Fraser Forum - June 2009

Fraser Forum

June 2009 $3.95

A Fraser Institute review of public policy in Canada

MEDICARE MISCONCEPTIONS Revisiting cost sharing in Canada Does preventive medicine save money?

Why federal transfers hinder reform

Canadian Publication Mail Sales Product Agreement Number 40069269.

Medicare’s unfunded liabilities

Common Medicare Myths

Table of Contents Articles 3 Up Front: An editor’s view of the economy On April 27, the Fraser Institute hosted John Micklethwait, Editor-in-Chief of The Economist, as part of its Illuminismo conversation series in Vancouver.

11 An ineffective business partner Charles Lammam & Niels Veldhuis Companies financed by governments are less likely to grow and more likely to generate lower commercial value than privately financed companies.

14 Key Concepts: Trade Donald Boudreaux Free trade provides many benefits, including lower prices, better products, and increased prosperity for all those involved.

16 How good is Canadian health care?

Kristin Fryer The Fraser Institute’s Waiting Your Turn and hospital report card series offer Canadians vital information about the performance of their health care system.

Focus 5 Poor value for your tax dollars Nadeem Esmail Canadians are paying for a world-class health care system, but are not receiving one in return.

6 Revisiting cost sharing in Canada Mark Rovere Introducing user fees would help reduce health care costs without causing harmful health outcomes.

9 Medicare’s unfunded liabilities Milagros Palacios & Nadeem Esmail Unless immediate action is taken to reduce Medicare’s unfunded liabilities, young Canadians will be hit with a significantly larger tax bill in the future.

12 “Too old” for hip surgery Nadeem Esmail When individuals bear no direct responsibility for paying for their health care, as is the case in Canada, that care is rationed through waiting lists.

23 The cause of the crisis Jason Clemens reviews John Taylor’s new book, Getting Off Track.

18 The cost of reform Nadeem Esmail Federal health transfers make it harder for the provinces to improve their Medicare programs.

25 Minimum wage hikes kill jobs Niels Veldhuis & Amela Karabegović Given the current economic climate, Saskatchewan and Manitoba should rethink their planned minimum wage increases.

21 Preventive medical services do not save money John C. Goodman Preventive medical services—such as checkups, mammograms, and most of kinds of tests—almost always increase medical spending.

27 Reducing the size of government Niels Veldhuis & Milagros Palacios Decreasing rather than increasing government spending is the key to a brighter economic future.

Our own history provides the evidence.

29 The risks of electronic health records Gordon Atherley Electronic health records come with risks that must be acknowledged, researched, and confronted before such a system is implemented in Canada.

Further Reading Hospital Report Card: British Columbia 2009 by Nadeem Esmail and Maureen Hazel. Download free at www. fraserinstitute.org.

Official Language Policies at the Federal Level in Canada: Costs and Benefits in 2006 by François Vaillancourt and Olivier Coche. Studies in Language Policy: $7.50.

Taxes versus the Necessities of Life: The Canadian Consumer Tax Index, 2009 by Milagros Palacios and Niels Veldhuis.

Fraser Alert. Download free at www.fraserinstitute.org.

Critical Topics in Global Warming edited by Ross McKitrick.

Download free at www.fraserinstitute.org.

Hospital Report Card: Ontario 2009 by Nadeem Esmail and Maureen Hazel. Download free at www.fraserinstitute.org.

To order: E-mail sales@fraserinstitute.org or call our toll-free order line: 1-800-665-3558, ext. 580. There are extra charges for taxes, shipping, and handling. These publications are also available through our website at www.fraserinstitute.org.

Fraser Forum

From the Editor

Publisher Fraser Institute

Medicare misconceptions

Chief Editor Mark Mullins Managing Editor/Layout and Design Kristin McCahon and Kristin Fryer Coordinating Editor Nadeem Esmail Contributing Editors Peter Cowley, Diane Katz, Brett Skinner

The image on the cover of Fraser Forum this month comes from phrenology, a pseudoscience developed by Franz Joseph Gall in the early 1800s.

Phrenologists believed that the structure of the skull could determine a person’s character and mental capacity. This theory has long since been discredited and dismissed as quackery, but for much of the nineteenth century, phrenology was very popular—among scientists and the general public alike.

If scientific history has taught us anything it is that a theory’s popularity does not determine its veracity. That is why all commonly held views and theories, scientific or otherwise, should be tested regularly—in order to separate myth from reality.

This issue of Fraser Forum looks at a number of common myths about Canada’s Medicare system. For example: Preventive medicine saves money. We are often told that a great deal of money could be saved if doctors caught conditions early, before they developed into more costly-to-treat diseases. But as Dr. John C. Goodman notes, preventive medical services—such as checkups, mammograms, and most of kinds of tests—almost always increase medical spending (“Preventive medical services do not save money,” pg. 21).

User pay results in negative health outcomes. A common argument against introducing user pay or “cost sharing” in Canada is that individuals would be deterred from using health care services to the detriment of their health. It sounds plausible, but studies show that cost sharing mechanisms have no adverse impact on health outcomes as long as specific populations are exempt (“Revisiting cost sharing in Canada,” pg. 6).

More federal support would improve our health care system. Provincial governments often argue that they are not getting enough financial support for Medicare, and that health care in Canada would improve if federal transfers were increased (“The cost of reform,” pg. 18). But under the current system, federal transfers actually make it harder for provinces to improve their Medicare programs and thus improve health outcomes.

One of the most common myths I’ve come across is the idea that the Canadian health care system has always been the way it is now. In fact, public health care insurance for physician and hospital care has only been around in all of Canada’s provinces since 1972, and the Canada Health Act is only 25 years old. Our health care system can—and should—change. It’s time for Canadian policy makers to look beyond the myths and start rethinking Medicare.

— Kristin Fryer (kristin.fryer@fraserinstitute.org)

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Cover Design Bill Ray Copyediting Mirja van Herk Media Relations Dean Pelkey Advertising Sales Advertising In Print Tel: (604) 681-1811 E-mail: info@advertisinginprint.com Fraser Forum is published 10 times a year by the Fraser Institute.

The Fraser Institute’s vision is a free and prosperous world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals. Founded in 1974, we are an independent research and educational organization with locations throughout North America, and international partners in over 70 countries. Our work is financed by taxdeductible contributions from thousands of individuals, organizations, and foundations. In order to protect its independence, the Institute does not accept grants from government or contracts for research.

For additional copies, or to become a supporter and receive Fraser Forum, write or call Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7 Telephone: (604) 688-0221; Fax: (604) 688-8539 Toll-free order line: 1-800-665-3558 (ext. 580—book orders; ext. 586—development) Copyright © 2009 Fraser Institute ISSN 0827-7893 (print version) | ISSN 1480-3690 (online version) Printed and bound in Canada.

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Fraser Institute Board of Trustees Hassan Khosrowshahi (Chairman), Edward Belzberg (Vice Chairman), Mark W. Mitchell (Vice Chairman), Gwyn Morgan (Vice Chairman), Salem Ben Nasser Al Ismaily, Louis-Philippe Amiot, Gordon E. Arnell, Charles B. Barlow, Everett E. Berg, T. Patrick Boyle, Peter Brown, Joseph C. Canavan, Alex A. Chafuen, Elizabeth Chaplin, Derwood Chase, Jr., James W. Davidson, John Dielwart, Stuart Elman, Greg C. Fleck, Shaun Francis, Ned Goodman, Arthur N. Grunder, John A. Hagg, Paul Hill, Stephen A. Hynes, David H. Laidley, Robert H. Lee, Brandt Louie, David MacKenzie, Hubert Marleau, James McGovern, Mark Mullins, Eleanor Nicholls, Roger Phillips, Herb C. Pinder, Jr., R. Jack Pirie, Con S. Riley, Gavin Semple, Rod Senft, Anthony Sessions, William W. Siebens, Anna Stylianides, Arni C. Thorsteinson, Michael A. Walker, Catherine Windels, Michael Perri (Secretary-Treasurer)

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Up Front

An editor’s view of the economy On April 27, the Fraser Institute hosted John Micklethwait, Editor-in-Chief of The Economist, as part of its Illuminismo conversation series in Vancouver. In a FraserTV interview following his presentation, Micklethwait shared his views on the global economic crisis. Below is an excerpt from that interview.

FraserTV: How deeply has capitalism been damaged by the economic crisis?

John Micklethwait: I think it’s been damaged much more than it should have been, and I think it’s been particularly damaged in terms of the popular perception. Too many people now look at the world and think that bankers ruined it, and we ended up with a system where the profits were all privatized and the risks were all socialized; the bankers took all the money and we have to bail them out. That’s a cliché and, to quite a large extent, it’s wrong.

I think there is a big difference between financial capitalism, where there is transparently a problem that needs to be fixed, and capitalism more generally, the basic philosophy of open markets, trade, and a broad freedom of expression. All those things still work. Finance has always had problems, there have always been banking crashes, and that’s something we have to deal with. But that doesn’t invalidate everything else.

FraserTV: What problems do you see with the way in which the world is dealing with the economic crisis?

JM: I still think we haven’t really taken out the banking problem.

It’s now, depending on how you measure it, 9 to 18 months since this thing started and there is still a lot of rubbish on banks’ balance sheets. To some extent, the lesson of all [past] crises is that the sooner you get it out, the better it is.

There is an argument coming out of the banks which says, “Give us a bit more time, we’ll make a little bit more money, and that will give us more time to absorb these losses.” Well, yes, but that means the time at which the problem is sorted out is put back. And that is having an effect. Unemployment is rising, there are fewer people buying things, and that is having a longterm effect on the banks themselves.

FraserTV: How well is Canada doing at this time?

JM: I think Canada is not doing badly at the moment. There’s no doubt that, out of the rich countries, it has done demonstrably better. The root cause [of the crisis] has been banks.

Canada seems to have well-run banks, and its central bank www.fraserinstitute.org

John Micklethwait, Editor-in-Chief of The Economist, speaks at a recent Illuminismo event in Vancouver.

seems to have acted in the right direction. All these things are good.

The bit of Canada that would worry me is decoupling [breaking ties with other countries]. I think there is this idea that Canada has escaped [the crisis]. Canada won’t escape, really. It’s connected, most obviously, to the American economy, but also to other developed economies. That is where Canadian exporters sell their business, it’s where demand filters back—there are so many different ways that Canada is linked in. 

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About the Authors Featured Authors

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Contributors

Gordon Atherley holds the British equivalent to the Canadian Ph.D. and M.D. degrees, and a L.L.D., Honoris Causa, from Simon Fraser University. He is President of Virtual Care International and Principal of Greyhead Associates.

Donald Boudreaux is Professor of Economics and Chair of the Department of Economics at George Mason University in Virginia. He blogs with Russell Roberts at Café Hayek, www.cafehayek.com.

Nadeem Esmail (nadeem.es​ mail@fraserinstitute.org) is the Director of Health System Performance Studies at the Fraser Institute. He has an M.A. in economics from the University of British Columbia.

Jason Clemens is the Director of Research at the Pacific Research Institute. He is the former Director of Fiscal Studies at the Fraser Institute and is now a Senior Fellow.

John C. Goodman is President, CEO, and Kellye Wright fellow of the National Center for Policy Analysis. His blog can be read at www.john-goodman-blog.com.

Amela Karabegović (amela. karabegovic@fraserinsti​tute.org) is a Senior Economist in the Fiscal Studies department at the Fraser Institute. She has an M.A. in economics from Simon Fraser University.

Milagros Palacios (milagros. palacios@fraserinstitute.org) is a Senior Economist with the Fraser Institute’s Fiscal Studies Department. She has an M.Sc. in economics from the University of Concepcion in Chile.

Charles Lammam (charles.lam​ mam@fraserinstitute.org) is a Policy Analyst in the Fiscal Studies Department at the Fraser Institute.

He has a B.A. in economics and is completing an M.A. in public policy from Simon Fraser University.

Mark Rovere (mark.rovere@ fraser​institute.org) is a Senior Policy Analyst in the Department of Bio-Pharma and Health Policy Research at the Fraser Institute.

He holds an M.A. from the University of Windsor.

Niels Veldhuis (niels.veldhuis@ fraserinstitute.org) is the Director of Fiscal Studies and a Senior Economist at the Fraser Institute.

He has an M.A. in economics from Simon Fraser University.

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Poor value for your tax dollars Canada’s health care system doesn’t measure up Nadeem Esmail With the task of completing our personal tax returns now done and the size of those tax bills fading from our memories, some Canadians may find themselves taking solace in the belief that the taxes they pay purchase a high-quality universal access health care program.

Unfortunately, as the following data clearly show, Canadian taxpayers are not receiving the same sort of value that their counterparts in other nations are when it comes to universally accessible health care.

To begin with, Canadians are funding the developed world’s second most expensive universal access health insurance system. On an age-adjusted basis (older people require more care) in the most recent year for which comparable data are available, only Iceland spent more (as a share of GDP) on their universal access health insurance system than Canada did, while Switzerland spent as much as Canada. The other 25 developed nations that maintain universal health insurance programs spent less than we did—as much as 38% less (as a percentage of GDP) in the case of Japan (Esmail and Walker, 2008).

Given this level of expenditure, you might expect that Canadians receive world-class access to health care. But the evidence demonstrates that this is not so.

Consider Canada’s waiting lists. In 2008, the median wait time from general practitioner referral to treatment by a specialist was 17.3 weeks. Despite substantial increases in both health spending and federal cash transfers to the www.fraserinstitute.org

provinces for health care over the last decade or so, this wait time is 45% longer than the overall median wait time of 11.9 weeks back in 1997, and is 86% longer than the overall median wait time of 9.3 weeks in 1993 (Esmail and Hazel with Walker, 2008; Esmail et al., 2007).

Canada’s waiting lists are also, according to the available evidence, among the longest in the developed world. For example, a 2007 survey of individuals in seven nations, six of which maintain universal access health insurance programs, published in the journal Health Affairs found that:  Canadians were more likely to experience wait times of more than six months for elective surgery than Australians, Germans, the Dutch, and New Zealanders, but slightly less likely than patients in the United Kingdom;  Canadians were least likely among the six nations to wait less than one month for elective surgery;  Canadians were most likely to wait six days or longer to see a doctor when ill, and were least likely among the six universal access nations surveyed to receive an appointment the same day or the next day; and,  Canadians were least likely to wait less than one hour and most likely to wait two hours or more for access to an emergency room among the six universal access nations surveyed (Schoen et al., 2007).

That is hardly the sort of access you might expect from the developed world’s second most expensive universal

access health insurance system. It is also worth noting that there are seven developed nations—Austria, Belgium, France, Germany, Japan, Luxembourg, and Switzerland—that maintain universal access health insurance programs while delivering access to health care without queues for treatment (Esmail, 2004).

Access to medical technologies is also relatively poor in Canada. In a recent comparison of age-adjusted inventories of medical technologies, Canada ranked 14th of 25 nations for which data was available in MRI machines per million population. It ranked 19th of 26 nations for CT scanners per million population, 8th of 21 for mammographs per million population, and tied for second last among 21 nations for lithotriptors per million population (Esmail and Walker, 2008). Clearly, Canada’s relatively high level of expenditure on health care is buying neither quick access to care nor high-tech health care services for the population.

Governmental restrictions on medical training, along with a number of other policies affecting the practices of medical practitioners, have also taken their toll on Canadians’ access to care. A recent study found that, among 28 developed nations that maintain universal approaches to health insurance, Canada ranked 26th in the age-adjusted number of physicians per thousand population (Esmail, 2008).

It should come as no surprise that nearly 1.7 million Canadians aged 12 and older could not find a regular physician in 2007 (Statistics Canada, 2008). continued on page 26

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Revisiting cost sharing in Canada Co-payments can reduce health care costs Mark Rovere Health care costs are escalating in most developed countries where populations are aging and new, more expensive medical treatments are coming to market (Kotlikoff and Hagist, 2005).

Although this problem exists in most developed countries, it is exacerbated in countries like Canada where patients are not required to make out-of-pocket payments for medically necessary services, and thus are not sensitive to costs because there is no payment at the point of service.

The Canada Health Act forbids extra billing for medically necessary services and bans user charges for insured health services by hospitals or other providers under the provincial health plans.

Provinces that violate the act are penalized by the federal government through a reduction in federal health and social cash transfers. As Esmail (2006) has argued, patients do not have the incentives to make the most cost-efficient decisions regarding their health care because they are not required to share in the cost of the care they consume. And provincial governments have a disincentive to introduce cost sharing, as doing so would result in a loss of federal transfer payments.

Medically necessary services in Canada are funded entirely through provincial and federal taxes. Even though Canadians are responsible for paying for their health care through taxes, there is no price at the point of service. This is problematic because, without price signals, individuals do not have an incen-

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tive to control the amount (and type) of health care services they consume, which inevitably leads to excess demand for health care services. On the other hand, if individuals were responsible for bearing part of their health care costs out-of-pocket, they would be sensitive to costs and would thus reduce their health care consumption accordingly (Feldstein, 1973).1 Although the economics of cost sharing for health care services is well established, and cost sharing is practiced in most European countries (Esmail and Walker, 2008), there remains opposition to such a system in Canada. According to Blomqvist (1994: 38), much of the resistance originates from a natural experiment with cost sharing that took place in Saskatchewan. However, all of the major criticisms of cost sharing have been shown to be groundless by the renowned RAND Health Insurance Experiment. These two experiments and their conclusions are explained below.

The Saskatchewan experiment Canada’s most noteworthy analysis on the effects of cost sharing for health care services took place in the late 1960s and early 1970s in Saskatchewan. Cost sharing was introduced in response to significant increases in health care costs and then later removed following a change in government. Between 1968 and 1971, Saskatchewan implemented a $1.50 user charge for a visit to a physician’s office and $2.00 for each physician home visit.

At the same time, hospitals in the province introduced a $2.50 per day user fee

for the first 30 days of care, and $1.50 per day for any subsequent days up to a maximum of 90 days (Beck and Horne, 1980).

Prior to introducing co-payments (user fees), first dollar comprehensive health care coverage2 was provided to almost all residents through the province’s medical care insurance plan. The plan, which was introduced in 1962, allowed Saskatchewan residents to access medical care without paying any out-of-pocket expenses at the point of service. Thus, this unique period in the province provides an ideal opportunity for us to observe the effects of cost sharing on medical care.

Beck and Horne analyzed the effects of introducing and removing co-payments on tax-funded health care services in the province in a number of papers, using data drawn from random samples from approximately 40,000 Saskatchewan families. In order to determine the effect of the co-payments, Beck and Horne noted changes in utilization before, during, and after the period when co-payments were in place.

Beck found that co-payments for lowincome families reduced utilization for physician services by approximately 18% (three times the average for the entire sample) (Beck, 1974). He argued that the use of co-payments and co-insurance for health care services created a barrier to service for low-income families that could lead to adverse health outcomes, though Beck did not actually measure the effect of cost sharing on health status (Beck, 1974). Beck asserted that creating such barriers would be difficult to justify “within the framework of public medical care insurance” (Beck, 1974: 141). www.fraserinstitute.org

Cost sharing in Canada In 1968, the year that the co-payments were introduced, aggregate utilization for physician services declined by approximately 5.07% (Beck and Horne, 1980). This reduction persisted throughout the three years during which co-payments were in place, decreasing total utilization for physician services by 5.66% over the entire period (Beck and Horne, 1980). Although the findings indicate that co-payments for physician services decreased physician utilization, the study found that co-payments did not have an effect on the utilization of hos-

(costs) and health outcomes. The study looked at approximately 2,000 families (5,800 individuals) from six regions of the United States (Newhouse et al., 1993).3 Researchers randomly assigned families to health insurance plans that had assorted levels of cost sharing, ranging from “free care� (no cost sharing) to plans with a 95% co-insurance rate.4 Plans with co-insurance were subject to annual spending limits. Thus, patients who reached the annual limit were not required to pay co-insurance for any additional health care services they used.

Health care services, like any other commodity, submit to the laws of supply and demand. pital services or on the lengths of stay in hospitals. The researchers claimed that user fees simply shifted the costs from the public to the private sector. They argued that, under such a scenario, the cost burden falls disproportionately on the sick (Beck and Horne, 1980).

The notion of creating barriers for low-income individuals (and how those barriers could affect health status) has become one of the fundamental arguments against introducing cost sharing mechanisms for medically necessary services in Canada (see, for example, Barer et al., 1979). However, the results of the RAND Health Insurance Experiment prove such criticisms to be mostly groundless.

The RAND Health Insurance Experiment The seminal RAND Health Insurance Experiment (HIE) was conducted in the late 1970s and early 1980s by the RAND Corporation, a California-based research institute. The purpose of the experiment was to study the effects of cost sharing on health care utilization www.fraserinstitute.org

The experiment used multiple types of cost sharing mechanisms, but found that co-insurance had the most significant impact on reducing utilization (Newhouse et al., 1993). Health utilization and the health status of participating families were observed for a period of three to five years. Overall, the study found significant differences in health care utilization between participants with a free care plan (no cost sharing) and those with a cost sharing plan. Equally important, the study found that the reduced use of services due to increased cost sharing had no adverse effect on health outcomes for individuals who were not diagnosed with a chronic health condition (Newhouse et al., 1993).

Specifically, the study found that participants with the highest cost sharing plan (95% co-insurance) spent approximately 33% less than those on the free plan, while participants on the 50% co-insurance plan spent around 25% less than those on the free plan. Participants on the 25% co-insurance plan spent 19% less than participants on the free plan.

These findings refute the argument that health care is somehow special and

thus not responsive to financial incentives. For example, economist Robert Evans and his colleagues have argued against the use of user fees, claiming that health care is not a commodity and thus is not subject to the rules of supply and demand (Evans et al., 1994). However, the RAND HIE and the Saskatchewan experiment are part of a large body of research and natural experiments that clearly indicate that patients do react to price signals (Irvine and Gratzer, 2002).

The RAND HIE also disproved the belief that patients are not capable of being efficient health care consumers because they lack information about the consequences of foregoing health care.

This argument is based on the idea that user fees would deter patients from using any health care services, whether for minor health problems (a headache) or in the case of an emergency (a heart attack), which could lead to adverse health outcomes and increase health care costs (Bryan, 2008, Feb. 21). However, findings from the RAND HIE suggest that this is not the case. The study found that although cost sharing reduced all visits (necessary and unnecessary care) to the emergency room, it did not increase unfavourable clinical outcomes (Newhouse et al., 1993). This finding is critical because it refutes the argument that cost sharing would lead to increased health care costs and adverse health outcomes because individuals would be deterred from using health care services for emergency care. Opponents of cost sharing are particularly concerned about this issue among the poor.

Low income and the chronically ill The primary resistance to cost sharing in Canada is the belief that low-income individuals would be deterred from using health care services to the detriment of their health. The assumption is that the rich would have an advantage over

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Cost sharing in Canada low-income families because they would have access to health care services while the poor would not. Evans has argued that “in general, a shift to more user fee financing redistributes net income from lower to higher income people and from sicker to healthier people. The wealthy and healthy gain; the poor and sick lose” (Bryan, 2008, Feb. 21). This argument is based on a number of papers drawn from the Saskatchewan experiment (Barer et al., 1979). It appears that the critics of cost sharing are more concerned with wealth distribution and equity than the quality and efficiency of Canada’s health care services.

Although Beck (1974) found that lowincome individuals would reduce their health care utilization with increased cost sharing, the RAND HIE is the only experiment that has observed the effects of cost sharing on the health status of a particular population. While the findings suggest that cost sharing among the poor could lead to adverse health outcomes, the HIE found that this occurred only among low-income individuals with low blood pressure and/or with specific chronic health conditions (Newhouse et al., 1993). In fact, the RAND study recommended a co-insurance exemption for low-income individuals with specific conditions who require chronic care. Importantly, it did not recommend system-wide exemptions for all low-income families because it found that adverse health outcomes did not increase as a result of cost sharing (Newhouse et al., 1993).

In the majority of European countries that have cost sharing mechanisms for health care services, low-income individuals with chronic conditions—and even those without—are exempt from user fees (Irvine and Gratzer, 2002). Research into the effects of cost sharing in Nordic countries also emphasizes the need for appropriate exemptions for low-income individuals to ensure that they are able to access the health care system (Øvretveit,

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2001). Similarly, every provincial public drug program in Canada has some form of cost sharing mechanism while exempting specific population cohorts based on explicit criteria.

In a 2002 paper, Medicare and User Fees: Unsafe at Any Price? Irvine and Gratzer reviewed the most pertinent literature and natural experiments on the effects of cost sharing for health care services. The authors contend that the RAND HIE resolves many of the criticisms that have been put forth against cost sharing.

While they agree that sick lowincome individuals should not be required to pay user fees for certain kinds of health services, Irvine and Gratzer generally conclude that “moving from a scenario with full insurance to partial insurance will reduce health care consumption and the deadweight loss to society” (Irvine and Gratzer, 2002: 24). This is entirely in keeping with a review of cost sharing by Esmail and Walker (2008).

Conclusion International evidence, economic research, and the findings of the RAND HIE all demonstrate that health care services, like any other commodity, submit to the laws of supply and demand. Furthermore, the RAND HIE reveals that patients are capable of making decisions regarding the health care they consume without negatively affecting their own health (with the exception of individuals with chronic health conditions). Most importantly, RAND’s seminal study on the effects of cost sharing indicates that the health status of low-income individuals who do not have a chronic health condition is not negatively affected by cost sharing mechanisms. This research demonstrates that the common claims against cost sharing in Canada simply do not hold water. Economic theory and natural experiments indicate that we can reduce health care utilization and

costs without causing harmful health outcomes.

It’s time for the federal and provincial governments to revisit the Canada Health Act because, as with every other good and service available to Canadians, when it comes to health care, incentives matter.

Notes 1 The three direct types of cost sharing recognized by the OECD are co-payments, coinsurance, and deductibles. Co-payments are a fixed amount that is required to be paid when purchasing a service, while a coinsurance payment is a proportion of the total cost that is required to be paid. Deductibles are a fixed dollar amount that must be paid before insurance benefits begin to cover the cost of services (OECD, 2008).

2 Under first dollar coverage, the insurer pays for the benefits as soon as covered medical expenses are incurred. Policies with first dollar coverage have a deductible amount of zero, and insured individuals are not required to pay out-of-pocket expenses at the point of service.

3 The study excluded the population with the highest incomes (over $25,000 in 1973 dollars). It also excluded individuals 62 years of age or older as they would be eligible for publicly funded old-age health care insurance (Medicare) before the end of the study period.

4 As noted above, this means that patients would be responsible for paying 95% of the costs of care consumed until they reached their annual maximum dollar expenditure or limit for co-insurance payments.

References Barer, Morris L., Robert G. Evans, and Greg Stoddart (1979). Controlling Health Care Costs by Direct Charges to Patients: Snare or Delusion? Occasional Paper 10.

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Beck, R. G. (1974). The Effects of Co-Payment on the Poor. The Journal of Human Resources 9, 1 (Winter): 129–42.

www.fraserinstitute.org

Beck, R. G., and J. Horne (1980). Utilization of Publicly Insured Health Services in Saskatchewan Before, During and After Copayment. Med Care 18, 8: 787–806.

Blomqvist, Ake (1994). Limits to Care: Reforming Canada’s Health System in an Age of Restraint. CD Howe Institute.

Bryan, Jay (2008, February 21). Time to Kill the User-fee Zombie. The Gazette. <http://www2.canada.com/montreal gazette/columnists/story.html?id=c61 aa625-a268-41c2-8797-ef8654b4e5a6>.

Canada Health Act, R.S.C. 1985, c. C-6.

Esmail, Nadeem (2006). Federal Transfers and the Opportunity for Health Reform.

Fraser Forum (July/August): 16–18.

Esmail, Nadeem, and Michael Walker (2008). How Good Is Canadian Health Care? 2008 Report. Fraser Institute.

Evans, Robert G., Morris L. Barer, and Theodore R. Marmor (1994). Why Are Some People Healthy and Others Not? The Determinants of Health of Populations. Aldine de Gruyter.

Feldstein, M. S. (1973). The Welfare Loss of Excess Health Insurance. The Journal of Political Economy 81, 2: 251–80.

Irvine, Carl, and David Gratzer (2002).

Medicare and User Fees: Unsafe at Any Price? AIMS Background Paper No. 9.

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Kotlikoff, Laurence J., and Christian Hagist (2005). Who’s Going Broke? Comparing Health Care Costs in Ten OECD Countries. NBER Working Paper No. 11833.

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Newhouse, J. P., and The Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insurance Experiment. Harvard University Press.

Organisation for Economic Co-operation and Development [OECD] (2008). OECD Health Data 2008: Statistics and Indicators for 30 Countries. CD-ROM. OECD. Øvretveit, John (2001). The Changing Public-Private Mix in Nordic Healthcare— An Analysis. Nordic School of Public Health. 

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Medicare’s unfunded liabilities Milagros Palacios & Nadeem Esmail While some still cling to the false notion that Canada’s health care system is among the best in the world, their beliefs are not supported by the evidence, which clearly shows that the system is in dire straits (see, for example, Esmail and Walker, 2008; Esmail and Walker with Hazel, 2008). Canadians collectively spend more on health care than their counterparts in almost all other industrialized OECD countries, but receive relatively poor access to health services in return (Esmail and Walker, 2008).

Worse still, the portion of government revenue currently used to pay for Medicare will not be sufficient to fund future medical expenses. In other words, governments have promised to provide health care that the current tax rates leave unfunded. Unless immediate action is taken to reduce Medicare’s unfunded liabilities, young Canadians will be hit with a significantly larger tax bill in the future.

Medicare’s unfunded liabilities An “unfunded liability” is the shortfall between the future stream of funding for a program and its future obligations (expenditures). Put simply, it is the difference between what we might expect to spend on health care in the future and what we might expect to have available to actually pay for health care.

Medicare is funded through general government tax revenues.1 There are

no specific funding sources set aside to pay for Medicare benefits2; all services are funded on a “pay-as-you-go” basis whereby current government revenues and borrowing fund current health expenditures.

At its inception, Medicare was based on the assumption that the demographics prevailing in the 1960s would persist. It was considered favourable social and economic policy to transfer a small amount of money from a large group of younger workers to benefit a small group of older and relatively less well-off retirees (Palacios et al., 2008).

Unfortunately, demographic assumptions have proven false. In 1956, the proportion of the Canadian population that was under 20 years of age was 39.4%, while the proportion of those over 65 was 7.7%. By 2007, the percentage of the population under 20 years old had decreased to 23.7%, while the ratio of those over 65 had increased to 13.4% (Statistics Canada, 2008). Statistics Canada predicts that by 2040, those under 20 will account for 17.2% of the total population, while those 65 and over will account for 26.5% (Statistics Canada, 2005).3 In 2007/2008, Medicare consumed 19.5% of total federal, provincial, and local government revenue (Statistics Canada, Public Institutions Division, 2008). Given that seniors (persons over 65 years old) account for approximately 44% of all health spending, and that the percentage of seniors will increase dramatically in the coming years, the portion of revenue currently used to fund

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Medicare’s unfunded liabilities Medicare will not be sufficient to pay for medical expenses in the future.

This change in Canada’s demographic makeup will continue to increase the amount of revenue needed to fund Medicare expenditures. We estimate that the difference between the stream of promised benefits and the expected future stream of revenues—the unfunded liability of Medicare—was $364 billion in 2004, the latest year for which the estimate is available (Palacios et al., 2008).4 Medicare’s unfunded liability grew by 20.7% between 2000 and 2004, from $301.5 billion to $364.0 billion (table 1).

Conclusion Canada’s Medicare system is failing Canadians today—by delivering relatively poor access to health care services, despite having a world class price tag— and tomorrow through a substantial unfunded liability. Without fundamental reform to Canada’s health care system, young Canadians will be digging much deeper to pay their future tax bills.

Notes 1 This is also true in provinces that levy health care premiums (British Columbia, Ontario, and formerly Alberta), as those premiums are paid into general revenues and health expenditures are paid from general revenues.

2 Nor is there a stock of assets that have been set aside to pay for future Medicare obligations.

3 These estimates are based on projections

by Statistics Canada (2005) assuming a medium growth scenario.

4 In order to calculate the unfunded liability of Medicare, the discounted stream of future benefits and the discounted stream of future contributions were calculated using a model developed by the Fraser Institute.

A description of the model and its assumptions can be found in Palacios et al. (2008).

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Table 1: The unfunded liability of Canada’s health care system Fiscal year

Medicare’s unfunded liability (billions of $)

2000

$301.5

2001

$323.0

2002

$331.1

2003

$347.0

2004

$364.0

Change from 2000 to 2004 (%)

20.7%

Source: Palacios et al., 2008.

References Canadian Institute for Health Information [CIHI] (2008). National Health Expenditure Trends, 1975–2008. CIHI. Esmail, Nadeem, and Maureen Hazel with Michael Walker (2008). Waiting Your Turn: Hospital Waiting Lists in Canada (18th ed). Fraser Institute.

Esmail, Nadeem, and Michael Walker (2008). How Good is Canadian Health Care? 2008 Report. Fraser Institute.

Palacios, Milagros, Niels Veldhuis, and Kumi Harischandra (2008). Canadian

Government Debt 2008: A Guide to the Indebtedness of Canada and the Provinces. Fraser Institute.

Statistics Canada (2005). Population Projections for Canada, Provinces and the Territories. Catalogue No. 91-520-XIE. Statistics Canada.

Statistics Canada (2008). Annual Demographic Estimates: Canada, Provinces and Territories. Catalogue No. 91-215-X. Statistics Canada, Public Institutions Division (2008). Financial Management System. Electronic data. <www.statcan. ca>. 

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An ineffective business partner The government is ill-suited to an entrepreneurial role Charles Lammam & Niels Veldhuis Just days after the federal and Ontario governments announced plans to pour billions of tax dollars into the now insolvent Chrysler Corporation, Ontario’s economic development minister, Michael Bryant, declared that the government plans to become more involved in the private sector. Bryant said that “the state has got to be strategic” and must “act as an entrepreneur and invest directly in businesses,” adding that “this is government choosing winners and losers” (Greenberg, 2009, May 4).

Ontario Premier Dalton McGuinty subsequently tempered his minister’s comments by saying that the government will simply become a “new partner” to business and invest only in industries that are of “particular strength” or poised for growth (Greenberg, 2009, May 5).

Despite this political rhetoric, there is nothing new about governments actively “investing” in businesses. Through countless programs, funding initiatives, ministries, departments, and agencies, Canadian governments have long sought to encourage entrepreneurship by helping businesses start, grow, and expand.1 Unfortunately, the results of their efforts have been rather disappointing.

Consider a recent comprehensive study published by the National Bureau of Economic Research that casts serious doubt on the government’s ability to invest in potential high-growth businesses (see Brander et al., 2008). The study looked at high-risk/high-return capital, known as venture capital, whereby investors prowww.fraserinstitute.org

vide financing and mentoring services in the early stages of business development and play an active and instrumental role in the later stages of business expansion.

The authors, University of British Columbia professors James Brander, Edward Egan, and Thomas Hellman, examined the performance of virtually all Canadian enterprises financed by both government and private venture capital between 1996 and 2004 (3,720 enterprises in total).

The professors found that companies financed by government-sponsored venture capital were less likely to grow operations and tended to generate significantly lower commercial value than their privately financed counterparts.

Companies financed by the government were also more likely to go out of business over relevant time horizons, less likely to attract investment from the United States, and less likely to engage in innovative activity.

The professors determined that this poor performance stemmed from weaker mentoring services and managerial performance by government venture capitalists.

In addition, the professors found evidence suggesting that governmentsponsored venture capital crowded out or displaced more effective private venture capital. In other words, instead of expanding the pool of private venture capital, governments appeared to be replacing private investment dollars with taxpayerfunded investment dollars. This means that government venture capital may have caused the venture capital market to function less efficiently, thus impeding

the process of private venture capitalists bringing new ideas to the market.

In a separate academic study, professors Douglas Cumming and Jeffrey MacIntosh (2006) examined the performance of Canadian Labour Sponsored Venture Capital Corporations (LSVCCs) between 1978 and 2002. LSVCCs are government-supported venture capital initiatives intended to encourage investment.

As with Brander and his colleagues, Cumming and MacIntosh found that LSVCCs displaced private venture capital funds and lowered the level of capital available to Canadian entrepreneurs. In fact, federal LSVCCs alone have resulted in more than 400 fewer venture capital investments per year in Canada, representing nearly $1 billion.

Professors Cumming and MacIntosh also found that LSVCCs performed poorly when compared to private venture capital funds, and yielded rates of return that were consistently below those of investments considered to be risk-free (i.e., Treasury Bills).

Why do governments have a poor record as an entrepreneurial partner? First, governments possess no informational or technological advantage over private entrepreneurs. In fact, Brander and his colleagues noted that individual fund managers in the government venture capital sector are typically less experienced than those in the private venture capital sector.

Governments are also pre-occupied with promoting political objectives that might be at odds with economic objectives. Since politicians are interested in gaining votes, they may give certain, often unsuccessful, businesses support

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and pass the costs on to a wider group of taxpayers.

Discussing the government’s “new” role as a business “partner,” Premier Dalton McGuinty said, “there’s a smart way to assume that role and a dumb way to assume that role” (Greenberg, 2009, May 5). Contrary to the premier’s assertions, the smart way is to not get involved at all. The evidence demonstrates that government investment in businesses is not an effective model for developing an entrepreneurial economy.

Note 1 Please refer to the Canada Business website for details on the various services available to Canadian entrepreneurs, <http://www.can​ adabusiness.ca/gol/cbec/site.nsf/en/index. html>. Canada Business is “a cross-jurisdictional government organization that helps Canadian entrepreneurs get the information, advice, and support they need to build their businesses.” See also Small Business BC (2009) for a collection of some of the more popular federal and provincial programs intended to support small businesses.

References Brander, James A., Edward J. Egan, and Thomas Hellmann (2008). Government Sponsored Versus Private Venture Capital: Canadian Evidence. NBER Working Paper No. 14029. National Bureau of Economic Research.

Cumming, Douglas J., and Jeffrey G. MacIntosh (2006). Crowding Out Private Equity: Canadian Evidence. Journal of Business Venturing 21, 5: 569–609.

Greenberg, Lee (2009, May 4). Ontario Now in Business of ‘Reverse Reaganism.’ National Post. <http://tinyurl.com/pcxuto>.

Greenberg, Lee (2009, May 5). Capitalism “Alive and Well” in Ontario: McGuinty.

Ottawa Citizen. <http://tinyurl.com/ qwdzp6>.

Small Business BC (2009). 2009 Overview of Government Financing. <http://tinyurl. com/qmkptu>. 

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“Too old” for hip surgery Nadeem Esmail On the campaign trail, presidential candidate Barack Obama promised health insurance for all Americans. Now President Obama appears eager to deliver on that pledge by giving government a greater role in health care insurance.

Before proceeding further, here’s a suggestion for the United States: look at Canada’s experience.

Health care resources are not unlimited in any country, even rich ones like Canada and the United States, and must be rationed either by price or time. When individuals bear no direct responsibility for paying for their care, as in Canada, that care is rationed by waiting.

Canadians often wait months or even years for necessary care. For some, the status quo has become so dire that they have turned to the courts for recourse.

Several cases currently before provincial courts provide studies in what Americans could expect from government-run health insurance.

In Ontario, Lindsay McCreith was suffering from headaches and seizures yet faced a four and a half month wait for an MRI scan in January 2006. Deciding that the wait was untenable, Mr. McCreith did what a lot of Canadians do: he went south, and paid for an MRI scan across the border in Buffalo. The MRI revealed a malignant brain tumor (CCF, n.d.).

Ontario’s government system still refused to provide timely treatment, offering instead a months-long wait for surgery. In the end, Mr. McCreith returned to Buffalo and paid for surgery that may

have saved his life. He’s challenging Ontario’s government-run monopoly health insurance system, claiming it violates the right to life and security of the person guaranteed by the Canadian Charter of Rights and Freedoms (CCF, n.d.).

Shona Holmes, another Ontario court challenger, endured a similarly harrowing struggle. In March 2005, Ms. Holmes began losing her vision and experienced headaches, anxiety attacks, extreme fatigue, and weight gain.

Despite an MRI scan showing a brain tumor, Ms. Holmes was told she would have to wait months to see a specialist.

In June, her vision deteriorating rapidly, Ms. Holmes went to the Mayo Clinic in Arizona, where she found that immediate surgery was required to prevent permanent vision loss and potentially death.

Again, the government system in Ontario required more appointments and more tests along with more wait times.

Ms. Holmes returned to the Mayo Clinic and paid for her surgery (CCF, n.d.).

On the other side of the country in Alberta, Bill Murray waited in pain for more than a year to see a specialist for his arthritic hip. The specialist recommended a “Birmingham” hip resurfacing surgery as the best medical option. But government bureaucrats determined that Mr. Murray, who was 57, was “too old” to enjoy the benefits of this procedure and said no. In the end, he was also denied the opportunity to pay for the procedure himself in Alberta. He’s heading to court claiming a violation of Charter rights as well (Carpay, 2007).

These constitutional challenges, along with one launched in British Columbia www.fraserinstitute.org

“Too old” for hip surgery earlier this year (Joyce, 2009, Jan. 28), share a common goal: to win Canadians the freedom to spend their own money to protect themselves from the inadequacies of the government health insurance system.

The cases find their footing in a landmark ruling on Quebec health insurance in 2005. The Supreme Court of Canada found that Canadians suffer physically and psychologically while waiting for treatment in the public health care system, and that the government monopoly on essential health services imposes a risk of death and irreparable harm to health.

The Supreme Court ruled that Quebec’s prohibition on private health insurance violates citizens’ rights as guaranteed by

that province’s Charter of Human Rights and Freedoms (Chaoulli v. Quebec (Attorney General) 2005 SCC 35).

The experiences of these Canadians—along with the untold stories of the 750,794 citizens waiting a median of 17.3 weeks from mandatory general practitioner referrals to treatment in 2008 (Esmail and Hazel with Walker, 2008)— show how miserable things can get when the government is put in charge of managing health insurance.

In the wake of the 2005 ruling, Canada’s federal and provincial governments have tried unsuccessfully to fix the long wait times by introducing selective benchmarks and guarantees along with large increases in funding. The bench-

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marks and the guarantees aren’t ambitious: four to eight weeks for radiation therapy; 16 to 26 weeks for cataract surgery; 26 weeks for hip and knee replacements and lower-urgency cardiac bypass surgery (Ontario, Ministry of Health and Long Term Care, 2005; Esmail, 2007).

Canada’s system comes at the cost of pain and suffering for patients who find themselves stuck on waiting lists with nowhere to go. Americans can only hope that Barack Obama heeds the lessons that can be learned from Canadian hardships.

References Canadian Constitution Foundation [CCF] (no date). McCreith & Holmes v. Ontario. <http://www.canadianconstitutionfou​ ndation.ca/article.php/52>, as of May 14, 2009.

Carpay, John (2007). Taking Canada’s Medical Monopolies to Court. Fraser Forum (February): 11–13.

Chaoulli v. Quebec (Attorney General), 2005 SCC 35, [2005] 1 S.C.R. 791. <http://www. canlii.org/en/ca/scc/doc/2005/2005scc​ 35/2005scc35.html>, as of May 14, 2009.

Esmail, Nadeem (2007). Guaranteed Suffering. Fraser Forum (May): 3–6.

Esmail, Nadeem, and Maureen Hazel, with Michael Walker (2008). Waiting Your Turn: Hospital Waiting Lists in Canada (18th ed.). Fraser Institute.

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Joyce, Greg (2009, January 28). Private Clinics in BC Launch Challenge to Provincial Medicare Legislation. Canadian Press. <http://cnews.canoe.ca/CNEWS/ Canada/2009/01/28/8182326-cp.html>, as of May 14, 2009.

Ontario, Ministry of Health and Long Term Care (2005). First Ever Common Benchmarks Will Allow Canadians to Measure Progress in Reducing Wait Times. News release (December 12). Ontario Ministry of Health and Long Term Care. <http://tinyurl.com/r2hjup>, as of May 14, 2009. 

A version of this article appeared in the Wall Street Journal.

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TRADE

The benefits of free markets

FREE TRADE GIVES CONSUMERS THE

...

OPPORTUNITY

by Donald Boudreaux

G

lobalization is the spread of human cooperation across the globe. If not hindered by government restraints, this cooperation spreads naturally and without much attention to political boundaries. Geographic and cultural differences, along with differences in currencies and other social institutions, sometimes slow the spread of cross-border economic cooperation.

But the single largest obstacle to the spread of human cooperation across political borders is politics—in particular, the difficult-to-resist pressure on each government to protect local producers from the competition of external producers.

We typically think of cooperation as something done consciously, face-to-face, by people who know each other.

In this sense, describing globalization as the cross-border spread of human cooperation might sound odd. But what else could we call the coordinated actions of millions of persons from around the globe, each of whom contributes a piece of the knowledge and some of the effort required to bring to market an ordinary shirt, for example?

Assembled in Malaysia using machines made in Germany, cotton grown in India, collar linings from Brazil, and thread from Portugal, and then retailed in Sydney, Montreal, or any other city, today’s typical shirt is the product of the efforts of many people worldwide. And remarkably, the cost of a typical shirt is equivalent to the wages earned by an ordinary person in the industrialized world for just a few hours of work. Of course, what is true for a shirt is true for countless products available for sale in modern capitalist countries.

of labour and production across different industries around the world is the phenomenon of globalization.

Suppose, for example, that shirts can be made in one of two ways. The first is by hand. It costs a shirt maker using this method—regardless of how many shirts he produces—$250 to produce each shirt. Working full-time producing shirts by hand, the shirt-maker can produce 10 shirts each month. The second way to produce shirts is in a highly mechanized factory. If the factory runs at a peak capacity of a million shirts monthly, each shirt costs $5 to make. But because building and equipping the factory requires a huge initial investment, operating the factory at less-than-full capacity causes the cost of each shirt to rise. The reason for this increase is that producing fewer shirts denies the shirt-maker the opportunity to spread the investment cost over maximum output. The smaller the factory’s output, the higher the cost of each shirt.

Which method of production would a shirtmaker use? The answer depends on the size of his market. If a shirtmaker expected to serve a market of millions of people, he would use the factory method. But if he expected to serve a market of only a few dozen potential customers, he would produce shirts by hand. If each shirt-maker had access only to small markets, the price of shirts would be higher than it would if shirt-makers had access to larger markets. This example provides one important justification for free trade: by expanding markets beyond political boundaries, firms can take better advantage of what economists call “economies of scale” and allow consumers to enjoy lower prices.

KEY CONCEPTS

How is it that a typical worker today can easily afford a wide variety of goods and services, the production of which requires the coordinated efforts of millions of workers? The answer is that each of these workers is part of a market so vast that it is worthwhile for many entrepreneurs and investors to organize highly specialized production operations that are profitable only because the market for their outputs is large. This specialization

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Another advantage of specialization is that it allows consumers to enjoy the fruits of resources and talents located far away. Canadians can enjoy pineapple grown in Hawaii while Hawaiians can enjoy maple syrup produced in Canada; the French enjoy financial expertise concentrated in the City of London while Londoners enjoy wines from Burgundy and Bordeaux. Although other factors are al-

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...TO BUY GOODS AND SERVICES FROM THE BEST PRODUCERS IN THE WORLD. ways in play, a region’s geographical characteristics—for example, its weather, topology, and mineral deposits— and the special talents of its work force determine which goods and services can be produced in that region at the lowest cost—or, as economists say, “at a comparative advantage.” The freer the trade, the more likely it is that regions will specialize in producing the goods and services they can produce most efficiently, and then import those things that are produced most efficiently elsewhere.

Free trade gives consumers the opportunity to buy goods and services from the best producers in the world. If shirts could be best produced domestically, then free trade would help to keep those producers profitably in business.

Alternatively, if shirts could be best produced abroad, domestic consumers would only have ready access to those shirts through trade. Thus, free trade would encourage inefficient domestic shirt makers to use their talents for the maximum benefit of consumers by switching out of shirt-making and into other productive activities. By directing resources around the world into those tasks that each resource does best, free trade arranges the world’s resources so that they produce the greatest possible output while giving consumers maximum access to this output.

A more fundamental justification for free, globalized markets is that they reduce the number of workers required to produce most types of output and thus make possible the production of goods and services that would otherwise be too costly to produce. Globalized markets also contribute to rising living standards by freeing factory workers to seek higher value jobs and by making labour-saving products and services more affordable.

If every government blocked the importation of foreignmade shirts, each country would require more of its citizens to produce shirts than would be the case under freer trade. Able to serve only the domestic market (which in every case is smaller than the international market), no

shirt maker could take advantage of the maximum possible economy of scale in shirt production. Without free trade, shirts would be more expensive and consumers would be denied the opportunity to buy the goods and services that would be available if some domestic shirtmakers were employed in other pursuits.

Free trade also keeps producers disciplined by creating maximum competition for their products. If governments protect domestic firms from the need to match foreign rivals’ lower prices or improved quality, consumers suffer as domestic firms lose an important incentive to remain efficient, innovative, and responsive to consumer desires.

It is evident that free trade benefits all those involved, but what if some countries do not want to lower their trade barriers? Would it make sense for Canada, for example, to keep its trade with the world free even if some other governments protected or subsidized their domestic firms? The answer is yes. It always pays for a country to keep its trade free, regardless of other countries’ policies. “Retaliating” against non-free trading countries with protectionism and subsidies would only make Canadians poorer, even if other countries did not respond by restricting their own trade even further.

Unquestionably, the people hurt most by trade barriers are the citizens of countries where such policies exist.

Forced to prop up their countries’ inefficient producers, citizens of these countries end up paying higher taxes and consumer prices, while enduring reduced access to goods for sale on world markets. That’s why restricting trade just because other countries restrict trade is bad policy.

Those who doubt the strength of the theoretical case for free trade should also consider that the empirical evidence in its favour is overwhelming. There is simply no credible evidence to support the belief that restricting trade increases the prosperity of ordinary citizens. All of the evidence points towards the benefits of free trade.

Suggestions for further reading Boudreaux, Donald (2007). Globalization. Greenwood Press.

Irwin, Douglas (2005). Free Trade Under Fire. Princeton University Press.

Norberg, Johan (2003). In Defense of Global Capitalism. Cato Institute.

Wolf, Martin (2005). Why Globalisation Works. Yale University Press. 

*Key Concepts is a series of essays on the fundamentals of economics and markets. In addition to appearing in Fraser Forum, these essays will form the basis of a live Ask the Professor discussion, held at www.fraserinstitute.org each month.

Please join us on June 25 at 11:00 am PDT for an online discussion of this essay with Prof. Donald Boudreaux.

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Fras e r Forum 0 6/09

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Median wait time in Canada from general practitioner’s 20

Weeks

HOW GOOD IS CANADIAN HEALTH CARE?

15

10

In celebration of the Fraser Institute’s 35th anniversary, each issue of Fraser Forum in 2009 will look at a different milestone in the Institute’s history. This feature looks at the history of two of the Institute’s well-known health publications series, Waiting Your Turn and the hospital report cards.

I

n 2008, thousands of Canadians found themselves on a waiting list for health care—750,794 Canadians, to be exact, according to an estimate by the Fraser Institute.

These Canadians waited, on average, 17.3 weeks for treatment from the time they obtained a general practitioner’s referral to the time their treatment was provided by a specialist.

With so many Canadians waiting so long for medically necessary care, it should come as no surprise that wait lists are a hot topic in Canada today. But this wasn’t always the case. Twenty years ago, before the first edition of the Institute’s Waiting Your Turn—a study of hospital waiting lists in Canada—was published, there was anecdotal evidence but no real measurement of wait times for care.

The idea to begin systematically measuring wait times in Canada came from Britain. While visiting England in the late 1980s, Michael Walker, founding Executive Director of the Fraser Institute, came across a guide to hospital waiting lists in London, a booklet published by the British government that showed which hospitals had the shortest (and longest) waits for surgery.

“I thought to myself, if it’s happening in Britain and our health care system is patterned after the British system, then it’s probably going to happen here,” Walker says.

On his return, Walker contacted Steven Globerman, a professor at Simon Fraser University, to research waiting lists, with the help of Lorna Hoye, a researcher at the Institute. Based on this research, Globerman and Hoye developed a questionnaire for specialists that would ask about wait times for various surgical procedures. The Institute received assistance from the British Columbia Medical Association, which helped generate a mailing list and arranged for the pre-testing of questionnaires. This help, recalls Walker, was “crucial” to the success of the survey.

The first edition of Waiting Your Turn, published in 1990, covered wait times in BC. The second edition, published in 1992, tracked five provinces, and in 1993, Waiting Your Turn went na-

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5

9.3

3

199

9.7

4

199

10.2

5

199

10.9

6

199

11.9

7

199

13.3

8

199

14.0

9

199

2

tional. The survey has not changed much since the early 1990s, but in 2003, a psychiatric wait times survey was added.

“It was becoming more and more obvious that the deterioration in Canada’s public health care program was not confined to just the physical specialties, and yet there was little measurement of the extent of deterioration in access to mental health services,,” says Nadeem Esmail, Director of Health System Performance Studies at the Institute and co-author of Waiting Your Turn since 2002.

When the first edition of Waiting Your Turn was released in 1990, reactions were varied. The general public, Walker notes, found the study “helpful, but also worrisome.” The government’s initial reaction was “quite negative,” but since that time, the government has attempted to improve the situation by targeting specific wait times. Though these actions have not done much to reduce wait times overall, the acknowledgment that there is a problem with Canada’s health care system is a welcome change.

“When we first started measuring wait times, the Canadian Hospital Association said that there was no such thing as waiting lists,” recalls Walker. “In the last 20 years, people have come to realize that what we’ve been saying is in fact the case.”

WAITING YOUR TURN AND THE HOSPITAL REPORT CARDS: WAITING YOUR TURN 18 editions published since 1990 2,570 Canadian specialists surveyed in 2008 543 Canadian psychiatrists surveyed in 2008 17.3 weeks – total wait time between visiting a general practitioner and receiving treatment in 2008 392 related media hits in 2008

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s referral to treatment by a specialist, 1993 to 2008

16.5

16.2

1

0-0

200

17.7

2

1-0

200

3

200

17.9

4

200

17.8

5

200

17.9

6

200

18.3

7

200

17.3

8

200

Grading Canada’s hospitals By 2006, the Institute had published many more studies in health care policy, many of which are still updated each year. But at the time, it did not have a report that would help patients choose the best hospital for their inpatient care by providing them with information on the performance of their local hospitals.

Seeing this gap, Fraser Institute Executive Director Mark Mullins thought it would be “a natural extension of our work in health care” to produce a detailed assessment of hospitals in the form of a report card. With that idea in mind, he set out to find a suitable data source and a sound methodology. The data came from the Canadian Institute for Health Information’s Discharge Abstract Database, which documents every overnight hospital stay in all Canadian provinces except Quebec. Looking at a number of hospital report cards from around the world, Mullins settled on a methodology developed by the US Agency for Healthcare Research and Quality and researchers at Stanford University.

“The major advantage of this methodology is that it is fully transparent,” Mullins notes. “You can see exactly what you’re getting and how it works.”

BY THE NUMBERS HOSPITAL REPORT CARDS: BC AND ONTARIO 5 report cards published since 2006 231 hospitals scored and ranked in 2009 10.5 million Ontario patient records from 1997/98 to 2006/07 2.5 million BC patient records from 2001/02 to 2006/07 185 related media hits in 2008

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The first Ontario hospital report card was based on more than 8.5 million patient records, shown across 50 quality and safety indicators for 136 hospitals and 138 municipalities for the years 1997 to 2005. Hospitals were scored and ranked for each separate indicator and an overall mortality score based on the Institute’s Hospital Mortality Index. This report was the first in Canada to provide patients with comparable, hospital-specific performance measurement, incomplete in just one respect: it could not name the majority of the hospitals it ranked.

“That’s the twist in Canada,” explains Mullins. “You must ask for permission from each individual hospital, and if they don’t grant it, you’re not allowed to publish their name.”

In that first year, 43 hospitals agreed to allow the Institute to publish their name alongside their results, but that number has dropped since then. Only 17 hospitals agreed to be identified in the 2009 edition of the Ontario report card.

The Institute faced a similar situation when it published its first report card on British Columbia’s hospitals in 2008: BC’s regional health authorities refused to identify any of the province’s 95 hospitals.

“When the government refused to release the names of the hospitals for last year’s report card, the public was incensed,” recalls Nadeem Esmail, the Institute’s Director of Health System Performance Studies and co-author of the hospital report card.

The government was criticized heavily in the media and by other elected officials, including NDP health critic Adrian Dix. Earlier this year, however, the BC government reversed course and announced that it would release enough information to the Institute so that the report card could identify every hospital in the province by name.

“With this change of policy, BC’s government has taken a major step forward in terms of openness and public accountability,” Esmail says. “BC’s health minister should be applauded for providing patients, taxpayers, and health care providers the opportunity to make more informed decisions about health care.”

The 2009 BC hospital report card—the first to identify all hospitals by name—was released last month. The release was aided significantly by the Vancouver Sun, which provided comprehensive coverage of the report card’s findings over several days.

“Providing the public with accurate information on the performance of public institutions is the first step towards encouraging improvement,” says Esmail. “Both patients and care providers benefit from knowing where the standard of care might be improved and where examples of excellence can be found.”

The Institute plans to release its first report card on Alberta’s hospitals later this year. As with the inaugural BC report, the Alberta government has not allowed any hospitals to be named.

However, with the laudable BC example of openness and accountability next door, both Esmail and Mullins hope to see full identification of Alberta hospitals in future reports.

—Kristin Fryer

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The cost of reform How federal transfers make it harder for provinces to improve their Medicare programs Nadeem Esmail The amount of financial support the federal government provides for provincial Medicare programs is regularly discussed in Canada. The provincial governments often argue that the federal government does not provide sufficient financial support for Medicare, as a share of provincial expenditures on health care, to the detriment of their citizens. Canadians should not be misled: an increase in the federal government’s contributions would actually make it harder for the provinces to improve their Medicare programs through sensible reform.

Under the current system, health policy in Canada is guided by the federal government through cash transfers that support programs that abide by the federal government’s vision. These transfers can be (and have been) withheld as a penalty if a province implements health policies that do not square with Ottawa’s guidelines, even when the result would be a higher quality and more efficient program. These penalties are enforced through the Canada Health Act, whose myriad rules, regulations, and federal interpretations define what provinces can and cannot do.

By lobbying for greater federal support for health care over the past decade, provinces have reduced their opportunity to exercise their constitutional jurisdiction over health care. As long as federal health transfers are large enough to outweigh the financial benefits of sensible health care reform, the incentives for reform are diminished.

The costs and benefits of cost sharing reforms International comparisons with the Canadian health care system show that Canadians are receiving poor value for their health care expenditures. A key explanation for this disconnect is the lack of appropriate incentives for health care providers to deliver high quality services in a timely fashion, and for patients to make more informed choices about when and where it is best to use the health care program. If these incentives were improved, the result would be superior access to and improved quality of care, along with a potential reduction in health care expenditures (Esmail and Walker, 2008).

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While there are many reforms necessary for creating a system that would accomplish these goals—such as introducing competitive private provision of services, output-based funding for hospital services, and private parallel health insurance—one key reform, which is explicitly disallowed by the federal health act, is user fees for provincially-insured health services. In the absence of user fees, patients have no incentive to restrain their use of health care services, resulting in excessive demand and wasted resources. On the other hand, if patients had to pay a fee when they sought care, they would have a direct financial incentive to get the most cost-effective care (Rovere, 2009; Esmail and Walker, 2008).

Introducing a cost sharing scheme in a provincial Medicare program, with appropriate exemptions for those with low incomes, would have two positive effects. First, it would reduce taxpayers’ annual bill for health care services1 because some patients would opt to obtain more cost-effective care (for example, by choosing a provincial phone-assistance program rather than seeing a physician). Second, it would also improve access to health services because some people who seek care when it is free at the point of access would opt not to do so when faced with a small out-of-pocket cost. These two effects are not merely theoretical, but have been borne out in studies of cost sharing and in nations that have implemented such schemes (see, for example, Newhouse et al., 1993; Esmail and Walker, 2008). Cost sharing policies have also been shown to have no adverse impact on health outcomes as long as low-income populations are exempt (Rovere, 2009; Newhouse et al., 1993; and Esmail and Walker, 2008).

The savings that accrue from cost sharing can be significant.

According to the RAND Health Insurance Experiment, the seminal study on cost sharing in a health insurance program, the imposition of a 25% co-insurance payment with a reasonable annual limit would reduce total health expenditures by approximately 19% (Newhouse et al., 1993). Put simply, Canadian provinces could save substantial sums of money and patients would receive better access to care if the provinces introduced a cost sharing scheme.

In Canada, however, any savings from reform could be offset if a province lost its federal transfers for health and social www.fraserinstitute.org

Federal health transfers Table 1: The opting-out calculation—foregone Canada Health and Social Transfers and savings from cost sharing, 2008/2009 ($ millions) BC Provincial health expenditures (forecast) Savings from reform*

AB

SK

14,861.5 13,664.3

MB

3,657.5

ON

QC

NB

4,445.9 42,903.2 23,572.0

NS

PE

NL

2,610.8

3,351.7

468.0

2,052.3

2,823.7

2,596.2

694.9

844.7

8,151.6

4,478.7

496.1

636.8

88.9

389.9

4,661

3,032

1,184

1,273

13,099

8,155

791

991

151

538

3,172

1,817

816

860

8,706

5,520

533

669

100

362

Wait Times Reduction

79

61

18

22

235

140

14

17

3

9

Wait Times Guarantee Trust**

25

21

8

9

68

42

7

8

4

6

Total Canada Health & Social Transfers (cash component): Canada Health Transfer

Canada Social Transfer Gain or loss per capita ($)

1,385

1,133

342

382

4,090

2,453

237

297

44

161

-414.87

-124.03

-491.65

-359.06

-382.26

-474.85

-392.91

-378.41

-446.18

-292.85

*These savings do not include the exemption of low-income populations from the cost sharing scheme, the cost of which was not estimated in the RAND experiment. Such exemptions would erode these savings somewhat. **The calculation here conservatively considers the Wait Times Guarantee Trust a health and social cash transfer that might be subject to withdrawal under the Canada Health Act. However, this may not necessarily be the case as the trust payments are available to provinces that publicly outline plans to implement a wait time guarantee, as all provinces have. Assuming that these trust payments may not be subject to withdrawal does not materially affect the findings in this table and has only a small effect on the per capita consequences of implementing a cost sharing program (ranging from $5.25 in Ontario to $28.75 in Prince Edward Island).

Sources: CIHI, 2008; Department of Finance Canada, 2009; Newhouse et al., 1993; calculations by author.

services. The implementation of a cost sharing scheme for physician or hospital services would be a clear violation of the Canada Health Act. Violations of the rules, regulations, and interpretations of the act can result in a penalty from the federal government that restricts payment of both the Canada Health Transfer and Canada Social Transfer (previously the Canada Health and Social Transfer).2 As long as federal transfers were below 19% of health expenditures, however, provinces would still stand to benefit from a 25% co-insurance scheme.

Unfortunately, in 2008/2009, federal transfers for health and social programs exceeded that threshold in every province. In that fiscal year, the losses resulting from federal penalties for beneficial reform could have ranged from a low of about $124 per person in Alberta to a high of about $492 per person in Saskatchewan had those provinces implemented a 25% co-insurance payment for insured services. In 2008/2009, federal transfers were large enough to ensure that no province would have benefited financially from implementing a policy that has been shown to meet the goals of reducing health expenditures and improving access to health care services. Table 1 calculates the potential gains and penalties associated with introducing a 25% co-insurance rate for insured services for each province. www.fraserinstitute.org

Bigger transfers mean less independence Federal transfers for health and social programs have not always been large enough to outweigh the gains that sensible reform of health policies could bring. Zelder (2000) found that in 1998/1999, both Alberta and Ontario could have saved enough money from a 25% co-insurance payment for health services to be in a better position financially than they were under the status quo. A later review for 2002/2003 came to a similar conclusion, though the finding applied to Alberta and Newfoundland and Labrador, and not Ontario (Esmail, 2003).

However, that same study examined later estimates of the Canada Health and Social Transfer, which included additions to the transfer beyond those budgeted, and found that the potential financial gains for all provinces were eliminated by the growth of the transfer (Esmail, 2003). That conclusion is equally applicable to the analysis for 2008/2009. Data on the size of transfers and public health expenditures show that the growth rates of federal cash transfers have outpaced the growth rates of provincial health expenditures in six of the last 10 years, in some cases substantially (table 2). In total, cash transfers to provinces for health and social programs grew 112% between 1998/1999 and 2008/2009, while provincial and territorial government health expenditures grew 103%.

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Federal health transfers Table 2: Year-over-year growth rates in major federal cash transfers for health and social programs and provincial health expenditures, nominal dollars, 1999/2000 to 2008/2009 Canada Health and Social Transfer cash component*

Provincial and territorial government health expenditure

1999/2000

-7.0%

7.4%

2000/2001

-2.6%

9.6%

2001/2002

19.3%

7.1%

2002/2003

22.0%

7.2%

2003/2004

17.7%

8.2%

2004/2005

38.0%

6.2%

2005/2006

-18.8%

7.9%

2006/2007

7.1%

6.4%

2007/2008

9.8%

7.6%

2008/2009

3.8%

5.9%

112.2%

103.2%

Total growth

References

*This category includes Canada Health and Social Transfers, as well as all other transfers for health care including those for health care reform, waiting lists, wait time guarantees, and medical technology.

Canada, Department of Finance (2009). Federal Support to Provinces and Territories. Government of Canada. <www.fin.gc.ca/fedprov/ mtp-eng.asp>.

Sources: CIHI, 2008; Receiver General of Canada, 2007, 2008; Canada, Department of Finance, 2009; calculations by author.

Canadian Institute for Health Information [CIHI] (2008). National Health Expenditure Trends: 1975-2008. CIHI.

Conclusion Response to the demand for greater health care transfers from Ottawa has reduced the potential for meaningful reform in Canada’s provinces by substantially increasing the price of that reform. In a sense, the provinces that want more effective and efficient health policies have sabotaged themselves by participating in the lobbying for more federal funding. Provincial governments—and Canadians—must realize that the cash transferred to the provinces for health care comes with strings attached. Those strings have serious implications for the performance of their health care programs.

Notes 1 All else equal. This savings could be used to treat the serious problems that reside on provincial wait lists, to expand health care coverage/provide additional services, to increase funding for other taxfunded activities, or it could be returned to taxpayers through tax relief.

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2 Sections 20 and 21 of the Canada Health Act stipulate that extra billing by physicians and cost sharing schemes for patients will result in a dollar-for-dollar reduction in the Canada Health and Social Transfers for provinces that allow or implement such practices. A cost sharing policy could also be said to violate the act’s principle of accessibility, for which the penalty is a withdrawal of transfers. For the purposes of this article, it is assumed that the imposition of such reform would result in the greater penalty. It is possible for the federal government to apply the lower penalty of reducing health and social transfers by the amount that was charged to patients as user fees. In this scenario, the loss in federal transfers (16% of post-reform health expenditures according to the RAND Health Insurance Experiment) would not outweigh the savings from reform (19% of prereform health expenditures). The federal government could also, at its discretion, impose no penalty on contravening provinces, though this would technically violate the stipulations in sections 20 and 21 of the act. However, such a decision could not be predicted, and inaction by the federal government at one point in time would not guarantee inaction at another. The possibility of penalties will exist as long as cash transfers exist and are governed by the Canada Health Act under current conditions.

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Esmail, Nadeem (2003). The Potential and Penalty for Real Health Care Reform. Fraser Forum (November): 13–14.

Esmail, Nadeem, and Michael Walker (2008) How Good is Canadian Health Care? 2008 Report. Fraser Institute.

Madore, Odette (2003). The Canada Health Act: Overview and Options. Library of Parliament, Government of Canada. <http:// www.parl.gc.ca/information/library/prbpubs/944-e.htm>.

Newhouse, Joseph P., and the Insurance Experiment Group (1993).

Free for All? Lessons from the RAND Health Insurance Experiment. Harvard University Press.

Receiver General of Canada (2007). Public Accounts Canada 2007.

Government of Canada. <http://epe.lac-bac.gc.ca/100/201/301/ public_accounts_can/2007/index.html>.

Receiver General of Canada (2008). Public Accounts Canada 2008.

Government of Canada. <http://www.tpsgc-pwgsc.gc.ca/recgen/ txt/72-eng.html>.

Rovere, Mark (2009). Revisiting Cost Sharing in Canada. Fraser Forum (June): 6–9.

Zelder, Martin (2000). The Ultimate Health Care Reform. Fraser Forum (February): 15–16. 

www.fraserinstitute.org

Preventive medical services do not save money John C. Goodman Public health advocates and reformers often call for greater use of preventive medical services. A common argument is that huge amounts of money could be saved if doctors caught conditions in their early stages, before they develop into more costly-to-treat diseases.

However, there are literally hundreds of studies from over the past 40 years that show preventive medical services usually increase medical spending. For instance, a review of nearly 600 studies published between 2000 and 2005 found that fewer than 20% of preventive services (and a similar proportion of treatments for existing conditions) were cost saving (Russell, 2009)—80% actually increased the total costs of care.

As one observer has put it, “Nearly every aspect of preventive care has crashed upon the rocky shore of added costs” (Gottlieb, 2001). Some exceptions to the general rule include immunization for childhood diseases, smoking cessation advice, and prenatal care for at-risk mothers (Tengs et al., 1995).

Contrary to popular belief, checkups for children and adults do not save the health care system money. Nor do pap smears, mammograms, and most other tests (Ferrara, 1995).1 And while diagnosing cancer early does lower treatment costs for patients found to have the disease, that diagnostic test is given to thousands of healthy patients in order to find the sick patients. When all costs are considered, the cost of screening healthy patients is much higher than the cost reduction associated with treating the www.fraserinstitute.org

few found to have the disease (see, for example, Russell, 2009). For instance, a study by a Copenhagen-based independent research center found that 2,000 women (aged 50 to 70) would have to be screened for 10 years to save one woman from dying of breast cancer. During the same period, 10 women would be misdiagnosed as having breast cancer and undergo unnecessary treatments (Gøtzsche and Nielsen, 2006).

Costs and benefits The fact that preventive care usually adds to overall health care costs does not mean that it is not valuable. But we need to compare the money spent with the benefits received. For example, consider the cost of screening for breast cancer (including the costs of treatment for those discovered to have cancer) per qualityadjusted life year saved as a result of the screening and subsequent treatment for breast cancer. In a 2006 study, Natasha Stout and her colleagues found that:2  When compared to no screening, giving mammograms to women every five years, starting at age 55 and ending at age 70, costs about $43,000 for every quality-adjusted life year (QALY)3 saved as a result of the screening, when all costs are considered.  Decreasing the screening interval from five years to every three years could buy additional QALYs at a cost of about $46,000 for every additional year of life.  Increasing the last screening age to 75 while screening every three years

would add $51,000 in costs per incremental QALY. This does not mean that mammograms are wasteful. On the contrary, they are a very reasonable investment for many women. Economists who have studied the price people will pay to avoid various risks have found that people were willing to pay between $110,000 and $220,000 for each year of life saved (Viscusi, 1993; Tolley et al., 1994).4 These numbers are based on the amounts people were willing to pay to avoid risk when the risks were small and the amount of money was also small (for example, the extra wages required to induce people to take riskier jobs).

Since the cost of a mammogram is below that range, regular mammograms probably seem worthwhile to most women. However, more frequent screenings make the costs rise in relation to the benefits. Despite the preference of many doctors for annual screening, the tradeoff is not in keeping with the kind of choices people typically make to avoid risk in other areas of life.

Prevention vs. preventive care A distinction should be made between “prevention” and “preventive medical care.” Anything that can prevent a disease can be labeled prevention. Eating a proper diet, getting adequate exercise, losing excess weight, abstaining from smoking, drinking only in moderation, and practicing proper sanitation are all examples of prevention. The medical literature has conclusively demonstrated

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Preventive medical services that many individuals can avoid disease and premature death by choosing healthy eating and living habits.

For instance, many cases of diabetes could be prevented by appropriate lifestyle modifications. One study found that cases of adult onset diabetes could be reduced by 58% through a prevention program for at-risk obese adults. Treatments include training sessions with physicians, nutritionist consultations, and individual case management on diet and exercise regimens, with annual follow up (Tuomilehto et al., 2001). However, the cost of such a tailored program of behavioral modification exceeds the cost of reducing diabetes. Taking into account annual enrollee turnover rates, a private sector health plan could expect to spend $143,000 per quality-adjusted life year (QALY) gained on such a program (Eddy et al., 2005).5 These figures would change depending upon the duration of the program:  A five-year program would result in a cost of $2.7 million per QALY gained.  A 10-year program would result in a cost of $1.2 million per QALY gained.  A 20-year program would result in a cost of $188,000 per QALY gained.

The longer the program, the lower the cost per QALY gained because diabetes prevention has high upfront costs, while savings often come many years later.

Vaccination is still one of the few medical interventions that saves more money than it costs. Public health efforts to provide clean drinking water and improve sanitation have also been shown to prevent disease and promote longevity. In fact, according to public health experts, most of the increases in life expectancy over the last 100 years have resulted from improvements in public health rather than advances in medicine. Only a few of the 10 greatest public health triumphs of the twentieth century were related to medicine (CDC, 1999).6

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Conclusion Preventive medical care usually adds to overall health care costs, but this does not mean that it is bad. Diagnostic tests showing that no disease is present benefit patients by relieving anxiety and reassuring them of their health. Most of the time, preventive care is like a consumer good that creates benefits in return for a cost. It is not like an investment good that promises a positive economic rate of return.

Notes 1 The Office of Technology Assessment (OTA) studied the cost-effectiveness of various preventive medical services and found that only three kinds of preventive care save money: prenatal care for poor women, tests in newborns for certain congenital disorders, and most childhood immunizations (US Congress, Office of Technology Assessment, 1993).

2 Figures stated in 2000 dollars.

3 A quality adjusted life year is a year of life saved adjusted for its quality. Under this measure, a year of disability-free life is worth more than a year of life confined to bed.

4 Figures updated to 2009 dollars. Please note that this is not the amount of money people were willing to pay to purchase an extra year of life.

5 Figures stated in 2000 dollars. Russell (2009) calculated the equivalent value in 2008 to be worth $192,000.

6 For an in-depth review of each achievement, visit the Centers for Disease Control and Prevention’s website, <www.cdc.gov>.

References Centers for Disease Control and Prevention [CDC] (1999). Ten Great Public Health Achievements — United States, 19001999. Morbidity and Mortality Weekly Report 48, 12: 241–43. <http://www.cdc.gov/ MMWR/preview/mmwrhtml/00056796. htm>.

Eddy, David M., Leonard Schlessinger, and Richard Kahn (2005). Clinical Outcomes and Cost-Effectiveness of Strategies for Managing People at High Risk for Diabetes. Annals of Internal Medicine 143, 4: 251–64.

Ferrara, Peter J. (1995). Is Preventive Medical Care Cost-Effective? Brief Analysis No. 188. National Center for Policy Analysis.

Gottlieb, Scott (2001). For HMOs, Preventive Medicine Doesn’t Pay. American Medical News 44, 30. <http://www.amaassn.org/amednews/2001/08/13/bica0813. htm>.

Gøtzsche, P.C., and M. Nielsen (2006).

Screening for Breast Cancer with Mammography. The Cochrane Database of Systematic Reviews 2006, 4.

Russell, Louise (2009). Preventing Chronic Disease: An Important Investment, But Don’t Count on Cost Savings. Health Affairs 28, 1: 42–45.

Stout, Natasha K., Marjorie A. Rosenberg, Amy Trentham-Dietz, Maureen A. Smith, Stephen M. Robinson, and Dennis G. Fryback (2006). Retrospective Cost-effectiveness Analysis of Screening Mammography. Journal of the National Cancer Institute 98, 11: 774–82.

Tengs, Tammy O., Miriam E. Adams, Joseph S. Pliskin, Dana Gelb Safran, Joanna E. Siegel, Milton C. Weinstein, and John D. Graham (1995). Five Hundred LifeSaving Interventions and Their CostEffectiveness. Risk Analysis 15, 3: 369–90.

Tolley, George, Donald Kendel, and Robert Fabian (eds.) (1994). Valuing Health for Policy: An Economic Approach. University of Chicago Press.

Tuomilehto, Jaakko et al. (2001). Prevention of Type 2 Diabetes Mellitus by Changes in Lifestyle among Subjects with Impaired Glucose Tolerance. New England Journal of Medicine 344, 18: 1343–50.

US Congress, Office of Technology Assessment (1993). Benefit Design in Health Care Reform: Clinical Preventive Services. US Government.

Viscusi, W. Kip (1993). The Value of Risks to Life and Health. Journal of Economic Literature 31, 4: 1912–46. 

www.fraserinstitute.org

The cause of the crisis Book review: John Taylor’s Getting Off Track Jason Clemens

Two principal conclusions

A critical step in solving any problem is the identification of the cause. As much of the world and, in particular, Western countries continue to struggle with the aftermath of the financial collapse, an important new book by John Taylor has been published. The book, Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis, provides an interesting and uncommon explanation of the causes of the crisis.

John Taylor is a professor of economics at Stanford University and a well-known, respected economist, specializing in monetary and international economics. His research on the foundations of modern monetary theory and policy is used by central banks around the world. He served as senior economist on the US government’s Council of Economic Advisers (CEA) from 1976 to 1977, as a member of the CEA from 1989 to 1991, and as US Under Secretary of Treasury for International Affairs from 2001 to 2005. His academic credentials are buttressed by a wealth of government experience that makes him uniquely qualified to assess the current crisis.

Taylor’s book clearly and comprehensively explains how the current crisis started and how government actions exacerbated it.1 The book is short, but is useful for anyone interested in understanding today’s economic troubles.

Taylor’s analysis and summary of academic work regarding monetary policy generally and the current financial crisis more specifically leads to two general conclusions. First, the main explanation for the current crisis is overly easy monetary policy from roughly 2002 to 2005, meaning that interest rates were kept too low during that time period. Second, the nature and cause of the financial crisis was misdiagnosed by government officials from the very start, which led to incorrect responses. I found the second argument to be the more important of the two.2

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in this period was largely due to the effective monetary policy implemented and maintained by the US Federal Reserve. For example, only two recessions, both of which were short and shallow, occurred in the United States during this period3—a clear contrast with the more turbulent 1970s when recessions were longer, deeper, and occurred more frequently. In addition, the volatility of both interest rates and infla-

The nature and cause of the financial crisis was misdiagnosed by government officials from the very start, which led to incorrect responses.

(1) Easy monetary policy Taylor goes to some lengths to explain the improvements in monetary policy that began in the early 1980s. This period, referred to as the Great Moderation, is considered to have achieved an effective balance in monetary policy between controlling inflation while fostering economic growth. Taylor argues that the tremendous prosperity enjoyed

tion during the Great Moderation declined relative to previous periods.

Figure 1 presents Taylor’s core argument regarding overly easy monetary policy. It presents the actual federal funds rate4 in the United States as well as a counterfactual rate based on the Taylor Rule. The Taylor Rule is a monetary rule-of-thumb used widely to calculate when to increase or decrease rates, and what magnitude the change should be.5

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The cause of the crisis Figure 1: The US federal funds rate compared to a counterfactual rate based on the Taylor Rule, 2000 to 2008 8 7 6

Rate of interest

As figure 1 shows, there was a prolonged divergence between what the Taylor Rule would have recommended and the actual interest rate in the United States. Taylor concludes that this period represents a far too easy monetary policy that laid the groundwork for the boom, which was concentrated in the housing sector. He also explains how this phenomenon leaked across national borders so that it ostensibly affected most industrialized countries, although to differing degrees.

5 Taylor rate 4 3

Disappointment

2

If there is one disappointment in the book it is the scant attention paid to the role of several other contributing factors.

Taylor does acknowledge the effect Fannie Mae and Freddie Mac and the subsequent securitization of mortgage-backed securities had on the overall housing crisis. However, he does not spend sufficient time or provide enough details so that an average reader could understand how these government institutions distorted lending and investing decisions on a large scale. In addition, the book overlooks a host of other contributing factors, including the Community Reinvestment Act (both the initial act and revisions to it), the protected status of rating agencies, and the tax reform act of 1997, to name a few.

1

Actual federal funds rate

(2) Misdiagnosing the problem Several chapters of the book are dedicated to explaining why the crisis is based on counter-party risk (a problem with perceived risk among financial firms, such that they were reluctant to lend to one another) rather than liquidity (a lack of funds in the banking system). The liquidity explanation is what most economists and politicians were and are basing their solutions on.

Taylor uses three different methods to substantiate his assertion that the

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0 Q1

00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 20 3 20 1 20 3 20 1 20 3 20 1 20 3 20 1 20 3 20 1 20 3 20 1 20 3 20 1 20 3 20 1 20 3 20 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

Year and quarter Sources: John Taylor (2009). Getting Off Track. Hoover Institution; Federal Reserve Board, <www.federalreserve.gov/fomc/fundsrate.htm>; reconstructed by the author.

root of the problem was counter-party risk. Discussion of each approach is too lengthy for the purposes of this article; however, Taylor presents a compelling case that the empirical data supports his conclusion that the crisis was based on counter-party risk.

This is an important conclusion since many of the economists who are helping to formulate a response have based their analysis on the assumption that the crisis was a liquidity problem. Indeed, many of the Keynesian economists who have emerged with renewed prominence during this crisis have based their analyses and recommendations on Keynes’ famous liquidity trap outlined in his General Theory of Employment, Interest, and Money.

Recommendations The book spends little time outlining specifically how the problem should

be solved. One of Taylor’s conclusions is that “policy makers should rethink the idea that frequent and large government actions and interventions are the only answer to our current economic problems.” In other words, one of the book’s conclusions is that sometimes the best government action is no action at all.

Taylor does, however, offer a few specific recommendations. Not surprisingly, he emphasizes the need to return to the monetary policies of the Great Moderation period, particularly the rules used for setting interest rates. In addition, he calls for the establishment of a clearer government framework for (a) determining and diagnosing problems, and (b) rationalizing subsequent intervention.

He also recommends the development of a more definitive and predictable set of rules and principles for financial assistance within the International Monetary Fund (IMF) framework. www.fraserinstitute.org

Conclusion: Recommended reading The major contribution of Taylor’s book is its accessible and clear arguments demonstrating how government interventions caused and then prolonged the crisis. The book is well worth its cost (about $18) as it provides a good understanding of how we got into the current mess. It also helps readers to more fully understand that almost all of the culpability for this crisis lies with the government rather than with the market.

Notes 1 A summary version of the book is available online at <http://www.stanford.edu/~john​ tayl/FCPR.pdf>.

2 Dr. Anna Schwartz, who co-authored with Milton Freidman A Monetary History of the United States, 1867-1960, wrote an influential column in the Wall Street Journal on October 18, 2008 (http://online.wsj.com/article/ SB122428279231046053.html), arguing that Federal Reserve Chairman Ben Bernanke had misdiagnosed the cause of the financial crisis and was therefore fighting the wrong battle.

3 Unlike the United States, Canada did not experience a recession in 2001, although GDP growth did slow.

4 The federal funds rate is set by the Federal Reserve’s Federal Open Market Committee (FOMC). It is the interest rate at which depository institutions such as banks lend monies at the Federal Reserve to other depository institutions overnight. For further information please see <http://www.federalreserve.gov/monetarypolicy/fomc.htm>.

5 Specifically, the rule calls for interest rates to increase when inflation rises and decrease when GDP declines. The precise rule states that the interest rate should be oneand-a-half times the inflation rate plus onehalf times the GDP gap plus one. It offers a specific rule for setting the Central Bank interest rate. 

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Minimum wage hikes kill jobs SK and MB should rethink their minimum wage increases Niels Veldhuis & Amela Karabegović Given the current economic climate, there could hardly be a worse time for Saskatchewan and Manitoba to move forward with their planned minimum wage hikes. On May 1, Saskatchewan’s minimum wage increased to $9.25 per hour (up from $8.60), the last of a threephase increase that began in January 2008.

Manitoba also increased its minimum wage last month, from $8.50 to $8.75 per hour, and has another bump-up (to $9.00 an hour) scheduled for October (HRSDC, 2009). While minimum wage increases are made with the best of intentions, the unfortunate reality is that they result in serious and negative consequences.

The single largest problem with increases to the minimum wage is that they result in higher unemployment for low-skilled workers and young people.

Increases in the minimum wage increase labour costs to employers who respond by reducing the number of employees and/or the number of hours worked.

Empirical evidence from Canada and around the world shows that higher minimum wages lead to lower employment levels (Godin and Veldhuis, 2009).

For example, a recent, comprehensive study by renowned minimum wage experts Professor David Neumark, of the University of California, and Dr. William Wascher, a US Federal Reserve Board economist, reviewed over 100 studies

covering 20 countries over the past 15 years and found that the “overwhelming majority” of studies, especially the most credible, consistently show that minimum wage increases result in decreases in employment (Neumark and Wascher, 2007).

Closer to home, 14 studies have specifically examined the impact of minimum wage increases in Canadian provinces.

The Canadian research indicates that a 10% increase in the minimum wage is likely to decrease employment by 3% to 6% among workers between the ages of 15 and 24. For the young workers who are most directly affected—those earning between the old and new, higher minimum wage—the impact is more acute, resulting in employment losses of 4.5% to 20% (Godin and Veldhuis, 2009).

Using the evidence from past experiences with minimum wage increases across Canada, we estimate that increasing Manitoba’s minimum wage to $9.00 per hour (a 5.9% increase from its current level of $8.50) would lead to a loss of up to 3,500 jobs for workers aged 15 to 24. Increasing Saskatchewan’s minimum wage from $8.60 to $9.25 (a 7.6% increase) would lead to a loss of up to 4,000 jobs.

Those fortunate enough to retain their jobs after the minimum wage is increased could see reductions in their hours, fringe benefits, and/or training (Godin and Veldhuis, 2009). Again, these effects have been confirmed in the academic literature. For example, a

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Minimum wage hikes recent study in the Journal of Labor Economics found that a 10% increase in the minimum wage reduced the proportion of minimum wage workers (aged 20 to 24) who received on-the-job training by two percentage points (Neumark and Wascher, 2001). Even if low-skilled workers retain their jobs, they may actually not be better off, depending on changes to their benefits and training.

Of course, some minimum wage earners would benefit from a wage increase, but the typical minimum wage earner is not the person depicted by the advocates of higher minimum wages (i.e., adults supporting families). The reality is that the majority of “typical” minimum wage workers are young people, often students living at home.

According to Statistics Canada, only about 5% of workers in Manitoba earned minimum wage in 2008 (Statistics Can-

ada, 2009). Of these, 64% were young workers aged 15 to 24 years old. In addition, the vast majority of young minimum wage workers (84%) lived at home with their families. Similarly, 3.8% of workers in Saskatchewan earned minimum wage in 2008, 65% of whom were young workers aged 15 to 24 years old. Again, the majority of young minimum wage workers (81%) lived at home with their families.

Many of the remaining individuals earning minimum wages in Saskatchewan and Manitoba in 2008 were adults supplementing their family’s income during child-rearing years or after retirement. This means that any changes to the minimum wage would mainly affect younger workers and would have negligible effects on working adults or those supporting families.

Finally, it is important to note that working for minimum wage is largely a

Poor value for your tax dollars continued from page 5 While our taxes can and do pay for important and valuable services for all Canadians, it is critical that we assess whether or not we are receiving value for the dollars we are spending. In the case of health care, it is clear that Canadians are paying for a world-class health care system, but are not receiving one in return. Hopefully, this knowledge will encourage Canadians to think more carefully about the need for substantial reform to Canada’s failing approach to health care policy.

References Esmail, Nadeem (2004). Fixing Waiting Times. Fraser Forum (May): 3.

Esmail, Nadeem (2008). Canada’s Physician Supply. Fraser Forum (November): 13–17.

Esmail, Nadeem, Jason Clemens, Niels Veldhuis, and Milagros Palacios (2007). Federal Health Transfers to the Provinces: Expensive and Ineffective. Fraser Alert. Fraser Institute.

Esmail, Nadeem, and Maureen Hazel with Michael Walker (2008). Waiting Your Turn: Hospital Waiting Lists in Canada (18th ed.). Fraser Institute.

Esmail, Nadeem, and Michael Walker (2008). How Good is Canadian Health Care? 2008 Edition. Fraser Institute.

Schoen, Cathy, Robin Osborn, Michelle M. Doty, Meghan Bishop, Jordon Peugh, and Nandita Murukutla (2007). Toward Higher-Performance Health Systems: Adults’ Health Care Experiences in Seven Countries, 2007. Health Affairs (Web Exclusive): w717. <http://www.healthaffairs.org>.

Statistics Canada (2008). Canadian Community Health Survey. The Daily (June 18). <www. statcan.ca/Daily/English/080618/d080618a.htm>. 

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temporary experience (Godin and Veldhuis, 2009). Research shows that after one year, more than 60% of minimum wage workers earn more than the minimum wage, with a typical wage gain of about 20% (Long, 1999). The percentage of workers earning more than the minimum wage increases to over 80% after two years. With experience and better skills, minimum wage workers increase their productivity and thus garner higher wages.

While increasing minimum wages in Saskatchewan and Manitoba may be well intentioned, doing so would rob young workers and those with few skills of the opportunity to participate in the labour market and gain the skills and experience they need to succeed in today’s workplace. If the governments of those two provinces want to increase economic opportunities for young workers, they should steer clear of future increases to the minimum wage.

References Godin, Keith, and Niels Veldhuis (2009).

The Economic Effects of Increasing British Columbia’s Minimum Wage. Studies in Labour Markets. Fraser Institute.

Human Resources and Skills Development Canada [HRSDC] (2009). Minimum Wage Database. <http://srv116. services.gc.ca/dimt-wid/sm-mw/menu. aspx?lang=eng>, as of April 20, 2009.

Long, James (1999). Updated Estimates of the Wage Mobility of Minimum Wage Workers. Journal of Labor Research 20, 4: 493–503.

Neumark, David, and William Wascher (2001). Minimum Wages and Training Revisited. Journal of Labor Economics 19, 3: 563–95.

Neumark, David, and William Wascher (2007). Minimum Wages and Employment. Foundations and Trends in Microeconomics 3, 1-2: 1–182.

Statistics Canada (2009). Labour Force Survey, Program A040903. Special data request. Received April 21, 2009. 

www.fraserinstitute.org

Reducing the size of government The Conservatives must decrease spending Niels Veldhuis & Milagros Palacios At the last meeting of the Group of 20 in Washington, Finance Minister Jim Flaherty encouraged the G-20 countries to rapidly implement their stimulus packages, highlighting that his government provided a greater stimulus budget than the G-20 countries agreed was needed.

While that may be so, his government’s 2009 budget also turned back the clock on Canada’s 15-year record of sound fiscal management and set the nation back on the path to a larger, more interventionist government. If the current government truly wants a more prosperous Canadian economy, it would do well to return to the austerity policies of the 1990s and put forth a plan to reduce the size of the federal government.

Some Canadians may not be aware of Canada’s efforts to reduce the size of government over the past 15 years (19922007). Since peaking in 1992, the size of government in Canada, measured in terms of total spending at all levels of government as a share of gross domestic product (GDP), has decreased from 53% to less than 40%, according to data from the Organisation for Economic Co-operation and Development (figure 1). This is a dramatic departure from the 1960s, 1970s, and 1980s, when Canada leaned towards ever bigger government.

After years of deficit spending, which resulted in a serious debt problem, Canadian governments began scaling back spending in the early 1990s. For example, the federal government, led by Prime Minister Jean Chrétien and Finance Minister Paul Martin, reduced prowww.fraserinstitute.org

gram spending by nearly 10% between 1994/1995 and 1996/1997, from $123 billion to $111 billion (Canada, 2004, 2006).

Several provinces also reduced government spending at the provincial and local levels. Alberta reduced inflationadjusted spending by nearly 20% between 1992/1993 and 1996/1997 under Premier Ralph Klein; Ontario reduced government spending by 6% between 1994/1995 and 1997/1998 under Premier Mike Harris; and Saskatchewan reduced spending by 11% between 1993/1994 and 1996/1997 under Premier Roy Romanow (Statistics Canada, 2008a, 2009a).

As a result of the spending reductions, further restraint, and strong economic growth since the early 1990s (itself partially the result of a smaller government), the size of government in Canada fell to 39% of GDP in 2007 before increasing slightly in 2008 (OECD, 2008).

Canada’s government spending has also decreased relative to the United States. In 1992, Canadian governments consumed 36% more of the economy than their counterparts in the US did. By 2008, that gap had decreased to just 3% (OECD, 2008). Indeed, given President Obama’s recent budget, Canada will likely have a proportionally smaller government than the United States within the next few years.

Many politicians, journalists, and activists currently believe that government spending creates jobs and increases economic activity. But if that were true, wouldn’t the reductions in government spending during the 1990s have adversely affected Canadians and the economy?

In fact, the opposite is true. As governments reduced and constrained

spending, a greater share of the resources in our economy was controlled by individuals, families, and businesses.

The result was a robust Canadian economy with average inflation-adjusted economic growth exceeding that of the United States and every other G7 country since the mid-1990s (OECD, 2009).

The results of Canada’s spending reductions are documented in an important and comprehensive study published by the European Central Bank (ECB), Reforming Public Expenditure in Industrialised Countries: Are There Trade-Offs?

(Sckuknecht and Tanzi, 2005). Economists Ludger Schuknecht and Vito Tanzi studied the economic impact of reductions in the size of government in Canada and elsewhere. They found that the dramatic increase in government spending in Canada between 1960 and the 1980s was not unique. Nor was Canada unique in reducing the size of its government in the 1990s. Indeed, the relative size of government in most industrialized countries reached a peak sometime between 1982 and 2002 and then, in many cases, began to decrease quite dramatically.

Schuknecht and Tanzi divided countries into two groups: ambitious reformers and timid reformers. Countries were considered ambitious reformers if reductions in government spending as a percentage of GDP exceeded five percentage points. Reformers were also split into early reformers (countries that reached their maximum spending levels by the early to mid-1980s) and late reformers (countries that reached their maximum spending levels by the early to mid1990s). Canada was classified as an ambitious and late reformer with government

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Reducing the size of government

Government expenditure as a % of GDP

Figure 1: Size of government in Canada and the United States, 1950 to 2008 60

Clemens, Jason, and Niels Veldhuis (2002).

Setting the Record Straight: Size of Government and Economic Growth. Fraser Forum (September): 21–23.

Canada 40 United States

30

1960

1970

1980

1990

2000

Sources: OECD, 2008; Statistics Canada, 2008b, 2009b; US-BEA, 2009.

spending as a percentage of GDP reaching a maximum in 1992 and decreasing by 12 percentage points by 2002.

Sckuknecht and Tanzi then examined the impact of the spending reductions on a host of indicators. A critical finding was that reductions in the size of government were not accompanied by decreases in economic growth. In fact, in most cases, economic growth improved after the reforms took place.

Furthermore, economic growth rose twice as fast among ambitious reformers than among timid reformers. This demonstrates that it is best for countries to reduce government spending significantly and to do it quickly.

Similar results were found for employment: improvements in ambitious countries were greater than those in timid countries. The authors also found that the effects on income distribution within countries were small and largely mitigated “by faster growth and by better targeting of public spending” (Schuknecht and Tanzi, 2005: 6).

While the Schuknecht and Tanzi report is just one study, a comprehensive body of academic work supports its finding that size of government has a considerable effect on economic growth and social progress.1

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Canada (2004). Public Accounts of Canada 2004. <http://publications.gc.ca>.

Canada (2006). Public Accounts of Canada 2006. <http://publications.gc.ca>.

50

20 1950

References

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Conclusion After years of significant spending increases, the Conservative government would be wise to implement a spending plan aimed at reducing the size of the federal government. Doing so would provide the fiscal room needed to reduce economically damaging taxes and create better incentives to encourage economic activity.2 The list of potential areas where Canadian governments could reduce or even eliminate spending with very little, if any, consequences on economic growth or social progress is long and includes regional development subsidies, corporate welfare, agricultural supports, and broadcast subsidies, to name a few.

Reducing rather than increasing the size of government is the key to a brighter economic future. Our own history provides the evidence.

Notes 1 See Clemens and Veldhuis (2002) for a review of the key empirical studies on the size of government and economic growth.

2 For a thorough discussion about the impact of taxes on economic behaviour, see Palacios and Harischandra (2008).

Organisation for Economic Co-operation and Development [OECD] (2008). OECD Economic Outlook No. 84, November 2008. OECD. Organisation for Economic Co-operation and Development [OECD] (2009). OECD Stat Extracts. <http://stats.oecd.org/WB​ OS/index.aspx>, as of April 29, 2009.

Palacios, Milagros, and Kumi Harischandra (2008). The Impact of Taxes on Economic Behavior. In Jason Clemens (ed.), The Impact and Cost of Taxation in Canada: The Case for Flat Tax Reform (Fraser Institute): 3–31.

Sckuknecht, Ludger, and Vito Tanzi (2005).

Reforming Public Expenditure in Industrialised Countries: Are there Trade-Offs?

European Central Bank Working Paper No. 435 (February). <http://www.ecb. int/pub/pdf/scpwps/ecbwp435.pdf>.

Statistics Canada (2008a). CANSIM Table 385-0001. Consolidated Federal, Provincial, Territorial and Local Government Revenue and Expenditures, Annual (dollars). <http://cansim2.statcan.gc.ca/>.

Statistics Canada (2008b). Canadian Economic Observer: Historical Statistical Supplement. Catalogue No. 11-210-X. <http://www.statcan.gc.ca/pub/11-210x/11-210-x2007000-eng.pdf>.

Statistics Canada (2009a). The Consumer Price Index March 2009. Catalogue No. 62-001-XWE. <http://tinyurl.com/ FFsc02>.

Statistics Canada (2009b). Canadian Economic Observer, March. <http://tinyurl. com/FFsc01>.

US Bureau of Economic Analysis [US-BEA] (2009). Government Current Receipts and Expenditures. <www.bea.gov>, as of March 2009. 

www.fraserinstitute.org

The risks of electronic health records Gordon Atherley In Canada, governments have a near monopoly on the provision of medically necessary services. As health care costs are a serious concern for governments, they rely on information technology to monitor and control costs. Electronic health records, a form of information technology, are seen by governments as an instrument for better managing health care. But in pushing electronic health records on the public, governments are ignoring the risks associated with this technology.

As with so many forms of technology used in health care to the benefit of many—such as ionizing radiation— electronic health records have risks that must be acknowledged, researched, and confronted. Not acknowledging, not researching, and not confronting them is an instance of what Clemens and his colleagues (2007) have termed government failure.

The risks of electronic health records arise because of the need to accurately identify the individuals to whom the electronic health records relate. Accurate identity data avoids mix-ups such as patients with similar names receiving transfusions of the wrong blood type. And accurate identity data is exactly what hackers and fraudsters seek in identity theft.

Electronic health records give governments the ability to micromanage the delivery of health care. For example, eHealth Ontario, a government agency, seeks to “control and manage diabetes more effectively to reduce associated www.fraserinstitute.org

complications and costs” (eHealth Ontario, 2009).

Armed with this power, governments and their agencies can access the detailed personal and health information of individuals and, thanks to record linking, of their families and caregivers, the back-stops of Canada’s health care system. How is that electronic information

tity theft from the private sector. For example, the Canadian Bankers Association tracked credit card data from 1983 to 2008 and published the number of credit cards used fraudulently—through identity theft—in Canada for 1983 to 2006. The year-over-year percentage changes in these totals, the grey line in figure 1, demonstrate that centrally stor-

By centralizing the storage of personal data, information technology facilitates fraudsters in the wholesale stealing of identity data for impersonation. being handled? Is it being adequately safeguarded and fairly used?

Electronic information in the hands of government In his 2008 annual report, the Auditor General of Alberta observed that the government of Alberta manages huge volumes of sensitive and confidential information, including medical records, which are all stored electronically. He found that even though the government has a duty to safeguard this information properly, it is “not doing so,” and that the government’s information technology security is “inadequate” (Auditor General of Alberta, 2008).

The dangers of inadequate security in centralized databases have been demonstrated many times by instances of iden-

ing personal data through the use of information technology facilitates the opportunistic robbing of individuals.

The average year-over-year change for the net retail volume was 12%; the average change for the number of cards used fraudulently was 13%.

The dashed line’s spikes represent security gaps exploited by fraudsters until they were closed by credit card companies. According to Visa Canada, these spikes (from left to right) were the result of:  Counterfeiting, which involves forging paper slips and double swiping;  Skimming, which involves reading magnetic stripes or recording key strokes; and,  Shifting focus and locus: for example, moving from credit card fraud to

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Electronic health records Figure 1: Retail volume and fraudulent credit card use (Visa and MasterCard) in Canada, yearly change (%)

Year-over-year change (%)

80 70

Net retail volume

60

Number of fraudulently used cards

50

Inadequate safeguards harm health

40 30 20 10 0 -10 -20

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: Canadian Bankers Association, 2009; calculations by author.

debit card fraud and switching regions to exploit regional variations in security.

The vulnerability of big computer systems is underscored by two recent events.

The first is the credit card fraud of customers of retail giant TJX, whose stores include Winners and Home Sense. The scale of this fraud, which TJX disclosed in January 2007, was vast: at least 45.7 million Canadian, American, and British credit and debit cards were fraudulently used (Nakashima and Mui, 2007, Mar. 30).

A second example came to light on January 13, 2009, when US-based Heartland Payment Systems Inc., a credit and debit card processor, contacted the US Secret Service and Department of Justice about a data breach (United States Attorney’s Office, 2009).

This breach resulted in the exposure of personal information associated with over 100 million credit and debit card transactions.

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centralizing the storage of personal data, information technology facilitates fraudsters in the wholesale stealing of identity data for impersonation, and that health care data would not be immune to the robbery, harm, and prying enabled by information technology.

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Government systems are not immune.

As of May 7, 2009, the FBI was investigating the alleged hacking of a government website, the Virginia Prescription Monitoring Program, which tracks prescription drug abuse and contains 35.5 million prescriptions. In a ransom note, the hacker or group of hackers announced that they had stolen 8.3 million patients’ personal and prescription drug information and demanded $10 million for the safe return of that information (Merrill, 2009, May 6).

The opportunistic nature of the attacks stands out in the spikes in figure 1. Fraudsters will find and exploit a gap in the defences until the gap is plugged. Sooner or later they will find a different gap in the defences and the process will repeat itself.

Unless the authorities responsible for defences can confidently claim that all gaps are currently plugged and will continue to be in the future, prudence demands the anticipation of further threats.

By 1999, Canada’s governments, which regulate the financial sector, knew—or should have known—that by

One challenge currently facing our health care system is crime that targets prescription medications, especially opioids. Derived from the opium poppy or chemically synthesized, opioids include oxycodone, morphine, codeine, and heroin. Used chiefly for pain relief, the adverse effects of opioids include dependence and addiction. For this reason, opioids are subject to strict controls.

In a 2006 study, Fischer and his colleagues found that over the prior decade, abuse of prescription opioids had pulled ahead of heroin use in Canada. They also found that while heroin was bought from drug dealers, prescription opioids for illicit use were obtained directly or indirectly from sources in the medical system.

The consequences of this shift to prescription drug abuse have been dire, including, among other harms, death by overdose, home invasion (Vaillancourt, 2009, Apr. 17), and the overuse and mixing of prescription drugs with alcohol by post-secondary students (BC Centre for Social Responsibility, 2008).

Prevention of prescription drug abuse relies on vigilant communication between pharmacists and physicians.

Currently, they depend (though perhaps not often enough) on low-tech methods of fax and telephone communication, which maintain personalization and are effective when used.

Governments, on the other hand, prefer high-tech, depersonalized methods.

BC’s Pharmanet is working on electronic prescribing through its eDrug Project, www.fraserinstitute.org

Electronic health records which will “improve medication management and patient safety” and “provide broader authorized access to comprehensive patient medication history information” (BC Ministry of Health Services, 2008: 1). Meanwhile, eHealth Ontario is planning to implement “online management of prescription medications to minimize preventable adverse drug events” (eHealth Ontario, 2009: 2).

A centralized government prescription and medications management system would provide criminals with opportunities to impersonate not only physicians and patients, but also the medications management system itself.

What would happen if criminals gained access to a large electronic database that contained information on what drugs people were taking and in what quantities, and when they last filled their prescriptions?

In Canada, the security threat is real.

Information technology systems in the hands of government can be and have been pierced by opportunistic attacks.

Early in 2007, the Public Health Agency of Canada experienced a security attack in the form of a “worm,” a malicious computer program that can run and spread itself. It immobilized 80% of the agency’s computer system for a month and disabled 543 additional workstations in five of Health Canada’s Ottawa-area offices through the department’s data network (Canadian Press, 2008, Mar. 31a, b). A November 2007 post-mortem report on the emergency warned that if the incident had occurred during a public health crisis, loss of life could have resulted. But neither the attack nor the report on it came to public attention until March 2008, when the Canadian Press succeeded with its Access to Information request.

Late in 2008, two federally funded, quasi-non-governmental organizations, the Canadian Institutes of Health Research and the Canadian Institute for Health Information, experienced “phishwww.fraserinstitute.org

ing” attacks (Greyhead Associates, 2009a) used by hackers for mischief and misappropriation and, if an insider is involved, malfeasance. A phishing attack usually takes the form of an e-mail, sent out by an individual falsely claiming to be from a legitimate organization, which attempts to deceive the recipient into surrendering private information for the purpose of identity theft.

In January 2009, Vancouver Coastal Health warned clinical personnel, among others, of a phishing attack aimed at harvesting their account information and passwords (Greyhead Associates, 2009a). The attack put at risk the identity data of persons in the care, scope, and employ of the networks of primary health care, community care, and acute care, serving some one million people in the Vancouver area.

The Vancouver attack demonstrates that electronic health record systems are not immune to identity theft by fraudsters who are skilled enough to opportunistically outwit the credit card industry.

Canada’s privacy legislation Health information privacy legislation provides the primary prescription for safeguarding personal health information. But Carman Baggaley, the Strategic Privacy Adviser at the Office of the Privacy Commissioner of Canada, holds that the privacy laws of Canada are inadequate against identity theft (Baggaley, personal communication, 2007) which, according to Jennifer Stoddart, Privacy Commissioner of Canada, “has become a serious and very real threat for Canadians” (Stoddart, personal communication, 2009).

Canada’s privacy legislation suffers from two main weaknesses.

First, the privacy legislation enacted federally and provincially since 2002 has enabled governments to define privacy in ways that support electronic health

records. As a result, health information privacy is whatever governments want it to be. If a government wants to grant a department, agency, or quasi-nongovernmental organization access to the personal health information of identifiable individuals, all it needs to do is enact an enabling regulation. While this power is not unique to privacy legislation, it nonetheless carries with it important consequences for how secure and private health information is when managed by government.

Second, at the time of writing (May 2009), identity theft was not even a crime in Canada.

The Health Council of Canada (2009: 35) notes that we “have been slow to adopt some developments that might stimulate more evidenced-based care … such as electronic health records.” Yet, as figure 1 shows, there are opportunistic risks associated with information technology (see, for example, Greyhead Associates, 2009b). However inadvertently, the council is perpetuating the myth that electronic health records entail no risks, as it does not acknowledge the risks to personal safety and security described in this essay anywhere in its promotion of the electronic health record.

Publicly expressed concerns Given the risks associated with information technology, it should not be surprising that privacy concerns are evolving into popular resistance to electronic health records in Canada.

BC’s Big Opt Out (2009) has demanded that the BC government ensure the “right of every British Columbian to determine … whether or not to participate in eHealth by giving or withholding informed consent.” Opt Out’s intention is to “rally British Columbians against the threat to privacy rights” under the new eHealth system. The organizations involved with Opt Out include the BC Civil Liberties Association, BC Persons

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Electronic health records with AIDS Society, and the Freedom of Information and Privacy Association.

In April 2009, the Consumers Association of Alberta (2009) called on the Alberta government to clearly identify who will have access to Albertans’ electronic health records and related personal and financial information, partly out of concern for protecting citizens from harm resulting from losses of confidentiality. Organizations sharing these concerns include the Privacy Commissioner of Alberta, the College of Physicians and Surgeons of Alberta, the Alberta Medical Association, the Alberta College of Pharmacists, the Canadian Mental Health Association, AIDS Calgary and HIV Edmonton, and the Sheldon Chumir Foundation for Ethics in Leadership.

Conclusion In their attempt to control costs and better manage health care, Canada’s governments are looking at establishing electronic health records. For broad protection against the risks of information technology—including robbery, harm to individuals’ health, and general privacy breaches—the governments provide only privacy laws. The laws are arbitrary in their provisions and application, and insufficient for combating the risks. Especially troubling is the fact that governments themselves have failed to safeguard their own data holdings, including electronic health records. Concerns about privacy and safety are growing across a broad base of organizations.

None of this is to say that electronic medical or health records are not a valuable endeavour. Nor is this to say that electronic management of information should be avoided in health care. However, it is critical to understand and recognize the risks that are associated with electronic health records before charging down the path of creating such a system for all Canadians.

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As they seek to increase the holdings of personal health information in electronic form, governments should attend with greater diligence to one of their core duties: protection of individuals, families, and family caregivers against the transgressions of others, including the government.

It’s all a matter of patient safety.

References Auditor General of Alberta (2008). Report of the Auditor General of Alberta, October 2008. Office of the Auditor General of Alberta.

BC Centre for Social Responsibility (2008).

The Misuse of Prescription Drugs by PostSecondary Students: Executive Summary. <http://tinyurl.com/p3kwxw>, as of May 9, 2009.

BC’s Big Opt Out (2009). BC’s Big Opt Out Campaign Launches Tomorrow. News release (April 6). <http://www.bcoptout. ca/Media_LaunchAdvisory.pdf>, as of May 9, 2009.

British Columbia, Ministry of Health Services (2008). Ministry of Health – eHealth eDrug Project: Snapshot. <http://www. health.gov.bc.ca/pharme/newsletter/ eDrugSnpsht.pdf>, as of May 9, 2009.

Canadian Bankers Association (2009). Credit Card Statistics. <http://www.cba.ca/ contents/files/statistics/stat_20081031_ cc_db038_en.pdf>, as of May 14, 2009.

Canadian Press (2008, March 31a). Computer Worm Wreaked Havoc at Federal Health Agency. CBC News. <http://www. cbc.ca/health/story/2008/03/31/phacvirus.html>, as of May 9, 2009.

Canadian Press (2008, March 31b). Public Health Agency Infected by Worm.

Clemens, Jason, Charles Lammam, Milagros Palacios, and Niels Veldhuis (2007).

Government Failure in Canada, 2007 Report. <http://www.fraserinstitute.org​ /researchandpublications/publications​ /4988.aspx>, as of May 14, 2009.

Consumers Association of Alberta (2009).

Consumers Association Calls for Full

Public Disclosure and Sober Second Thought on Health Information Act Amendments (Bill 52). News release (April 24). <http://www.albertaconsumers.org/>, as of May 9, 2009. eHealth Ontario (2009). Frequently Asked Questions. <http://www.ehealthontario. on.ca/about/faqs.asp>, as of May 9, 2009.

Fischer, Benedikt, Jürgen Rehm, Jayadeep Patra, and Michelle Firestone Cruz (2006). Changes in Illicit Opioid Use Across Canada. Canadian Medical Association Journal 175, 11: 1385.

Greyhead Associates (2009a). Atherley Screenshots. <http://www.greyhead-asso ciates.net/know012/index.htm>, as of May 9, 2009.

Greyhead Associates (2009b). Privacy Highlights 2009. <http://www.taxonomer. com/PublishTxgd001/Privacy%20Highlights%202009/index.htm>, as of May 9, 2009.

Health Council of Canada (2009). Value for Money: Making Canadian Health Care Stronger. <http://www.healthcouncilcan​ ada.ca/docs/rpts/2009/HCC_VFMRep​ ort_WEB.pdf>, as of May 9, 2009.

Merrill, Molly (2009, May 6). Hacker Says He Stole Confidential Medical Data on 8 million Virginia Residents. Healthcare IT News. <http://www.healthcareitnews. com/news/hacker-says-he-stole-confid​ ential-medical-data-8-million-virginiaresidents>, as of May 9, 2009.

Nakashima, Ellen, and Ylan Q. Mui (2007, March 30). Data Theft Grows To Biggest Ever. Washington Post. <http://www. washingtonpost.com/wp-dyn/content/ article/2007/03/29/AR2007032900237. html>, as of May 9, 2009.

United States Attorney’s Office (2009). United States v. Jeremy Frazier, et al. Case Information. United States Department of Justice. <http://www.usdoj.gov/usao/fln/ frazier_info.html>, as of May 9, 2009.

Vaillancourt, Bob (2009, April 17). “I Did Grab the Stuff,” Court Told. Sudbury Star. <http://www.thesudburystar.com/ ArticleDisplay.aspx?e=1528393>, as of May 9, 2009. 

www.fraserinstitute.org