category of expenditure and age. Weighted capitation balances, to a degree, the disparity in costs of care at various ages. This arrangement discourages practitioners from taking only healthy young adults as patients and, in theory, promotes improved access for those who need more care. Other factors such as disability and chronic disease can be factored into the equation if desirable. Proponents of this approach claim that it eliminates the incentive to overservice, which is said to be inherent in fee-for-service payments, while its opponents claim that capitation provides an incentive to underservice and not provide necessary care.

Click here to view Table 5: Per Capita Provincial Government Health Expenditures by Category of Expenditure and Age (Canada 1994)

Capitation is not used extensively in Canada at this time, but it is seen by many physicians as a way of enabling them to concentrate their energies on patient care, [W. McArthur, personal communications. This is a frequent topic of conversation among family practitioners today, with many expressing interest in moving to capitated remuneration.] and also as a mechanism for reducing the presently increasing bureaucratic government intervention in medical practice. The College of Family Physicians of Canada and some provincial medical associations have been promoting forms of capitation in their proposals for amending the methods of primary provider remuneration. ["A Discussion Document on Primary Health Care Reform in Canada," The College of Family Physicians of Canada, Sept. 19, 1995.] On the other hand, government, through the Deputy Ministers of Health Committee, has been promoting capitation as a means of overcoming perceived deficiencies in fee-for-service financing. ["A Model For The Reorganization of Primary Care and the Introduction of Population Based Funding," The Advisory Committee on Health Services, B.C. Ministry of Health, July 18, 1995.]

One aspect of capitation that is seldom mentioned is that it brings with it rostering of the patients served. That is, every patient treated under a capitation scheme must be on the roster of a particular primary care physician and except in special circumstances, such as absence from the home community, must receive all their primary care from that doctor. Unless this proviso is included, it would be difficult to see any advantages in a capitation scheme. However, there is considerable doubt that Canadians, who seem to value their ability to "doctor shop," are ready to embrace what would probably be seen as a degree of regimentation not previously encountered in health care in Canada.


Summary

Each payment modality certainly brings with it specific benefits and disadvantages as well as incentives for certain kinds of behaviour by practitioners and their patients. To date, no one system has been universally satisfactory in any jurisdiction. In Canada, there appears to be a growing belief that capitation, or weighted capitation, may solve many of the health care dilemmas facing Canada. This presupposes that physician payments constitute a significant problem for health care in Canada, a suggestion that appears to have little or no factual support. Also, we must remember that the British have paid their primary care physicians on a capitation basis for nearly 50 years, and this has not been a panacea for the problems associated with delivery of health care there.

The reality is that altering the mode of payment to primary providers almost certainly will change the behaviour of those providers, but the results may be rather different from those anticipated, and not all beneficial. For example, as noted in part I by Margit Gennser, Swedish doctors are salaried and have little incentive to be productive. Consequently, they commonly see 12 or fewer patients per day and Swedes have an extraordinarily low physician contact rate of 2.8 visits per year (see figure 3). Any change in payment schemes will fail that sees providers dragooned into a situation of which they neither approve, nor help to create. To be successful, reforms must create incentives to change.

Another and more attractive alternative to changing payment modalities is to change the way primary care is funded. In order to do this, funding must be directed to benefit individual patient care rather than make the individual patient fit into a preconceived bureaucratic concept of what the patient's needs are. This concept is discussed in greater detail later.


Pharmaceutical costs

An important aspect of primary care is the administration of drug therapy. In recent months, there has been considerable publicity regarding the cost of pharmaceuticals. In British Columbia, a program of reference-based pricing has been introduced in an attempt to reduce the cost to the taxpayer of publicly funded prescription medicines. Other provinces are considering similar plans.

The reference-based pricing policy in British Columbia states: "In consultation with an expert committee, therapeutic guidelines will be established and the best overall drug product(s) to treat a specific medical condition will be identified. Pharmacare will reimburse other drugs in the same therapeutic category based on the price of this reference product." [B.C. Ministry of Health, Pharmacare Bulletin, Aug. 25, 1995.] On the surface, this plan is beguilingly attractive. Patients whose pharmaceuticals are subsidized will be able to obtain, for just the dispensing fee, the drug selected by a government-appointed committee. The drug selected will be therapeutically equivalent to others in the category and it will be the least expensive. If the physician believes another drug is required, he/she has only to fill in the prescribed form and fax it off to the bureaucracy knowing that the likelihood that it will be approved is 95 percent. If the doctor's application is not successful, the patient still has the option of paying the extra cost above that for the government-approved drug and thereby obtaining it as a privately paid but subsidized item. The B.C. Ministry of Health estimates that this will result in savings in drug costs of about $30 million annually. [B.C. Ministry of Health, "Pharmacare Initiatives Saving Money, Improving Services," News Release, November 30, 1995.]

This and similar plans assume, first, that there is a problem to be solved, and second, that this type of approach is the way to solve it. These assumptions require a closer look.

Those who claim that there is a problem point to the fact that drug costs have increased more than other health expenditures over the last 20 years. In 1980, Canadians spent 14.7 percent of their total health care budget on all physician services, and a further 8.4 percent on pharmaceuticals. By 1994, these figures had become 14.2 percent for all physicians and 12.7 percent for pharmaceuticals dispensed outside hospitals. [Policy and Consultation Branch, Health Canada, National Health Expenditures 1975-1994, January 1996.] However, the pharmaceuticals figure does not take into account the approximately $800 million in drugs used in hospitals and paid for in hospital budgets. [Statistics Canada, Hospital Statistics: Preliminary Annual Report 1992-93, cat. 83-241 annual.] This $800 million represents more than 1 percent of total health care spending; thus, in 1994, Canadians spent almost as much on pharmaceuticals as for all physician services.

Superficially, it would seem that government, the monopoly provider and purchaser of health care in Canada, should be concerned about the escalation of costs related to pharmaceuticals. When examined more closely, however, a different picture emerges. Of all pharmaceutical spending outside hospitals, the public sector component has increased from 2.7 percent of total health care costs in 1980 to 5.6 percent in 1994. However, pharmaceutical purchasing by Canadian taxpayers, which in 1994 amounted to $100.14 per capita, falls well below the OECD average, and seems small when compared with the routine expenses of day-to-day living. [Ibid.]

Another important fact is that pharmaceuticals have brought an enormous increase in the capability to fight and control disease. In many cases they have replaced much more expensive interventions. Thirty years ago, one of the most common procedures performed in Canadian hospitals was a Vagotomy and Pyloroplasty, an intra-abdominal surgical procedure designed to relieve the symptoms of peptic ulcer disease. As a result of a number of drugs that have come on the market this procedure is seldom performed today, and the consequence is a substantial reduction in costs combined with considerable reduction in patient suffering and disability. There are many examples of how new drugs have reduced costs, but these seem to be ignored by those who choose to focus only on the cost of the drugs, without examining the total picture.

When examined from the viewpoint of the benefits and savings invoked by the introduction of newer drugs, the incremental increase in taxpayer cost from 2.7 percent of health care to 5.6 percent seems small. It appears that those who focus on drug costs as a problem in Canadian health care have picked a very shaky cause on which to focus their efforts.

Moreover, when the full impact of cost containment on drugs is examined closely, a more disturbing picture appears. William Looney has pointed out that "there is growing clinical and documentary evidence demonstrating that reforms to cut government exposure to rising drug costs have an unanticipated adverse impact on the national health services, in the form of additional specialist referrals and hospitalizations; denial of needed therapies, particularly for the elderly and other vulnerable groups; deterioration in the overall quality of medical treatment; increased bureaucratization; and higher costs system wide." [William Looney, Drug Budgets: The Hidden Costs of Control. The Impact of European Drug Payment Reform on Access, Quality and Innovation, Centre for the New Europe, June 1995.] Looney's work is substantiated by other studies, including those of Soumerai et al., who examined the results in New Hampshire and New Jersey when a cap was placed on medications available to Medicaid patients in New Hampshire. [S.B. Soumerai, D. Ross-Degnan, J. Avorn, T.J. McLaughlin, and I. Choodnovskiy, "Effects of Medicaid Drug-Payment Limits on Admissions to Hospitals and Nursing Homes," New England Journal of Medicine, 1991, vol. 325, pp. 1,072-77; and "On Squeezing Balloons: Cost Control Fails Again," Editorial, New England Journal of Medicine, 1991, vol. 325, pp. 1,099-100.] When the cap was instituted in that state, there was a substantial increase in admissions to nursing homes and a lesser but still measurable increase in hospitalization. These figures reversed themselves when the cap was lifted. Furthermore, conservative calculations revealed that the extra costs created by the cap exceeded any savings by a significant amount.

There are other solidly based examples of how programs such as reference-based pricing actually increase the cost of health care substantially. In a recent 13,000-patient health maintenance organization (HMO) study, seemingly benign measures such as restricting formularies to generic drugs were shown to create even more expensive health problems. [Susan Horn, Ph.D., P.D. Sharkey, Ph.D., D.M. Tracy, Ph.D., C.E. Horn, B. James and F. Goodwin, M.D., "Intended and Unintended Consequences of HMO Cost Containment Strategies: Results from the Managed Care Outcomes Project," American Journal of Man. Care, Vol. II, No. 3, March 1996, pp. 253-64.] The proponents of such programs usually report the savings realized in drug costs alone, and seldom if ever report the other costs incurred. Studies conducted in Arkansas, California, Texas, and Germany have demonstrated that the hidden costs of reference-based pricing programs greatly exceed any savings. [Dr. R. Robinson, "Economic Models for Evaluating Health Care Costs," Presentation at The Fraser Institute, March 12, 1996.] There is no reason to believe that the experience in Canada would be any different. Programs such as those presently functioning in B.C. will likely increase overall costs and also cause a deterioration in the quality of care available to patients, particularly the most vulnerable-the frail, the elderly, and low-income patients.

The focus on containing drug costs has occurred in spite of the lack of evidence supporting the need for such a measure. Furthermore, the literature indicates that a narrowly focused drug cost containment policy will not be successful, but will, in all likelihood, increase the cost to the taxpayer, while resulting in a deterioration in available care. We will return later to the issue of pharmaceuticals and how they ought to be managed in a comprehensive reform of the health care system.


The hospital sector

Acute care hospitals consume 38 percent of health care resources, cost $27 billion annually, and represent the single greatest health care expense. [The Health Services Utilization Group for the Conference of Federal/Provincial/Territorial Deputy Ministers of Health, "When Less is Better: Using Canada's Hospitals Efficiently," June 1994; J.N. Lavis and G.M. Anderson, "Inappropriate Hospital Use in Canada: Definition, Measurement, Determinants and Policy Implications," Queen's University of Ottawa Economic Projects, 93-08.] In any consideration of health care reform it is natural to focus in some detail on this aspect of spending. But first, how does the system work now?

Control and management of acute care hospitals vary from province to province, but in general, voluntary, non-profit boards of directors are responsible for supervising, directing, and controlling the senior management of these facilities. However, in British Columbia and most other provinces, the boards can operate only within fiscal and administrative regulations set by government. They can neither build, renovate, nor operate without government approval. They cannot even sell their property unless the government agrees. If a board is seen to step out of line, it can be replaced by the Minister of Health. With variations in approach, this type of control over hospitals is exercised by provincial governments across Canada, and for this reason most Canadian acute care hospitals are considered by OECD analysts to be public sector bodies.


Performance measures

Hospital services are measured in various ways. These include such factors as appropriateness, effectiveness, and efficiency. An appropriate service is one that, on the best scientific evidence, will improve the health status of the recipient the most and where the benefits exceed the risks by a wide enough margin to make the service worth providing. An effective service is one that improves the health status of the recipient. An efficient service is one that is delivered in the most cost-efficient place at a time when the effectiveness of the intervention will be optimal. [Ibid.] Other important concepts are those of utilization, utilization review, and utilization management. Utilization is the use of services or resources, utilization review is the assessment of the appropriateness and efficiency of hospital care through review of medical records, and utilization management is the deliberate action by payers or hospital administrators to increase the efficiency and effectiveness with which services are provided. [

S.M. Payne, "Identifying And Managing Inappropriate Hospital Utilization: A Policy Synthesis," Health Serv. Res. 1987, 22(5), pp. 709-769.]

The most recent OECD comparative data date back to 1991. Though slightly out of date, they appear to point to specific deficiencies in the Canadian hospital system. Some of these data, illustrated in table 6, reveal that the majority of OECD countries provide high quality acute care with a much lower average length of patient stay (ALOS) than do Canadian hospitals. The number of beds per capita in Canada is higher than in countries such as the U.K., Ireland, and the U.S., while the number of bed-days per capita is more than 50 percent higher in Canada than in the U.K., Australia, Sweden, and the United States. Staff-to-bed ratios show that the number of Canadians required to support each bed is more than 50 percent higher than in Australia, Ireland, and Switzerland, more than 150 percent higher than in France, and 250 percent higher than in Japan. The number of registered nurses per bed in Canada is more than 50 percent higher than in Germany and approximately double the numbers for France and Japan. These data suggest that significant improvements in efficiency, effectiveness, and utilization are required in the Canadian hospital sector.

Click here to view Table 6: Average Length of Stay, Beds per Capita, Hospital Staff per Bed, Nurses per Bed (OECD 1991)

A review of the problems related to the hospital sector in Canada was conducted by the Health Services Utilization Working Group in its working paper for the 1994 Conference of Deputy Ministers of Health. [The Health Services Utilization Group for the Conference of Federal/Prov-incial/Territorial Deputy Ministers of Health, "When Less is Better: Using Canada's Hospitals Efficiently," June 1994.] This report largely confirms and expands on the OECD data comparing the situation in Canada with other countries. There is detailed documentation to show that from 48 percent to 65 percent of acute care patient days are being provided to patients who are not acutely ill. Half or more of the services-and therefore the costs-provided in acute care hospitals were either non-essential or could have been provided more efficiently elsewhere. The report documents examples of inappropriate service, ineffective service, inefficient service, and inappropriate use. The following is a paraphrased version of some of its findings:

Both Canadian and international studies of hospitalization reveal large proportions of non acute and, therefore, inappropriate admissions and use of patient days in hospitals.

There are large variations in the ways in which hospitals are used; individual physician patterns and practices were the key determinants of over use.

Simply reducing acute care capacity did not eliminate inappropriate service or the risks associated with prolonged stays. It is necessary to introduce utilization review to address these topics.

There are very good, well validated, low cost assessment tools for carrying out utilization review, several of which have been used successfully in Canada.

There are wide variations in medical practice in Canada and the most effective way of dealing with this is the development of clinical practice guidelines.

There are many proven ways of reducing in-patient hospital costs. These include pre-admission clinics, day surgery, same day admitting policies, length of stay targets, discharge planning, and other utilization management initiatives. Short stay units, day care, and "do not admit to hospital" orders that respect individual and family choice, are other commonly used measures for reducing hospital costs.

Diagnostic services such as labs and imaging need to be managed better. Studies have shown a great deal of overcapacity with unrealized potential for centralization and coordination to improve both quality and efficiency in the use of equipment.

The inappropriate use of emergency departments has resulted in less than ideal service for genuine emergencies and inefficiency in the use of expensive resources.

Current fee-for-service physician payment systems appear to result in the provision of more services. Canadian and American studies report a reduction in in-patient use of from 20 percent to 40 percent on the part of physicians paid by other means.

Studies of waiting lists typically reveal failures in prioritization and management rather than insufficient capacity in the system.

Doctors who use the hospitals are responsible for generating most of the costs, but they are not employees and have few incentives to economize, nor do they incur any financial risk or consequences from their patient management decisions. Including physicians in policy formulation, management processes, information systems development, and as genuine management team members eligible for financial rewards and penalties with their contributions is highly desirable.

Rigid job categorization and inflexible education programs supported by the unions provide a substantial barrier to change and improvement. Health care workers of the future will have to be adaptable to changing circumstances. This will require changes in the way health care unions operate.

Public debate and discussion of the issues concerned in health care is essential. At the moment, the knowledge of individual members of the public is restricted to the personal experience of themselves or their family. While important, single-encounter information provides very little insight into the overall aspects of this large and complex system.

Many of the observations and findings brought forward by the Working Group support and corroborate studies conducted at The Fraser Institute and elsewhere which appear to indicate that hospitals in Canada, as in many other countries, are inefficient, overused, and fall short of management standards acceptable in the private sector. However, it would be unfair and wrong to blame only the hospitals and those who run them for this incentive-based overuse. These deficiencies appear to be due, in part, to unnecessary government regulation and control. For example, some of the problems are an ongoing consequence of the 1950s hospital construction program, followed by The Hospital and Diagnostic Services Act which effectively enticed people into hospital for treatment, much of which could have been done as well or better elsewhere, and at lower cost. The hospitals can hardly be held accountable for the thousands of frail but otherwise healthy elderly patients who occupy acute care beds because, in many cases, no other placement potential exists. This situation is exacerbated by the perverse incentives of the present system. While intuitively it appears that expenditures could be reduced by reducing the time each patient stays in hospital, the reality is that admitting and discharging patients quickly is labour intensive and therefore costly. This gives hospitals a financial incentive to slow turnaround, thereby increasing length of stay and reducing efficiency and productivity. However, if appropriate incentives for efficiency existed, there is little doubt that the hospitals would be more creative in finding appropriate placement for such patients.


Hospital budgeting

A key factor in the huge expense of hospital operation has to do with the way these insitutions are funded. The report from the Working Group on Hospital Utilization makes 20 recommendations, but it does not go far enough. The missing link is that there is little incentive for hospitals to implement these measures. The pivotal point in addressing this issue is the mechanism by which hospitals are financed.

In most countries, privately owned and operated hospitals provide a significant proportion of care, and have to compete with similar facilities to retain the privilege of serving their clientele. These private hospitals may receive funds from individual patients or their insurers (U.S.), the government (U.K.), or both (New Zealand). Since these facilities operate within a competitive market they have an incentive to institute internal measures to improve efficiency, effectiveness, and proper use, and in these circumstances the role of government is restricted to ensuring that taxpayers' money is targeted toward designated areas of need.

In Canada, 28 percent of all health care funding comes from the private sector. [OECD Health Data, Electronic Version #3.6, released May 1995.] However, very little of this private sector money goes toward hospital costs. This is an area in which Canada lags behind most OECD countries; competitive, privately owned and operated hospitals must be encouraged to compete for the opportunity to offer service to patients from both the private and public sectors. This is an essential ingredient for beginning to bring the benefits of market-driven incentives to secondary care in Canada.

In some countries, government payments to hospitals are based on the population being served. Each hospital has a population catchment area, and only people from that area are entitled to treatment. Portability is achieved by arranging for patient billing to be transferred from catchment area to catchment area. In another model, hospitals are remunerated on the basis of each patient treated. For example, in the U.S., the individual patient is often regarded as the primary payer, and either the patient or his insurer is billed item by item for services rendered. This account is then given to the insurer, which may be a health maintenance organization (HMO), the government (Medicaid, Medicare), a private company, or the individual patient, who may be responsible for paying all or some part of it. Experience shows that this type of itemized accounting produces higher administrative costs than a monopoly system. Of course, that does not mean that the overall cost in quality-adjusted terms of a system relying on individual billing will be higher than a monopoly, government administered system. For the provision of most goods and services, we rely on the market system to provide competition among suppliers; this influences the package of quality, availability, and price that is offered to the consumer. The extra cost of separate billing in these markets is to some degree offset by the overall efficiencies which result from competition.

In most parts of Canada, hospital funding is not based on the population served, nor is it dependent on the number of services provided; instead, it is generally calculated on the basis of the previous year's funding by a system known as "global budgeting" which does not take into account usual market factors such as the number, type, and quality of service provided. There is a negotiation around whether the previous year's budget should be increased, decreased, or maintained-hence the name "global" budgeting. Usually, there is no discussion about the number of services of each type to be provided, nor is quality of care discussed. Indeed, some claim that quality of care is not measurable.

Individuals working in the health care field recount a multiplicity of examples that reflect the types of deficiencies that come with global budgeting. Consider, for example, the situation in a British Columbia community hospital where two surgeons performed identical procedures. One, as a matter of routine, admitted his patients to hospital for five days, while the other surgeon performed all his procedures on an out-patient basis. The cost of hospitalization in a community hospital varies greatly, depending on location, size, and case load, but in general runs between $600 to $750 per patient per day. [Statistics Canada, Hospital Statistics: Preliminary Annual Report, 1992-93, table 16, pp. 32-3.] Thus, in the situation described, there was an extraordinary variation in cost to the system depending on which surgeon performed the operation, but for some time, there was no examination into whether one surgeon was keeping his patients in the hospital too long, or whether the other surgeon was releasing his patients too early (which would result in patient suffering and further costs to the system at a later date). Eventually the matter was resolved, but if the hospital had been competing with other hospitals for funds, this fiscal anomaly would likely not have been permitted in the first place.

Global budgeting does not create any meaningful incentive for a hospital to be efficient. If a budget is not spent in one year the hospital will receive less the next, and is thereby punished for saving. If something is sold for a profit, the amount of the profit is deducted from the next year's budget-once again punishment for fiscal prudence.


Labour in the hospital sector-the case of British Columbia

Another critical factor in understanding the cost of running hospitals relates to the labour sector. The latest available Canadian figures are for 1992-93 and reveal a total of 165,747 public hospital beds employing 395,000 people at a cost of $17.8 billion. [Statistics Canada, Hospital Statistics: Preliminary Annual Report, 1992-93.] By 1995, this is estimated to have increased to approximately $21 billion. This figure represents over 73 percent of total hospital expenditures, a percentage that is much higher in some hospitals and in some locations. For example, the Vancouver Hospital has a budget of $400 million and employs 9,000 people who receive 80 percent of the total budget or, on average, over $35,500 in salary and benefits per person per annum. [L. Bartz, Director, Communications and Public Affairs, Vancouver Hospital, in the Vancouver Sun, July 15, 1995.] This amount does not include the money paid to physicians who are, for the most part, paid on a fee-for-service basis by the Medical Services Commission.

The Seaton Commission on health care in B.C. indicated that hospital workers are paid more than their counterparts outside the hospital sector and that their wages have outpaced general wage levels since 1969. The commission drew the following conclusions from these facts:

Such trends do not, of course, tell us whether nurses' or other hospital workers' wages are too high or too low. . . . It might . . . be argued that wages in hospitals compare favourably with those in similar occupations elsewhere. But perhaps they are also underpaid. [Closer to Home: The Report of the B.C. Royal Commission on Health Care and Costs (1991) pp. B-93.]

Many jobs in hospitals are similar to jobs performed in other sectors of the economy. The largest overlap of comparable workers is between the hospital and hotel sectors. Both sectors need food service personnel, laundry service, housekeeping service, maintenance, and clerks. Many jobs, of course, cannot be compared directly, such as those in the hospital sector that require specific medical knowledge: this group includes people such as nurses, technicians, and lab assistants. Excluding these medically specialized workers from the comparison leaves 18 clearly comparable occupations. The effect of existing wage differentials between comparable workers is shown in table 7, using the Royal Columbian Hospital in B.C. as an example. Even though only 18 occupations are compared, if the Royal Columbian Hospital were to pay these workers wages comparable to those of their private sector counterparts, it would save over $2.6 million a year.

Click here to view Table 7: Hospital Employees Union (HEU) and Local 40 (Greater Vancouver Hotel Union)-Wage Comparisons

This comparison, however, includes only 372 of 766 (medically) non-technical workers at the Royal Columbian Hospital. Given an average wage differential for the 372 workers compared of $3.94 an hour, it is possible to extrapolate the potential savings which could be realized if all the non-technical hospital workers were paid on par with the hotel workers. Adding the amount for these remaining workers to that calculated for the 18 clearly comparable occupations, total savings for the Royal Columbian Hospital would be $5.4 million a year, equivalent to about 4 percent of its total annual budget. Other B.C. hospitals could similarly save 4 percent or more of their annual budgets. Extrapolation gives us a general sense of the savings to be achieved province-wide. If British Columbia could save 4 percent of its total annual spending on acute care hospitals in the province, the savings would be approximately $115 million a year. [Calculations based on expenditures on hospital services in B.C. for 1995/96 of $2.88 billion. B.C. Ministry of Health, "B.C. Hospitals Get Funding Increase as Clark Redirects Savings to Protect Health Care," News Release, April 9, 1996.]

Most critics of the health care system focus on capping doctors' billings and restricting entrants into medical school as cost containment measures. The cost of the many other workers in the health care sector usually goes unmentioned. This has incorrectly placed much of the blame for increasing health costs on the shoulders of physicians who, as a group, receive a lower percentage of the health budget than they did 20 years ago.


Summary

In the hospital sector in Canada, the ultimate consumer is the patient, but the patient has little or no say in what types of services are purchased. The government is the only major health insurer, the only major purchaser of health services, and government is also the only supplier of almost all hospital services. This creates a conflict of interest which would be unacceptable to Canadians in almost any other sector of the service industry.

It is apparent also that the largest single cost for hospitals is the cost of labour, and from the evidence presented it seems clear that the wages being paid to hospital workers are not competitive with those in the private sector. This factor, when combined with the OECD data which reveal that staff-to-bed ratios are higher in Canada than in many other prosperous countries, makes it clear that hospital employment and wages are a major target area for efficiency gains.


Case study-misguided directions for British Columbia
[Unless otherwise indicated, the information for this case study is derived from Ministry of Health documents prepared to inform the public about New Directions for a Healthy British Columbia, 1993.]

As noted earlier, many of the changes which have taken place in the health care sector in Canada, including the introduction of universal health insurance, have taken place for political rather than medical reasons. Inefficiencies have been built into the system. These inefficiencies are manifesting themselves in many ways, such as progressively longer waiting lists, increased costs, limited technology, and limited R&D in Canada. Many provinces have turned to regionalization and increased decentralization of services as solutions to the problems of access and cost. In B.C., the response to these escalating problems was to set up the Seaton Commission on Health Care in 1991, which delivered the document, New Directions, Closer to Home recommending, among other things, the regionalization of services.

New Directions, the document, resulted in New Directions, the reform strategy; its purpose was to change how health is defined, to change how health services are provided, to promote better health for all British Columbians, to spend limited health dollars in a more sensible and efficient way, and to give communities and regions more control over the planning and delivery of health services (closer to home). Doctors and hospitals were to represent the core of health services, but New Directions was to emphasize such previously neglected health areas as home care and community health services.

New Directions has admirable objectives for a community-based health care system. It aspires to ensure that people get the right service at the right time from the most appropriate provider. For example, community health centres are intended to be responsive to the specific needs of the community and allow for more "client-centred" care. As well, links with other health and social services are intended to support the continuity of comprehensive care. Greater public involvement at the community level is supposed to allow for the identification of health priorities and the allocation of available resources in a way that best meets local needs. Effective and efficient use of resources is meant to be achieved through improved administrative savings and by tying health expenditures to health outcomes.

New Directions fails in that it neglects to include one important mechanism for ensuring that "people get the right services at the right time from the most appropriate provider": the market. The market would communicate the wants of patients to care providers. The market would allow for competition between providers. Competition would ensure that providers respond appropriately and adopt the most efficient and effective methods of delivering health care. Competition would also facilitate technological advancement, not only in medical devices and procedures, but in the way in which medicine itself is practised. Until market mechanisms are put in place and the incentive structure of the medical system is overhauled, any reform is bound to fall short of its intent. Advantages such as the reduction in hospital waiting lists noted in the U.K. and the significant increase in surgical throughput observed in New Zealand illustrate the benefits of introducing market incentives to health care.


The organization of New Directions

Community Health Councils (CHCs) and Regional Health Boards (RHBs) have been created to aid in planning, managing, and delivering services at the community level. The government hopes that regionalization will reduce duplication of services and administrative costs. Twenty RHBs and 85 CHCs have been created, and the roles of these bodies vary across the province, depending on the sizes of the communities, the health services they provide, and the wishes of local residents.

CHCs have replaced the separate boards of governance that existed in each community. Their composition is as follows: one third elected by the public, one third appointed by the Health Minister, and one third appointed from other elected bodies (e.g. school boards, municipal councils, etc.). At the moment, the public representatives are people who were nominated from community steering committees. Elections for these positions are expected to begin taking place in the fall of 1996.

CHCs are accountable to both their RHB, and the communities they serve. Each CHC participates in the decision-making process through representation on an RHB. Council responsibilities are still being phased in, but ultimately, the CHCs will participate in the planning, co-ordination, and control of community health services such as acute care, mental health, and continuing care. Over time, they will be responsible for allocating the funding for most community health services; they will be permitted to enter into contracts with public and private health providers to deliver some services. They are intended to ensure that their community has access to core services which meet provincial standards.

RHBs are composed of CHC representatives and Minister of Health appointees. They are accountable to the community, to populations not represented by a CHC, and to the Minister of Health. Initially, their role is to plan and co-ordinate regional health services and determine, with the aid of the CHCs, which services will be provided regionally and which will be provided at the community level. Eventually, RHBs will receive and allocate to the CHCs a global budget and, with the Ministry and the municipalities, will plan capital projects. A large part of their mandate will be to protect the health interests of the taxpaying public who fund the system.

The Ministry of Health is still the centre of power in the system. It is accountable to the legislature for the health system in B.C. It provides all the funding, defines the range of essential services, and sets standards and policies for the equitable provision of these services. The Ministry will allocate resources to RHBs in accordance with a funding formula for health programs based on such factors as age, gender, and health status of the population. It will conduct research and evaluate health services. It will be responsible for planning, funding, and monitoring tertiary care services, and it will continue to provide and co-ordinate services that are provincial in nature, such as the B.C. Centre for Disease Control. It will also continue to directly administer the Medical Services Plan, the Alternate Payments Plan, and Pharmacare.


How New Directions has not worked

New Directions was supposed to save money for the province and thus the taxpayers. It was also intended to improve the availability and quality of health services received by British Columbians. "Overall institutional cost reductions have not been realized, however, and there are no indications that accessibility to care in B.C. has been improved as few new community programs have yet materialized." [Murray Martin, President and CEO, Vancouver Hospital, speaking at Medical Grand Rounds in December 1995.] The failure to renegotiate health workers' union contracts, and the government decision to merely shift labour around rather than to examine which types of labour would be most effective in a regionalized system have constrained the ability to contain health costs and improve service. CHCs are unable to ensure that their communities' needs are met as their role has already been changed by the Ministry of Health. Rather than allowing them to possess any real decision-making power, the Ministry has relegated the CHCs to an advisory role. This mistake parallels a similar situation in New Zealand which appears to be impeding progress there also.


Hospitals

In 1995, 123 acute-care hospitals in B.C. received an increase in funds of over $90 million, a 3 to 4 percent increase in the budgets of over half of the hospitals. During the 1995/96 fiscal year, allocations to hospitals will rise to $2.88 billion, a 2.5 percent increase in funding. Over the past 4 years, $1.25 billion of new provincial funding has been committed to hospital services. [B.C. Ministry of Health, "B.C. Hospitals Receive Budget Allocations for 1995/96," News Release, May 31, 1995; and "B.C. Hospitals Get Funding Increase as Clark Redirects Savings to Protect Health Care," News Release, April 19, 1996.] The government has spent a total of $150 million since 1991 building new nursing homes and renovating older ones. [Vancouver Sun, May 30, 1995, p. B4.] In 1995-96, mental health and continuing care facilities will receive funding increases of 4.5 percent and 8 percent respectively. [Better Health Care News: An Update From the B.C. Ministry of Health, Spring 1995, p. 3.] The total health budget will have risen to $6.5 billion by 1995/96, an increase from $6.25 billion spent by the Ministry of Health in 1994-95, and up from the $6.0 billion it spent in 1993-94. [Public Institutions Division, Statistics Canada, Provincial and Territorial Expenditure, Financial Management System, January 15, 1996.] Health care spending appears to be flourishing in B.C. with the occasional exception, such as the closing of the Shaughnessy site of University Hospital. Its programs and staff, however, have not been cut; they have been absorbed by the Vancouver Hospital at its two sites, and by community hospitals in the area.


Doctors, nurses, and government

B.C. health providers are discontented. Most vocal in recent months have been the physicians who feel that they are being completely excluded from the government's decision-making process. Dr. Victor Dirnfeld, past president of the B.C. Medical Association (BCMA), has said that "doctors have witnessed other instances when the Ministry [of Health] has promised to consult with them, and then imposed policies with little notice-such as the introduction of reference-based prescription drugs." [Vancouver Sun, October 6, 1995, p. B1.]

Doctor and nurses are sparring too. With the move to regionalization, nurses, as represented by the Registered Nurses Association of B.C., have been advocating community health centres controlled by nurses rather than doctors. They have also suggested that nurses should be the first point of contact for patients, given the emphasis being put on containing the costs of the health care system. They contend that doctors are "clinging tightly to fee-for-service . . . [you] have to wonder whose interest they are looking after," while the BCMA contends that the nurses' union is proposing a role for nurses for which they are not trained. [Globe and Mail, September 28, 1995, pp. A1-2.]


Closer to home

The Ministry has claimed that it is downsizing. What it is actually doing is transferring-it has transferred approximately 3,200 jobs from the Ministry to the CHCs and RHBs. The government is extending its influence over health care rather than relinquishing any power to the regions and communities. The Ministry still "holds the purse strings"; it has defined the core services that communities must deliver and it has negotiated the collective labour agreements to which the regions are bound to adhere. Regionalization is inheriting the problems of uncoordinated planning and financing that afflicted the "old" health system.

The transfer of problems to the regions rather than their resolution is further demonstrated by a report released recently by the B.C. Women's Hospital indicating that women are not being well served by the health system:

The system is too rigid and too tightly bound to the medical model. . . . It doesn't emphasize prevention. It isn't geared to meeting the diverse needs of women from different ethnic backgrounds. It is not accessible enough. [R. Wigod, Vancouver Sun, August 16, 1995, p. A1.]

With its stated goals being "to serve all people equally well, while becoming more responsible and flexible to our changing needs," [B.C. Ministry of Health, New Directions News, September 1994.] New Directions is a failure. Its implementation began years ago and its supposed benefits have yet to be seen. Costs have not been contained; service has not been improved. Perhaps these concerns contributed to the Ministry's recent decision to "put all regionalization activity temporarily on hold." [B.C. Ministry of Health, "New Minister Outlines Priorities for Health," News Release, June 21, 1996.]