CPP offers financial model for covering elderly drug costs

Mark Stabile March 12th, 2012

In almost all developed countries, health-care costs have grown faster than the economy over the past few decades. Canada is no exception.

From 1982 to today, Canadian health-care costs grew on average 6.9 per cent a year, while the economy grew on average by 5.7 per cent. This growth, coupled with tax reductions, has led to provincial health-care budgets that now take up the lion’s share of provincial program spending. In Ontario, for example, health-care spending now accounts for 46 per cent of program spending, and is projected to pass 50 per cent in the next decade.

These numbers illuminate the challenge of funding public health-care systems in a sustainable way while preserving the values and benefits of full accessibility and universality. While Canadian provinces, like countries across the OECD, are trying to make their systems more efficient, the reality of the last few decades, coupled with an aging population, suggests that we will need to find more money for health care going forward.

The response across jurisdictions to this financing crunch has been to diversify funding mechanisms–those relying heavily on tax-based finance are incorporating elements of social insurance and vice versa for those more heavily reliant on social insurance. One way to incorporate social insurance into our health-care system is to pre-fund certain expenditures for the elderly. Pre-funding in this context implies that individuals pay into a fund during their working lives to cover highly probable future expenditures.

Pre-funding through a government-run program is currently used to provide part of old-age income replacement through the Canada Pension Plan and the Quebec Pension Plan (CPP-QPP). The CPP-QPP model works well for many reasons, including ensuring that the elderly have part of the income they need in order to finance a wide range of predictable expenditures. Health-care needs are far more uncertain. However, certain areas of health-care expenditure occur with more certainty and more equally among the elderly than others, thus more closely mimicking the savings function provided by income replacement plans.

One of these areas is the use of prescription drugs by the elderly. Almost all seniors use prescription drugs, and patterns of use are more similar among seniors than they are in health care more generally.

There is potential to build on the success of the CPP-QPP model in providing a mechanism and support for pre-funding prescription drugs for the elderly. While the actual pre-funding program could be run at either the federal or provincial level, many of the features could resemble those of the CPP-QPP.

There are several benefits to such a program. First and foremost, it begins to set aside savings today for expenditures we can clearly anticipate and that will place considerable pressure on public budgets if not dealt with in some alternative way.

If not addressed, these future expenditures could potentially lead to further crowding out of other social services within provincial budgets, to larger deficit financing, to further privatization of the system or to higher tax burdens on the working age population of the day.

Four additional appealing features of pre-funding a drug benefit for the elderly are, first, that medically necessary services now funded through a variety of tax measures in most provinces could remain so and that, over time, the majority of prescription drug funding would come from pre-funding rather than from the tax pool and out-of-pocket spending.

Second, such a plan could enhance accessibility to prescription drugs in many provinces where they are currently excluded from the basket of medically necessary services for segments of the population.

Third, it builds on a significant existing infrastructure of employer-based insurance for prescription drugs, as most Canadians who currently have coverage for drugs receive it through the workplace and pay a monthly contribution for this coverage.

Finally, as noted above, it allows for both risk sharing and redistribution across an age cohort, keeping a key value of an insurance benefit intact.

Canada is not unique in experiencing a sustainability issue with regards to funding health care, but that is not an excuse to ignore the problem. One way or another, Canadians are going to have to find a way to pay for new treatments.

We can leave this problem to the next generation to solve, or we can set aside the funds today through a pre-funded plan to help secure this benefit for ourselves in the future.

Mark Stabile is director of the school of public policy and governance at the University of Toronto and professor of economics at the Rotman School of Management. He is the co-author of the IRPP study, Providing Pharmacare for an Aging Population: Is Prefunding the Solution?