Financing Healthcare: Weighing the options

Presented by: Alexandra Constant MSc, Senior Economic Specialist

It’s about equity and financing

How would we finance extending coverage?

Policy Objective• Policy Objective

• Is income and risk sharing desirable for non-CHA services ?• prescription medication outside hospital • long-term care• Other services

• Assuming the answer is YES for the discussion

Factors to Consider• Economics:

– Any form of taxation may negatively impact:

– Typically does not make a normative judgment of whether a tax should be implemented – this depends on public values

• Key questions:– What are societal preferences?– How to minimize negative impacts of the higher taxation?– Can it be offset by the positive economic impact and health outcomes of an increase in health expenditures?

•Economic output •Income distribution • Disposable income

•Employment •Government fiscal position

Options for Increasing Revenue1) Personal income tax: Raise rates?2) Corporate tax:

– Raise rate and/or– Eliminate tax deductions on employer-sponsored private

health insurance and tax progressively

3) Consumption taxes– GST/HST – broad base– Excise tax – narrow base apply to:

• tobacco, alcoholic beverages, other unhealthy” products

Options for Increasing Revenue4) Payroll tax5) Charge a health premium

• targeted income tax collected through employer

5) Medical savings account • Encouraging people to pre-plan for unexpected health

expenditures

7) User fees• Directly charging for health services through

deductibles or copayments on drugs and other services

Comparing AlternativesKey characteristics of different options:• Macroeconomic impact• Distributional impact

• Is the policy progressive or regressive?• Are specific groups made relatively worse off?

• Transition costs/Administrative burden• Cost of policy vs. revenue generating ability

• Capacity to generate revenue• Public perceptions• Capacity for risk-sharing • Capacity for income-sharing

In reality, the ‘devil is in the

details’ – implementation assumptions and

redistribution!

Policy Option Macro (negative) Distribution

Who pays (burdensome

for)Admin. costs Revenue

generateEarmark

for health?

Fed personal Inc.Tax (1 per cent point increase in each income bracket)

Medium Progressive Tax payers Small ~$6.2 billion N

GST (from 5% to 6%) Large Regressive Consumers Small ~$5.4 billion Y

Excise Tax and Duties (double rates)

Large Regressive Consumers (poor) Large ~$3.5 billion Y

Payroll Tax (Increase CPP/QPP by 2 per cent points or increase by twice the level of YMPE)

Large Regressive* Workers, employers Small ~$5 billion or

$7.8 billion Y?

Corporate Income Tax Small Regressive Businesses (Small) Small - N

Deductibility of Employer Paid Health Premiums

Medium Progressive Workers Medium - Y

Medical Savings Account Small Regressive Savers Large- New

program - Y

Source: Informetrica Limited (Mike McCracken) (2011). Additional funds for the healthcare system in Canada: The distributional and economic impact of alternative revenue-raising schemes. A report to the Canadian Health Services Research Foundation. *Applicable for an increase in contribution rate. For increases in the cut-off level of employment income, the impact is more progressive, with the total effect being more proportional.

Public Perception

Soroka, S. (2011). Public Perceptions and Media Coverage of the Canadian Healthcare System: A Synthesis. A report to the Canadian Health Services Research Foundation.

Source: the 2010 Focus Canada Survey

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Public Perception : User FeesOver the next two decades there will be fewer working Canadians relative to the total population. Which of the following do you think would be the best way of ensuring that there will be enough government tax revenue to pay for future health care expenditures without compromising other government programs?

Source: Ipsos Reid Online Omnibus, March 2010 (N=~2000)

Developing a contribution-based Canada Health Plan that would raise revenue and set aside financial resources for individuals who need health care the same way that the Canada Pension Plan works for people who want to retire.

Developing a Registered Health Savings Plan, similar to the Registered Retirement Saving Plan that would allow individuals to save money on a tax free basis that would be available for them to pay for health services or prescription drugs that are not included in the public health plan coverage.

Raising taxes over time to cover the increased demand for health care services.

Taxing Canadians an additional amount on their annual income tax return that is linked to how much health care the person has required over the year up to a maximum amount (a percentage of their total income).

% respondents

Closing remarks• With any choice of financing there are many considerations

– All have some negative impacts, must assume benefits outweigh these

– Choose an approach which minimizes potential negative impacts while achieving goals around income and health risk-sharing

• Details of implementation are important• Recall that changing the way services are financed will not

produce a more efficient/effective health care system requires reform of the delivery system, such as improving allocation

efficiencies, and of how providers are organized and funded

For additional information, please contact Alexandra Constantalex.constant@chsrf.ca

Presentation to participants in CHSRF’s stakeholder event that was held in Ottawa on May 31, 2011.