Vancouver Institute Lectures

Healthy, wealthy and cunning? Profit and loss from health care reform [audiorecording] Evans, Robert G. 1996

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446447Robert Evans HEALTHY, WEALTHY AND CUNNING?PROFIT AND LOSS FROM HEALTH CARE REFORMProfessor Robert EvansCentre for Health Services and Policy ResearchUBCFebruary 3, 1996Biographical Note: Considered one of Canada’s foremost health economists, Dr.Evans holds degrees from the University of Toronto and Harvard. He has servedas Commissioner of the B.C. Royal Commission on Health Care and Costs; Mem-ber of the SNS International Panel Review of the Swedish Health Care System,Member of the LSE Health team reviewing the Greek Health Services; and Mem-ber of the National Forum on Health, chaired by the Prime Minister of Canada. Heserved as the Director of the Program in Population Health of CIAR, from 1987 to1997.Those of you who heard last week’s lecture by Dr. Fraser Mustard,the President of the Canadian Institute for Advanced Research, willhave some idea of the breadth and eclecticism of CIAR researchprograms.   Tonight’s address will likewise draw on, and I hope inte-grate, ideas and research findings from a number of different subjectareas.   In particular, the first part will be built around some veryintriguing work by Professor Tad Homer-Dixon, who is a politicalscientist directing the Peace and Conflicts Studies program at theUniversity of Toronto.  Tad and his associates are interested in envi-ronmental change and violent conflict.  You may wonder how aneconomist studying the reform of health care systems comes to beinterested in an intellectual apparatus developed by a political scien-tist interested in violent conflict (or perhaps you may not!).  But Ihope to show you that there is a connection.  I believe that Tad’swork provides an intellectual basis from which to think about anumber of the things that are going on in the current debates over thereform of health care, not just in Canada, but in many countries inthe world.  I will, however focus my remarks tonight on Canada.448The down side of the kind of eclectic, broad-based,multidisciplinary thinking that is characteristic of a program like oursin the Canadian Institute for Advanced Research is that it can bemightily entertaining, and extraordinarily shallow.  That is the greatdanger with multidisciplinary research; it’s a whole lot of fun, but itcan very easily turn into a bull session.  The test of the quality ofideas that emerge from such a process of cross-fertilization and syn-thesis is whether they make sense and seem to be helpful and usefulto audiences with a number of different kinds of interests.  Do theychange and broaden the “frameworks of understanding” throughwhich we try to comprehend the world around us?   So in some waysthis audience represents the testing environment for these ideas to-night.  As we begin to probe them further, we shall see whether,when you try to push a bit deeper with them, you actually do findsomething useful emerging.The first question, though, is: “Why does one need a broaderframework of understanding at all?”  Why do you need to go andlook at international political science theory to think about healthreform when you’re supposed to be coming at the topic as an econo-mist from Canada? And I guess the quick (and honest) answer is:“Boredom.”   That is by no means a complete answer, but it actuallyserves as a very good lead into more fundamental motivations.  Letme illustrate.In 1990-91 I served under Mr. Justice Peter Seaton as a mem-ber of the BC Royal Commission on Health Care and Costs.  Whenour report, Closer to Home, was released in November, 1991, JimHume wrote a very instructive column (“Talk Politics”) in the Vic-toria Times Colonist.  He listed several statements characterizing theprovince’s health care system and recommending specific reforms.But he then pointed out that these were not drawn from the SeatonCommission’s report.  They were from the federal Task Force on theCost of Health Services of 1969, and from the provincial FoulkesReport (the Health Security Program Project) of 1973.  But they couldalso have been the recommendations of the Seaton Commission, andin fact some of them were.  “Only in a few areas do the three majorhealth care reports of the past 22 years vary, and even when they do449Robert Evansthe variations are slight.”  And that is an extremely important point— that those same sets of ideas keep coming back, and back, andback, over and over again.  It is not, as has been said, that the onlything we learn from history is that we learn nothing from history.We learn quite a lot, but we seem to have great difficulty acting onwhat we learn.On another level — even closer to home, so to speak — an-other commissioner, David Sinclair, brought in a clipping quotingthe Dean of Medicine at UBC to the effect that hospital beds werebeing heavily over-utilized in Canada, and particularly in British Co-lumbia.  The Dean emphasized the importance of reducing the un-necessary use of in-patient care, and discussed ways to do so.  Butthe clipping was not quoting Dean Hollenberg in 1990, it was a quotefrom Dean Jack McCreary and the date was 1965.Yet again, consider the whole debate over “privatization” inour health care system — Should there be “two-tiered” care, with apreferred level for those willing to pay, or should we preserve thesingle tier?  Should we open or keep closed the Canada Health Act?— all those issues. I think it is safe to say that, though the terminol-ogy changes, nothing new is being said, or has been said for at leastthirty years.  All of these arguments were brought forward in front ofMr. Justice Hall back in the early 1960s; many go back long beforethat time.  They were all rehashed again during the run-up to theCanada Health Act in 1984.  Yet despite more than a quarter-centuryof experience with Medicare – easily the most successful and popu-lar public program in Canada, the same issues keep coming back tothe table.  How many times do we have to go through this same set ofarguments?  Why do we not seem to make intellectual progress inthis area, despite the accumulation of experience?Well one of my colleagues, Ted Marmor at Yale, has a veryuseful aphorism to the effect that “nothing that is regular is stupid.”(I think he filched it from Hegel.)  Ideas in particular may seem stu-pid, especially after they have been refuted a number of times bylogic, experiment and field experience.  But most of the time peopleare not all that stupid, at least not consistently so, especially on mat-ters that are important to them.  (They may look stupid, but they are450usually not as stupid as they look.)   And so if a pattern keeps onrecurring, there is probably a reason for it.   If you don’t understandit, if you can’t explain it, if it looks stupid, that’s probably becauseyou just don’t understand the dynamics behind it.Moreover, this observation of recurring patterns of thoughtdoes not appear to be unique to health care, or to Canada, or to ourcentury.  I have found a lovely quote sourced to the Edinburgh Re-view of 1843. “In the pure and physical sciences each generationinherits the conquests made by its predecessors” — that’s Newtonand the shoulders of giants, you remember — “but in the Moral Sci-ences, particularly the Arts of Administration, the ground seems neverto be incontestably won.”  In other words, you do have to keep goingthrough the same arguments over again. They had noticed that backin Edinburgh in the 1840s, and that probably was far from the firsttime such thoughts had been expressed.So if this is a phenomenon which is broader and more gen-eral than our particular circumstances, then we should be looking forbroader and more general explanations.  We should not be lookingfor the explanations solely in our own circumstances, although whenwe find useful insights, we certainly want to bring them back and seewhether they help us in our own circumstances.  And that is why Ifound myself trolling in the work of a scholar who was looking at therate of erosion of topsoil in the highlands of the Philippines, and theconflicts between Bengali settlers and the local people in Assam,and water rights in the Middle East.  I was looking for more generalstories that might apply in other areas of conflict.Professor Homer-Dixon’s work goes back to some of the old“challenge-and-response” traditions in historiography.  It takes offfrom the notion that human environments tend to degrade over time,that basically things get worse.  It’s very pessimistic in that respect.Resources run out, the game fails, the climate changes – and if noneof those things happens then the Reverend Malthus comes along andincreases the population until it presses against the available foodsupply.   Famine and plague.But we respond to that deterioration by the application ofingenuity of various sorts.  Technical ingenuity is an important part451Robert Evansof the story — gadgetry, the engineers and the scientists, and theircurious and handy predecessors, and not least the amateur and pro-fessional agronomists.  But also very important, and usually lessnoticed, is social ingenuity — finding institutional adaptations,changes in our political system, changes in our economic arrange-ments that enable us to cope with the changes in our environments.Ingenuity of both forms permits us to continue to progress, eventhough the purely external world has a tendency to get worse.The tension between human ingenuity as a positive force(most of the time), and the inherent tendency for things to get worse,on the other side, can be resolved – or perhaps projected — in twoquite different ways in interpreting the evolution of human societies.One approach might be called Neo-Malthusian — as Homer-Dixondoes — and the other I would label Naive Neo-classical EconomicOptimism.  That is a bit of a mouthful, but economists, despite thefact that everyone else thinks they are dismal, tend to think of them-selves and the world around them in optimistic terms.  It may bebecause they know what the alternatives are.The Neo-Malthusians focus on population growth and themining out, or the declining availability, of non-renewable resources.The “non-renewable” part is really important — once the resourcesare gone, there will never be any more, and what will we do then?You see this orientation expressed in the Limits to Growth literaturethat received considerable attention about twenty years ago, and ithas stayed with us as a part of tree-hugger environmentalism.  (Mywife particularly likes the bumper sticker that says: “Hug a logger;you’ll never go back to trees.”)  The implicit assumption is that nomatter how much ingenuity we bring to bear, as a society or species,eventually the combination of population growth and declining re-sources will get ahead of us.  There are fundamental limits to eco-nomic activity, and more generally to the (material) possibilities forhumanity.   Those limits will be binding soon, if not now, and thereis no way out.  That is why the viewpoint is Neo-Malthusian, andwhy economics – which was once built on a similar foundation –earned the title of the Dismal Science.But intellectual fashions change.  The optimistic neo-classi-452cal economist now implicitly assumes a continuous and unlimitedsupply of ingenuity (available at constant long-run marginal cost.).There will always be enough ingenuity to get around any limitationsimposed by resource shortages, because demand (for ingenuity) callsforth its own supply through the magic of the market.  The march ofprogress can continue indefinitely.   So long as no one, such as mis-guided politicians, interferes with the price system and “free mar-kets,” they will, like the God of the eighteenth century Deists, assurethat we will all live in the best of all possible worlds.  (Actually theNeo-Malthusians might agree, except for them the best is none toogood.)Members of this school point to the fact that the real price ofmost resources does not seem to rise over time.  If economic activitywere really being constrained by a growing shortage of resources,we should find these increasingly scarce resources getting more costlyover time.   But we do not.  There are occasional sudden run-ups, asin oil prices, but these are caused by special institutional factors,such as OPEC or a war, and in due course prices move back downagain.   (“Just you wait,” say the Neo-Malthusians, grimly.)So there are these two polar views, one of which essentiallysays that no amount of ingenuity will get us out of the long-run scar-city trap, and the other which says: “Don’t worry about it.”  There’salways going to be as much ingenuity as we need.  The InvisibleHand will supply it, as it supplies all other good things, automati-cally, when left alone to do its beneficent work.Homer-Dixon in effect goes up the middle of this argumentin a way that harks back to H.G. Wells’ comment that civilization isa race between education and disaster.  Human progress, and indeedmaintenance of present levels of capability and comfort, depend upona race between ingenuity and deterioration, and the race has not beenfixed in our favour – or against us.  We might then be well advised toconsider the institutions and circumstances that encourage, or dis-courage, the supply of ingenuity.  International experience, past andpresent, gives us examples both of societies that have successfullygenerated the ingenuity necessary to cope with their changing envi-ronments and thrive, and also of societies that seem quite clearly to453Robert Evansbe sliding backwards.Secondly, however, he and his colleagues shift the focus fromnon-renewable resources to renewable resources.  It would seem in-tuitively obvious that the former should be the objects of concern,because they are the resources that will (or will not, depending onyour point of view above) “run out.”  Traditionally, this intuition hasguided discussion. Renewable resources, after all, can be renewed.But just because a resource is renewable, does not mean that it willbe renewed.  Renewable resources are made available through reallyquite complex combinations of interactions within the physical en-vironment and between that environment and human interventions.These interactions include both positive and negative feedback loopsthat are very incompletely understood.  In simple terms, ill-informed,ill-judged or simply unaware human interventions can get you intobad trouble before you know it.  The cod suddenly disappear.  Andyou can have a lot of difficulty getting out of trouble again – they donot seem to be coming back.   Previously renewable resources, noware not.The non-renewable resources tend to be much simpler, con-ceptually.  As you start to mine out available supplies of coal, theprice of coal goes up and people think of substitutes for it.  Or theybecome more ingenious at finding ways to mine previously unavail-able reserves, at acceptable costs.   The balance is between physi-cally available supplies, and technical ingenuity, and there is a (con-ceptually) simple negative feedback loop that responds to increasingscarcity and tends to get you off the hook.  Social institutions matter— a war or less dramatic dispute over property rights may suspendexploitation of a particular resource.  But both it and the necessarytechnology remain available to be applied in more propitious times.But renewable resources present much more complicatedmanagement problems, and the necessary responses — and this isthe critical part of the story — tend to require social ingenuity asmuch as technical ingenuity.  One has to design and create the ap-propriate institutions for managing the environment. The difficultyis only partially that of trying to figure out what to about the fisher-ies, for example.  Professors Tony Scott and Peter Pearse here at454UBC, among others, have been telling us what should be done foryears, and certainly I have no reason to believe that they’re wrong.The problem, however, has been that the political environment, thebalance of affected interests and their established patterns of interac-tion, have not permitted us to apply the knowledge that we alreadyhave.  (This should remind you of Jim Hume’s column about thereport of the Seaton Commission, referred to above.)  We are con-strained in adapting to our changing environment more by the lackof social ingenuity than the lack of technical.This perspective thus focuses attention on the kinds of socialenvironments that will best induce the flows of ingenuity necessaryto cope with deteriorating physical environments and maintain theprogress of comfort and capability.  Or won’t.  The flip side of thisapproach, and this is where the study of conflict and violence comein, is to consider what happens when societies do not cope well withadversity.  In the face of challenge does your society mobilize todevelop more ingenious responses, or does it fragment into smallergroups that fight among themselves over the resources that are stillavailable?  Are there lines of cleavage in your society — ethnic,religious, economic — that begin to open up when it is under pres-sure, and form natural battle lines?  Do “narrowly based interest coa-litions” form (or are they already in existence) that have more togain by simply appropriating a larger share of the resources avail-able, than by trying to figure out ways of expanding or extendingthem?Such internal conflicts tend both to divert and to dry up thesupply of ingenuity.  It dries up, because in an unstable environmentthe incentives to “be ingenious” are weakened.  The results of yourefforts may be appropriated by someone else (stolen), destroyed, orsimply ignored.   Why bother?  This applies to both technical andsocial ingenuity.  There will still be a considerable demand for inge-nuity, of course, but the highest pay-off comes from ingenuity de-voted to internal conflict — violent, litigious, bureaucratic, politicalor commercial — rather than figuring out what to do with the com-mon problem.Again the distinction between non-renewable and renewable455Robert Evansresources becomes significant.  People struggle, and may fight, overboth forms of resource.  But as an empirical generalization, Homer-Dixon and his colleagues observe that non-renewable resources tendto induce more explicit warfare among states.  Struggles over renew-able resources, when they become violent, tend to be low-level “com-munal” fighting between small groups of relatively close neighbours.The former tend to strengthen the formal state apparatus (unless to-tal defeat discredits it) but the latter undermine its authority by weak-ening the monopoly on violence.  Moreover as noted, non-renew-able resources tend to survive conflict, being available to the victor,while the complex processes that sustain renewability may them-selves be damaged by conflict such that nobody wins.Thus the diversion and dispersion of ingenuity through frag-mentation and internal conflict leads not only to failure to cope withthe increasing challenges posed by the external environment, but totheir becoming more severe.  Nonetheless the calculations of thosewho initiate and sustain the process of internal conflict, and devotetheir ingenuity to it, are not necessarily wrong.  General pain is quiteconsistent with partial gain, and quite large gain at that.   In the“kleptocratic” society, warlords of various forms live very well in-deed, with Swiss bank accounts for ultimate insurance.Homer-Dixon’s framework was developed as a way of try-ing to understand how communal conflict is generated within a state,as different from the more overt and dramatic conflicts among states.This process is linked to the need to develop, or the difficulty ofdeveloping, the appropriate social institutions for dealing with dete-rioration in the external environment.  This has been a very cursorytreatment of a very extensive and complex research program, but hehas constructed a figure that encapsulates the outline of the story andmakes explicit the key forces and interactions believed to be at work. On the top of Figure 1 are the basic factors tending to leadtowards deterioration of the environment: renewable resources avail-ability going down, population growth going up.   More unequalaccess to resources — a wider gap between rich and poor — alsotends to create more severe social problems feeding into increasedlikelihood of conflict.  Conflict in turn leads to increased scarcity of456renewable resources(damage to the envi-ronment), and possiblyto migration or expul-sion of people.  Eco-nomic productivity de-clines, the state appa-ratus is weakened fromboth reduced eco-nomic resources andreduced legitimacy(inability to providesecurity by monopoliz-ing violence).  Govern-ments have less roomto manoeuvre — fewerpolicy choices avail-able — and becomevulnerable to coupsd’état.  Conflict feedson itself as ethnic or re-ligious divisionswiden.Well and good— or bad — you maysay, for places such asSomalia, Bosnia,FIGURE 1: Some sources and consequences of re-newable resource scarcity. Based on Homer-Dixonet al., Scientific American, Feb. 1993, pp. 38-45.Rwanda or parts of west Africa.  The international research programthat Homer-Dixon directs has had teams studying a number of “hotspots’ in the world, and fortunately West Point Grey is not amongthem.  What on earth does this have to do with a modern developedsociety such as Canada?  Well, certainly the forms and stakes ofconflict are quite different.Start with coups d’état. As far as I know, nobody is threaten-ing to send tanks down to 700 Hamilton Street and take over theCBC.  There have been, however, threats to the continued existence457Robert Evansof the CBC in the not too distant past.  And given the nature of thecommercial alternative, that might amount to much the same thing.When one man takes over nearly all the newspapers in a country,and is overt in his intention of using them for political purposes,does that not have elements of a coup?  More generally, if we shiftour focus from explicit violence to violent swings in political phi-losophy, personnel, or policies, is there that much difference betweenMike Harris taking over from Bob Rae, and a coup d’etat?Well, yes there is, because nobody gets shot, and that is a bigdifference.  There are no tanks, and no bodies to speak of, whichsaves a lot of wear and tear on the personal as well as the socialfabric.   But in terms of the dramatic change in political focus, maybenot so much.  What we have seen over the last couple of decades inCanada, the United States and Britain is this sort of more dramatic,more “violent” fluctuation in the political environment.  Increasedinternal conflict, in mature democratic societies, is not expressed inactual fighting; the narrowly based interest coalitions do not raiseprivate armies.  (The United States may be a partial exception.)But we do perceive our states to be much weaker now, bur-dened by debt, constrained by angry taxpayers, locked in by foreigninvestors.  The public rhetoric, particularly in Canada, emphasizesthis theme.  Are we seeing increased conflict among ethnic groups,increasing pressure to control immigration, and “kick out the for-eigners” and all that?  Well, yes we are.  The form and intensity ofexpression vary enormously from country to country – Canada isdifferent from California, and there is some distinct ugliness devel-oping in France and Germany.Homer-Dixon’s framework makes no pretence of universalapplicability.  But a set of tendencies can be observed, to differentdegrees in different countries, suggesting that similar forces may beat work.  The fundamental notion of environmental deterioration lead-ing to the opening up of lines of fracture within a society, and ofincreasing internal conflict diverting or dampening the supply of in-genuity needed for dealing with emerging problems, seems to havequite general applicability.  The old advice has it that: “We would bewell advised to hang together, because otherwise we shall certainly458hang separately.”  Well, more people seem to be prepared to take therisk of hanging separately.Let me then summarize the story so far.  Human environ-ments tend to deteriorate from a combination of declining resourcesand increasing population.   But these challenges can be, with luckand good management, more than compensated for by human inge-nuity.  That human ingenuity must be applied both in the technicaland in the social/institutional domains.  But the process of mobiliz-ing ingenuity can be interfered with or short-circuited by the open-ing up of lines of fracture within a society and increased conflictover shares of the resources available.  Narrowly based interest coa-litions emerge or are activated — small interest groups that expect tocome out ahead, even though the overall situation may deteriorate,because they will eat someone else’s lunch (the phrase “making outlike bandits” comes to mind) and the whole process then leads togeneral decline.  Prosperity and decline thus both seem to feed onthemselves, virtuous/vicious circles or more neutrally, positive feed-back loops.This, then, is the story that I want to use as background tounderstanding the process of health care reform in Canada.Let us begin with the deteriorating environment.  Figure 2shows the trend in “real” (i.e. adjusted for inflation) national incomeper capita in Canada (Gross Domestic Product or GDP) since theSecond World War.  The small boxes are the actual values; the curvedline is simply a logarithmic trend that I have fitted to the data.  Thattrend, however, was fitted only to the data from 1947 to 1980, andwas then projected over the rest of the period.  It thus shows whatwould have happened if the average growth rate over the thirty-fouryears prior to 1980 had continued down to the present.  But it didnot.By comparing the actual experience after 1980 with a projec-tion of the average experience prior to 1980, Figure 2 highlights theextent of the deterioration in our economic performance after thatdate.   The recession of the early ’80s dropped our real income percapita below the previous trend, and we never really recovered thatlost ground.  Then the wheels really came off the economy in the late459Robert Evans’80s.  And despite a great deal of enthusiastic economic cheerleading,it is rather hard to find much of a recovery in these data.  The stockmarket may have done extraordinarily well, but the most compre-hensive measure of collective economic well-being, real income perhead, has marched stolidly sideways.That to me is a quite dramatic decline in the quality of oureconomic environment.  It corresponds to the period of rising unem-ployment rates, rising payments for unemployment insurance, risingpayments for welfare, rising public deficits and debts.  All of thosecorrelate, not precisely but quite closely, with the stagnation in theoverall economy.  It’s really quite simple and straightforward.  Therecovery of the mid-1980s did not in fact return us to our previousgrowth path (averaged over previous booms and slumps); incomeper capita grew in parallel with but below the previous trend.  Corre-spondingly we did not return to previous relatively low rates of un-employment or relatively low government deficits either.Figure 3 recasts the same data to make the point a bit moredramatically, displaying the ratios of the actual values in each yearFIGURE 2: Canada Real GDP per Capita ($1986), 1947-1996460from Figure 2, divided by the value of the trend line in that year. AsFigure 3 shows, prior to the 1980s the actual values of real incomeper capita moved in quite a narrow band around the trend value.  Butin 1982 the actual values dropped well below the previous trend line,and have never recovered.The ratio did stabilize during the mid-1980s, but as Figure 3shows, it stabilized at a level similar to that which, in the 1950s, wasconsidered a severe recession.  Yet in 1990 a commentator in theGlobe and Mail enthused: “Canada has been blessed with seven ex-tremely prosperous years” (Robert Sheppard, The World in 1990,prepared by the Toronto Globe and Mail Report on Business, Vol. 6no.7, p. 32).  In hindsight the enthusiasm is perhaps understandable,because things got a lot worse again at the end of the 1980s.   The“recovery” of the mid-1990s is, from this perspective, another pe-riod in which we have stopped falling away from the former trend.But our standards have changed.If one fits a trend line to real income per capita from 1960 to1980, ignoring the earlier period, the contrast with the post-1982FIGURE 3: Canada Real GDP per Capita over Trend ($1986), 1947-1996461Robert Evansperiod is even more extreme.  The actual values cluster even moretightly around the trend, and the collapse in 1982 is even more pro-nounced – because growth in those two decades was more rapid andmore consistent than before or afterward.  But the post-1960 periodis of particular relevance because that is when our health care sys-tem began to take on its present form.  Universal hospital coveragedates from the late 1950s and the first of the universal medical careplans started in 1962 in Saskatchewan.  The expectations as to theeconomic background for Medicare, implicit or explicit, were formedin an unusually favourable time.The importance of standards and expectations is illustratedby the fact that even in the depths of the last recession, real incomesper capita were higher than at any time in the pre-1980 period — asshown in Figure 2.  But Canadians felt much worse off economically(and a number of them were), and much less able to afford inter aliaexpensive public programs.  Relative to previous growth paths, andto where people had expected to be, they were poorer.  But what hasall this got to do with health care?Figure 4 shows expenditure patterns over the same period ofFIGURE 4: Canada Real Health Spending per Capita ($1986), 1947-1996462time in the health care system.  As everyone knows, health care costsnormally “explode” or “spiral,” usually “spiralling out of control.”Figure 4 shows nothing as interesting as that, but it does show steadyincreases from the immediate post-war until 1992, after which some-thing quite different happens.  Both this long term trend, and themarked change in pattern after 1992, are fundamental as backgroundto any discussion of health care reform.The data in Figure 4 are total expenditures on (what in Canadais defined as) health care, divided by the population, and also by theConsumer Price Index.  [Data for Total Health Expenditures are notcompiled prior to 1960.]  They are thus, like those in Figure 2, realper capita values.  But they are not adjusted for whatever was goingon in the general economy at the same time.  When the overalleconomy is growing, typically the people who work in the healthcare sector expect to participate in that growth and feel somewhatdistressed and ill-used if they do not.  Those expectations have aninfluence on overall costs, and particularly on perceptions, and claims,of underfunding and crisis.As Figure 4 indicates, there are only two periods during whichthe escalation of health spending in Canada slowed down or stopped.One was the flat(tish) spot in the 1970s, and the other is right now, inthe mid-1990s.  Amid all the current rhetoric of cutbacks and systemcollapse, with the whole thing going to hell in a hand basket, it isimportant to note that the level of real resources per capita that Ca-nadians were allocating to the health care system had been steadilyincreasing — prior to 1992 — for pretty much as far back as the datago.  And yet it is never enough.  In fact there have been claims ofcrisis, cutbacks, and underfunding for the last quarter century (roughlycoincident with Medicare coverage for physicians’ services).  Themoney was continuing to grow, but never fast enough.  Since 1992total funding (per capita, adjusted for inflation) has stopped grow-ing, but it has not in fact been cut to any significant degree.But does that mean that people are making this whole crisisthing up?  Well no, not really. Figure 5 shows the share of nationalincome going to health care, rather than the dollar amounts as inFigure 4.  The actual values are the black boxes, while the dotted line463Robert Evansat the lower right represents a hypothetical alternative that “mighthave been.”   It is calculated by dividing actual expenditures, after1980, by the projected trend in total income per capita shown in Fig-ure 2.  If the economy had continued to grow at its historic rates, andhealth care expenditures had nonetheless been what they actuallywere, down to the present (unquestionably a questionable assump-tion), the share of Canada’s national income spent on health carewould have evolved as shown on the lower, dotted line.Figure 5 presents data only from 1960; Figure 6 shows spend-ing on hospitals and doctors, for which earlier data are available.These categories are covered by the Medicare plans and are there-fore the primary focus for public debate and policy.  (They also ac-count for the majority of the total.)   They show the dramatic expan-sion during the pre-Medicare years and the equally dramatic flatten-ing once universal coverage had been achieved.  The impact of thecost restraints of the 1990s is also more pronounced for these com-ponents, because they are almost entirely financed from publicsources.FIGURE 5: Canada Health Expenditure over GDP, 1960-1996464The differences between the pairs of lines in these two fig-ures go far, I think, to explain the contrasting positions that havebeen presented in the arguments over health care reform, past andpresent.   The reality is that the health care system substantially in-creased its share of national income after 1980.  In effect health spend-ing was protected during the recessions of the early and late 1980s,being not only maintained but continuing to grow, so that its sharewent up sharply as the denominator, overall income, went down.The relatively anaemic recovery of the mid-1980s did not bring thatshare back down again.   As the fiscal crisis deepened, however,Canadian governments became unable — or unwilling — to main-tain that protection and in 1992 the pattern changed.But if one looks at Figures 5 and (especially) 6 from the per-spective of the people in the health care system, a different storyemerges.  Viewed as a share of national income, the rate of costescalation actually slowed dramatically — flattened — after 1970,and would have stayed flat in the 1980s if the economy had not col-lapsed.  Providers of health care could see themselves as being quiterestrained, in relative terms, and “living within the means” (taking aroughly constant share) of a prosperous and growing economy.  TheyFIGURE 6: Canada Hospital and M.D. Expenditure over GDP, 1947-1996465Robert Evanshad formed their expectations of continuing expansion on this basis,and as Figures 5 and 6 show, relative to the economy that “mighthave been,” health spending in Canada is now way down.Mark Baltzan at the Canadian Medical Association expressedthis view of the situation very nicely when he said that there wasnothing wrong with the health care system, we just have to get abetter economy.  That is basically what Figure 5 says too, that healthcare looks pretty restrained – relative to the growth patterns of thepast.   And if that is what everybody in health care believes, thosegeneral beliefs become “facts.” So those two lines can explain a con-siderable amount of cognitive dissonance, of failure to communi-cate.  The people in the Ministries of Finance are dealing with theupper line and saying that is what is happening to the overall share(because it is), and the people in the health care system are saying“but we’re being really restrained.  You know, we’re being muchmore careful than we used to be.”  Jack Armstrong at the CanadianMedical Association was quoted a week ago saying, “Our system iscut to the bone.”  Actually that “cut to the bone” rhetoric emerged inthe mid-1970s.  There was a flat spot then in the curve shown inFigure 2 — at a much lower level, and that is when I first heard thephrase.  Anyway, the system is “cut to the bone” again — the bonesare bigger now.Coming back to the Homer-Dixon theme, these figures showthe impact of deterioration in the overall economic environment trans-lated through to the health care system.  This is the opening up of agap between what the people in health care had come to expect andthought was appropriate in terms of meeting expanding needs, andwhat was going on in the rest of the economy in terms of willingnessor ability to pay.  We could pay lots more, if we wanted to, by in-creasing taxes or user charges, or even deeper cuts in other publicprograms.  But collectively, we seem to be saying we don’t want to.There’s also a problem of expenditure shares that is illus-trated in Figure 7.  This figure shows the proportion of national in-come spent, year by year since 1960, on each of hospitals, physi-cians’ services and drugs.  Notice that the bottom line, expenditureson drugs, has been moving up quite steadily in recent years.  These466expenditures, predominantly on prescription drugs, have roughlydoubled their share of total national income over the last fifteen years.Their growth has been unaffected by the restraints of the last fiveyears, such that their share of total health spending has markedlyincreased.  As Figure 7 shows, drugs now cost as much as physi-cians’ services.If you want to know why the province of B.C. is trying to setup a reference-based pricing system for Pharmacare, or why privateemployers in Toronto are getting interested in what are called “phar-maceutical benefits management companies” — i.e. private firmswho will come and tell you how to slash your drug budget, or whyCanadians are pretty unhappy with the extraordinary expansion, overthe last decade, in the patent privileges enjoyed by the multinationaldrug industry — that’s why, right there in Figure 7.  Overall, healthexpenditures are being contained.  But within the more or less con-stant total the pharmaceutical industry — a narrowly based interestcoalition – are making out like bandits. Other sectors, such as hospi-tals, are correspondingly enjoying cuts.FIGURE 7: Hospital, Physician and Drug Costs (as percent of GDP, Canada),1960-1996467Robert EvansSo that’s my story about a deteriorating economic environ-ment for the Canadian health care system, that now has to be fittedinto Homer-Dixon’s story about the supply of ingenuity, humanprogress or decline, and what happens when the lines of fracture in asociety open up under pressure.But anyone following the argument so far might well say“Wait a minute!  Homer-Dixon’s story (as presented here) is all aboutopening up lines of fracture, of divisions within a society, of peopleengaged in more or less violent conflict with each other.   All thedata shown so far are aggregate numbers.  The closest we have cometo conflict is in the division of shares within overall health spend-ing.”  And that is quite true.  Nothing has been said about the distri-bution of services or resources among the members of Canadian so-ciety, only that the overall situation has become worse, both in thegeneral economy and more recently in the health care system.Research on the distribution of income and more generallyof well-being in Canada has, however, become a very active field inrecent years – and that is no coincidence either.  The subject is verymuch a “moving target.”  The material here is drawn from the on-going work of Michael Wolfson at Statistics Canada (also a Fellowof the Canadian Institute for Advanced Research).  He first addressedthe question of whether incomes in Canada were becoming moreunequal over ten years ago, in a paper entitled “Stasis Amid Change”(a very Canadian title).   Subsequent work has confirmed and ex-tended its conclusions (likewise very Canadian): “Yes and no.”   Butboth the yes and the no are extremely important.As backdrop to this question, there seems to be general agree-ment in both the academic literature and in the media more generallythat incomes in both the United States and the United Kingdom havebecome much more unequal over the last two decades.  There hasbeen extensive media coverage, particularly in the United States,about the vanishing middle class, the increase in the income sharesof the wealthy, and the increasing numbers of people in poverty.The middle band is allegedly disappearing – and it may well be so.But that is and is not happening in Canada.In Canada, the distribution of family incomes (total, from all468sources) does not seem to have changed much for decades.  Thebottom 20% of families pick up about 4% of the total income, thetop 20% pick up about 40%.  There is quite a lot of inequality — notas much as in the United States or in the United Kingdom, but muchmore than in Scandinavia.  The point is that it is not changing much.Whether you are against inequality or for it, the distribution of (fam-ily) incomes is not widening dramatically; in fact it’s not wideningat all.But when one looks instead at individual incomes, earnedout in the marketplace, one finds that these are becoming much moreunequal over time.  The market in Canada is changing so as to pro-duce more and more inequality.  So why is that not feeding throughinto overall family incomes?  Because the system of taxes and trans-fers and the various other social programs in place in Canada areeffectively offsetting the impact of a more and more inegalitarianmarket.As the overall economic environment has deteriorated, de-velopments in the private marketplace appear to be generating thesame pressures towards more inequality in income as in the UnitedStates and the United Kingdom.  But the difference is that in thosecountries public policies changed in the same direction, becomingless egalitarian and reinforcing the trends in the private marketplace.But in Canada, to quote Michael Wolfson: “The actions of govern-ment tax transfer policies have essentially offset the trends in marketincome inequality.”   Consequently the distribution among familiesof disposable income, i.e. the money you have available after youhave paid your taxes and after you receive whatever benefits you getfrom government, has not become more unequal. Now this buffering process should show up as a substantialincrease in the share of total income coming from government trans-fer payments.  And it does.  According to Wolfson, transfer pay-ments — i.e. things like old age pension, unemployment insurance,workers’ compensation benefits, welfare — all money that peoplereceive but do not work for directly — amounted to 6.6% of totalincomes in 1967.  By 1993 this percentage had more than doubled,to 14%.469Robert EvansThese transfer payments are of greatest importance, as onewould expect, to people with lower incomes.  They make up abouttwo-thirds of the income of people in the lowest 20% of the incomedistribution. (20% of persons, not incomes).   People in the next 20%slice receive about 40% of their income from government transfers;for those in the top quintile, the top 20%, the figure is 3%.  In otherwords, what you have is a social redistribution system that moves aconsiderable amount of money into the hands of lower income peo-ple, an amount that has been increasing over time, in proportion tototal incomes.  That expansion has offset the increasing inequality ofmarket-generated incomes that appears to be associated with weakergeneral economic performance.Now those trends are relevant to discussions of reform ofhealth care delivery, and particularly finance, because the health caresystem as organized and financed in Canada also transfers substan-tial resources from higher to lower income people, in amounts thathave been steadily increasing over time.  Wolfson’s data refer to theredistribution of money incomes through various forms of direct cashtransfers.   But Medicare provides what economists call “benefits inkind” in the form of “free” care that the user would otherwise haveto pay for – or simply forego.   These in-kind transfers are equallyaccessible to all on the basis of need rather than ability to pay; butpeople with lower incomes tend to use more care, and generate highercosts, because they are on average sicker.  Health is correlated withwealth, as Fraser Mustard pointed out previously.  But care is never“free;” in Canada it is paid for through taxation.  And tax liability isalso closely correlated with income.  So on average, people withhigher incomes pay more for health care (through taxes) and use less(because they are healthier).   The amount of money involved is large– public funding for health care makes up about 70% of the total, orbetween 6% and 7% of total national income – and has been increas-ing over time as health expenditures have grown.Now one can look at this process of redistribution from twoquite different perspectives, each of which is reflected in a differentapproach to health care reform.  On the one hand, one might say thatthese social programs are doing exactly what they were supposed to470do.  They were intended and designed not merely as a “social safetynet,” but as mechanisms to moderate and buffer the inequalities thatare generated by impersonal external forces such as private markets,or illness and injury.   Since the strength of these “unequalizing”forces has been growing over time, the amount of redistribution nec-essary to mitigate their effects has also increased.   The “work” be-ing done by these equalizing programs is greater, because the sys-tem is working.But suppose one turns that coin over.  More and more moneyis being moved around by our social programs, both directly and inthe form of services supplied to some and paid for by others.   Spe-cifically, more and more money is being moved from people withhigher incomes to people with lower incomes, offsetting the changesin the economy that are tending to move money in the opposite di-rection.   And this is happening at a time when the overall rate ofincome growth has become much slower.  It follows that a success-ful attack on those programs, to reverse or divert that flow, has be-come increasingly profitable.  In other words, if you happen to be atthe payer end rather than the payee end there is a lot more money tobe made/saved now by scaling back or wrecking (“reforming”) oursocial systems.  The prospects for overall growth, on the other hand,look much dimmer than in past decades.These perspectives really are two sides of the same coin.  Onecan look at the trends in our social programs from the point of viewthat more work is being done, through both money and in-kind trans-fers, in moving money from high to low income people and offset-ting the increasing inequalities generated in the private economy.Or one can see these trends as increasing the potential gains fromorganizing “narrowly based interest coalitions” to reduce or removethe buffers, so as to benefit from the increased inequality that theprivate marketplace is providing.  Both perspectives are reflected inthe debates over social policy reform, which is why the proposalsoffered by different groups tend to be so inconsistent with each other.Behind the public rhetoric of (mostly) shared objectives, there is atug-of-war going on over income shares – Homer-Dixon’s internalfracture in response to external deterioration, but without guns.471Robert EvansHealth care, and in-kind transfers generally, are however dif-ferent from straight financial transfers in an important way.  Lump-ing both together in general discussions of “social programs” ob-scures a key distinction that is crucial for understanding both thenature of the debates and the consequences of different policies.Public expenditures on health care are what is called in the trade“exhaustive expenditures,” as distinct from pure income transfers.(There are others, such as education, but health care is the largest.)Pure transfer programs — the ones described in Wolfson’sanalysis referred to above — are conceptually simple.  They justmove money around, taking money out of one person’s pocket andputting it into another’s.  Governments tax one group and give themoney to another. (More accurately they tax everyone, and givemoney back to most people, but some gain and some lose.)  Themoney that is transferred is still spent in the private marketplace, byprivate individuals, in whatever way they see fit – but it is spent bydifferent people.  Contrary to most of the public rhetoric, govern-ments are not in this way transferring resources from private to pub-lic purposes.  Rather they are transferring resources from one set ofprivate purposes to another.  But for those who lose, the rhetoric of“Big Government” can be politically effective.There is a little more to the story than this.   There is theoverhead cost associated with running these programs, which is anexhaustive expenditure – the “bloated bureaucracies.”  But these, onexamination, turn out to be, like “welfare fraud,” quantitatively prettysmall potatoes.   Such matters require serious attention, because theacceptability of such transfer programs by the general public dependsupon confidence both in their administrative efficiency and in theirmoral integrity – and rightly so.   But the claim that these factorsplay an important role in overall costs has no substance; it has beenrefuted time and again.   Claims of “waste” and “fraud” continue tore-surface, because they are recruiting slogans for those who opposethe transfers per se.On another conceptual level, it can be argued that transferprograms embody patterns of economic incentives that in variousways lower economic productivity and thus have an impact not only472on the distribution of private output, but on its overall level.  Thereare economists who can create the most extraordinary superstruc-tures of cost associated with such programs, spun out of pure theory.But the costs thus identified turn out to emerge, not from the struc-ture of economic theory per se, but from particular behavioural ortechnological assumptions imposed a priori by the analyst.  Theydisappear if these are changed.  Nor do comparisons of countrieswith different levels and forms of transfer systems show the differ-ences in output that such theorizing would imply.  But then econom-ics is basically a form of religion carried on by other means anyway— to paraphrase von Clausewitz on war.Back to the exhaustive programs.  The effects of these are abit more involved, because unlike pure transfers they actually use upresources, that are accordingly unavailable for other purposes.  Thatis what economists mean by “exhaustive.”  Human time, skills andenergy, physical resources, and services of capital are required, andused up, to produce health care.  That in turn means that the ownersof these “factors of production” in economic jargon must be paid fortheir use.  Program expenditures are the incomes of the people in-volved, directly or indirectly, in delivering the services.There are thus three groups involved — the payers, the re-cipients, and the suppliers — all with different economic interests.Pure monetary transfer programs have only payers and recipients;the third group involved in exhaustive programs generates a some-what more complex set of relationships.  These are shown in Figure8.  I have made a few simplifications that should be apparent to thosefamiliar with national income accounting.Figure 8 represents a health care system in terms of two dif-ferent circular flows.   The organizations that produce care — medi-cal practices, hospitals, public clinics, the “firms” of economic theory— provide it to people, who are members of households.  Thesesame people own and supply to firms the resources with which careis produced.  The dotted arrows represent the exhaustive use of re-sources; the households provide the services of the people who workin the health care sector, as well as the other factors of productionthat they own, and these are then combined and sent back as differ-473Robert Evansent forms of health care.  Thus a “real” exchange of things, factorinputs for commodities, takes place between these two types of enti-ties.Corresponding to this physical exchange, however, is a setof financial flows.   The members of households — people — arepaid for their factor inputs by the organizations that have used them,and these payments constitute their incomes from the production ofhealth care.  These dollar amounts are shown as the solid arrow fromprovider organizations to households.  But the return flow, of pay-ments for the health services themselves, can go through three dif-ferent channels.  Revenues may be raised from households as taxesthat are allocated into health care by governments, or as premiumspaid to private insurers (where these exist), or as direct paymentsfrom persons to provider organizations.   The funds flowing throughall three channels then come to provider organizations as their rev-FIGURE 8: Alternative Ways of Paying for Health Care474enues, and are in turn paid back to households as incomes.  Andevery stage in the cycle has to remain in balance – total revenuesassembled from households through the various channels must equaltotal payments to providers (health expenditures) and total incomesearned by households from the provision of health care.  If one of thearrows is left out, it means that money is collecting somewhere un-der somebody’s bed or being spirited out into the Cayman Islands.[What it really means, if these three components are not equal, isthat people are just not doing their sums right.]This three-part identity among total expenditures on healthcare, total income for the people who work in the sector, and totalrevenues raised to pay for it, holds (cannot not hold) at the aggregatelevel, for a whole society and any health care system.  Thus it cannotin itself tell us anything about the balance of gain and loss from dif-ferent ways of organizing a health care system.  To understand that,we have to consider the circumstances of differently placed indi-viduals, and to note that the identity does not hold for each indi-vidual, and probably not for any individual.  For an individual – orhousehold – the amount of revenue contributed to, expenditure ac-counted for in, and income received from the health care system willeach be different, and the differences will typically be quite large.The different relative sizes of these amounts divide the popu-lation into three groups, whose (economic) interests with respect tothe health care system are in significant conflict.  The fracture linesamong them have opened up as the economic environment has dete-riorated, increasing the degree of conflict over the distribution ofresources and threatening the supply of ingenuity necessary to man-age an increasingly complex health care system.The clearest line of fracture, defining a corresponding axis ofconflict, is between those who pay and those who are paid for healthcare.  The latter group are those people or households who receivemore in income from the health care sector than they contribute inrevenue or cost in service use; the former are everyone else.  Thelatter are (net) providers of health care; health expenditures are theirincomes.   But within the former group of (net) users of care there isa distinction between those who contribute more in revenue than the475Robert Evanscost of the services they receive, and those whose care costs morethan their contributions.  Since in every modern society the principalsource of revenues for health care is taxation, and since taxation tendsto be proportionate to income, we may call the former the healthyand/or wealthy and the latter the unhealthy and/or unwealthy.Conflicts between those who pay and those who are paid area continuing part of the daily news in Canada, and have been through-out the history of Medicare.  They are almost always framed as con-flicts between “government” and some professional organization orrepresentative of providers.  But governments are acting on behalf ofcitizens more generally, in their various roles as voters, taxpayers,and (actual or potential) patients.  To the extent that particular pro-viders get “more,” everyone else will get “less.”Arguments over doctors’ incomes are as old as Medicare,and seem most readily to command public attention.  What began asovert arguments about fees either within the public plans (fee sched-ules) or outside (extra-billing) has broadened to arguments in thepublic system about capped public budgets, fee roll-backs, and thejustification for utilization increases, along with efforts to introducevarious forms of private service charges such as “facility fees.”   Butthe core issue is still doctors’ incomes, though for negotiating rea-sons medical associations try to blur the distinction between “moremoney for health” and “more money for doctors.”But the conflict between payers and paid extends across thewhole range of health care providers; doctors are simply the mostprominent.   The reference pricing system for drugs introduced byB.C.’s public Pharmacare system is designed to transfer money fromthe shareholders of drug companies (mostly non-Canadian), to theB.C. taxpayers who pay for Pharmacare.  When the medical evi-dence shows that two drugs, though chemically different, are equallyeffective, Pharmacare will no longer reimburse the more expensiveone.  Its producers must either cut their prices, or lose their share ofthe Pharmacare market.  Either way, public outlays and companyprofits are reduced – payers gain, payees lose. Needless to say, thelarger pharmaceutical companies find this system outrageous andhave brought a variety of public and private pressures to bear to dis-476courage this policy.  The public claims are variations on the themethat reducing provider incomes represents a threat to the health ofthe population.An earlier example of this same conflict is provided by theB.C. Hospital Labour Accord.  Reducing the use of in-patient beds –which in the past were widely believed to be over-utilized in B.C.and in Canada generally – implies eliminating nursing, dietary andhousekeeping jobs.   (Many diagnostic and therapeutic services canbe moved to ambulatory settings.)  The Labour Accord was intendedto mitigate this process by providing job transfers and letting “attri-tion” shrink the workforce after beds were closed.  Critics arguedthat it resulted in higher expenditures than if people had simply beenlaid off.   Again there was a direct conflict of interest between payersand paid.Most of the high profile public conflicts in health care takeplace along the payer-payee axis, with the latter attempting to influ-ence government payers by convincing the public of the link be-tween level of payment and quality or effectiveness of health care.The link may be tenuous to non-existent in some cases, but by nomeans all.   (Such a link is easier to see in arguments to expandparticular forms of service capacity [people and/or equipment] thanin income claims by current personnel – unless there is reason tobelieve that recruitment is suffering.)  The problem is that the claimwill be made in all cases and is thus of no help in drawing the dis-tinction.  (Payees may also make appeals to “fairness,” or threatenunacceptable levels of service disruption.)While conflict along the payer-payee axis is a fundamentaland eternal feature of any health care system, it obviously varies inintensity over time.   Conflict flares up when the economic environ-ment deteriorates.  The general deterioration described above, trans-lated through accumulating government deficits and much more re-strained provincial budgets for health in the first half of the 1990s,was focused by the Canadian Health and Social Transfer of 1996.The CHST consolidated federal transfers to the provinces forhealth, education and social welfare, and reduced the total by about$7 billion.  This reduction did not, strictly speaking, reduce the allo-477Robert Evanscation of funds “for health,” because despite the surrounding lan-guage, federal transfers were not earmarked for health spending atthe provincial level.  They simply transferred funds from the federalto the provincial treasuries.  But in transferring $7 billion less — ineffect transferring part of the federal deficit to the provinces — thefederal government did substantially reduce provincial resources forany program — including health.  Provincial governments could makeup the difference by increasing taxes, borrowing, or cutting programspending.  Since they in turn were already struggling to bring theirdeficits under control, and facing strong taxpayer resistance, the thirdoption was unavoidable.  But health spending is the biggest programarea in all provinces.Going back to Figure 8, this implies a lower flow of fundingthrough the top pair of pipes.  Expenditures are, as an accountingnecessity, equal to incomes, so provider incomes must then be lower– fewer and/or less well paid jobs – unless they can open up or in-crease the flow through the other two channels of funding.  The ac-counting is simple and stark.Consequently the fundamental payer-payee conflict hasbroadened.  Frustrated in dealing with governments as the representa-tives of the public – or the “rest of us”, providers are trying to goaround them to deal directly with individuals – more private fund-ing.  The ancient debates have been re-energized, over “two-tier”medicine, user charges, private facilities, core services/ basic ben-efits, etc.   All are being driven by the pressure from providers toexpand the flow of income from private sources, so as to compen-sate for the reduced flow through the public sector.   There is a greatdeal of surrounding rhetoric about waiting lists and unmet needs, onthe one hand, and inefficiency and inappropriate servicing on theother hand.  These are just the old arguments, of providers trying tolink expenditure with health, in the public mind, and payers trying tode-link it. But beneath that rhetoric, the mainspring of the currentpolicy debate is laid bare by the fundamental accounting identity.  Ifgovernments reduce their payments, then either private funding mustbe tapped, or provider incomes (in total) must fall.There is, however, a particularly sneaky way of opening up478private channels.  That is to introduce various forms of private chargesfor hospital and medical care, and/or “two-tiered” services, and thenbring back private insurance to cover them.  In Canada (and in mostother countries), private insurance for such things as drug, dental,and extended health benefit plans, is all subsidized through the in-come tax system.  (Private health insurance premiums, when paid bythe employer, are deductible from the employer’s income just aswages would be, but unlike wages they are not taxed in the hands ofthe employee.  Thus “private” health insurance is paid for with be-fore-tax dollars.)  Economists long ago introduced the term “tax ex-penditures” to describe subsidies given by governments to privateenterprises in the form of tax breaks rather than by direct payments.Tax breaks show up as reduced government revenue; direct paymentsas increased expenditures, but their effect on the budgets of bothgovernments and beneficiaries is the same.  The big difference ispolitical visibility.  Direct subsidies show up in the public accounts(and are readily targeted by opponents and general budget-cutters).Most people are unaware of subsidies that take the form of tax breaks.Their beneficiaries, however, are very aware.  The 1995 fed-eral budget included a “trial balloon” that would have made em-ployer-paid health insurance a taxable benefit for the employee.  TheCanadian Dental Association allegedly raised a war chest of a mil-lion dollars; they ran advertisements all over the country saying:“don’t take away this exemption.”  Like any other industry, they didnot want to lose a government subsidy.So private insurance for medical and hospital services, if in-troduced on the same pattern as already established in this countryfor other health benefits, would bring more government money inthrough the back door.  Quite a lot can come in this way; the Con-gressional Budget Office in the United States estimates that their“private” insurance system receives over $100 billion in public sub-sidy through this route.  But unlike a direct subsidy, it is invisibleand – especially important – the amount is not controllable by gov-ernment.  That is why the industry, both insurers and health careproviders, greatly prefer tax expenditures to direct subsidies.  Thespecialists all know this, but the general public is blissfully unaware.479Robert EvansOr at least most of them are.  Another interesting feature ofthe subsidy to private insurance, however, is that because it is a taxexemption, its value to the employee varies by tax bracket.  Thehigher the marginal tax rate, the larger the subsidy; conversely if onehas no taxable income, a tax exemption is worth nothing.  Thus in asystem with expanded private health insurance, more public moneyflows into health care in a way that is difficult to see or control.  It isdisguised as “private” money; and notably, yields the greatest ben-efits for people with higher incomes.That observation draws our attention to the second fractureline noted above, between those who contribute more than [the costof what] they use, and those who use more than they contribute —the healthy and/or wealthy, and the unhealthy and/or unwealthy.  Thissecond conflict is entirely played out on the left hand side in Figure8 — taxes, premiums, and user charges.  It is hardly rocket scienceto observe that if a health care system is funded through taxes, thetotal costs — whatever they may be — will fall more heavily onthose with higher incomes.All modern tax systems tend to collect more from people whohave more (Willie Sutton’s Principle).   On the other hand, to theextent that the system is financed through private payments, whetheruser charges or private premiums,  the costs are borne by those whoare ill (or most likely to be).  It follows that a shift in funding fromone channel to another redistributes the burden of payment from onegroup to another.   If the proportion of private funding is increased(decreased) people at higher incomes will bear a smaller (larger) shareof the overall burden.  Even if higher income people pay more (less)out of pocket, this will be offset in lower (higher) taxes.  (This trans-fer is larger because of the negative correlation between health andincome, but does not depend on it.)In case the effect of the financing mix on the distribution ofburden across income classes was not sufficiently obvious a priori,there is now increasing empirical evidence to demonstrate it.  But itshould be obvious. Economists have a bad habit of using what arecalled “single sector models,” in which it is assumed that everyoneis identical at least for purposes of analysis, and these critical distri-480butional effects disappear.  But it is worth noting that support forprivate financing of health care tends to be stronger the higher up theincome distribution one goes, suggesting that people do have somenotion of where their economic interests lie.This axis of conflict tends to align with that between provid-ers and payers.  As noted above, when there is a tight clamp on pub-lic payments, the income aspirations of providers depend upon theirbeing able to tap private money.  Healthy and wealthy payers arelikely to be supportive, because even if total expenditures do go up,their share of that total can be reduced.   The interests are not pre-cisely identical; providers want public payments to stay constant andeven increase while private payments rise, while healthy and wealthypayers are better off if public sources shrink.  They are the onesadvocating smaller government and lower taxes.  But so long as theincrease in private funding is large enough, both can come out ahead.Not all providers gain, of course.  Those who earn their liv-ings caring primarily for the unhealthy and unwealthy will, alongwith their patients, be worse off.  So one finds that private funding isadvocated by those who expect to be able to collect it. But they seemto have the best media access – perhaps because the media are ownedby the healthy and wealthy.But there is a third axis, that is not quite as simple as thestraight conflicts over money outlined thus far.   Apart from pay-ment issues, who gets care?   So long as most of us are confident thatthe system can provide “all medically necessary care” when we needit, this is not an issue.  But as the system has come under increasingfiscal pressure, this confidence has begun to wane.  Suppose therereally isn’t enough to meet all the needs?  Should those who have themoney be able to buy their way to the head of the queue?  The an-swer is likely to depend, at least in part, on whether or not one hasthe money – another line of fracture.But the answer will also depend, to a very large degree, onones’ perception of risk.  Does the public system really fall short ofmeeting needs?  Is it getting worse – falling apart?   Is my, and myfamily’s health – even life – at risk if anything serious goes wrong,and is the only path to safety, one with a private toll-gate?  If so, this481Robert Evansopens up the clear fracture line between those with more and thosewith less money.  If we both get into serious trouble, I want to besure that my money will get me out.  If your lack of money meansthat you get squeezed out – well, that is unfortunate.  Sauve qui peut.The adequacy of the health care system is always a seriousquestion, and it has become much more serious now that the longfiscal expansion has stopped.   For years, the ancient cries of“underfunding” have resounded in a system that was getting morefunding, per person, above inflation, every year.  But now, for atleast five years, it has not grown.  Are the widespread and lurid anec-dotes of system failure and inadequate care, evidence that finallythere is real underfunding and harm to patients – the wolf is reallyhere?These questions do deserve to be addressed – in Homer-Dixon’s terms we do need to bring to bear greater ingenuity to dealwith our genuinely less favourable environment.  But, as in his frame-work, the task is made much more difficult by the opportunistic be-haviour of “narrowly based interest coalitions” struggling for a largershare of the more slowly growing national pie. When doctors’ repre-sentatives claim that “people are dying” because of lack of moneyfor health care, it turns out that they really mean lack of money fordoctors.  It is unclear why increasing doctors’ fees and bank accountswould save lives.  One might have thought that, on the contrary, thiswould draw away money that might have been used for other pur-poses.Similarly when the spokesmen for the wealthy seize uponthe present stresses to bring forward ancient arguments for privatefunding, their objective is clearly two-fold.  They are trying to shiftthe costs of care farther down the income distribution – to pay asmaller share themselves – and to assure themselves preferred ac-cess to better quality care at the same time.  Their basic tactic, likethat of the doctors, is to spread fear and undermine support for col-lective public financing and management of health care.   When publiccoalitions fragment, and people act like frightened individuals, theycan be more readily victimized by the wealthier and more powerful.“Divide et impera” was undoubtedly practiced long before the Ro-482mans.Part of this process of fragmentation, of what some have called“medical terrorism” (in the United Kingdom they refer to “shroud-waving”), includes spreading a message of inevitability.  Agingpopulations, technical progress, popular expectations, and the lim-ited capacity of the state, make it impossible to meet all the needs.“Rationing” is inevitable: so make sure you can buy what you need.”Someone must be rationed, but those of you with greater means canmake sure it is the other guy.  Why not? — it is inevitable, after all.On the other hand, it turns out that every group to study thisissue with some care has reached the opposite conclusion – the “in-evitability” message is false.  It serves only to discourage the appli-cation of the ingenuity needed to cope with this more difficult envi-ronment.   Extensive research refuted the “aging” story long ago,and the “technology” and “expectations” stories are at best grossdistortions.   It is true that the overall level of funding has stoppedgrowing – at least for the moment – but there is already a great dealof money in the system.  Roughly a decade ago, Royal Commissions(or their equivalent) in every province concluded that the systemneeded “more management, not more money.” (David Sinclair’swords, in the Seaton Commission report).   That’s another way ofsaying, more ingenuity.Those studies did not address the impact of pulling out $7billion of federal transfers in one shot.   There is a real issue forconcern, in how fast the “new ingenuity” can or should be appliedwhen so many people’s livelihoods are at stake.  System staff whoare demoralized or in shock may not show much ingenuity.  But aremarkable amount of adjustment has already taken place, with quiteastonishing declines in the use of in-patient hospital care in particu-lar, with no indication of harm to anyone’s health.  Indeed, there isconsiderable evidence that further major reductions are possible, ifsuitable alternative forms of care are available.The possibilities of and directions for adapting our health caresystem, so as to maintain and improve its quality and effectivenessin a more restricted economic environment, are not the subject forthe closing sections of an evening address.  Royal Commissions have483Robert Evanswritten volumes on the subject, and so have many others.  Our focushere has been on the inevitable structural conflicts within our systemthat keep the same issues coming back and back and back, decadeafter decade, and make progress so difficult.  Placing these in thebroader context provided by the work of Homer-Dixon and his col-leagues permits us to see our experience as part of a much moregeneral pattern of social responses to deterioration in the externalenvironment.   How does a society mobilize the ingenuity to dealwith that deterioration, and continue to progress, rather than dissi-pating energy in communal violence, or endless wrangles over“underfunding,” user charges and doctors’ incomes?But the “management versus money” issue is contentious,and clearly the position I have put forward is not universally ac-cepted.  It seems only fair, then, to offer an example of the applica-tion of ingenuity to health care, impeded by structural conflict.There is a movement currently underway in medicine, called“Evidence-based Medicine” whose participants believe that one re-ally ought to go out and look at medical care, quite rigorously, tofind out whether the things that are being done work or not.  If theyreally do work, you should continue to do them and maybe even domore; and if they don’t work, you should stop.  Radical.  A bizarreidea.  Some members of this movement are even trying to act on theidea.  And why should this notion be restricted only to medical prac-tice?  Maybe it should be extended all the way through our healthcare system – including administrative practices.   The key messagesare: “If it doesn’t work, don’t do it.”  And “If you don’t really know,find out.”But if something is not done, somebody is not going to getpaid for doing it.  And that means somebody’s income will be lower– perhaps non-existent.  So a sort of side conversation has devel-oped, sounding similar to evidence-based medicine but actually quitedifferent, about the possibility of defining so-called “core services”or basic benefits.   This approach would define a set of services to becovered by the public health insurance system.  These would be theservices for which there is good evidence of significant benefit topatients — they work.  And then the private market will provide….[fill484in the blank].   Phrased that way, it sounds silly.  All of the servicesthat are of little or no benefit, or that have little or no clear evidenceone way or another — these we should allow private marketers tosell directly to patients?   (At one time physicians worried aboutquackery.)The evidence-based medicine movement emphasizes thequestion: “Does the service work?”  If not, stop — and save themoney.  (Of course the process is “revenue-neutral” one might wellfind that a number of services ought to be expanded.  But the move-ment is powered by the understanding that there is overwhelmingevidence of a large and expensive mismatch between current evi-dence and current practice.)  The “core services” focus is on “Whopays?”  If it does not work, move the costs from public to privatebudgets and keep the income stream flowing.  If public budgets canbe maintained at the same time, total expenditures and incomes canbe increased.   (And if they cannot, well, at least taxes will be lower.)That’s the solution to an income shortage, not to inappropriate care.And these two conversations go straight past each other.  Thepeople who are using one form of rhetoric simply do not meet thepeople who are using the other form.  Two people on a panel thispast summer (at the Canadian Health Economics Research Associa-tion meetings) made presentations, one after the other.  The first said:“Ineffective care should not be paid for, by anybody” and the secondwent on to talk about why private markets should be opened up fornon-core services.  The radical inconsistency bothered no one, andthen we went and had coffee.The scene on that panel illustrates the larger “conversationof the deaf” that takes place at the national and provincial levels.(Actually the deaf, ingeniously, would be signing.)  In setting up theNational Forum on Health in 1994, Prime Minister Chrétien askedwhy, if all the major European countries can provide health care at acost of 8%-9% of national income, or less, Canada was spendingover 10%?  The question is important, though it cannot be answeredat the aggregate level.  God is in the details – as is the devil.  But theresponse of providers, at least in the public arena, has been simply toignore the question and continue to demand more money.485Robert EvansThis escalating racket is then fed by other interest groups,opportunistically using the general confusion and anxiety to try torearrange the financing system – reducing their contributions andincreasing their share of benefits.  In much the same way, in lessstable societies individuals and families re-open old private griev-ances under the cover of more general conflict.Somehow we have to maintain, extend, and protect the ap-propriate institutional structures for focusing our collective atten-tion.  We have to try to deal in a rational and informed way with thevery real pressures that we’re now under.  That means a lot of hardwork and thought – and as much good will as we can muster – and agood deal of that is now going on behind the scenes.  But we’ve gotto do this in an environment which is increasingly contaminated bythe noise of fault lines opening under stress, as groups with funda-mental conflicts of economic interest re-activate ancient arguments,spread dis-information, and turn up the volume.Metaphorically, dealing with the drought is going to take agood deal of investment in better water management.  That turns outto be technically possible; but it may not happen if we spend all ourenergy fighting over the water that is left, while being harassed bybandit gangs advancing their traditional income redistribution agendaamid the confusion.  Homer-Dixon and his colleagues remind us thatsuccess is not guaranteed, and that the price of failure is high.  But abetter understanding of the situation may help.Related Reading:Canadian Institute for Advanced Research (1995) “Health Care, So-cial Fragmentation, Economic Change and the Human Inge-nuity Gap” Symposium Proceedings, October 30, Toronto:CIAR-P14.Homer-Dixon, T.F., J.H. Boutwell and G.W. Rathjens (1993) “En-vironmental Change and Violent Conflict” Scientific Ameri-can Vol. 268, no. 2 (February) pp. 38-45.Homer-Dixon, T.F. (1995) “The Ingenuity Gap: Can Poor CountriesAdapt to Resource Scarcity?” Population and Development486Review Vol. 21, no. 3 (September) pp. 587-612.van Doorslaer, E., A. Wagstaff and F. Rutten, eds. (1993) Equity inthe Finance and Delivery of Health Care: An InternationalPerspective Oxford: Oxford U. Press, Ch. 3.Wolfson, M.C. (1986) “Stasis Amid Change – Income Inequality inCanada 1965-1983” Review of Income and Wealth, Series32, No. 4, (December) pp. 337-69.Wolfson, M.C. and B.B. Murphy (1998) “New Views on InequalityTrends in Canada and the United States,” Monthly LabourReview, United States, Bureau of Labor Statistics (April), pp.3-23.487INSTITUTE MEMORABILIA

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