Cold Reality

How they don't do it in Canada

Several years ago, I was presented a most puzzling piece of information. It was an article in The New England Journal of Medicine analyzing the costs of health care in Canada and the United States. The conclusion: Canada has found a way to produce health care at a cheaper cost than the United States.

Being a Canadian, I confess to swelling with pride at the fact that we were able to do something better than our mighty American cousins—particularly in the sphere of economics. Reading more deeply, I was shattered to discover that this superiority allegedly came from the fact that we have a system of socialized health care in Canada, while the United States still depends primarily on private supply.

I had long been a fastidious reader of the studies produced by the Reason Foundation and our own economists to the effect that private suppliers of services ranging from garbage collection to river dredging operate more efficiently than their public-sector counterparts. Yet here was evidence that in one of the most complex and expensive aspects of modern life, public service meant efficient service.

And the evidence, in the form of the historic trends in health-care costs as a fraction of the total national income, was quite compelling. Whereas health-care costs had absorbed a greater fraction of the Canadian GDP in the years before full-fledged Medicare emerged in 1971, ever since health care has absorbed a greater fraction of U.S. GDP—currently 12 cents of every dollar compared to just less than 9 cents in Canada.

The question is, How does Canada do it? How do we produce the same health-care product for only 9 cents of every dollar of GDP?

To understand the question, one must first understand the system. It is not entirely correct to refer to "the Canadian health-care system," for it actually includes 11 separate provincial and federal health-care programs operating under the umbrella of the National Health Act. The federal government provides a significant but declining fraction of health-care funding. It also tries to ensure national standards, portability of coverage, and elimination of co-insurance payments or user fees by penalizing provincial governments that break the rules.

Patients may pay extra for semi-private and private hospital rooms since the basic service covers only ward accommodation. Patients may also pay for services that aren't covered by the hospital plan, including elective plastic surgery or outpatient physical therapy. They may not, however, pay a doctor anything more than the government's fee for covered services, and the doctor may not accept any extra payment.

(This prohibition extends to hospital services or surgical procedures. Canadian patients may not "jump the queue" by paying directly for procedures in short supply. Patients of other nationalities may, however, get access to Canadian health care faster than Canadians by paying the full cost themselves. The argument used to justify this practice is that letting foreigners pay cash generates more money for the health-care system and hence enables more Canadians to be treated.)

So why does Canada do things so much more cheaply than the United States? The most significant fraction of the difference, according to the New England Journal, is in the costs of administering the two systems. To administer the U.S. system takes 1.23 percent of GDP, compared to a mere 0.1 percent for the Canadian system.

Add to that the fact that Canadian physicians are protected from unlimited liability by a Supreme Court–imposed ceiling on pain-and-suffering damages and the further fact that we have a younger population, and considerably more than half of the difference is accounted for. What's more, notes Victor Fuchs, a Stanford University researcher and noted health-care authority, Canadian doctors charge smaller fees. Casual observation of the salaries offered by American recruiters at nursing job fairs in Canada indicates that other health-care personnel also earn more in the United States.

But even all these factors do not entirely account for the difference. There is, after all, the pesky matter of the demand for health care. Since 1971, Canadians have had universal access to the medical system—with fees of any kind forbidden by law. Health care is, in other words, a free good. And, as a Royal Commission of Enquiry determined in 1976, "the demand for health care appears to be unlimited." In such a system, we would expect demand for care to skyrocket, taking costs along with it.

Oddly enough, this hasn't happened. The reason is simple, though not obvious: Canada doesn't control the unit cost of health care—the cost, for instance, of an appendectomy—but the total cost. Each provincial government sets a health-care budget for the year and pays each hospital accordingly. Although nominally independent, hospitals depend entirely on these politically determined budgets for their revenue.

No matter how much demand there may be, the hospitals usually do not receive any additional payment. Any operating deficit must be made up in the next fiscal year. To meet these restraints, hospitals limit the total number of complicated surgeries—cardiac bypasses, hip replacements—they can do in a particular budgetary period. They also reduce the number of available beds to bring their total operating expenses down to the budgeted figure. This practice, on a system-wide basis, amounts to rationing.

The provincial governments also control hospitals' capital budgets—thereby limiting the acquisition of such new technologies as CAT scanners, MRI scanners, and lithotripters. And the governments allocate money separately for such special procedures as cardiac bypass surgery, rationing them as well. As a result, there are many fewer angioplasty sites, open-heart surgery sites, and organ transplant facilities per capita in Canada than in the United States.

Although physicians are paid on a fee-for-service basis, with fees negotiated collectively, they, too, are limited to a fixed amount of total billing. If total billings exceed the budget for a certain period, each physician's payments in the next period are reduced to make up the difference.

So the answer to the question, How do they do it in Canada?, is that they do not do it. The total cost of health care is controlled by arbitrarily limiting the number of procedures of certain types, by limiting access to technology and diagnostic machinery, and by compensating physicians so that they are discouraged from responding to the demands of their patients. There are measurable consequences of this supply limitation in the form of queues or waiting lists for surgery.

As the celebrated case of Stanley Roberts, former president of the Canadian Chamber of Commerce, makes clear, being insured in Canada is no guarantee that you will receive medical care when you need it—even if the required treatment is a fairly standard procedure. Roberts was admitted to Burnaby General Hospital near Vancouver with neurological symptoms—memory loss, speech impediment, headache. The cause, it was determined, was either a tumor or an abscess.

If an abscess, it needed immediate treatment, since these can fulminate and kill the patient relatively quickly. If a tumor, while potentially just as deadly if malignant, there would be more time to treat it. Roberts was placed on the waiting list for neurosurgery to have a biopsy or other definitive test of his malady. It turned out to be an abscess—a fact determined by an autopsy after Roberts had died. For Stan Roberts, a personal friend and a man who had done much for Canada in many capacities during his life, the waiting list for diagnostic surgery proved to be too long.

Until recently, such tragic anecdotes accounted for most of our knowledge of Canadian waiting lists; there was little hard information available. But the Fraser Institute has just completed a five-province study of patient waiting. Surveys of specialists were conducted in the Pacific coastal province British Columbia; in Manitoba, a centrally located province; and in three Atlantic provinces, Newfoundland, Nova Scotia, and New Brunswick. The results of these surveys are reported in Tables 1 and 2.

In all, 333 physicians representing 10 different specialties were surveyed—20 percent of the total number of practitioners in each of the fields of specialization. Physicians were asked to indicate how many patients they had waiting for procedures of different kinds and how long people were waiting before they got the service they needed.

These survey responses constitute a unique source of information, because comprehensive surveys of this kind have not been conducted by others and, in particular, no waiting list measurements are published by governments. Table 1 shows the number of weeks patients are waiting for a variety of types of surgery. Table 2 provides the estimates of the total number of people waiting for surgery. Table 2 provides, in addition, an estimate of what these figures imply about the total number of people waiting in the country as a whole.

The waiting lists reveal quite a bit about how the Canadian system has adapted to the unlimited demand for health care. Generally, waiting was longest in cardiology, orthopedics, and plastic surgery. Patients in Newfoundland needing cardiac surgery wait an average of 42.6 weeks, an experience matched only by the 37-week average wait for plastic (restorative) surgery in Newfoundland. Waiting lists were, on average, shortest for internal medicine, where the longest wait, in British Columbia, was just over a month. In general, the waiting times for gynecology, urology, and general surgery were short—ranging from 0.9 week to 13.2 weeks.

It would be helpful to know whether Canadian waiting lists are getting longer or shorter over time. Although there are no comprehensive waiting-list data, we can compare a 1990 measurement for British Columbia to the 1991 estimates for that province. And the result is striking: There has been a significant decline in waiting times and, in some categories, a dramatic decline. In the case of general surgery, for example, the waiting time dropped from 23.9 weeks to 4 weeks. In the case of urology, from 25.6 weeks to 8.3 weeks.

The explanation for this apparently good news is not, however, all that encouraging. In 1989, there was a general strike by the nurses in British Columbia, boosting the length of waiting lists dramatically. When the strike was over, waiting lists shrank.

But they didn't necessarily return to normal. Consider the effects on cardiac-surgery waiting lists, as examined in an August 1991 Journal of the American Medical Association article by Steven J. Katz and his colleagues. In the first quarter of 1989, 400 people were waiting for bypass surgery. The province's nurses then began a work-to-rule campaign, followed by a 17-day strike. During the strike, no bypass surgeries were performed. And even after the strike there was a shortage of critical-care nurses. The result: nine months of less-than-capacity operating levels and a drop in the average number of procedures per quarter, from 600 to 400. By late 1990, when the number of operations finally returned to normal, some 800 people were waiting—twice the number before the strike.

The waiting list still hasn't returned to its previous level. Our measurements show 669 people waiting in 1991, a 67-percent increase from before the strike. Because there is no unused capacity to do cardiac surgery under ordinary circumstances, the strike permanently lengthened the waiting list. (Fortunately, this problem hasn't emerged for other surgeries, except orthopedic, suggesting that those surgeries are not as dependent on specialized nurses or equipment.)

We have one other clue to the status of waiting lists over time. We have recently discovered a 1967 government report compiling waiting lists for a number of the larger hospitals in British Columbia and projecting these waiting lists for the province as a whole. From these projections we can calculate that 0.6 percent of the population of British Columbia was waiting for surgery in 1967. (At that time, a comprehensive system of hospital insurance had been in place for 10 years. Comprehensive public insurance of physician costs did not arrive until the following year.) The total number estimated in our new survey amounts to about 1.24 percent of the population for 1991—double the earlier figure. This suggests that the waiting-list problem may be getting worse.

Moreover, contrary to U.S. advocates of a Canadian-style system, national health insurance doesn't mean equal access to health care—or equal health. One striking difference is from province to province. A woman in Newfoundland might wait 36.2 weeks for restorative surgery after a radical mastectomy, while she would wait only 13.2 weeks in the more-affluent province of British Columbia. For potentially life-preserving cardiac surgeries, the difference is even larger—a disparity of 32 weeks between the longest and shortest wait. And even that disparity is misleading: New Brunswick has a short waiting list because that province only recently began to offer cardiac bypass surgery at all.

So, what can we conclude from all of this measurement of health-care supply and demand in Canada? The most obvious inference is that while it is true that Canada has a good health-care system, that system does not contradict the general rule that governmental production of services is expensive. Canada spends less of its GDP on health care not because we have found a way to produce health care at lower unit costs but because we have found a way to limit the total supply of services made available. We do not permit prices to play a role in allocating health-care resources in Canada. Instead, we ration the supply, denying treatment to some and making others wait.

A second inference from the data is that in Canada neither access to health care nor medical outcomes are equal. People wait longer in some provinces than in others, and some medical technology is available in some provinces but not others. Waiting, which is the only alternative for low-income Canadians, encourages high-income Canadians to go to the United States for treatment. The clear indication is that Americans should not adopt the Canadian health-care system in the mistaken belief that it will solve the problems of access and high cost.

Michael Walker is executive director of the Fraser Institute in Vancouver.