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