I am pleased to give you a brief overview of 3 pieces of work currently underway at CHSRF. They are part of a series of papers which aim to synthesis the evidence on financing models for decision makers .
Today’s talk is about equity and financing. Canada’s is renowned for its universal national health insurance system, which covers all physician and hospital medically necessary services, guaranteed by the Canada Health Act. It demonstrates the high value Canadians place on equity through income and health risk sharing. Although the provincial and territorial Medicare programs go beyond the requirements of the CHA (for example by covering some cost of medical imaging, medical transportation and drugs prescribed outside hospitals), coverage for services not mandated by the CHA is uneven across jurisdictions, raising equity concerns. Healthcare has changed dramatically since the CHA was passed. With technological innovation, medically necessary care is no longer provided solely in hospitals, but may be provided at home, in the community or other settings. This means changing the location of the treatment or expanding the use of allied professionals may deprive people of coverage. Canadian governments are already concerned about the sustainability of the publicly funded healthcare system as it is. If we were to expand public funding to include pharmaceuticals outside hospital and/or to long term care, the question is HOW WOULD WE PAY for THE BAG OF SOLUTIONS as illustrated in this picture?
Three options are: Canadian governments can take actions to reduce inefficiency within the current public system; by revisiting how physician and hospital are financed, how pharmaceutical prices are negotiated and ensuring that best practices are followed. However, even though, efficiency gains translate into more value for money spent, they may not reduce the level of public spending or be enough to offer extended coverage. 2) Canadian governments could also decide to reallocate public funds from other programs (such as education, housing, etc) toward pharmaceutical or long term care. However, this concerns are already being expressed that healthcare is taking too large a share of public program expenditures. In addition , more funds for healthcare may mean less for addressing upstream social determinants of population health. 3) Canadians governments could also decide to raise revenue. Note that of course, all three approaches could be combined.
First, before discussing financing models. Canadians and policy makers have to believe that it is desirable to have a broad pool for income and risk-sharing for drugs prescribed outside hospital or long term care or any other non CHA services they would wish to see universal. For this afternoon’s discussion we assume this is the case and then try to understand and compare how to raise ADDITIONAL FUNDS, as a complement to the existing system.
Factors to consider: Economics can be used to compare various financing options in terms of specific types of effects. Any form of taxation may negatively impact GDP, employment rate, disposable income, consumer prices and more. However, there needs to first be a normative decision of whether the use of the funds being raised is worthwhile. This depends on public values and so makes it difficult to find a clear ranking. We will provide some perspective on public values from recent work, although a fuller exploration is needed. Our hope today is that through our discussions we can determine the important considerations. Thus, important economic and societal questions need to be answer (alex, I think you can drop this last paragraph). [How to minimize the negative impacts of an higher taxation? Does these negatives impacts offset by the positive health outcomes and economic impacts that would be created by the spending on long term care or on drugs prescribed outside hospital ? And what are the societal preferences?]
What are the options to increase revenue. Governments could raise personal income tax. It can be a cost effective way to increase healthcare revenue while ensuring risk solidarity. (36) However it would affect personal saving and investment. An alternative to increasing the dependence on personal income tax is to increase corporate income taxes. One option under this heading would be to discontinue the tax deduction for employer sponsored private health insurance (PHI) (39) , as permitted by the federal government and all of the provincial governments (except for Quebec). Critics argue that this tax exemption to corporations is regressive because it disproportionately favours high income and employed individuals (40) . Discontinuing the [employer sponsored PHI] tax exemption while implementing a progressive tax on employer sponsored PHI instead may serve to increase revenue, as well as improve income solidarity (39) . *A progressive form of revenue generation is one that increase with individual income and does not affect disproportionally the lower income groups. 3) Taxing consumption (by raising PST or GST) insures a large risk pool (people cannot opt out unless they avoid consumption) and it can promote better economic growth because it leaves personal savings and investments untouched (unlike taxing income). (37) However, taxing consumption is generally regressive because higher income groups will pay a lower proportion of their income than lower income groups; exempting basic goods can help alleviate this. The progressivity of indirect taxes depends on how the system is designed to raise the funds. For example, taxing consumption through raising taxes on products harmful to health (such as tobacco, as France recently did to cover growing health expenditures) is typically even more regressive (11) .
4) Governments could raise revenue by implementing a payroll tax similar to public pensions, unemployment and worker’s compensation. Because contributions are capped at a certain level, this becomes a regressive tax at any income higher than the cap. 5) Governments could also charge a health premium collected from individuals through the tax system (income tax or payroll) which in principle, can be reserved for health care. Depending on how it is implemented, it can be partly based on income, with low income groups exempt.. Residents of Ontario and British Columbia currently pay health premiums. 6) Medical Savings Accounts, or MSAs, refer to a family of financing approaches used to pay for specified healthcare services. MSAs are currently in use world-wide and there are considerable differences across plans. Although, all plans or models have two fundamental features: a personal or household savings account; and a high-deductible catastrophic insurance plan. MSAs have been criticized with respect to the inequities they produce, favouring the healthy and wealthy while forcing the unhealthy and poor to undertake a much higher cost burden. [ It may be worth to explore whether supplementing the exiting public healthcare system with non-mandatory MSAs would improve accessibility of non-Medicare (and Medicare) services and whether Canadians would support such an initiative.] I think this is controversial and not sure you want to go there. 7) The last option would be to implement user fees. Individuals could be required to pay the deductible through annual income taxes based on the cost of services used. To help prevent barriers to access, the fee is usually calculated and capped according to individual and family income, or low income individuals or families could be exempt. The principal problem is that the mechanism increases the burden on the sick relative to the healthy, and can be a barrier to access.
In order to compare the different financing options, here’s a list of characteristics that be considered. The macroeconomic impact - To what degree does the policy negatively impact GDP, employment, disposable income, consumer price, the fiscal balance of government? Distributional impact- the progressivity of the financing option and whether specific groups are made relatively worse off The administration cost of implementing the tax change and collecting it every year. [cost of the administration of implementing the tax change relative to the tax collected. ] The capacity to generate revenue The capacity for income and risk sharing And the public perceptions Comparing the financing options may not be straightforward and in reality, the devils is in the details! The way the financing options is designed to raise the funds and the way money is then redistributed.
This table comes from of a study currently underway by Mike McCracken for CHSRF. The objective of the paper is to help decision makers in health-related fields to understand the various tax options by examining the economic and distributional consequences. The paper will be released in June and in which you will find all the assumptions and details related to the 2 models they used to produce this table. We decided to share with you the preliminary results that compare the tax options simply to demonstrate the challenges for policy makers to choice the appropriate tax option require if we were to extend coverage to drugs prescribed outside hospital or to long-term care. The first column provides the policy options and column 2 to column 7 are characteristics that can be considered. - A 1-percentage point increase in the federal personal income tax today would have over the next 5 years a medium negative impact on the economy, would raise approximately 6.2 million dollars in the first year and can hardly be earmark for health COMPARE to an increase in payroll tax which would have a large negative impact on the economy over the next 5 years, can potentially be earmark for health and could raise approximately 5 million $ if the CPP/QPP would be increased by 2-percentage point or approximately 7.8 million $ if the level of the Yearly Maximum Pensionable Earnings would be twice the current amount. [2 scenario was made for payroll tax given a range between $5 million to 7.8 million potential revenue raising.] [For the last 3 financing options, their models hasn’t been applied – only qualitative discussion]
In addition to the economic analysis, it is interesting to get a sense of the public opinion. A paper by Stuart Soroka will be released in June. It synthesis the public perception of the Canadian Healthcare System by Canadian from 5 national survey. They are random samples of Canadians, but we don’t know to what extend it is representative. Anyhow, It means to provides a broad sense of the public perception The survey were not specifically on financing and information limited, which mean it would be informative to conduct a poll on the various financing options Here on the slide, the question asked to respondents was what is the main cause of problems in our health system : not enough funding for the system, inefficient management, or both? Results shows a growing proportion of respondent believe the healthcare system is poorly managed rather as insufficient funding. Recent Trends, from the 2010 Focus Canada Survey
On this slide, the survey asked what would be the best way of ensuring that there will be enough government tax revenue to pay for future health care expenditures without compromising other government programs? in total, 69% and 65% supported a contribution-based Canada Health Plan or a Registered Health Savings Plan respectively. Support for either more takes or user fees linked through the income tax system had much less support at 35% of respondents thinking it was a good idea in both cases.
With any choice of financing – we need to take many considerations into account In any given situation, details of implementation can affect characteristics of different approaches in practice Remember that financing is only one part of the issue – we must also look at how to improve efficiency as well as organization of delivery and funding levels.
Financing Healthcare: Weighing the options
Financing Healthcare: Weighing the options Presented by: Alexandra Constant MSc, Senior Economic Specialist
The Issues <ul><li>Around the world, governments must grapple with important questions around healthcare financing: </li></ul><ul><ul><li>Is there a need to increase financing to keep up with the rate of growth in health spending? </li></ul></ul><ul><ul><li>Are new methods of financing appropriate? </li></ul></ul><ul><ul><ul><li>Can we do more through the current approach, e.g. through raising income taxes? </li></ul></ul></ul><ul><ul><ul><li>Is diversification of financing approaches desirable? </li></ul></ul></ul><ul><li>In Canada, there is an additional question: </li></ul><ul><ul><li>Should we look for ways to finance non-Canada Health Act (CHA) services such as prescription drugs and long-term care in order to achieve income and risk-sharing? </li></ul></ul>
Policy Objective <ul><li>Policy Objective </li></ul><ul><ul><li>Is income and risk sharing desirable for non-CHA services ? </li></ul></ul><ul><ul><ul><li>prescription medication outside hospital </li></ul></ul></ul><ul><ul><ul><li>long-term care </li></ul></ul></ul><ul><ul><ul><li>Other services </li></ul></ul></ul><ul><li>Assuming the answer is YES for the discussion </li></ul>
Factors to Consider <ul><li>Economics: </li></ul><ul><ul><li>Any form of taxation may negatively impact: </li></ul></ul><ul><ul><li>Typically does not make a normative judgment of whether a tax should be implemented – this depends on public values </li></ul></ul><ul><li>Key questions: </li></ul><ul><ul><li>What are societal preferences? </li></ul></ul><ul><ul><li>How to minimize negative impacts of the higher taxation? </li></ul></ul><ul><ul><li>Can it be offset by the positive economic impact and health outcomes of an increase in health expenditures? </li></ul></ul><ul><li>Economic output </li></ul><ul><li>Income distribution </li></ul><ul><li>Disposable income </li></ul><ul><li>Employment </li></ul><ul><li>Government fiscal position </li></ul>
Options for Increasing Revenue <ul><li>Personal income tax: Raise rates? </li></ul><ul><li>Corporate tax: </li></ul><ul><ul><li>Raise rate and/or </li></ul></ul><ul><ul><li>Eliminate tax deductions on employer-sponsored private health insurance and tax progressively </li></ul></ul><ul><li>Consumption taxes </li></ul><ul><ul><li>GST/HST – broad base </li></ul></ul><ul><ul><li>Excise tax – narrow base apply to: </li></ul></ul><ul><ul><ul><li>tobacco, alcoholic beverages, other unhealthy” products </li></ul></ul></ul>
Options for Increasing Revenue <ul><li>Payroll tax </li></ul><ul><li>Charge a health premium </li></ul><ul><ul><ul><li>targeted income tax collected through employer </li></ul></ul></ul><ul><li>Medical savings account </li></ul><ul><ul><ul><li>Encouraging people to pre-plan for unexpected health expenditures </li></ul></ul></ul><ul><li>User fees </li></ul><ul><ul><ul><li>Directly charging for health services through deductibles or copayments on drugs and other services </li></ul></ul></ul>
Comparing Alternatives <ul><li>Key characteristics of different options: </li></ul><ul><ul><li>Macroeconomic impact </li></ul></ul><ul><ul><li>Distributional impact </li></ul></ul><ul><ul><ul><ul><li>Is the policy progressive or regressive? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Are specific groups made relatively worse off? </li></ul></ul></ul></ul><ul><ul><li>Transition costs/Administrative burden </li></ul></ul><ul><ul><ul><ul><li>Cost of policy vs. revenue generating ability </li></ul></ul></ul></ul><ul><ul><li>Capacity to generate revenue </li></ul></ul><ul><ul><li>Public perceptions </li></ul></ul><ul><ul><li>Capacity for risk-sharing </li></ul></ul><ul><ul><li>Capacity for income-sharing </li></ul></ul>In reality, the ‘devil is in the details’ – implementation assumptions and redistribution!
Policy Option Macro (negative) Distribution Who pays (burdensome for) Admin. costs Revenue generate Earmark for health? Fed personal Inc.Tax (1 per cent point increase in each income bracket) Medium Progressive Tax payers Small ~$6.2 billion N GST (from 5% to 6%) Large Regressive Consumers Small ~$5.4 billion Y Excise Tax and Duties (double rates) Large Regressive Consumers (poor) Large ~$3.5 billion Y Payroll Tax (Increase CPP/QPP by 2 per cent points or increase by twice the level of YMPE) Large Regressive* Workers, employers Small ~$5 billion or $7.8 billion Y? Corporate Income Tax Small Regressive Businesses (Small) Small - N Deductibility of Employer Paid Health Premiums Medium Progressive Workers Medium - Y Medical Savings Account Small Regressive Savers Large- New program - Y Source: Informetrica Limited (Mike McCracken) (2011). Additional funds for the healthcare system in Canada: The distributional and economic impact of alternative revenue-raising schemes. A report to the Canadian Health Services Research Foundation . *Applicable for an increase in contribution rate. For increases in the cut-off level of employment income, the impact is more progressive, with the total effect being more proportional.
Public Perception Soroka, S. (2011). Public Perceptions and Media Coverage of the Canadian Healthcare System: A Synthesis. A report to the Canadian Health Services Research Foundation. Source: the 2010 Focus Canada Survey
Public Perception <ul><li>Question: </li></ul><ul><li>What do you think is the main cause of problems in our health system ... not enough funding for the system ... inefficient management of the system? </li></ul><ul><li>Result: </li></ul><ul><li>Small, decreasing, support for not enough funding </li></ul><ul><li>Large, increasing, amount believe it’s due to inefficient management </li></ul>
Public Perception : User Fees Over the next two decades there will be fewer working Canadians relative to the total population. Which of the following do you think would be the best way of ensuring that there will be enough government tax revenue to pay for future health care expenditures without compromising other government programs? Source: Ipsos Reid Online Omnibus, March 2010 (N=~2000) Developing a contribution-based Canada Health Plan that would raise revenue and set aside financial resources for individuals who need health care the same way that the Canada Pension Plan works for people who want to retire. Developing a Registered Health Savings Plan, similar to the Registered Retirement Saving Plan that would allow individuals to save money on a tax free basis that would be available for them to pay for health services or prescription drugs that are not included in the public health plan coverage. Raising taxes over time to cover the increased demand for health care services. Taxing Canadians an additional amount on their annual income tax return that is linked to how much health care the person has required over the year up to a maximum amount (a percentage of their total income). % respondents
Public Perception <ul><li>Question: </li></ul><ul><li>Which way is best for ensuring there will be enough government tax revenue to pay for future healthcare expenditures; contribution based health plan, health savings plan, raising taxes, or taxation linked to healthcare consumption? </li></ul><ul><li>Result: </li></ul><ul><li>In total, 69% and 65% supported a contribution-based Canada Health Plan or a Registered Health Savings Plan respectively. </li></ul><ul><li>Support for either more taxes or user fees linked through the income tax system had much less support at 35% of respondents thinking it was a good idea in both cases. </li></ul>
Closing remarks <ul><li>With any choice of financing there are many considerations </li></ul><ul><ul><li>All have some negative impacts, must assume benefits outweigh these </li></ul></ul><ul><ul><li>Choose an approach which minimizes potential negative impacts while achieving goals around income and health risk-sharing </li></ul></ul><ul><li>Details of implementation are important </li></ul><ul><li>Recall that changing the way services are financed will not produce a more efficient/effective health care system </li></ul><ul><ul><li>requires reform of the delivery system, such as improving allocation efficiencies, and of how providers are organized and funded </li></ul></ul>
For additional information, please contact Alexandra Constant [email_address] <ul><li>Presentation to participants in CHSRF’s stakeholder event that was held in Ottawa on May 31, 2011. </li></ul>