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Will Change Result In Reform?

By: Linda Clay, Rob Carlyle & Ashim Khemani

The Canadian healthcare system is the subject of considerable debate and scrutiny. Whether this results in true reform is the question. Linda Clay, Rob Carlyle, and Ashim Khemani, of Aon Consulting, examine the impact this will have on the benefits industry.

Sustainability of sufficient public healthcare systems is a focus of most developed nations, and now has taken on the same priority for employer-sponsored programs in the private domain. With last yearʼs Supreme Court of Canada decision in Chaoulli v. Quebec and Albertaʼs recent examination of the ʻthird wayʼ for healthcare renewal, there is no doubt that the Canadian healthcare system is on the cusp of undergoing significant change… whether that would result in true reform remains debatable. The question is, ʻwhat impact will this change have on the benefits industry and what opportunities will this present?ʼ

In Canada, our public healthcare system is governed by the Canada Health Act which, in a nutshell, guarantees that Canadian residents have access to a publicly administered system that provides medically necessary services. Our universal healthcare system is one of Canadaʼs defining social characteristics and any suggestion of changing it invariably leads to heated debate.

In 2005, Canada spent $142 billion on healthcare, representing 10.4 per cent of our GDP. Almost 70 per cent of this spending was in the public sector, with the remaining 30 per cent in the private sector. According to the Fraser Instituteʼs 2005 report ʻHow Good is Canadian Healthcare?, ʼ Canada spends more on healthcare than all OECD nations, with the exception of Iceland and Switzerland, with universal access healthcare systems. However, unlike other OECD nations with universal healthcare systems, the percentage of total spending funded publicly – 69.6 per cent – is lower in Canada. Over the next decade, this number could drop to 64 per cent as governments continue to search for ways to trim their healthcare budgets through off-loading of services and the inflation rate associated with prescription drugs causes private sector spending to rapidly increase.

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Parallel Private Healthcare

Canada is the only industrialized country with a universal healthcare system that does not permit a parallel private healthcare system for medically necessary services. Opponents of private healthcare argue that such a system would lead to wealthier individuals being able to access medical treatment quicker and/or of higher quality, without creating any improvements for everyone else. There is no question that private healthcare exists today, although the range of services provided and the ability of Canadians to access services varies tremendously by province. Currently, BC, Alberta, and Quebec lead the way when it comes to private healthcare. Within Canada, a growing number of diagnostic services and treatments are outside the boundaries of the Canada Health Act, opening the door for private healthcare providers to offer these services and insurers to offer private insurance for these services.

Outside Canada, any legal restriction on the private delivery of healthcare services to Canadian residents stops at the border, meaning there is nothing to prevent Canadians from going overseas for medical treatment. Already there is an increasing demand to insure healthcare services that are delivered outside Canada.

Aging Population

We are all aware that Canadaʼs aging population is the dominant factor driving our healthcare costs higher. Utilization of healthcare services increases exponentially after age 65, more than tripling between age 65 and 85. Life expectancy in Canada continues to grow and, as the baby boom generation enters retirement, the ratio of people aged 20 to 64 compared to those over age 65 will fall dramatically over the next 25 years, from 4.75 today to an expected level of 2.42 in 2031.

Canada is facing significant healthcare labour shortages and a deterioration in our healthcare infrastructure, most of which was built in the 1970s. The sustainability of our current healthcare system is in question. Even Alberta, with its healthy surplus today, is projected to be in a budget deficit position by 2017 due to increasing healthcare costs, if the healthcare system is left unchanged.

While a significant portion of the Canadian population wants to strictly adhere to the fully public healthcare system, the trend for private facilities and private insurance options is on the rise. An aging population will not accept a lower standard of healthcare services if they have sufficient wealth to improve their health and well-being. According to the Pollara ʻStrategic Public Opinion and Market Research Survey,ʼ 54 per cent of respondents were willing to pay more for a wider range of medical services or improved timeliness in the delivery of medical services. Further, an August 2005 poll by Decima Research estimated that five million Canadians would be willing to “subscribe to a service that charged $2,300 a year, with a $1,700 initiation fee, to screen for early signs of disease and manage chronic problems.” Not surprisingly, entrepreneurs are attempting to capitalize on this movement by opening private, primary healthcare facilities in several provinces. Increasingly, people are taking personal responsibility for their own health and well-being and are willing to go outside of the public healthcare system to ensure their own needs are met.

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Employer-sponsored Healthcare Plans

Employer-sponsored healthcare plans represent approximately half of total spending from private means, with the other half coming directly out of Canadiansʼ pockets. For more than a decade now, plan sponsors have been faced with healthcare costs that have increased at double-digit rates every year due to a combination of factors including:

Group benefits plans have gone from being an insignificant portion of an employee's total compensation to a point where they represent five per cent or more of an employee's total compensation. As healthcare costs continue to increase faster than general inflation, this trend shows no sign of abating. Post-retirement benefit plans present an added challenge as employers face increased liability for offering such plans.

Similar to retirement plans, there is a growing trend towards moving benefits plans away from the traditional ʻdefined benefitʼ approach to a ʻdefined contributionʼ approach, through utilization of healthcare spending accounts. Traditional health and dental plans can be cut back to catastrophic coverage only, or perhaps eliminated altogether, in return for a fixed contribution to a healthcare spending account or cash compensation plus access to private health insurance options that employees can purchase on their own. Alternatively, employers may be forced to tie their companyʼs investment in the benefits plan to the economic growth of the business. As the business grows and becomes more profitable, a portion of the profit can be reinvested in the benefits plan. The reality is that the current healthcare inflation ation trend is forcing employers to evaluate their core business and assess whether they are in the business of providing benefits at any cost. Of course, the assessment needs to take the current labour market and employerʼs industry into account. Donʼt expect the public sector to change very quickly.

Limited Options

The market today offers limited options for private, individual healthcare insurance that can be customized to fit an individualʼs needs. The combined effects of citizens being expected to take more personal responsibility for their own health and employers looking for ways to reduce the cost of their benefits programs, means that demand for individual healthcare insurance is certain to grow. An increase in demand presents a significant opportunity for the insurance industry to capitalize on a growing market through the development of customized, comprehensive private insurance options for the public. However, to be viable, insurers will need to ensure the public has affordable access to private insurance coverage through simplified underwriting requirements.

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As for governments, the fundamental issue facing them in the future is the sustainability of Canadaʼs public healthcare system. Despite the growing interest in, and demand for, private healthcare options and insurance, Canadians want to maintain the essence of universality in our healthcare system. Political decision-makers will be slow to make changes because for a large minority of voters, ʻno changeʼ to our public healthcare system is their requirement when voting. Therefore, it is likely that change will be delayed until fiscal constraints reduce healthcare services to the point where they are below public expectations and politicians face even more pressure from the public or legal decisions, as was the case with Chaoulli v. Quebec, which create rights and force policy decisions earlier than would otherwise occur.

At the very least, governments should be examining Canadaʼs method of financing healthcare. Currently, health budgets are funded through general tax revenue, which means there is no clear linkage between the money collected for the purpose of funding healthcare and actual expenditures on healthcare. This method of funding ultimately leads to a chronic shortage of healthcare financing. At the same time, users of healthcare demand services as though they are ʻfree,ʼ yet fight any attempt to increase funding through a general tax increase. A dedicated tax for healthcare has the distinct advantage of being more transparent to users, to healthcare workers, to politicians, and the public.

So, expect healthcare reform to follow the path of retirement plans, from a defined benefit approach to defined contribution, and expect the insurance industry to capitalize on the change by making more private insurance options available to the public. But donʼt expect our public healthcare system to reform dramatically … at least not for some time. Most of the healthcare expenditure is largely funded on a pay-as-you-go basis while the costs grow at a multiple of both inflation ation and GDP. Its sustainability, therefore, should not be a surprise.

Linda Clay Ashim Khemani Robert Carlyle

Linda Clay is a senior consultant and Ashim Khemani is chair and chief executive at Aon Consulting. Robert Carlyle is vice-president of the Aon Intelligence Unit.

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