Costs and spending

Healthcare Costs and Spending

What’s the Issue?

Healthcare spending, both public and private, has increased over the past several years. Healthcare spending as a percentage of the Gross Domestic Product (GDP) has also increased since the late 1990’s. And, in several provinces, over the last decade, healthcare is taking a greater share of the provincial budget.

What’s going on to cause these increases in healthcare spending? To understand that, one must consider how a change in healthcare spending is calculated. First of all, think about ratios: ratios (e.g. 10/100 = 10%) have both numerators (10) and denominators (100). Healthcare spending is the numerator, while the state of the economy, or Gross Domestic Product (GDP), is the denominator.

First, consider the healthcare spending numerator. Understanding how accurately healthcare spending is calculated is complicated by several factors. For instance:

Are only traditional Medicare expenditures on hospitals and physicians included or all healthcare spending?
Is the total adjusted for inflation?
Does it represent private and public spending or only public spending by governments?
Is it adjusted for population growth to allow meaningful per capita comparisons?

Health spending may increase for a number of reasons, but it is not always clear how someone has put together these factors when spending figures are presented. Consider the following possibilities:

If more people are getting hip surgery, a higher use of that service might increase costs.
If patients are using higher priced brand name drugs rather than cheaper generics, then the over all prescription expenditures would go up.
If physicians’ fees increase, then there would be an increase cost of services.

Most of the confusion in looking at health spending, however, comes from changes in the economy. This is represented by the denominator in the healthcare spending ratio. When the economy does poorly, Gross Domestic Product (GDP) grows slowly, or even shrinks. This means that the same health expenditures will amount to a higher share of GDP. Conversely, when the economy is booming, health spending forms a relatively lower share of GDP.

Similarly, the percentage of government spending which flows to healthcare is influenced not only by the size of healthcare spending, but also by how governments decide to spend their money:

Has spending changed for other public programs? This includes moving some programs from provincial to regional or local governments.
Have revenues changed from tax cuts or increases? This can mean that the same spending for health amounts to a larger or smaller share of what provincial and territorial governments are spending.

Evidence

On the C.D. Howe Institute website: “Paying for Hospital Services: A Hard Look at the Options” by our expert advisor Jason Sutherland, et al.

See our infographic on 2012 healthcare costs in Canada (CIHI data): Reining in Spending, by Lindsay Jolivet.

While drug spending continues to increase in Canada, overall annual growth has slowed to its lowest rate in 15 years, according to a new report released by the Canadian Institute for Health Information (CIHI). Total drug expenditure is estimated to have reached $32.0 billion in 2011, an increase of 4.0% over 2010; this was equal to $929 per Canadian in 2011. Drugs account for the second-largest share of total health spending, after hospital expenditures.

For comparative data from Canada and other OECD countries see OECD Health Data 2012.

Public healthcare spending has risen in absolute terms since 1998. Healthcare spending as a percentage of Gross Domestic Product (GDP) has also increased gradually in Canada over the last several decades. Healthcare spending typically increases as a percentage of overall spending during recession, as demonstrated by sharp increases in spending in the recent past and in the early 90’s.

The Canadian annual average growth in per capita health expenditures (1997 – 2007) has been somewhat lower than the Organization or Economic Co-operation & Development (OECD) average. The OECD includes 34 member states.

In most provinces the percentage of provincial expenditures spent on healthcare has increased between 2000 and 2009.

Provincial revenues have been reduced through tax cuts. Most provinces participated in the tax cuts of the late 1990s and early 2000s, some more than others.

In KPMG’s 2010 Report on business taxes in 10 countries, Canada was second to Mexico in having the lowest total taxes paid by corporations.

Canada’s healthcare costs are at the higher end of other wealthy countries (although much lower than those of the United States).

Activity Based Funding is being considered by several provinces as an approach to increasing the number of patients hospitals treat and tying payments to patient volume, a possible cost containment strategy. However, evidence from its use in other countries suggests that while such a funding mechanism may help to increase the number of patients treated, it is not likely to help with cost control.

The Canadian Health Services Research Foundation 2007 Mythbuster focuses on the Myth: Canada’s System of Healthcare Financing is Unsustainable.

Synopsis: For the average Canadian, the debate over financial sustainability is not so much a question of whether the system is affordable, as it is “Will Medicare be there for me when I need it?” The answer hinges on a simple fact: “Medicare is as sustainable as Canadians want it to be.”

Note: the Mythbusters are a series of essays giving the research evidence behind Canadian healthcare debates

Recommended Reading On Healthcare Costs/Spending From The Health Council of Canada

Our Commentaries

Don’t confuse money with quality at our hospitals
By Jason M. Sutherland and Nadya Repin

Many people are willing to pay more for higher quality products. For example, you will be confident that a high quality, brand-name TV will work when you get it home. If it doesn’t, the TV will be replaced free-of-charge.

Generic drug prices in Alberta: A step in the right direction
By Michael Law and Jillian Kratzer

Want to buy a $100 coffee? Sounds absurd, doesn’t it? However, it’s equally absurd that this is how much more Albertans pay for some generic drugs than people in other countries.

How universal pharmacare might just save our health care system
By Steve Morgan

When the topic of universal drug coverage comes up in this country, the debate often runs aground on the question of cost. In an environment of government austerity, few seem willing to embrace the idea of a new, national government program.

It’s time to view public health care as an economic asset
By Cy Frank

The road to reviving Canada’s sluggish productivity may lead straight to an emergency department — or an operating room — or an immunization clinic.