Canada and Rising Healthcare Costs

Cost is an important part of the healthcare debate but it often ends by comparing healthcare expenditures as a percentage of GDP in the U.S. to other countries.  Economists are generally more interested in rate of change than the absolute level of an activity.  Claire Sibonney, a Reuters analyst, writes in "Soaring costs force Canada to reassess health model"

Pressured by an aging population and the need to rein in budget deficits, Canada's provinces are taking tough measures to curb healthcare costs, a trend that could erode the principles of the popular state-funded system.

Like the U.S., Canadians are debating how the government, using non-market mechanisms, should limit health care expenditures.

Ontario, Canada's most populous province, kicked off a fierce battle with drug companies and pharmacies when it said earlier this year it would halve generic drug prices and eliminate "incentive fees" to generic drug manufacturers.

British Columbia is replacing block grants to hospitals with fee-for-procedure payments and Quebec has a new flat health tax and a proposal for payments on each medical visit -- an idea that critics say is an illegal user fee.

And a few provinces are also experimenting with private funding for procedures such as hip, knee and cataract surgery.

To repeat oft made arguments ("Rationing Health Care," and "More on Rationing Health Care"), the best way to limit the growth in costs is to rely more heavily on market mechanisms.  Under the current system in the U.S., the insured have no incentive to limit expenditures in much the same way I have no incentive to limit auto pollution when I drive.  The amount of pollution I add or any one individual adds is so small as to be meaningless.  Summed across a large population area, the individual contributions produce a very visible problem.  If I stopped pollution there would be no measurable improvement in air quality.  The government has attempted to deal with auto pollution using command and control techniques like requiring catalytic converters or requiring auto producers to meet fleet fuel efficiency standards.  The command and control mechanisms are less efficient than market mechanisms.  A simple pollution tax (see Mankiw's "The Pigou Club Manifesto" for a full explanation.) added to every gallon of gasoline purchased would be more effective.

Why don't we through our government apply a gasoline tax rather than more expensive command and control regulation?  My guess is that voters could clearly link the tax to their wallets whereas that link is less visible with command and control regulation.  Voters as taxpayers want benefits paid for by others.  

Whereas the environment is a natural commons, healthcare markets are a government built commons, constructed because people want others to pay for their benefits.  If voters had to directly fund healthcare purchases, they would be more careful in ordering those services.  Healthcare providers who currently have little or no incentive to lower cost would find ways to offer better healthcare at a lower cost or lose customers to providers who could.