Mr. Speaker, as a professional economist before coming to Ottawa I had taken some interest in the economics of health care. In 1992, I published two editorials on the subject in the Medical Post .
Today I would like to share the most important insights about the problem of health care I have gained from these studies and suggest some policy initiatives based on them. These ideas are my own and not necessarily those of the Reform Party.
I believe the public provision of health care through the present Canadian system is bedevilled by a fundamental problem which is due to the absence of a deductible and of co-insurance. This problem is amenable to relatively easy solutions once political and ideological rhetoric is put aside.
Of course, the system has other problems. There are no patent solutions. Some of these problems involve fundamental issues of technology, incentives, values, ethics and morality. I will not discuss these today.
I would like to remind everyone that the Canada Health Act has created a gigantic system of insurance. Every Canadian contributes premiums through general taxes. Benefits are provided to anyone without the need to pay financial deductibles and co-insurance. As everyone knows, our system has produced a wonderful world in which every taxpaying Canadian is eligible to receive free of any charge general medical care, specialized services and hospitalization. Congratulations Canada.
In my view, one of the most important reasons for the financial problems which undoubtedly now are haunting our system stem from the absence of deductibles and co-insurance. I have reached this conclusion because the absence of restraint on demand stemming from this completely costless service has resulted in very large increases in demand. This is not a universally accepted proposition. Therefore, I would like to illustrate its validity by making reference to two historic experiments of public insurance systems that failed because of the absence of deductibles and co-insurance.
The first involves the government automobile insurance monopoly introduced by the NDP government in British Columbia in 1972. It started with great fanfare, having no deductibles at all on any repairs on cars, on the grounds that even small scratches and dents on cars ultimately lead to more serious problems. Therefore, it was argued it was wise to encourage repairs of such damage at no cost since some shortsighted owners might be discouraged from having the work done by a deductible of $50 or $100 or whatever it might be. The rest is history. The policy was cancelled by that same caring, foresighted NDP government because it was simply too costly.
The second experiment involved the British government, which in the early days of the public health scheme argued that no one in Britain should suffer because he or she did not have the money to pay for medication. I have heard the same arguments here about access to health care. I wonder why the rhetoric from members of the Liberal Party has not also extended to medication. After all, some people are suffering because they do not get all the medication they want just like that. They may have to spend some money.
The universally free dispensing of medication was ended after only a short time. Costs had become much higher than had been anticipated by a study of demand, a study which had been conducted under conditions when people paid for their medication. Studies have shown that if the cost is free it is easier to go back to the pharmacy to get medication rather than look for it in the medicine cabinet. People ended up with huge stocks of medication which were finally flushed down the toilet at an extremely high cost to society.
These two examples are instructive for Canadian medicare. The policy of having no deductibles or co-insurance in Canadian health care was motivated by the noblest of intentions, just like they were in the case of automobile insurance and free medication in England.
We need to take care of the needs of the most poor in society and we must prevent serious problems which might develop if small ones are neglected. The two experiments were terminated because of the universal law of demand. The price was too low and demand became too high. I believe that what we are seeing after 20 years of operation in Canada is exactly the same situation. That is one of the main reasons why the Canadian health care system is in such financial trouble.
There is a fairly straightforward solution: introduce user fees. However, there is a strong resistance in Canada to the use of this instrument.
We heard them just a few minutes ago. The arguments are the traditional ones: care about access for those who cannot afford it, and those who, even if they can afford it, are stupid enough to let illnesses go and the consequences will be more costly than if they had taken care quickly of the illness symptoms at the beginning.
Some even argue, somewhat more sophisticatedly, that the inconvenience of visits to physicians and the risk associated with all medical procedures represent a strong deductible and co-insurance. Others argue that the deterrent effect of such measures is small and not very cost effective. This is the position taken by my colleague at the university of British Columbia, Bob Evans, a professor of health economics, one of the most highly respected and best known economists in Canada. I disagree with him.
The arguments against deductibles and co-insurance involve empirical judgment on the way in which these incentives are introduced. I would now like to propose and outline briefly a scheme for the introduction of co-insurance and deductibles, which I have published in the Medical Post . It can be summarized quickly as follows.
Every doctor visit or treatment by a Canadian elicits a government notification of the cost involved. One gets a little postcard saying that your visit on such and such a day cost society and you $30. At the end of every tax year, the value of the medical services consumed is added as income when we file our income tax.
Think about what this would do. The poor would have access. Universality of access would be preserved. In the end, the poor would not pay anything. One of the most cherished, basic,
fundamental characteristics of our system would be preserved, one I think is worth preserving. Of course, the better off who have income tax to pay would as a result pay a share of the cost they have incurred on society.
Now I must state something that immediately comes up whenever I discuss this in a public forum. Of course there would have to be a ceiling to the amount of money that individuals would have to add to their income tax as income and on which they pay taxes. I do not even want to venture what it is, but maybe nobody would have to pay more than 5 per cent or 10 per cent of their income.
One of the most important things that every health care system must present is protection against the catastrophic consequences of serious illnesses. That could be preserved and will be preserved by the proposal I have just outlined.
One of the biggest problems I have is with the idea that these incentives of people paying their own money, in a way, having a deductible and co-insurance, would not work. Just recently I received some information about experimentations that are going on in the rest of the world. I would like to share these ideas with members.
I found the following. Most health economists agree that the primary reason why health care costs are rising is that the money we are spending in the medical marketplace is usually someone else's. More than a decade ago, the Rand corporation discovered that when people are spending their own money on health care, they spend 30 per cent less, with no adverse effect on their health.
Now it turns out that in the United States some employers are experimenting in putting this principle to work. Please do not be turned off by the idea that I have just mentioned that this is taking place in the United States.
Let me set the stage. Here are companies whose names I will read off that have for their employees systems of health care that are superior to that available to every Canadian. They have health insurance from the first dollar. They have catastrophe insurance. They are employed. They are very well taken care of.
Here is the experiment: Forbes magazine pays each employee $2 for every $1 medical claim they do not incur up to a maximum of $1,000 a year. For every time they look at what it costs to go to the doctor and they decide not to go during the year, they can earn as much as $1,000 extra income. Forbes' health costs fell 17 per cent in 1992 and 12 per cent in 1993.
Another example: Dominion Resources, a utility holding company, deposits $1,620 a year into a bank account for the 80 per cent of employees who choose a $3,000 deductible rather than a lower one. The result is the company has experienced no premium increase since 1989, while employers face annual increases of 13 per cent.
Another example: Golden Rule Insurance Company deposits $2,000 a year into a medical savings account for employees who choose a $3,000 family deductible fee. The result is in 1993, the first year of the plan, health costs were 40 per cent lower than they would otherwise have been.
Take the United Mine Workers, a union that is very concerned about the welfare of its members. Last year they had a health plan with first dollar coverage for most medical services. This year they accepted a plan with a $1,000 deductible. In return, each employee receives a $1,000 bonus at the beginning of the year and employees get to keep whatever they do not spend. As a result, the mine workers still have first dollar coverage plus all the catastrophe insurance coverage and all that, but now the first $1,000 they spend will be their own money rather than their employer's money.
These plans are popular with employees. They can save money in an amount directly related to their own effort. They are not deterred from seeking medical care by the traditional out of pocket deductible. They can usually use their medical savings to buy services not covered by traditional services, and they are usually not restricted to certain doctors, as they would be under a managed care plan.
We have here very strong evidence that deductible co-insurance works. It works in ways that satisfy the people who are involved.
Let me try in my own words to explain what are the fundamental benefits. These experiments have permitted individual employees to feel clearly and voluntarily that under a wide range of conditions they would have gone to the doctor if it cost them nothing, but when faced with the true cost of the doctor visit they preferred having the money instead.
It is important to note that under these medisave schemes that I have just described individuals retain the benefit of full protection against the consequences of serious illness. They are making these choices with their own money. We have just deleted the distortion the zero deductible and co-insurance system has introduced into the incentives of the individual. They are being misled by the system into believing that for them and society the cost of going to the doctor is zero. It is not.
As we can see, individuals like it if they are given the choice, the freedom to do so. They prefer it. And the system itself saves money. It is an opportunity that I believe we in Canada can also take advantage of. Of course there have to be modifications, because we want to preserve the current system of universality of access and all the other aspects we have just discussed.
Let me conclude by suggesting that these well documented experiences provide strong support for the effectiveness of introducing deductibles and co-insurance into the Canadian health care system through the tax system I just sketched. It could be modified and create more positive incentives by giving every Canadian a $1,000 tax offset against which the cost of medical services would be deducted. I think that very quickly after such a system is introduced people would know about it and they would pay attention to these things.
However, I believe these are details. I want to add to the current debate over the possible reform of the health care system the idea of using deductibles and co-insurance for routine medical services, administered through the tax system, while the system continues to provide universality of access and protection against catastrophic health costs.
Let me repeat: It is possible that this scheme-which not only I have proposed in the Medical Post editorial, but which has been proposed by the Fraser Institute competition for the reduction of the cost of government and has been proposed by other doctors who wrote to me after my publication-may very well be a way in which Canada can have all the wonderful qualities of our system we now have and create incentives for greater efficiency and prevent the demise of the system, which otherwise might collapse under the threat of excessive financial costs.
