Originally published in The Ottawa Citizen

As societies become richer, they tend to accommodate the rising demands and expectations of their citizens for more and better-quality health-care services. The value that citizens place on preserving and extending a good-quality life becomes more important as their consumption of other goods and services expands with their income.

Over the last 35 years or so, public and private health-care expenditures have risen substantially as a proportion of national income (GDP), doubling to 16 per cent in the United States and increasing from seven to 12 per cent in Canada. This is a trend that will not dissipate easily.

On the basis of historical trends, we project growth in total healthcare spending over the next 20 years to considerably outstrip the expansion of both national income and the fiscal capacity of governments in Canada, and push the health-care spending-to-GDP ratio to nearly 19 per cent by 2031.

This escalation has three drivers: an expansion in the scope and quality of medical services, population aging and, to a lesser extent, a rise in the relative price of health-care services.

In the 2020s, on the basis of historical trends, Canadians would be spending 31 cents of every dollar of increase in their nominal income on health care. This is by no means unsustainable as it leaves plenty of additional income to be spent on other goods and services. Nevertheless, if governments continue to finance 70 per cent of total health-care spending, the trajectory of health-care spending growing much faster than the capacity of governments to raise revenue without increasing tax rates is bound to generate a fiscal squeeze.

There are two ways to partially mitigate the fiscal squeeze implied by the health-care expenditure trajectory under the status quo:

1) To increase on a sustained basis the pace at which gains in efficiency and effectiveness of the health-care system proceed, through inter alia better organization, incentives and information systems as well as costreducing technologies, and to invest in prevention -this would slow the growth of health-care spending.

2) To increase the rate of potential economic growth, through faster labour productivity growth and increases in labour force participation rates, especially for older workers. In dollar terms, this would increase government revenue more than it would stimulate total health-care spending.

In an optimistic case, when both these favourable developments occur, we still project total healthcare spending to increase faster than nominal GDP and the fiscal capacity of governments, although significantly less than under the status quo. The health-care spending-to-GDP ratio would still rise to more than 15 per cent by 2031 and, over the 2020s, Canadians would be spending 20 cents of every dollar of increase in their nominal income on health care, as much as in the last decade or so.

Thus, even under optimistic assumptions, Canadians and their governments face difficult choices to finance the growth of health-care services that Canadians are expected to demand. These choices are the following:

  • Sharply reduce public services other than health care;
  • Increase taxes and fees;
  • Impose some form of copayment by individuals for health-care services which are currently paid for by provinces;
  • De-list health-care services that are currently publicly financed;
  • Markedly lower publicly financed health-care standards (e.g. longer waiting time) and develop a privately funded system to provide better quality care for those willing and able to pay for it;
  • Or some combination of the above.

None of these financing options is painless to Canadian citizens, nor politically easy to implement, but they would make quality health care sustainable. Just restricting the supply of health-care services would not do so. The experience of the 1990s suggests that after some years of compression, pent-up demand for health-care services risks flaring up into accelerated spending once the general fiscal situation improves.

Canadians cannot escape having to make hard choices about healthcare financing even if they are successful in improving the efficiency and effectiveness of health-care delivery. It is time to have a serious debate about those choices.

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