Alarge part of the welfare state, in Canada and in other wealthy countries, is devoted to paying for health care. In most wealthy countries, the government pays between 70% and 80% of all medical costs of its citizens and permanent residents. In Canada the public sector picks up 70% of all health care costs—slightly below the OECD average of about 73%—although it is more like 77% when the impact of the tax system is taken into account. The private sector, which covers the remaining 30% of costs in Canada, plays a much larger role in the U.S. health care system, paying 52% of all medical costs.

Figure 18-5 shows who paid for Canadian health care in 2011. Only 14.7% of health care spending was expenses “out of pocket”—that is, paid directly by individuals. Most health care spending, 70.4%, was paid for by the public sector—provincial and territorial governments covered 65.3% of all health care costs and the other 5.1% came from the federal government, municipal governments, and social security spending. Private health insurance covered 11.8% of all health care spending, often for things such as drug and vision care coverage. The final 3.1% of all health care spending is a category called non-consumption. This refers to a mixed bag of private spending on things such as hospital non-patient revenue, capital spending for privately owned facilities, and health research.

Insurance of some form or another paid for the majority of all Canadian health care costs. To understand why, we need to examine the special economics of health care.

In 2013, Canadian personal health care expenses were about $6000 per person—11.2% of gross domestic product (above the OECD average of 9.3% of GDP, but well below the United States at 17.7% of GDP). This did not, however, mean that the typical Canadian spent $6000 on medical treatment. In fact, in any given year half the population incurs only minor medical expenses. But a small percentage of the population faces huge medical bills, with 10% of the population typically accounting for almost two-thirds of medical costs.

Is it possible to predict who will have high medical costs? To a limited extent, yes: there are broad patterns to illness. For example, the elderly are more likely to need expensive surgery and/or drugs than the young. But the fact is that anyone can suddenly find himself or herself needing very expensive medical treatment, costing many thousands of dollars in a very short time—far beyond what most families can easily afford. Yet nobody wants to be unable to afford (and obtain) such treatment if it becomes necessary.

Private Health Insurance Market economies have an answer to this problem: health insurance. Under private health insurance, each member of a large pool of individuals agrees to pay a fixed amount annually (called a premium) into a common fund (or pool) that is managed by a private company, which then pays most of the medical expenses of the pool’s members. Although members must pay fees even in years in which they don’t have large medical expenses, they benefit from the reduction in risk: if they do turn out to have high medical costs, the pool will take care of those expenses.

There are, however, inherent problems with the market for private health insurance. These problems arise from the fact that medical expenses, although basically unpredictable, aren’t completely unpredictable. That is, people often have some idea whether or not they are likely to face large medical bills over the next few years. This creates a serious problem for private health insurance companies.

Suppose that an insurance company offers a “one-size-fits-all” health care policy, under which customers pay an annual premium equal to the average Canadian’s annual medical expenses, plus a bit more to cover the company’s operating expenses and a normal rate of profit. In return, the insurance company pays the policyholder’s medical bills, whatever they are.

If all potential customers had an equal risk of incurring high medical expenses for the year, this might be a workable business proposition. In reality, however, people often have very different risks of facing high medical expenses—and, crucially, they often know this ahead of time. This reality would quickly undermine any attempt by an insurance company to offer one-size-fits-all health insurance. The policy would be a bad deal for healthy people, who don’t face a significant risk of high medical bills: on average, they would pay much more in insurance premiums than the cost of their actual medical bills. But it would be a very good deal for people with chronic, costly conditions, who would on average pay less in premiums than the cost of their care.

As a result, some healthy people are likely to take their chances and go without insurance. This would make the insurance company’s average customer less healthy than the average Canadian. This raises the medical bills the company will have to pay and raises the company’s costs per customer. That is, the insurance company would face a problem called adverse selection, which is discussed in detail in Chapter 20. Because of adverse selection, a company that offers health insurance to everyone at a price reflecting average medical costs of the general population, and that gives people the freedom to decline coverage, would find itself losing a lot of money.

The insurance company could respond by charging more—raising its premium to reflect the higher-than-average medical bills of its customers. But this would drive off even more healthy people, leaving the company with an even sicker, higher-cost clientele, forcing it to raise the premium even more, driving off even more healthy people, and so on. This phenomenon is known as the adverse selection death spiral, which ultimately leads the health insurance company to fail.

This description of the problems with health insurance might lead you to believe that private health insurance can’t work. In fact, however, most working Canadians do have some private health insurance that supplements the public coverage available to all. Insurance companies are able, to some extent, to overcome the problem of adverse selection two ways: by carefully screening people who apply for coverage and through employment-based health insurance. With screening (which we’ll learn more about in Chapter 20), people who are likely to have high medical expenses are charged higher-than-average premiums—or in many cases, refused coverage entirely. The next section explains how employment-based health insurance, a unique feature of the Canadian workplace, also allows private health insurance to work.

Employment-Based Health Insurance For the most part, however, insurance companies overcome adverse selection by selling insurance indirectly, to peoples’ employers rather than to individuals. The big advantage of employment-based health insurance—insurance that a company provides to its employees—is that these employees are likely to contain a representative mix of healthy and less healthy people, rather than a selected group of people who want insurance because they expect to pay high medical bills. This is especially true if the employer is a large company with thousands or tens of thousands of workers. Employers require their employees to participate in the company health insurance plan because allowing employees to opt out (which healthier ones will be tempted to do) raises the cost of providing insurance for everyone else.

There’s another reason employment-based insurance is widespread in Canada: it gets special, favourable tax treatment. Workers pay taxes on their paycheques, but workers who receive health insurance from their employers don’t pay taxes on the value of the benefit. Also, employers contributions to these health insurance plans are not a taxable benefit for employees, but are a tax-deductible expense for the employer. So employment-based health insurance is, in effect, subsidized by the Canadian tax system. Economists estimate the value of this subsidy at about $5 billion each year.

In spite of this subsidy, however, many working Canadians don’t receive employment-based health insurance. Those who aren’t covered include most older Canadians, because relatively few employers offer workers insurance that continues after they retire; the many workers whose employers don’t offer coverage (especially part-time workers); and the unemployed.

Canada operates a publicly funded, privately provided, universal, comprehensive, accessible and portable, single-payer, provincially administered national health care system. Let’s examine each of these facets in more detail.

Under public health insurance, sometimes called publicly funded health insurance, each member of the public (citizens and permanent residents) qualifies for free access to certain health care services, which are paid for by the government. Canada’s public health care system is a single-payer system with the government acting as the single insurer and paying the entire cost of all medically insured health care services. Although the public does not directly face any payment, this health care spending is financed through taxes, in some cases including special levies geared toward collecting funding specifically for health care.

Canada’s health care system is administered by the provinces and territories according to the constitution. Nevertheless, the federal government plays a key role in the public provision of health care: it sends transfer payments to provinces to help cover health care costs. The Canada Health Act, which was unanimously enacted by Parliament in 1984, established five national principles as to how the provision of public health care should operate (otherwise federal transfer payments may be withheld).⁵ As described by Parliament these five national principles are:

According to the federal government, there are two overarching objectives of federal health care policy: (1) to ensure that every Canadian has timely access to all medically necessary health services regardless of their ability to pay for those services; and (2) to ensure that no Canadian suffers undue financial hardship as a result of having to pay health care bills.

While publicly funded, Canada’s health care is largely provided by private doctors and not-for-profit private hospitals. Provinces and territories determine lists of insured medical services provided by physicians and hospitals and negotiate with the providers of these services to set fee schedules. Should doctors or hospitals attempt to charge additional fees for insured services (sometimes called “user charges,” “co-payments,” or “extra-billing”), the federal government reserves the right to reduce transfer payments to their jurisdiction by an offsetting amount. This in essence makes such additional user fees illegal, and keeps the system a single-payer model free and accessible to all. The public administration of the system helps keep total costs down, which allows for the affordable provision of good quality health care.

For decades, Canada’s health care was privately funded, resulting in access to care based on ability to pay. But in 1947 Saskatchewan introduced Canada’s first publicly funded health insurance plan covering hospital services. In 1956 the federal government offered to share the costs with any province setting up a provincially funded health insurance plan. By 1961, all provinces and territories had signed agreements with the federal government and had set up provincial health insurance plans covering hospital care that qualified for federal cost sharing. The public health care system has since evolved into a provincial or territorial provision of many doctor and hospital health care services to all Canadians, plus a prescription drug benefit. These drug benefit plans are generally targeted to seniors, recipients of social assistance, and individuals with illnesses or conditions that are associated with high drug costs. All other Canadians have to pay for prescription drugs either out of their own pockets or via private supplemental health insurance. The same goes for any non-insured health care services or medication.

Health care is one area in which Canada is very different from the United States. In fact, when it comes to health care the United States is very different from most other wealthy countries in three distinct ways. First, the United States relies much more on private health insurance than any other wealthy country does. Second, they spend much more on health care per person. Third, they’re the only wealthy nation in which large numbers of people lack health insurance.

The United States government runs three health insurance programs: Medicare, Medicaid, and military health care. Medicare covers hospitalizations and some other medical costs. It is financed by payroll taxes and is available to all Americans 65 and older, regardless of their income and wealth. Medicaid is a means-tested program for low-income Americans, paid for with federal and state government revenues. Millions of Americans receive health insurance as a consequence of military service. Unlike Medicare and Medicaid, which pay medical bills but don’t deliver health care directly, the Veterans Health Administration runs hospitals and clinics throughout the U.S, in a similar system to the British National Health Service.

Table 18-5 shows the breakdown of health insurance coverage across the U.S. population in 2012. A majority of Americans—more than 170 million people—received health insurance through their employers. The majority of those without private insurance were covered by Medicare and Medicaid. (The numbers in Table 18-5 don’t add up because some people have more than one form of coverage. For example, many recipients of Medicare also have supplemental coverage either through Medicaid or private policies.)

So the U.S. health care system offers a mix of private insurance, mainly from employers, and public insurance of various forms. Most Americans have health insurance either from private insurance companies or through various forms of government insurance. However, in 2012 almost 48 million Americans, 15.4% of the population, had no health insurance at all.

Table 18-6 compares four wealthy countries: Canada, France, Britain, and the United States. The United States is the only one of the four countries that relies on private health insurance to cover most people; as a result, it’s the only one in which private spending on health care is (slightly) larger than public spending on health care.

As previously mentioned, Canadian doctors are generally not employed directly by the government, and hospitals, although they are not-for-profit, are usually privately run. The British system is extended to everyone: a government agency, the British National Health Service, directly employs health care workers and runs hospitals and clinics that are available free of charge to the public. France is somewhere in between the Canadian and British systems. In France, the government acts as a single-payer, providing health insurance to everyone, and French citizens can receive treatment from private doctors and hospitals; but they also have the choice of receiving care from a sizable health care system run directly by the French government.

All three non-U.S. systems provide health insurance to all their citizens; yet all three spend much less on health care per person than the United States. Many Americans assume this must mean that foreign health care is inferior in quality. But many health care experts disagree with the claim. As they point out, Britain, Canada, and France generally match or exceed the United States in terms of many measures of health care provision, such as the number of doctors, nurses, and hospital beds per 100 000 people. It’s true that U.S. medical care includes more advanced technology in some areas and many more expensive surgical procedures. U.S. patients also have shorter waiting times for elective surgery than patients in Canada or Britain. France, however, also has very short waiting times.

Surveys of patients seem to suggest that there are no significant differences in the quality of care received by patients in Canada, Europe, and the United States. And as Table 18-6 shows, the United States does considerably worse than other advanced countries in terms of basic measures such as life expectancy and infant mortality, although their poor performance on these measures may have causes other than the quality of medical care—notably, relatively high levels of poverty and income inequality in the United States.

So why does the United States spend so much more on health care than other wealthy countries do? Some of the disparity is the result of higher doctors’ salaries, but most studies suggest that this is a secondary factor. Another possibility is that Americans are getting better care than their counterparts abroad, but statistics don’t back up this claim.

However, the most likely explanation is that the U.S. system suffers from serious inefficiencies that other countries manage to avoid. Critics of the U.S. system emphasize the system’s reliance on private insurance companies, which expend resources on such activities as marketing and trying to identify and weed out high-risk patients, leading to high operating costs. On average, the operating costs of private health insurers eat up 14% of the premiums clients pay, leaving only 86% to spend on providing health care. By contrast, U.S. Medicare spends only 3% of its funds on operating costs, leaving 97% to spend on health care. In Canada, administration accounted for only 1.7% of public health insurance spending in 2013. A 2007 study by the McKinsey Global Institute found that the United States was spending almost six times as much per person on health care administration as other wealthy countries. Americans also pay higher prices for prescription drugs—or travel to Canada to buy lower priced prescription medication—because in other countries government agencies bargain with pharmaceutical companies to get lower drug prices.

However one rates the past performance of the U.S. health care system, by 2009 it was clearly in trouble. The root of the problem was the rising cost of health insurance, both private and public.

An immediate problem was that the cost of private insurance had been rising much faster than incomes. From 1999 to 2009, the average premiums for employment-based health insurance more than doubled, but the wages of the average worker rose only 35%. By 2009, the average cost of insurance for a family of four was almost $14 000.

As a result of these rising costs, employment-based health insurance, the centrepiece of the system for Americans under 65, was in decline. Figure 18-6 shows selected changes in the insurance status of Americans between 2000 and 2009. Over that period, while the total American population increased by 25 million, the number of people with employment-based health insurance decreased by almost 10 million. Despite the expansion of Medicaid by 18 million people, by 2009 an additional 12 million people had joined the ranks of the uninsured.

At the same time, as U.S. private health insurance was faltering and the ranks of the uninsured increased, American public health insurance was coming under increasing financial strain. Partly this was because Medicaid and other U.S. government programs covered more people than in the past. Mainly, however, it was because the cost per beneficiary of government health insurance, like the cost per beneficiary of private insurance, had been rising rapidly.

What’s behind these rising costs? Figure 18-7 shows overall Canadian and U.S. spending on health care as a percentage of GDP, a measure of the nation’s total income, since the 1960s. As you can see, U.S. health spending as a share of income rose about 350% between 1960 and 2011; this increase in spending explains why health insurance became more expensive in the United States. While similar trends can be observed in other countries, in Canada health care spending as a percentage of GDP rose by just over 200% during this same period.

The consensus of health experts is that the increase in health spending is a result of medical progress. As medical science progresses, conditions that could not be treated in the past become treatable, but often only at great expense. Both private insurers and government programs feel compelled to cover the new procedures—but this means higher costs, which either have to be passed on in the form of higher insurance premiums or require larger commitments of taxpayer funds.

In the United States, the combination of a rising number of uninsured and rising costs led to many calls for health care reform. And in 2010 the U.S. Congress passed comprehensive health care reform legislation, officially known as the Patient Protection and Affordable Care Act (PPACA, or ACA for short), but often simply referred to as “ObamaCare.”

ACA, which took full effect in 2014, is the largest expansion of the American welfare state since the creation of Medicare and Medicaid in 1965. It has two major objectives: covering the uninsured and cost control. Let’s look at each in turn.

Covering the Uninsured On the coverage side, ACA was modelled closely on a similar plan that had been introduced in Massachusetts in 2006. To understand the logic of both the Massachusetts plan and ACA, consider the problem facing one major category of uninsured Americans: the many people who seek coverage in the individual insurance market but are turned down because they have pre-existing medical conditions, which insurance companies fear could lead to large future expenses. (Insurance companies have been known to deny coverage for even minor ailments, like allergies or a rash you had in university.) How can insurance be made available to such people?

One answer would be regulations requiring that insurance companies offer the same policies to everyone, regardless of medical history—a rule known as “community rating.” But community rating tends to lead to an adverse selection death spiral: healthy individuals don’t buy insurance until or unless they get sick, and because only people with health problems are getting coverage, insurance becomes very expensive.

To make community rating work, it’s necessary to supplement it with other policies. Both the Massachusetts reform and ACA add two key features. First is the requirement that everyone purchase health insurance—known as the individual mandate. This prevents an adverse selection death spiral. Second, U.S. government subsidies make the required insurance affordable for lower- and lower-middle income families.

It’s important to realize that this system is like a three-legged stool: all three components must be present in order for it to work. Take away community rating, and those with pre-existing conditions won’t get coverage. Take away the individual mandate, and community rating will produce an adverse selection death spiral. And you can’t require that people buy insurance without providing subsidies to those with lower incomes.

Will this act, once fully integrated, succeed in covering more or less everyone? The Massachusetts precedent is encouraging on that front: after four years, more than 98% of the state’s residents had health insurance and virtually all children were covered. Since the ACA is very similar in structure, it ought to produce similar results.

Cost Control But how does ACA control costs? In itself, the expansion of coverage raises U.S. health care spending, although not by as much as you might think. The uninsured are by and large relatively young, and the young have relatively low health care costs. (The elderly are already covered by Medicare.) The question is whether ACA can succeed in “bending the curve”: reducing the rate of growth of health costs over time.

ACA’s promise to control costs starts from the premise that the U.S. medical system had skewed incentives that wasted resources. Because most care in the United States is paid for by insurance, neither doctors nor patients have an incentive to worry about costs. In fact, because health care providers are generally paid for each procedure they perform, there’s a financial incentive to provide additional care—do more tests and, in some cases, perform more operations—even when there are little or no medical benefits.

The act attempts to correct these skewed incentives in a variety of ways, from stricter oversight of reimbursements, to linking payments to a procedure’s medical value, to paying health care providers for improved health outcomes rather than the number of procedures, and by limiting the tax deductibility of employment-based plans. It will be several years before we can determine how well these measures worked, but supporters point out that ACA incorporates virtually every idea for cost control that has been proposed by health care economists and that some of these ideas are likely to be highly successful.

The Canadian health care system is a key part of Canada’s welfare state. A 2011 Nanos Research poll found that 94% of Canadians were in favour of preserving public health care. In fact, health care is often cited as the biggest issue for voters, beating out issues like taxes, job creation, retirement security, and the environment. But as Figure 18-7 clearly shows, Canadian health care spending as a percentage of total income has been rising. Canadians are right to be concerned about whether the public health care system is sustainable. Can the system survive? In what form? And what, if anything, can Canadians do to help keep the system running?

Between 1960 and 2011 health care costs rose about 350% in the United States and just over 200% in Canada. Canada’s public system experienced much smaller cost increases than the United States system with its dependence on for-profit health insurance and health care providers.

But you might ask if this is a fair comparison—what about other industrialized nations? As it turns out, health care costs are rising throughout the developed world. Table 18-7 shows total health care spending as a percentage of total income and the percentage growth of this amount between 1960 and 2011 for a number of major OECD countries. Canada’s total health care spending, at 11.2% of total income in 2011, is by no means on the low end for these countries. But at the same time it is not the highest either, nor has it grown any faster than health care costs in these other nations. According to the 2001 Romanov Commission report on the future of health care in Canada, publicly funded health care is both feasible and efficient. The much-publicized problems of Canada’s health care system stem from the fact that it is chronically underfunded.

Table 18-8 attempts to address what exactly is driving health care costs up. This table compares Canadian health care spending in 1983 and 2013. It tabulates spending over major categories and shows the percentage of public, private, and total health care spending in each category. For example, in 1983, 19.1% of public health care spending went to physicians and rose slightly to 20.9% in 2013. In 1983, 1.0% of all private health care spending went to physicians and this share declined to 0.6% of all private health care spending. The table also presents the health care spending as a percentage of GDP, showing that health care costs rose from 8.3% of GDP in 1983 to 11.3% in 2013.

Interestingly, while health care costs now represent a larger share of GDP, the total share spent on hospitals has shrunk. The shares spent on doctors and other professionals have remained stable. What we see instead is that the greatest cost pressures are coming from prescription drugs (both publicly and private funded), public health, and rising administration costs in the private sector.

The reason spending on drugs rose so quickly lies in two related areas. Medical progress offers new drugs for previously untreatable conditions, though often at great expense. Also, the aging population drives up drug costs since older citizens are much more likely to need prescription drugs than younger, healthier patients. This is exactly why some have called on the federal government to take the lead in negotiating with brand name pharmaceutical companies for price concessions, either in return for longer patent protection or through the bulk buying of drugs at the national scale. If this can be achieved, the health care system costs should be more sustainable for the long run. But is this feasible and will it be enough? Sadly, there are no easy answers to these questions.

In 2014, the health care accord that set the funding and health care service delivery agreements between the federal, provincial, and territorial governments expired and was being renegotiated. Unfortunately, at the time of writing, the federal government was ignoring the calls of the provinces and territories to come together and work on a deal, and instead unilaterally announced tens of billions worth of cuts to health care that will come into effect after the next federal election. Supporters of public not-for-profit health care were left scrambling to fight against what they saw as the next big threat to Canadian health care and another push toward the end of a single-payer system with for-profit health care.