June 20, 1979

June 20, 1979 | Backgrounder on Social Security

A Review of the Canadian National Health Insurance


(Archived document, may contain errors)

i sU tc 20, 19,g A REVIEW OF CANADIAN NATIONAL HEAL TH INSURANCE IiiTRODUCiiON i Natiohal health insurance is vee much on. the minds oi pmerick today. Hospital costs have been soaring upward fop i more than a decade and medical treatment costs show no sigris of dimihishing As usual in times of sharply rising .prices; the gove*ent der the guis e of Serving the public's expectations,..att+mptis tb repeal the inviolable laws of supp\\ ly and demand Congress now se&s poised to perform new feats in the health care area Attention has been focused in recent :years on. Canada; where despite some protests from physicians, a superficial glance seems to suggest.that Canadians are indeed feasting on the proverbial free lunch-ll Canadians have had-,government-financed hospitalization insurance since 1958 and government-financed physician care since 1968 Both o f .these. items .are.. available a f ree-fox-811 basis with a few unimportant expectations, yet no hageddon ibinent del; for American. adoption. It. seems .to offer the benefits f7 boG&rqent money without the widely recognized undesirable .resU~fs 0% govew e nt organization Never.mlnd that,most oE the-$romiSed Chadian natibnal health insurance CN?lI) is viewed as a s s,,:a aly$$s of ese aaf.cast ~o .decades> reassur,ing of,..experience dolibt on ~e Sn Canada ,reveaas g.f tbJ in either seginent -of the health industry semis Increasingly, therefore, this systkm is looked upon as. a i ii$vantages of national health. irisuk&nce are organizational ess I I..

It,;may therefore be. of interest thaf careful economic y&a&an some .fesu to magic. 2 6 According to its supp orters, this system has brought health care within the reach of all; it has eliminated the price barrier which, prior to its adoption, gave those with more wealth better access to these resources. Our results cast serious doubt on Canadian attainment of t h ese lofty objectives. On the contrary we find that it has made health care harder to get for large numbers of Canadians, principally those living in already under-doctored areas, and that it has shifted a large portion of the cost of the nation's medical care onto the shoulders of the economically disadvantaged.

Although a few studies have reported that after CWI adoption the poor began to consume a somewhat larger share of the available medical care, our econometric findings suggest that this is 9 short t ern phenomenon reimbursement system adopted by all provinces provides monetary incentives for physicians to spurn the ghettos and the hinterlands and to locate in attractive urban enqironments already richly endowed with medical manpower It matters little that there is no price barrier if there is no doctor, and as a result of the reimbursement system adopted by CNHI, doctors are simply moving away from the poor.

When prices no longer influence the rate and location of the supply of valuable services, othe r factors then fill this vacuum In the locational choices of Dhvsicians. that decision is now In the long run the made on the basis of the attrk%iveness'of the conditions for living and practicing in different areas As fees have been equalized across each province, the opportunity to earn high income no longer functions to attract doctors to remote or educationally and culturally unrewarding areas. Fewer physicians choose to live and practice in less amenable communities since they may earn the same fee wh e rever they practice In our major research report we present theoretical work which derives three implications for post-adoption locational equilibrium for physicians under NHI too lengthy to reproduce here, but we will present our implications That theore t ical work is 1. Greater variance will exist in the distribution of physicians across regions, relative to pre-NHI conditions. Those areas previously endowed with a larger than proportionate share of physicians will attract even more. Those which were rela t ively underdoctored obtain proportionately fewer 2. Increasing relative scarcity of physicians in unattrac tive areas.coupled with the shift to zero pricing 3 3 of medical services confront practitioners there with incentives to,lower the quality of care t hey provide predict that in these areas, office visits will become shorter, house calls will be more difficult to arrange and other advexse effects will occur, due to reduced re source commitments per patient We While queues should continue indeed,become w orse is the long run in the unattractive regions, the opposite conditisn will eventually prevail in the attractive regions, the opposite condition will eventually prevail in the attractive regions. The scarcity of patients in the attractive regions should itself produce several disquieting results. Physicians will be emplqyed fewer hours per week in these areas, and they will be treating increasingly trivial complaints SOME DISTRIBUTIONAL CONSEQUENCES So far we have referred to the alternative locations un der discussion as merely attractive or unattractive. This analysis may be a bit more relevant if we are more specific about the sort of features likely to influence the attractivenegs of a particular location.

There are, of course, certain features of topo graphy and climate which are important in determining the intrinsic attrac tiveness of a location. Most individuals prefer temperate cli mates to extremes, trees and foliage to barrenness, hills and irregularities to plain, and proximity to lakes, streams , and oceans. They prefer a low cost of living to a high one. Most also, probably have a net preference for urban iife, in spite of the many costs that such a lifestyle imposes and the several undeniable advantages that rural locations offer. We therefare p redict that NHI will cause a general migration toward locations which exhibit more of these features than others. Locations with high costs of housing and food, with extremes of climate, with flat and barren landscape and low population densities will att Spct fewer physicians than they would without I. Patients in these areas will have difficulty obtaining medical care from the..doctors who remain, because of the excess demand produced by the fixed fee fee schedule.

Those locations which have more temperat e climates, more intereating topography, and a more sophisticated and stimqlating urban setting will attract more physicians under 1. It is worth repeating that such 1oca.tions will already have a dispro portionate share of the practicing physicians, henc e the effect of this change will be to worsen. the disparity of a.ccess to medical practitioners rather th,an to correcf it. There is currently great concern in the V.S. over the observed shift of medical practice out of rural settings and'into the c1tie.s ; out 4 of the Central States toward either the East or West coast. Such a trend cannot but be augmented by adoption of Canadian-style I 1 More important for distributional considerations than all the above, however, may be a less obvious factor influencin g physician location used to analyze the locational patterns of individuals across a rather large geographical canvas in the manner we have used it above It is equally applicable to choice within a smaller but perhaps more important compass, i.e., the choi c e of location of practice within a city and the choice of the style of practice practice within a particular city or town tic individuals may prefer to locate in and serve the poorer neighborhoods of our cities, most would probably elect to locate in well - to-do and middle-class areas, other influences notwith standing. National Health Insurance will make it less costly to indulge this taste for more socially attractive patients. For, as we have illustrated above, NHI, in addition to equalizing the supply p rice to provides, lowers the demand price to patients.

The price of a visit, which in ordinary circumstances would act as a deterrent on the ability of middle- and upper-class families to consume additional quantities of medical care, is lowered by NHI eff ectively to zero. Thus individuals in these neighborhoods are encouraged to visit a physician for any ailment, regardless of medical urgency. For administering to such needs, physicians are reimbursed at the standard negotiated rate, in spite of the fact t hat the actual value of the service to the demander may be negligible. At the margin, regardless of how great the need of the patient in the slums or how trivial the symptom of the de mander in the middle-class neighborhood, the NHI reimburses the physici a n at the same rate for both. Fewer physicians will choose to care for the poor under such circumstances than they would without National Health Insurance The model we describe here is conventionally Consider, for example, the decision of where to locate o n e's Although some altruis 1 There is one important exception to this general rule that net migration should occur from ru'ral, low-density locations to urban high-density loca tions That will occur where rural locations were poor and so sparsely pop ulate d that no physicians practiced there without NHI with its zeroprice for service may stimulate demand (increase the number of visits per population) to the extent that physicians are attracted to the area. Where a physician without NHI could not expect suff i cient traffic to support a practice at a particular fee, physicians with NHI could now locate there and earn a living at the same fee because of the higher utilization rate with the zero price to patients. This anomaly will be observed, however, only for l ocations where no physicians existed prior to "HI the theory we have just discussed implies that NHI will produce net migration away from rural, low-density regions Introduction of NHI In all other cases, 5 Similarly, different specialties themselves offe r a physi cian more glamor, more control over his time, more prestige and power over his associates. Indeed, it seems clear from evidence reported by Sloan 1970) and Lindsay (1973 that a decision not to specialize but to remain a general practitioner invol v es the sacrifice of much nonpecuniary income of this type. Unless the negotiation process is able to introduce appropriate variation in compensation rates for all such differences in the attractiveness of different medical careers, then we may have even f e wer physi cians involved in first-line patient care than we have at pre sent. Canada has already experienced difficulty in making such adjustments across specialities In summary, our long-run analysis of the influence of Canadian NHI on access to medical c are through the locational and career decisions of physicians in Canada suggests that its effects may be quite remote from the intentions of the legislation. Although it is true that NHI lowers the money price to everyone, this need not lower the cost of o btaining care when queuing costs are also considered. Furthermore, access is influenced by both demand and supply, and supply effects of its adoption are almost universally adverse. With regard to locational decisions in the large and the small, this poli c y has been shown to exacerbate existing differences in spatial distribution of physicians. Attractive locations which had proportionally more physicians before NHI will gain even more at the expense of rural, inclement, ugly and improverished areas and ne i ghborhoods. Quality of care in these needy areas will diminish while care in the more attractive areas will be administered for trivial problems WHO BEARS THE COST OF NHI The man in the street generally favors government free-for all programs like nationa l health insurance because he believes that he is getting something for nothing or absolutely nothing when he uses it, he gets the impression that it is Itfree.lt Since he pays close to The most important lesson in economics, and the most dif ficult to tea c h, is that, while one person may get something for nothing (by taking it away from someone else), it is simply impossible for everyone to have something for nothing. For each person who gets something for nothing there must be someone else who get nothing for something 6 The fact that no one seems to pay for Canadian nat onal In 1976 the budgetary cost of this program in health insurance does not indicate that it is costless or for that matter that it costs less than it would if people bought it for themse lves.

Canada was $1,122 per family, and this does not include such items as dental care, out-patient drugs, home nursing care eyeglasses and hearing aids howeve r, accomplish three things. First it eliminates the feature that the market uses to ration the scarce existing health resources among competing demanders. When the price is lowered to zero, more care is demanded by would-be patients than the available doc t ors, nurses, and hospitals can provide Reducing the price at the point of purchase to zero does One way that this market disequilibrium is rationalized is that people will line up effectively paying a price in their own time and inconvenience instead of t h e money price. Evidence on waiting times is costly to collect but those studies that.have examined this problem have observed that in spite of the fact that there are more doctors than ever in Canada, it takes longer to'see a doctor there than before CNHI . This cost of waiting is not included in official tabulations of the cost of national health insurance.

Poorer Care A more important effect to reducing the price at the time of purchase to zero is that .the scramble for physician care puts physicians unde r pressure to hurry their patients through, to have their nurses and orderlies perform mre tasks, and in general to reduce the quality of the care provided.

Long lines in the waiting room and the lack of competition among physicians for patients will in the long run yeild a pro duct worth exactly what is paid for it. The sad state of British medicine today speaks eloquently to this point.

The final result of this sort of financing is that it be comes terribly difficult to discover who does bear the cost o f health care. The individual who calls for an appointment may realize that in some vague way his taxes are related to aggregate spending on CNHI, but the exact way in which individual taxes and the full cornucopia of government give-aways are connected i s only now beginning to be unraveled by economists.

Programs Cut If each government spending measure were accompanied by tax bill that fully financed that spending, then the task of identifying 7 who was bearing what share of the cost would be greatly sim plified. This is rarely done, however, and was not done at all. in Canada when national health insurance legislation was adopted.

Indeed, not only tax revenue but also aggregate government spend ing levels over time fail to reveal the impact of the adoption of these programs.

Government spending over time is best described as a trend line, and this trend is undisturbed in the years when the hos pital and medical care programs were established If spending on health programs is not accompanied by correspond ing expansions of the total budget, then the conclusion seems lnescapable that some older programs have been cut to finance Canadian national health lnsurance.

Part of the task of identifying who is bearing the cost of CNHI is therefore to find out which programs were cut and by how much. Space limitations prevent a full presentation of our meth odology for estimating these cutsl but the process may easily be summarized. The two parts of this NHI legislation were introduced by the Canadian federal governa n ent with matching cost provisions in which each provincial government shared the cost of such programs on roughly a dollar for dollar basis with the federal government. The acts therefore lowered the cost of these pro grams relative to other prograins fro m province to province, some variation was observed in the relative costs of programs cross-sectionally as well as longitu dinally As the matching formula varied We were able to use this variation in costs to estimate the sensitivity of the remaining budge t ary items to the lowered cost of government-financed health care. Spending on some government programs was discovered to be highly sehsitive to this introduc tion of Canadian "I. We found that the programs which suffered most with the introduction of NHI were in the category of Social Welfare, that is, mainly assistance to disabled, handicapped, un employed persons, workers' compensation and family allowances.

We find that 60 cents out of every dollar spent on CNHI came out of this single category. Small reductions were also observed in funding for police and fire protection and industrial subsidies.

These estimates were made econometrically using data for individual provinces' budgets over the period 1954 to 19

76. The procedure involved estimating what impact the two government health programs had on expenditure for each program category.

Only those programs named were significantly influenced by the medical care program while the impact of each on Social Welfare was large and highly significant.

This is not to say that welfare spending has actually been cut in Canada. Welfare has grown, as have most other government programs, with population and income over the per1o.d of our observation. 8 Our results indicate, however, that the path of that growth h a s been significantly retarded by the necessity to finance government health insurance CONCLUSION In summary, Canadian national health insurance is quite definitely not a "free lunch It may superficially appear to have opened access tQ medical attention to all members of the public regardless of means. It has indeed reduced the money price of care to zero for Canadians, and in this sense the Canadian government has endorsed the notion heralded by Senator Kennedy that "health care is a right The real implica t ions of extending that right are probably not what its authors acrid sup porters intended. It has set in motion a relocation of phys icians away from unattractive areas and patients (who, by the way, were already relatively underserved by physicians) towa rd urban and educational centers of the country.

This result has almost completely neutralized for rural and remote communities, the effect of the dramatic growth in the number of physicians in Canada over the past decade. It may spell severe deprivation for these areas in some future period when the na tion is less well endowed with medical manpower.

These findings by themselves raise serious reservations about the desirability of this ltright.l1 Additionally, such a system fosters waste in that it requires us to Itpay for our medical care twice: once in the form of taxes and a second time by standing in line or suffering longer because of delayed appointments. By reducing competition among-physicians for patients it weakens the inducement for physicians to produce quality care. Finally, it obscures from public observation the cost of this service and, more importantly, each individualls share of that cost.

Only by complex econometric calculations were we able to discover that it'is the poorest members of society who have borne the cost of extending the right of health care to.the nation.

Cotton M. Lindsay University of California, Los Angeles Associate Professor of Economics Dr. Lindsay, with the assistance of Steven Honda and Benjamin Zycher, has recently completed an econometric analysis of the issues discussed in this Backgrounder His findings are published in Canadian National Health Insurance: Lessons for the United States, one.of a series of studies and reports made possible by a grant from Roche Zaboratories, division of Hoffmann-La Roche Inc. }{ \f1

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