December 2000 Fraser Forum:
Financing Pharmaceuticals in Canada
How much do Canadians spend on prescription drugs? Most working Canadians must pay out of their own pockets, or rely on private health insurance to buy these drugs. Seniors and the poor are subsidized by provincial drug benefit plans, but have to pay some portion themselves. Costs are rising, and both provincial governments and insurance companies want to contain costs. This article looks at recent pharmaceutical spending and proposes another financing option.
Spending
In 1998, the average Canadian household spent $198 on prescription drugs directly, plus $119 on "public hospital, medical, and drug plans," and $146 on "private health care plans (e.g. supplementary coverage, extended benefit packages, drug plans, etc.)" for a total of $463, as shown in table 1. Since the average household size was 2.58 persons, the spending per individual was $77 on direct costs, $46 on public insurance, and $57 on private insurance, for a total of $179. Of course, the insurance items include more than prescription drug coverage. Alberta and British Columbia charge premiums for their public health plans, and private insurance companies provide health services other than prescription drugs. So, premiums for health insurance to cover prescription drugs alone would be less than the total described above. However, in the absence of more detailed information, let us assume that these insurance premiums were completely allocated to prescription drug benefits. To a large degree, the role of the Canadian private health insurance market is not to provide indemnity for catastrophic events (as do insurance markets for property such as automobiles and homes), but to provide pre-payment plans for goods and services not covered by the public sector, including pharmaceutical expenditures that would not be financially debilitating to the consumer. Since the premiums are (to a large degree) pre-payments, we can count them as benefits received.
A household expenditure of $463 is about half of what the average household spends on electricity, less than two-thirds of the average household’s telephone bill, and about the same as it spends on furniture in one year.
Table 1 also shows the estimated private health care spending by seniors. Although these numbers are much larger than for the general population, they still amount to less than a dollar a day. However, since government drug programs primarily benefit seniors, seniors’ consumption of drugs is much greater than their private expenditure on them.
|
Table 1: Canadian Private Health Care Spending, 1998 |
|||
|
Per |
Per |
Per |
|
|
Direct Prescription Drug Spending |
$198 |
$77 |
$137 |
|
Public Health Insurance Plans |
$119 |
$46 |
$82 |
|
Private Health Insurance Plans |
$146 |
$57 |
$101 |
|
Total |
$463 |
$179 |
$320 |
|
Total Private Health Care Spending |
$1,191 |
$462 |
$821 |
|
Source: Statistics Canada (2000), pp. 32, 95-96; calculations by the author. |
|||
About 40 percent of prescription drug spending is through subsidies, primarily provincial drug benefit plans (Canadian Institute for Health Information 1999, p. 17). In 1998, this amounted to $3.4 billion (Canadian Institute for Health Information 2000, p. 25). The average household (of 2.58 persons) contained 0.38 seniors (Statistics Canada 2000, p. 47). So, the estimated 11,280,850 households contained 29 million people, of which 4.3 million were seniors. If all provinces’ pharmaceutical budgets of $3.4 billion were allocated entirely to seniors, it would have amounted to $796 per senior. If we add this to the private expenditure of $320, we arrive at a figure of $1,116 per person, of which 71 percent is public subsidy. However, this amount, of about $3 per day, overestimates seniors’ consumption, because some of the provincial drug benefits actually go to non-elderly patients, such as the poor. On the other hand, although we have considered health insurance premiums to be proxies for benefits received for the general population, seniors receive private insurance benefits in excess of these, to the degree that they receive prescription drug benefits as retirees. In the absence of more detailed information, let us assume then, that the average Canadian senior consumed about $1,500 worth of prescription drugs in 1998.
How much pharmaceutical expenditure will Canadians who turned 65 in 1998 consume over the remainder of their lives? Pharmaceutical sales increased about 14 percent annually in 1998 and 1999 (Patented Medicine Prices Review Board 2000, p. 17). These increases are significantly higher than in previous years. In a worst-case scenario, they will continue at a high rate. Therefore, let us assume that this growth continues for the foreseeable future. Canadians’ life expectancy is 79 years, and the current long-term risk-free interest rate is 5.7 percent. From this we can infer an average remaining lifetime prescription drug expenditure of about $40,000 for the years 1998 through 2012, in 1998 dollars. In other words, a person who retired at age 65 in 1998 would need a credit of $40,000 to spend on prescription drugs for the rest of his life.
Currently, provincial governments tax the young and transfer their income to the elderly to finance pharmaceutical consumption. Another way to achieve the same social objective would be to allow people to save during their working years in anticipation of their expected pharmaceutical consumption. Since this would reduce or eliminate the need for provincial governments to subsidize such consumption, these savings could accrue in tax-exempt accounts, similar to RRSPs. These Medical Savings Accounts do not yet exist in Canada, although experiments to gauge their usefulness have been proposed (Ramsay, 1998). Moving from a primarily third-party payer system to a primarily user-pay system would result in certain behavioral changes due to reduced moral hazard, thereby altering consumption patterns. However, let us assume that those who turned 65 in 1998 would not have changed their pharmaceutical consumption under such a system. Could the average person have saved enough money in a tax-exempt pharmaceutical savings account to finance her prescription drug consumption in her retirement years?
If this person had opened such an account in 1968, when she was 35, and made her final deposit in 1997, she could have achieved this quite painlessly. An annual investment of about 2.8 percent of an average Canadian’s pre-tax personal income in Government of Canada bonds would have accumulated over $40,000 in 1998. The first deposit would have been $77, and the final deposit $700.1 These commitments are reasonable for the great majority of Canadians. Add to this simple calculation the option that the saver has to vary her contribution rate according to her income and lifestyle in different years, the decrease in taxes due to the reduced government drug subsidies (magnified by the positive impact on productivity caused by moving from a system funded by coercion to a system funded voluntarily), the ability of people with different health risks to make their own decisions about how much they should invest in such accounts, and the diminished moral hazard caused by moving from a third-party payer to a user-pay mechanism, and the result is a powerful argument for such a change in financing prescription drug purchases.
An insurance market would still exist to protect people from catastrophic illnesses that require thousands of dollars of prescription drugs every year. However, predictable pharmaceutical costs, which we all expect to incur as we age, would be well covered by such a tax-advantaged account.
Note
1Interest rates are from records of government bond yields maintained by the Bank of Canada. Details of calculations are available from the author.
References
Canadian Institute for Health Information (1999). National Health Expenditure Trends 1975-1999. Ottawa: Canadian Institute for Health Information.
Canadian Institute for Health Information (2000). Preliminary Provincial and Territorial Government Health Expenditure Estimates (October). Ottawa: Canadian Institute for Health Information.
Patented Medicine Prices Review Board (2000). 1999 Annual Report (May). Ottawa.
Ramsay, Cynthia (1998). Medical Savings Accounts: Universal, Accessible, Portable, Comprehensive Health Care for Canadians. Vancouver: The Fraser Institute.
Statistics Canada (2000). Spending Patterns in Canada 1998.Cat. No. 62-202-XIE (August). Ottawa: Minister of Industry.
John R. Graham (johng@fraserinstitute.ca) is Senior Analyst and Acting Director of the Pharmaceutical Policy Research Centre at the Fraser Institute. He has an MBA from the London Business School, University of London.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.