Author Audrey Laporte debunks common assumptions that economic theory does not apply to the delivery of medical care

OTTAWA, January 15, 2014 – What would a health care system look like if we took economics seriously? Hint: Not much like Canadian medicare. Nor would it look much like the US system.

In a major new paper published today by the Macdonald-Laurier Institute, Audrey Laporte, a noted expert in the economics of health care at the University of Toronto, addresses the erroneous but popular notion that health care delivery is fundamentally different from other areas of human economic activity. She urges policy-makers to consider taking advantage of market-based incentives to improve efficiency and meet the needs of that often forgotten and neglected stakeholder – the patient.

"The drawback with the solutions that have been introduced to tackle problems like wait times is that they are management-based solutions whereas economics-based solutions are needed", says Laporte.

Laporte's paper, titled "How markets can put patients first: Economics before politics in Canadian health care delivery," examines the mechanics of markets for health insurance, the organization of supply and the nature of demand for health care, and looks for evidence of the price mechanism in "the few still-untouched areas of its natural habitat". It examines the valid role of government in a universal-access system, and finally suggests what an economically rational health care system might look like.

"International health care rankings force a consideration of the absolute performance of the Canadian system. Economics provides a framework for this conversation", writes Laporte. She notes that Canadians ignore international rankings, where Canada fares poorly on measures such as cost and access to care, and focus on comparing Canada's system to that of the US.

"The US health care system is not a system if that word is taken to refer to a well-functioning mechanism. Rather, it is a Rube Goldberg device, built up over the decades by a process of making quick fixes and then, a few years later, piling on other quick fixes in the hopes of rectifying problems created by the previous quick fixes," writes Laporte.

Canadian health care needs a fresh look through the clear lens of economic theory.

In this paper, Laporte demonstrates that while there are indeed unique features to the health-care market, people respond to prices and prices respond to people, just as economic theory would suggest.

Laporte concludes that a health care system that takes economics seriously would:

  • Be structured so that price incentives operate on both demand and supply sides of the market. There should always be some element of out of pocket payment for medical care to reduce demand for unnecessary services and bring down prices, while individuals are protected from massive costs and income-based transfers reduce payments for the poor.
  • See the role of government on the supply side greatly reduced. The organization of practice would generally be left to the suppliers to determine since they have the greatest incentive for getting it right.
  • Be based around competitive provision of insurance with government setting a minimum core of coverage, as in the case of Switzerland today, for example. Such insurance would incorporate guaranteed renewability, perhaps along the lines tried out under the German and Australian systems, to protect people who develop chronic illness.
  • Incorporate reference pricing, as do several European drug plans and as certain insurers are experimenting with in California as a way of paying for some hospital care. Under reference pricing, not only do consumers respond to pricing incentives but the prices suppliers charge respond in their turn to consumers' responses.
  • Change the way the medical system is funded, currently from general revenues. Medicare's unfunded liability could be addressed by having working-age Canadians pre-fund their own later health care expenditures with a health savings component.

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Audrey Laporte is director of the Canadian Centre for Health Economics and associate professor at the University of Toronto's Institute for Health Policy.

The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.

For more information, please contact David Watson, managing editor and communications director, at 613-482-8327 x. 103 or email at david.watson@macdonaldlaurier.ca. On Twitter @MLInstitute