Health Care Reform: A Tale of Two Systems, One Problem

This article is from the RIIB blog of July 13, 2009.

The debate over health care reform in the United States is on and Canada is featuring prominently in it. From the US right come ads detailing claimed shortcomings of Canada’s health care system. From the Great White North comes the “Jack Layton Goes to Washington” show, with Layton and company seeking to debunk “myths” perpetrated by the right. Certain facts are not in dispute. Approximately 46 million Americans have no health insurance and health care expenditures are more than 16 percent of US GDP. In Canada all are insured and health care expenditures amount to only about 10.5 percent of GDP. In Jack Layton’s words, “The Canadian system produces better health outcomes, reaches everybody and is less expensive to operate than the U.S. system”.

Whether 16 percent of GDP is too much to spend on health care or 10.5 percent too little is open for debate. The fact that 46 million Americans are uninsured does seem to be a problem. Focussing narrowly on these issues, however, misses the real problem facing the US health care system, and the real reason reform is needed. Contrary to popular belief in Canada, the US does not have a fully private health care system. About 50 percent of health care payments there come from public sources. The Medicare and Medicaid programs in the US account for most of these payments. Unless the government gets health care costs under control, Medicare threatens to bankrupt the US. Estimates for Medicare’s unfunded liability – the additional tax revenue required today to cover future Medicare expenditures – range as high as $90 trillion. To cover this liability the US government would need either massive spending cuts or huge tax increases. As a practical matter, the unfunded liability is so large that neither one is realistic. The only real route open to the US is health reform that reduces the cost of health care.

As we give advice on health care reform to our neighbour to the South, we in Canada should not be smug about our own health care system. A recent study by Peter Dungan and Steve Murphy from RIIB’s Policy and Economic Analysis Program indicates that Canada too is facing large future health care costs (An executive summary for the study can be found on the RIIB web page.). Dungan and Murphy construct population and demographic profile estimates for Canada out to the next century. They match these estimates with the 2006 National Health Expenditure Trends from the Canadian Institute for Health Information (www.cihi.ca) that gives health care expenditures in 2006 by age group and by sex. This allows Dungan and Murphy to estimate what expenditures on health care would be today if the population demographics were those of 2025, say.

Looking only at provincial health care expenditures, which account for about 65 percent of total expenditures in Canada, they find that, were the 2025 demographics in place today, expenditures would be almost 20 percent higher, coming in at $115 billion. With the demographics of 2050, provincial health care expenditures would be over 40 percent higher ($137 billion or 9 percent of GDP). These estimates are likely on the conservative side. The CIHI report estimates that real expenditures on health care by the provinces will have increased by an estimated $7 billion, or by about 10 percent, by 2008. Should anything like this trend continue into the future, real provincial expenditures on health care will be significantly higher than the Dungan and Murphy estimates.

Much of the increase in health care expenditures projected by Dungan and Murphy comes from the aging of the population. In 2006 approximately 13 percent of the population is aged 65 and over. Dungan and Murphy estimate that, by 2025, 20 percent of the population will be over 65. It is well known that health care expenditures fall disproportionately in the later years of life. This aging of the population also means that, at the same time as health costs are going up, the group of working age individuals who would pay these costs is shrinking. This combination of rising costs and shrinking tax base is a serious problem. The system we have now, with doctor shortages, crowded emergency rooms and wait lists for care, is barely affordable. What will we face 15 years from now?

The long and the short of it is that the problem that Medicare faces in the US is a problem confronting Canada as well. Canada cannot afford to be complacent. Health care reform is not just a US problem!