Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, March 24, 2005

The Canadian Health System

Brian Ferguson sent me this piece (posted with his permission), to which I have added some links:

Looking at the posts by Kevin Brancato at Truck and Barter, and Don Boudreaux at Cafe Hayek, it seems to me that they miss one interesting point, which is that the fundamental cause of the problems of the Canadian health care system is the same as the fundamental cause of the problems of the American health care system. They just manifest differently. In both cases the problem is a system which holds the price down.

When Canada introduced Medicare, we didn't create a whole new structure. The doctors strike in Saskatchewan, driven by fears that Tommy Douglas was going to impose a British style NHS, showed Ottawa that that approach wouldn't work. Instead, we basically just took over the existing private, not-for-profit doctor sponsored insurance plans.

Literally in some cases - some provinces simply contracted with the pre-existing plan in their province (the market in health insurance before Medicare wasn't exactly competitive) to run the provincial Medicare plan. Same plan, same managers. That continued in some provinces until Ottawa decided that it violated the "publicly administered" requirement for Medicare (a nonsensical conclusion, but that's what they decided). Those older plans were basically modeled on the American Blue Cross, Blue Shield system.

In the early days of Medicare, some provinces had co-payments, at least in the sense of permitting extra billing. It was only with the Canada Health Act that extra billing was banned and the price out of pocket to the patient fell to zero everywhere. [The beginning of the end of a great health-care system in my opinion - JP/EE]
A zero price encourages overuse, but that's not unique to the Canadian system. Remember that the American health economics literature from the 1970s focussed very tightly on the welfare losses associated with excessive health insurance; welfare losses which resulted from the fact that the co-payment, service insurance structure of US health insurance also drove the price of care way down. [see here and here]

Both systems, in other words, drove the price out of pocket to the insured patient down to a level well below the marginal cost of the service (or commodity, since drug insurance takes the same form).

In both cases the fact that the patient paid only a fraction of the price of care out of pocket increased the quantity of care demanded. In the Canadian case, the government responded by putting a ceiling on price - doctors are price takers who have to accept the MEdicare fee as payment in full - and restricting quantity. In the American case, since the market for medical goods and services is imperfectly competitive (if only because patients can form brand loyalties over doctors), the effect of co-payment and co-insurance type service insurance was ultimately to drive the price of care up. The insured paid less than the market price out of pocket, the uninsured were faced with the full market price, which was often above the choke price on their demand curves.

The low out of pocket price is a major part of the reason the US has the world's most expensive health care system. A paper in Health Affairs not too long ago found that, while medical indication played some role, the major factor determining whether a patient with arthritis took COX-2 inhibitors was the generosity of their insurance cover. More generous cover means lower out of pocket price. Demand curves slope downward.

Part of the reason drug expenditures are so high is that insured patients often refuse to take nonprescription alternatives when there is a prescription drug available, because insurance covers prescription drugs but generally not non-prescription ones.
[I know of one physician who used to prescribe Ibuprofin 300s
because they were not available over-the-counter, which meant his patients didn't have to shell out a couple of dollars for what I call "Vitamin I"; once the dispensing fees were added, the price was over $10. -- JP/EE].
Even though the prescription drugs are more expensive - add more to total health care expenditures - they are cheaper to the patient. Look at what happened to the price of Claritin in the US when it lost its prescription status. (It was already a nonprescription drug in Canada, so here it was no more expensive than the other drugs on the shelves around it in the drugstore.)

Truck and Barter and Cafe Hayek are right when they say that zero price is the source of the problems in the Canadian system, but it is also the source of the problems in the US system [my emphasis]. The only reason those problems look different is because of the different constraints imposed on the two systems. And Canadians who claim that our system is so much better than the American system (still too many of them running around loose) should take a close look at the fact that we get our drug and dental coverage through insurance identical to the type the American system uses.
Who Links Here