Future of Health Care Costs in Canada: Analysis

Introduction

Health care systems play an increasingly important role within contemporary societies. More money is being poured into medical facilities and technologies as populations strive to increase their life expectancies and become more health-conscious. In some countries, this trend is further enhanced by growing numbers of elderly citizens. This scenario is most common within highly developed and economically powerful nations. In regions such as the United States, Canada, and Switzerland, young adults have become more focused on careers and professional fulfillment, postponing the establishment of families. This has resulted in reduced birth rates. Yet because natality rates were significantly higher five decades ago, the number of elderly people is now increasing, revealing a shortage in the labor force. Most notably, as American and Canadian baby boomers reach retirement age, they place increased pressure on the health care system, which must now manage a greater volume of requests.

Today's medical sector is able to deal with the growing demand for health care services, but the question lies in its future ability to sustain operations. In other words, will federal and provincial governments be able to adequately fund health care facilities? Answering this question requires consideration of several interconnected forces.

The Canadian health care system is simply called medicare — it is publicly owned but privately run. Medical services are provided to all in need and are free at the point of use. The system is based on five principles: universality, portability, comprehensiveness, accessibility, and public administration (Irvine, Ferguson, and Cackett, 2005). The implementation of these principles, safeguarded by the Canadian constitution, means that differences still occur between medical care centers. These differences may relate to the fees charged or the quality of services, generally determined by the staff's ability to negotiate their salaries. Differences can also occur in insurance policies, with some offering more or less extensive coverage. Canadian patients retain the right to choose the hospitals and physicians they prefer.

Overview of Canadian Health Care

As of 1968, the Canadian government implemented a universal medical coverage policy, provided that hospitals meet the established principles. This requirement demonstrates that the state exercises fiscal federalism over the public health care system. By 1971, all Canadians were offered access to medical services, regardless of income or employment status (Irvine, Ferguson, and Cackett, 2005).

In terms of costs, the Canadian health care system registers the third-largest expenditures globally, after the United States and Switzerland. Funding comes from taxes, and medical institutions may at times be unable to fully meet their tax obligations due to cost pressures. In 2004, 70 percent of all medical costs were registered by the public sector and only 30 percent were accounted for by the private sector. The average medical expenditure per individual was $4,078, and all medical costs accounted for 10 percent of the country's gross domestic product. An observed trend has been a shifting composition of health care funds: contributions from the federal government have declined while those from provincial governments have increased. In 2002, for instance, the federal government accounted for only 30 percent of all costs, while provincial governments accounted for an estimated 63.8 percent (Klatt, 2002).

The primary concern regarding the Canadian health care system revolves around its future financial sustainability. This question has been raised due to observed trends in population aging. Senior citizens require additional care and attention — adults over the age of 55 are hospitalized three times more frequently than those under 55, and Canadians over 65 cost the health care system 4.8 times more than younger populations (Freund and Smeeding, 2002).

The most obvious economic problem within the Canadian health care system is that of escalating costs. These expenditures are multiple and include the costs of medicine, hospitalization, surgery, medical utensils, and the wages of medical staff. All of these costs are expected to increase in the coming decades, driven by forces such as overall population growth and the aging and retirement of Canada's baby boomers.

The population over 55 years was estimated at 22 percent of the total Canadian population in 2001. By 2020, a 10-percentage-point increase is expected, bringing the proportion of Canadians older than 55 to 32 percent of the total population. The birth rate is expected to remain constant, with slight population growth occurring primarily through immigration. Medical costs for the population aged between 55 and 64 are expected to double by 2020. Consequently, total public health care costs are projected to increase from 31.1 percent in 2000 to 42.0 percent by 2020, at an annual average growth rate of 5.2 percent (Brimacombe, Antunes, and McIntyre, 2001).

The Economic Problem

Another change will occur in the type of medical services offered. Senior citizens require medical assistance on a continuous basis, and their health conditions are often multiple or chronic. This means the focus of the medical staff will shift away from curing toward easing suffering, reducing the negative effects of illness, and ensuring functional independence for as long as possible (Winston, 1984).

The question then becomes whether the Canadian health care system can remain financially sustainable as expenditures rise. A favorable answer might be supported by expected economic growth sufficient to absorb rising medical costs. However, the real economic growth rate of Canada's gross domestic product is only 2.5 percent per annum — far below the projected 5.2 percent annual increase in public health care costs.

A more pessimistic view is supported by the likelihood of decreasing tax revenues. Because the elderly tend to be cost-conscious, they save more and spend less, reducing the indirect taxes generated through consumption, such as VAT, and leaving governments with diminished funds. Viewed from another angle, however, the savings of the senior population could serve as an engine for economic growth. By making bank deposits, elderly citizens contribute to the growth of liquidity in the market, enabling banks to offer loans to Canadian entrepreneurs who can then create additional income, jobs, and tax revenues.

The economic theory underlying this topic revolves around macroeconomic forecasting — future estimations made relative to the growth of the elderly population, health care costs, governmental incomes and contributions, as well as Canada's projected economic growth. The question of future costs considers these macroeconomic forces, and the reliability of any answer depends directly on the accuracy of those estimates. It is therefore important to examine the elements that may affect the objectivity of projected data.

First, future projections of economic growth, population, and taxes may be underestimated because they do not account for increases in medical staff compensation. For instance, wages of medical staff are only projected to increase by 2.2 percent — a rate equal to estimated inflation. Yet it is quite likely that wages of health care professionals will rise faster than inflation. Additionally, projections do not consider global forces and threats. The United States, Canada's primary trade partner, has faced economic recessions that would undoubtedly affect the Canadian economy. Because the projections do not account for the possibility of an economic recession, they may be systematically underestimated.

Another shortcoming is that projections do not consider a potential expansion of the medical care sector itself. As demand for medical services increases, current facilities may prove insufficient. The type of services provided is also treated as a constant, yet technological advancements are likely to expand the range of medical services available. A further argument for underestimation is that tax rates are assumed to remain constant, when in fact they could decrease under future fiscal pressures — posing additional financial threats (Brimacombe, Antunes, and McIntyre, 2001).