The wrong health-care model. Is Canada's health-care system really cheaper?

NO MATTER how we view it, the U.S. health-care system is in crisis. At more than $6 billion annually, the cost of providing health care continues to outrun the growth of the economy, and yet 31 million citizens lack adequate insurance, and many middle-income insurees fear that their savings could be wiped out by a catastrophic illness. In the glare of these facts, it is not surprising that the Canadian health-care system is being touted as an alternative. It provides universally available health care at lower cost - 11.1 per cent of Gross National Product (U.S.) compared to 9 per cent (Canada) in 1987. The Canadian system, however, is less attractive than it appears at first.

Is It Cheaper?

TO BEGIN with, is it really cheaper? Take, first, the cost of capital. In the U.S. health-care system, as in any other business, the cost of working capital is included as an expense. Hospitals, provider networks, rehabilitation facilities, insurance plans - all must raise money either through the equity market or through debt financing instruments - and investors expect returns. But Canada's 1,400 hospitals were built, for the most part, through a combination of local funds and matching federal contributions. This is not to say that capital comes free in Canada, but rather than the capital cost of the health-care system is buried i the total financing costs of the Canadian government (contributing significantly to Canada's national debt, which is roughly 50 per cent higher per capita than the United States'.)

To estimate this hidden cost, we extrapolate the U.S. ratio of capital employed to annual operating costs for health-care institutions (67 per cent), multiply it by the percentage of total health-care expenditures attributable to institutions (47 per cent), and further multiply by a 10 per cent cost of money (a conservative estimate until recently). This calculation adds 3.15 per cent to total Canadian health expenditures, increasing the Canadian health-care-to-GNP ratio by 0.3 percentage points.

Consider, next, the cost of employee health benefits. In both the United States and Canada, the health-care systems are major employers - and labor costs constitute approximately 75 per cent of all health-care expenditures. Since every U.S. employer recognizes employee health benefits as a significant incremental payroll cost, benefits for the health-care labor force are included in the operational costs of U.S. health-care facilities. In Canada, however, the cost of employee health benefits is absorbed by general taxation, and therefore excluded from calculations of health-care expenditures.

To get a best estimate of labor costs in Canadian health care, we multiply the percentage of labor costs in overall health-care expenditure by 10 per cent, for a conservative approximation of benefits as a percentage of payroll. This figure is then multiplied by 83 per cent to allow for the 17 per cent of health benefits paid for by government-levied health-insurance premiums. The product of these numbers, 6.3 per cent, indicates the amount by which Canadian expenditure should be increased to make it comparable to U.S. figures. Canada's health-care costs as a percentage of GNP thus increase an additional 0.6 points.

Population mix comes next, for health-care demand is highly dependent on the demographic profile of the served population. In the United States, it is estimated that the 12 per cent of the population that is elderly accounts for well over 50 per cent of health-care consumption; an increase of 1 percentage point in the 65-and-older population can raise health-care costs by 4.4 per cent. The U.S. cohort of 65-plus, which is 1.2 per cent larger (proportionately) than the Canadian, accounts for a full 5.3 per cent of U.S. health-care costs. In other words, were the Canadian system required to care for a population demographically equivalent to the U.S. population, it would face a 5.3 per cent increase in its health-care costs. This adjustment adds a further 0.5 points to the percentage-of-GNP figure.

Finally, if Canada were to spend the same proportion of total health-care costs on R&D as the U.S., it would face a 2.4 per cent overall increase in costs, and a resulting 0.2-point increase in health care's percentage of GNP.

The net effect of these adjustments for costs of capital, health benefits for health-care workers, population mix, and R&D is to increase Canada's share of GNP spend on health by 1.6 points. That in turn reduces an apparent 2.1-point advantage over the U.S. system to a modest 0.5. Even then, we have made no adjustment for other factors which heighten both cost and demand for medical care in the United States (and which have no parallels in Canada). They include the large number of Vietnam veterans; inner-city phenomena resulting from more intense urbanization (violent crime, substance abuse, sexually transmitted disease, teenage pregnancy); substantially greater costs of malpractice liability and insurance; and administrative costs of the health-care system, which in Canada are absorbed into general government expenditures, with little of the real cost allocated back to health care.

Above all, we have made no allowance for the significant (currently unmeasured) use of the U.S. system by Canadian citizens. Each dollar spent by a Canadian in the United States increases the apparent cost of the U.S. health-care system, and decreases the apparent cost of the Canadian system. Thus, a more sophisticated analysis would almost certainly yield a percentage of GNP equal to, or perhaps greater than, that of the U.S. health-care system.

A Question of Limits

CANADA's health expenditure may be higher than the crude figures suggest; but it is still a finite sum of money. And it is a fundamental tenet of the Canada Health Act that all residents are covered by one of the provincial health-care plans. Hence unlimited demand meets limited resources, and - something's gotta give.

The result is that while health insurance may be universally provided, access to actual health care is limited. There is, in effect, rationing by delay. Canadian residents may wait two months for a CAT scan or cataract surgery, four weeks or more for elective surgery (sometimes even in urgent cases), six to ten months for hip replacements. Two of Canada's most affluent provinces - Ontario and British Columbia - have contracted with U.S. hospitals near the border to provide coronary bypass surgery for Canadian citizens, with the relevant provincial ministry of health paying for the procedure.

Furthermore, the restriction in access have grown more serious as Canadian administrators have sought to contain rising health-care costs. The 1970s were a period of rigorous management control that succeeded in squeezing much of the fat out of the health-care system. By the 1980s, however, management devices to improve productivity and cut waste were at the point of diminishing returns. Hence, the bulk of cost constraint in Canada is now achieved at the expense of ease, timeliness, and choice of access to health-care resources. A comparison of U.S. and Canadian access to higher (i.e., newer) medical technologies shows the per-capita ratio of accessibility ranged from 200 to 800 per cent higher in the United States. Ironically, while Americans examine the Canadian system, Canadians have been studying U.S. models, particularly health-maintenance organizations (HMOs), to learn from their skills at cost containment.

Although it derives its economic support from the federal government, the Canadian system is in fact a collection of ten different provincial plans, each administered by the individual province. Those provinces with a population base of one million or less can be usefully compared with the seven HMOs in the U.S. that provide health care to an enrollment of over one million subscribers. In fact, in 1987 three of the larger American HMOs - Kaiser Permanente, Cigna, and Harvard Community Health - provided a full range of health-care services with per-capita costs $400 to $500 lower than comparable services in Canada.

Increasingly, the U.S. health-care system serves as a safety valve for the Canadian system - the latter can succeed within its limitations because there is a medical version of "overdraft protection" to help it cope with the vagaries to adopt the Canadian system, not only would the resulting limitation of resources affect American healthcare consumers, it would also eliminate the Canadians' safety valve. And what country would then serve as a safety valve for the United States?

Still, the Canadians seem content with their health-care system. A recent Harris poll showed the overwhelming majority of Canadians as preferring their system to that of the United States or Britain, while more than 60 per cent of U.S. citizens indicated a preference for the Canadian system over their own. Why?

Primarily, it is because Canadians live secure in the belief that a catastrophic illness will never be compounded by financial catastrophe. Canadians routinely read about U.S. citizens left destitute by severe illness. It is that freedom from risk of personal financial ruin which underlies the perceived quality of the Canadian national health-insurance system.

But there is a more profound reason for the Canadians' acceptance of a system with so many restrictions. Healthcare systems reflect a society's deepest values; they cannot be examined in isolation from the culture that spawned them. Canada and the United States appear to be culturally similar in terms of language, media, educational systems, and technologies. But that is misleading. Social attitudes toward individual rights and the direct authority of government over daily life differ substantially. In its gradual evolution from a colonial to a democratic society, Canada has maintained many of the centralized characteristics of the colonial administration from which it grew and a corresponding deference to authority among the citizenry. These traditions persuade Canadians o accept limitations on individual rights unknown in the U.S. Among them: no access to punitive damages if wronged by a medical practitioner, no contingent legal fees; no class-action suits (with minor exceptions); no right to sue government officials or ministries of health for medical negligence; no effective chioce between the various provincial medical systems; no private alternatives. None of these limitations would be acceptable to Americans.

In sum, the Canadian health-care system does not operate than the or more effectively than the U.S. system. Its mechanism for funding health-care does constrain expenditure effectively, but comes with a price tag of decreased accessibility to medical technologies and the utilization of procedures that are substantially inferior. The domestic and international popularity of the Canadian system derives primarily from the financial safety net it provides, buttressed by a political culture that accepts government and community-based control of decisions that affect the deepest questions of human life. If Americans were to insist upon retaining the rights they now take for granted, they would make a Canadian-style system of health care both prohibitively expensive and inherently unworkable.

Mr. Krasny, a Canadian citizen, is president of Bogart, Delafield, Ferrier, Inc., a health-care consulting and strategy firm.