This week, Ontario Health Minister Deb Matthews published her plan for controlling provincial government health spending. While the Minister is correct when she says the growth of provincial health care spending is not sustainable, her proposed solution – more government-imposed central planning and bureaucratic management – is wrong. Ontario’s health system does not have a ‘management’ problem; it has an ‘economics’ problem.

Rearranging where surgeries are performed, forcing doctors to work overtime, and re-allocating patients out of hospitals into the community will not have a significant effect on government spending. While reorganizing hospital funding from fixed global budgets to activity-based funding will introduce some helpful economic incentives to treat the sickest patients first, it will do nothing to curb overall health care expenditures. Toying with incremental reforms will not save Ontario’s sinking health care ship.

In contrast, the provincial health system’s financial predicament has three clearly identifiable economic causes: the province’s monopoly over funding for medical care, the politically planned allocation of medical goods and services, and the lack of consumer exposure to the cost of using health care.

Politically managed, 100 per cent redistributive financing produces unsustainable cost growth and rationed access. In other words, Ontarians payers are paying more and getting less. When a government faces budget constraints and unsustainable growth in health spending, it doesn’t have many options. Raising taxes and cutting publicly insured medical services are the default – which Ontarians are all too familiar with.

In 2004, the province cut funding for biannual eye exams for everyone except children and seniors while terminating funding for chiropractic and physical therapy services. In the same year, it introduced a new health tax under the pretext of a ‘premium.’ Unsurprisingly, the typical taxing/rationing approach has not fixed the province’s unsustainable growth in government health spending. At the end of 2010, government health spending accounted for 49.5 per cent of Ontario’s total available revenues; compared with 41.5 per cent in 2000/2001.

Since Ontarians are prohibited from purchasing private insurance for medically necessary services, the availability of insured medical services is at the mercy of the province’s politicians. When central planning is responsible for determining the scope of insured services, the entire process becomes politicized. As a result, Ontarians have no control of their health care coverage because politicians and bureaucrats determine what is considered medically necessary and worthy of insurance coverage.

By contrast, in a well-regulated, competitive private health insurance market, insurers are forced to compete on price and services. This means that if an insurer stops financing a particular medical service, an individual has the ability to shop around for another insurance scheme that meets their personal medical needs. The ‘one-size fits all’ approach does not work for health insurance – which is precisely why Ontario needs to relinquish its health insurance monopoly and end the prohibition on private insurance.

Moreover, in contrast to a typical insurance scheme, the provincial health insurance program is not designed as a true insurance plan with deductibles, premiums, and co-payments. Since patient spending is unrelated to use, it creates perverse incentives for patients and providers to over utilize medical goods and services.

The first reform Ontario should implement is reduce the public subsidy for consuming medical goods and services to less than 100 per cent. Ontarians should be exposed to a portion of the costs associated with the publicly funded health care services they use. The objective of patient cost sharing is not to acquire additional income for providers – it is simply a means of introducing price-sensitivity to costs. 

Economic research and international evidence show that patients do react to price signals, and that cost-sharing is effective in reducing unnecessary use of medical goods and services without resulting in increased negative health outcomes. Canada is one of the only countries in the developed world with a universal-health care system that does not require patients to share the costs of the publicly-funded medical services they use. Notably, most of these countries have exemptions for low-income earners and people with chronic health conditions.

The other reform Ontario should consider is allowing people to voluntarily purchase private health insurance for hospital and physician services. Doing so would shift billions in expenditures off the public system. This is not radical stuff. Ontarians are currently allowed to obtain private insurance for drugs. In principle, a private health insurance option is no different than allowing a private education option to the public education system, which is something Ontario currently permits.

Ontario is currently facing a $16 billion deficit. Meanwhile, provincial health care spending accounts for half of every dollar the province obtains in total revenues (including federal transfers). Tough decisions will have to be made. Unfortunately the current provincial government is attempting to fix a deep wound with Band-Aid solutions.