To Fix Health Care, Follow the Money

Health spending is booming across Canada -- especially in Ontario. To appreciate the magnitude of the surge, consider some basic data:

Total public-sector spending in this province is approaching $32-billion, a rise of 60% over the past decade. That is fully 6% of the Ontario economy, considerably larger than the auto industry or retailing. Hospital-based activities account for more than half of this spending and they have taken the lion’s share of new dollars during the recent jump.

This week’s first ministers’ meetings represent just the latest high-profile effort to control provincial health-care costs. But in the long run, transferring pot-fulls of money from one level of government to another will do little.

There is also one nagging question that is almost never addressed during these confabs: Where does the money go? How are the billions of dollars that flow from taxpayers to the health system spent, and what do they produce?

A recent Fraser Institute report looked at one aspect of this question: worker pay in Ontario hospitals, the largest part of the health care system. A basic conclusion of the study is that all of the new money allocated to hospitals in the last five years for which data is available was spent on wages and salaries. Every cent.

Whose wages and salaries? To answer this question, the study looked at detailed census wage data, including a unique database for those workers earning more than $100,000 per year.

The study found that hospital pay is generally too high. Nurses, unionized workers and senior management have relatively high pay compared to similar workers in other provinces and in other parts of the economy.

For example, hospital cooks and cleaners are paid between 30% and 60% more than in the private sector, and nurses earn at least 14% more than in other provinces. The number of hospital workers earning over $100,000 per year has tripled since 1996, with average pay for these high earners rising 60%, and executive pay growing twice as fast as non-executive pay. As more and more public money was given to hospitals, high earner pay actually rose faster.

At the same time, hospital physicians, certain other high-level health professionals and mid-level administrative staff have relatively low pay. The system essentially values their services less.

The report examines the pay situation for physicians in more detail, as they are the central human resource providing health care. It finds that physician pay has dropped in half compared to average incomes over the past 30 years. Average income for all Ontario physicians is presently three-quarters of its peak 1972 level, after adjusting for inflation. Physician pay is at least one-third higher in the United States. As a result, physician numbers and patient-care hours are shrinking relative to patient needs.

These pay levels are signs of misallocated taxpayer funds. The public-sector health system produces excessive pay in hospitals and lower physician supply, the exact opposite of what taxpayers and patients demand. Such job market distortions reflect a public sector health system that lacks competition and rations patient care to control costs. The study concludes that it is impossible for the system, as it is currently structured, to solve access and cost-control issues at the same time.

By contrast, market-based policy reforms can deal with the twin problems of misallocated spending and inadequate patient access to care. They can solve the basic issue of excess demand and inadequate supply the way all market actors do: by reflecting consumer -- i.e. patient -- preferences, adjusting prices in response to demand changes, and forcing providers to compete for business.

For example, the hospital funding model can be changed so that funding follows patients and their needs, rather than being allocated in a lump sum by the health ministry. Patients can take on a portion of payment responsibility using co-payments, allowing their demands to direct resource allocation. Delivery and financing of hospital services can be opened to provider competition, thus encouraging efficiency, better service quality and a more sustainable wage structure.

What is needed is an expansion of health and hospital care by opening the public system to the winds of change, putting responsibility in the hands of the users and demanding better service from providers. The experience of other countries proves that hospitals can better allocate funds and increase access and quality of care if we break up the state health-care monopoly.