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Private highway, one-way street : the Deklein and fall of Canadian medicare Evans, Robert G., 1942-; Barer, Morris Lionel, 1951-; Lewis, Steven; Rachlis, Michael; Stoddart, Gregory Lloyd, 1948- Mar 31, 2000

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Private Highway, One-Way Street:The Deklein and Fall of CanadianMedicare?Robert G. EvansMorris L. BarerSteven LewisMichael RachlisGreg L. StoddartHPRU: 2000:3D March, 2000Private Highway, One-WayStreet:The Deklein and Fall of CanadianMedicare?Robert G. EvansMorris L. BarerSteven LewisMichael RachlisGreg L. StoddartMarch 2000We are grateful to Diane Helmer for her invaluable assistance with trackingdown elusive supporting materials, and to Garry Fletcher for comments on anearlier draft.  Opinions and interpretations are the authors’.  This documentmay be downloaded from http://www.chspr.ubc.ca.The Centre for Health Services and Policy Research was established by the Board ofGovernors of the University of British Columbia in December 1990.  It was officiallyopened in July 1991.  The Centre’s primary objective is to co-ordinate, facilitate, andundertake multidisciplinary research in the areas of health policy, health servicesresearch, population health, and health human resources.  It brings together researchers ina variety of disciplines who are committed to a multidisciplinary approach to research,and to promoting wide dissemination and discussion of research results, in these areas.The Centre aims to contribute to the improvement of population health by beingresponsive to the research needs of those responsible for health policy.  To this end, itprovides a research resource for graduate students; develops and facilitates access tohealth and health care databases; sponsors seminars, workshops, conferences and policyconsultations; and distributes Discussion Papers, Research Reports and publicationreprints resulting from the research programs of Centre faculty.The Centre’s Health Policy Research Unit Discussion Paper series provides a vehicle forthe circulation of (pre-publication) work of Centre faculty, staff and associates.  It isintended to promote discussion and to elicit comments and suggestions that might beincorporated within revised versions of these papers. The analyses and interpretations,and any errors in the papers, are those of the listed authors.  The Centre does not reviewor edit the papers before they are released.A complete list of available Health Policy Research Unit Discussion Papers and Reprints,along with an address to which requests for copies should be sent, appears at the back ofeach paper.Few trends could so thoroughly undermine the very foundationsof our free society as the acceptance by corporate officials of asocial responsibility other than to make as much money for theirstockholders as possible.Friedman, 1962For-profit health care is an oxymoron.  The moment care isrendered for profit, it is emptied of genuine caring.  This moralcontradiction is beyond repair.  It entails abandoning valuesacquired over centuries of professionalizing health care into ahumanitarian service.Lown, 1999Most institutions on the scale of the NHS end not with a bangbut with a whimper…one possible endgame is that the middleclasses lose confidence in the service and begin to make otherarrangements.R. Smith, 1999aTable of ContentsExecutive Summary  1Scope and Definition  1Extending Private, For-Profit Provision: Risks and Benefits  1Illusions of Efficiency  4Market and Regulatory Potential?  4Free Trade Agreements – Lots of Uncertainty, Lots of Risk  5Summing Up  5A. Introduction    7Alberta and private health care – again  7The meaning of Medicare: Specific program or general system?  7B. What Does Private Mean?  8The ambiguity of “private”  8Who pays for care?  8Providers of Care – A spectrum of ownership and of motives 10Mixed motives – professionalism versus profits 10Private delivery and private payment: Distinct in logicbut not in practice 12C. Extending Private, For-Profit Provision: Rationales, Risksand Benefits 13Could private, for-profit hospitals help meet “unmet needs”? 13But are for-profit providers more efficient?  A look at the evidence 15What behaviour is most profitable? That depends on the context 16Profits versus professionalism again – conflicting physician interests 18Monitoring and prosecuting fraud – a neglected cost? 18Is evidence from elsewhere relevant? Profits motives are thesame everywhere 20“For profit”, not “private”, is the issue: Motives matter most 21Privately profitable strategies with public costs(i)   Transparency – what are the costs? 21(ii)  Cream-skimming and cost shifting 22(iii) Extra-billing the patients under a new name 23(iv)  Increased services do not necessarily meet needs 24Minimizing unit costs – increased efficiency, quality dilution,or income redistribution? It depends 25More illusions of efficiency – private capital is not a charitabledonation   26Accounting illusions – private contracting as off-budget publicborrowing 26Harnessing the profit motive for public benefit – What prospectsfor “competitive” or direct regulation in health care? 27Contracting in the commercial sector – the contrasts with health care 28Regulating for-profit enterprise, or replacing (moderating) the profitmotive – professionalism and self-regulation 29Smoking in the powder magazine: International trade agreementsand the threat to public health care 30So what is Premier Klein’s real aim?  “Two-tier” care byinadvertence, indifference, or stealth? 33D. Summing Up 34The balance sheet just doesn’t seem to balance 34AppendixOpening the private medical market: who gains and who losesfrom “two-tier” care? 38The standard argument for “two-tier” health care 38Flaws in the fundamental assumptions – both argument and evidence 39The mis-match between arguments and policy: “Two-tier” healthcare does not address the problem that its advocates(claim to) perceive 40Problems with user charges – and a partial response 41The real agenda behind “two-tier” proposals 43Preferential access to superior care 44Preserving the private advantage: Manipulation of public accessby private providers 44“Those who can afford it” pay for themselves, but not for others.Higher charges, lower taxes, and better access to care 45A completely segregated private market, but a small one –The American “upper tier” 46Would a domestic upper tier be larger than the foreign one? 47Private the profits, socialize the losses – The implausibility of aSelf-supporting private tier 48References 50iiExecutive SummaryScope and Definitionq “Medicare” has two meanings for Canadians: the entire range of health care services,or only those (mainly physicians and hospitals) mandated and governed by theCanada Health Act (CHA).  This paper focuses on the narrower legal meaning ofMedicare, as does the recent Alberta proposal to fund CHA-mandated servicesdelivered on an overnight stay basis in privately owned and operated facilities.Nevertheless there is considerable confusion in the minds of the public, and concernsabout access to or private costs of other health care services (e.g. home care andpharmaceuticals) may create a pervasive anxiety about the health care system overallthat then generates concerns about the sustainability of the narrower core ofphysicians and hospitals.q The label “private” in the context of health care is being used in many different waysby different people for different purposes. The most basic distinction is betweenpayment for and provision of health care services. The financing for health care maybe drawn from public or from private sources: this is logically independent ofwhether the services themselves are provided by public or private agencies. But thedistinctions on the provision side are not always as clear as on the financing side.  Atone end of the spectrum is provision of care by government employees working forgovernment agencies.  At the other end are purely for-profit, publicly tradedcorporations, such as drug and equipment manufacturers and some providers oflaboratory and long-term care services.  Most health care is provided by not-for-profit and “not-only-for-profit” organizations that respond to  motivations and“bottom lines” that are very different from those of for-profit corporations.  A uniquefeature of the recent Alberta proposal that is the principal focus of this paper, is toallow private for-profit facilities to be the site of overnight care covered under theCHA.Extending Private, For-Profit Provision: Risks and Benefitsq One of the principal justifications offered for the Alberta proposal is that of “meetingunmet needs”, of expanding service capacity to deal with shortages and waiting listsfor care.  But this argument seems at best seriously incomplete.  Alberta cutprovincial hospital spending by 30% between 1992 and 1995.  The 1999 level wasstill 15% below that of 1992.  Over that seven years, Alberta’s per capita hospitalexpenditures fell from 6% above the Canadian average to 6% below.  To reducepublic hospital expenditures and then turn around and argue the need for privatehospitals or equivalent facilities to meet shortages of capacity seems disingenuous atbest, unless the argument is being made on efficiency grounds.q If there is a case for opening up the hospital sector to for-profit overnight-stayfacilities, then, it must rest on an argument that such facilities can provide care moreefficiently than is possible in public hospitals, AND that the public as purchaser will2be able to capture any such realized efficiencies through lower expenditures.  Inshort, the belief must be that private sector organizations, operating under theincentive of profit opportunities, can provide as good or better quality care at lowercost.q The evidence, alas, does not support this belief. Health care organizations that aremotivated strictly or primarily for-profit behave differently from those with morediverse objectives.  They adopt whatever behaviours will maximize the margins ofrevenue over cost.  A fundamental “tension between profit maximization andmedical appropriateness” is reflected in distortions in patterns of patient managementand medical decision-making so as to generate higher margins.  In less competitiveenvironments, charges and use of services (whether or not appropriate) tend to behigher among for-profit firms.  In more competitive environments, for-profitorganizations appear to find ways to reduce their costs of operation and protect theirlarger operating margins.q But the same powerful incentives that encourage cost control within the organizationalso strongly discourage passing savings on to purchasers in lower prices.  To theextent that reduced costs of care in for-profits do represent real efficiencies, and notjust lower quality, the benefits of these cost reductions appear to be absorbed byshareholders as higher profits, and in other administrative and overhead componentsof operating margins.q Ownership can also affect clinical decision-making in more insidious ways.  Themost troubling of these concern “self-dealing” by physicians who have an equityinterest in services to which they can refer their own patients.   Physicians with sucharrangements have been shown to have very much higher rates of referral, forservices carrying much higher charges, than physicians without such an equityinterest.q In the extreme, the irresistible imperative to which for-profit corporations mustrespond can force them to “do whatever it takes” to maintain and increase earnings.There has recently been a spate of high-profile indictments and convictions for fraudin the for-profit health care sector. .  They have involved corporations that are amongthe industry leaders (perhaps that is how they came to be “leaders”), the biggestcompanies in their fields, and the pattern of behaviour is systematic.q Various forms of questionable behaviour – including criminal fraud – do occuroutside the for-profit sector, and clearly not all for-profit corporations engage infraudulent practices.  But payers dealing with for-profit providers will have to beprepared to pay the additional cost of monitoring, suppressing, and where necessaryprosecuting such behaviour, or to bear the financial consequences.  Whether or notexplicitly accounted for, these costs become part of the administrative overheadassociated with for-profit provision.3q There are many reasons why any efficiency gains that might be achieved, are morelikely to flow through as profits for shareholders/owners of facilities rather than assavings to individuals or governments.  Under current arrangements, physicians arereimbursed by the public plan for the provision of their professional services.  Butsurgical services are provided in not-for-profit facilities whose capital and operatingcosts are funded through separate (public) budgets.  The Alberta proposal opens upnew opportunities to bill privately for the facility (capital and operating cost)component, in effect transferring those facility costs from hospital global budgets tothe private fee-for-service sector. This will necessitate negotiating reasonable fees forthat component, on the basis of overhead cost information from the public sector, aswell as a clear idea of the nature and volume of services to be provided in the privatefacility.  But there is no readily available information on the costs of providingsurgical services in public facilities, and such information on the private side wouldbe proprietary.  Because relative costs are likely to be a black hole, the setting ofoverhead/facility charges will reduce to a matter of relative negotiating skill andpersuasion, with the information advantage being held by the private facility owners.q The introduction of private, for-profit hospitals will open up a variety of “cream-skimming” opportunities.  If surgeons are able to work in both public and privatesystems – as they are at present in Alberta – and have an equity interest in the privatefacility, it will be economically advantageous to steer their most straightforwardcases, and higher paying patients, to the private facility.  Cost shifting is as effectiveas cost reduction in improving the bottom line of the private, for-profit, organization.In addition to serving the less complex and costly Canadian patients, we might expecta private facility to market its services to Americans.  Indeed, if a private clinic couldattract a sufficiently large American clientele, it would have no economic incentive tocare for Canadians at all – unless they were prepared to pay extra, in some form orother.  In this case, public sector shortages and waiting lists allegedly faced byAlbertans would be exacerbated, not alleviated, by private care.q The private hospital also provides motivation and opportunity to promote additional,uninsured or “not medically necessary” services, which carry substantial profitmargins.  These services may appear to be merely “offered” to patients, to choose orreject.  But they may be packaged with the insured service such that in practice theyare not optional.  Or the patient who accepts and pays for these “optional” servicesmay be placed on a much shorter queue.  The patient will typically have no way ofevaluating the real value, let alone the true cost, of the extras.q This is precisely what has transpired for cataract surgery in Calgary.  Most Calgarycataract patients pay an average of $400 out-of-pocket (some have paid up to $700)for the procedure.  For this the patient receives a foldable lens implant, offered asbeing of higher quality, and a variety of other services which can include a video ofthe procedure.  The foldable lenses themselves can be manufactured at a cost in therange of $25.  Purchase prices appear to be highly variable, but these lenses areoffered as an insured service at public hospitals in Lethbridge.  Since foldable lenses4may be easier to insert, these lenses may in fact pay for themselves in reducedprocedural time.  The question of relative quality has not yet been resolved.Illusions of Efficiencyq Most potential sources of “efficiency” are likely to be more illusion than reality.  Ifthe private provider is able to move service provision from a unionized to a non-unionized environment, wage and benefit costs may be reduced for essentially thesame mix of personnel.  This provides no real gain in efficiency because the sameresources are being used up in providing services. Unless the regional authority isable to negotiate contracts that ensure such cost savings accrue to the public benefit(see above), this will simply be a transfer of income from those providing the care, tothose holding the shares. To the owners (who may include non-Canadians) it isadditional profit – unequivocally a good thing.  The workers, and the Alberta public,might take a different view.q Another “efficiency illusion” is that it is cheaper to “buy” by contract than to “make”in the public system, because “buying” avoids the necessity of investing largeamounts of public capital.  But the capital must still be paid for, and governments canraise funds more cheaply than private firms.  A second consideration may be thatcontracting on a pay-as-you-go basis appears to be a more flexible approach.  But thistoo is an illusion.  The buyer’s flexibility is the contractor’s risk, and investors mustbe compensated for accepting risk.  There is no free lunch from private investors.q A third form of efficiency illusion arises from the fact that capital expenditures bygovernments show up as public expenditures at the time they are made.  Privatecontracts, involving long-term commitments, are in effect a form of long-termindebtedness, but only the current year expenditures show on the government books.A government that is trying to show low public expenditures, to an electorate most ofwhom are not accountants, may find this form of illusion, of “off-budget” financialcommitments, politically valuable.Market and Regulatory Potential?q Buyers who are unable to judge the value/appropriateness of services, or their truecost, or who are constrained in their choices, fare badly in private markets, and willfind themselves paying too much, for services they do not need.  The advantages (forbuyers, or those they represent) of a competitive process are also dependent upon thepresence of multiple independent bidders.  Without this, any benefits that do arisefrom private provision are more likely to accrue to the providers themselves.  It isdifficult to imagine how such competition can be achieved in the Alberta setting, evenin large urban centres.  It should come as no surprise that the advocates of anexpanded role for private hospitals in Alberta are not simultaneously calling for amore openly competitive delivery system.5q As an alternative, we might look to regulatory oversight. But in the health care sector,direct public regulation shares with private contracting those same problems ofinformational disadvantage, not to mention the difficulty of enforcement.  Thecomplexity of the regulatory task has led almost all countries toward a mix of directregulation, delegated self-regulatory control, and non-profit provision, with a verylimited role for for-profit firms. A great irony is that the outstanding exception, theUnited States, has the most heavily regulated health sector.   Experience in thatcountry demonstrates that detailed regulatory oversight is singularly ineffective atcreating the conditions for efficiently functioning health care markets.Free Trade Agreements – Lots of Uncertainty, Lots of Riskq As if all of this were not enough to put anyone off embracing private, for-profithospitals, there is another larger trap here, one that may catch not only Premier Kleinand the people of Alberta, but the rest of Canada as well.  The Alberta proposal risksundermining Medicare across the whole country, by exposing it to the full force ofthe “liberalizing” thrust of current international trade agreements.  Both the NorthAmerican Free Trade Agreement (NAFTA) and the General Agreement on Trade inServices (GATS) of the World Trade Organization have as their over-riding objectivethe removal of all barriers to international trade in goods and services in any form,including health care services, and correspondingly the reduction of the jurisdictionand powers of national governments.q All sectors of the economy that are not explicitly and exclusively reserved for publicaction are to be open to international trade and competition, if not immediately thenas soon as possible.  Countries where the hospital sector is opened up to a mix ofpublic and private ownership, or where there is private insurance or user fees, areunlikely to be able to sustain an exemption for this sector.  And the agreements havebeen explicitly designed as a one way process.   Once a sector is no longer eligible forexemption, it is extremely unlikely that eligibility could ever be restored.  UnderNAFTA, for example, if a government chooses to enter a new field of activity, orreturn to one previously vacated, it incurs potentially prohibitive penalties in the formof compensation to any commercial interest that can claim lost business opportunities.These rivers are all flowing toward international waters.  And Canadian governmentsare not salmon.Summing Upq But if there are so obviously other ways of “meeting unmet needs”, if the allegedbenefits of opening up over-night-stay hospital activity to private for-profitorganizations are almost certainly either illusory or accrue only to shareholders, and ifthe free trade risks associated with such action are so immense and widespread, whydoes the premier of Alberta press ahead with such blinkered determination?  Giventhis government’s past record of explicit support for the introduction of privatemedicine with private payment, this proposal may be a stalking-horse behind which itcontinues to pursue the real long-term agenda of establishing a publicly subsidized6private tier of health care delivery and payment.  Yet this is an outcome that, as thegovernment itself has made clear, Albertans definitely do not want.q Stripped to the bone, the Alberta proposal appears to be little more than taking lousyodds on a very small payoff, and gambling with the health of Canada’s health caresystem, for the sake of a few Alberta health care providers who would stand to gainconsiderably in the short term.  It is troubling that the rest of Canada has been so slowto take notice of Alberta, and that the premier has taken so little notice of Albertans’vehement objections.7A:  IntroductionAlberta and private health care -- againAmidst growing concerns (at least some of which seem justified) among the Canadianpublic about whether their health care system will be there for them if/when they need it,the Government of Alberta has again fanned into flame the smouldering issue of the roleof the private sector in Canada’s health care system.  Premier Klein’s proposal, declaredon November 17, 1999, to introduce legislation allowing private, for-profit facilities tooffer over-night care, has raised the spectre of a parallel private hospital systempotentially undermining Medicare.  The provincial government argues, to the contrary,that private facilities will be under contract to the Regional Health Authorities and will bereimbursed for all insured services through the public Medicare program.  They will addmuch-needed capacity to provide additional insured services for Albertans.  Where is thethreat in that?  After all, physician services have long been provided by privatepractitioners and funded through public Medicare.Yet if the proposal is as straightforward as the premier suggests, why has it aroused suchcontroversy?  Who, after all, is against strengthening the capacity of Medicare to providenecessary services?  On the other hand this initiative is not wholly new. Twice in the lastfour years the premier has brought forward proposals to extend the scope of privatedelivery, and has withdrawn them in the face of intense opposition and controversy.  Whyis this objective so important to the Premier?  There would seem to be more at stake herethan meets the eye – and there is.On closer examination, the apparently innocuous extension of the role of private facilitiescomes with dubious benefits, but considerable risks to the integrity of the public system.We describe these risks in some detail.  Since the ostensible justification for the proposalis the strengthening of Medicare, we  offer, in a companion paper (Rachlis et al., 2000),some constructive suggestions for how this might be accomplished without the risksentailed in extending the role of the private sector.1The meaning of Medicare: Specific program or general system?We note at the outset, however, that Medicare has two meanings for Canadians, and it isimportant to keep these distinct.  In common parlance, “Medicare” is often used to referto the whole range of health care services provided in Canada, from hospitals andphysicians’ services through to home care and drugs.  These are financed and regulated ina number of different ways.  Only the services of hospitals and of physicians aregoverned by the terms of the Canada Health Act, which provides for federal financialcontributions to the provinces in support of programs conforming to federal standards.                                               1 There is no “magic bullet” -- bullets generally kill rather than cure – but there are a number of quitespecific policies and practices that hold considerable promise.8The Alberta proposal, and most of this paper, relate to these programs, “Medicare” in itsnarrow meaning.The alternative proposals for improvement that we offer in the companion paper (Rachliset al., 2000) do, however, address the effectiveness of the public system as a whole, notjust Medicare narrowly defined.  Some of the more fruitful avenues take us into long-term care and home care, and the regulation and financing of pharmaceuticals.  Thesolution to the annual crisis in emergency wards, for example, may lie not in buildingmore acute care beds, but in a comprehensive program of flu immunization in anexpanded public long-term care sector.In the minds of the public, however, the separation may not be nearly as precise.Perceived problems with access, now and in the future, to the full range of needed healthservices, including expensive drugs, long-term care, or home care, become bound up inheightened anxiety about the adequacy of the Canadian health care system as a whole.This generalized anxiety then translates into perceptions of the inadequacy of “Medicare”as narrowly defined.  People who are concerned about access to new and expensive drugsconclude that “Medicare is in trouble”, unaware that these problems arise largely becausedrugs (outside hospitals) are not and never have been covered by Medicare.  Theirexclusion leaves the way open for “passive privatization” -- moving costs from public toprivate budgets as a side-effect of otherwise desirable changes.  Reductions in hospitallengths of stay, for example, move the costs of associated drugs and post-operative carefrom the hospital budget to patients and their families.  “The problem with Medicare isnot that it covers too much (as some would have us believe) but that it covers too little.”2B: What Does “Private” Mean?The ambiguity of “private”The label “private” in the context of health care has always been used in many differentways by different people for different purposes (Stoddart and Labelle, 1985).  This makesmeaningful communication, and the assessment of competing claims, virtuallyimpossible.  Accordingly, we begin by offering a basic taxonomy of the variousmeanings that might be attached to the term, in so doing drawing key distinctionsbetween public and private in the health care context.  The skeleton of the taxonomy iscontained in Figure A.1.Who pays for care?The most basic distinction is between payment for and provision of health care services(Deber et al., 1996).  The financing for health care may be drawn from public or from                                               2 The original architects of Medicare, Tommy Douglas and Emmett Hall, always envisioned Medicare inthis more comprehensive and more logical form.  But the compromises required during its introduction firstdelayed and eventually lost this broader vision.9private sources: this is logically independent of whether the services themselves areprovided by public or private agencies.  A private practitioner, for example, may (as inCanada) provide medical services that are reimbursed through a public insuranceprogram.  Similarly, a public health service (as in Sweden or the U.K.) might impose usercharges (private payments) for some of its publicly provided services.  Public healthservices such as well-baby home-visiting by public health nurses are Canadian examplesof public provision with public payment, as are psychiatric hospitals, while most dentalcare in Canada is privately provided and paid.Public funding, in turn, can be drawn from general taxation (as in Canada) or from socialinsurance funds (as in Germany or France).  The latter are, in general, more regressive3and more restrictive, being typically based only on wage income up to a ceiling.  But bothdetach the financial liability of the individual from the experience or expectation of use ofservices.--------------------------------------------------------------------------------------------Figure A.1:The Many Meanings of “Private”Payment for Health Care ServicesPublicTaxesSocial InsurancePrivateOut of pocketPrivate insurancewithout public subsidywith public subsidyProvision of Health Care ServicesGovernment OrganizationNon-Government OrganizationNot for Profit InstitutionPrivate Firm with Well-defined Owners/Residual ClaimantsMixed Motives: Professional and ProfitPurely For-Profit Motive-------------------------------------------------------------------------------------------Private financing takes the form either of out-of-pocket payments by users of services or                                               3 A regressive form of finance takes a larger share of the income of people at lower incomes; a progressiveform takes a higher share from those at higher incomes.  A “flat tax” would take the same proportion ofincome – not the same amount – from people at each income level.   In Canada, the overall tax system – alltaxes combined --  is either roughly proportional or moderately progressive, depending upon the analyst’sassumptions about tax shifting.10private purchase of insurance coverage for some defined set of benefits.  The latter maybe purchased by individuals, but is more commonly purchased by employers on behalf ofa group of employees and their dependents.  A principal reason for employment-basedcoverage is that in Canada, as in many other jurisdictions, this expense is deductible fortax purposes by the employer, but is not taxable in the hands of the employees.  Thisform of public subsidy, or foregone tax revenue, is referred to as a Tax ExpenditureSubsidy, and in Canada now amounts to three to four billion dollars.Providers of Care – A spectrum of ownership and of motivesLike financing, provision of health services can be public or private.  But the distinctionshere are not always as clear as on the financing side.  At one end of the spectrum isprovision of care by employees of one or other level of government, working forgovernment agencies -- e.g. services of public health departments.  At the other end arepurely for-profit, publicly traded corporations, such as drug and equipment manufacturersand some providers of laboratory and long-term care services.It is important to emphasize that “purely for-profit” means exactly what it says.  Toparaphrase Red Saunders (not Vince Lombardi) "[Profit] isn’t the most important thing.It’s the only thing.”4  Publicly traded firms have a legal and financial obligation to theirshareholders, and to them alone.  Claims to a broader social role, education, say, or theadvancement of human health and happiness, are usually just corporate imageadvertising.The bulk of health care in Canada, however, is provided by institutions that lie betweenthese extremes.  Hospitals are (so far) strictly not-for-profit agencies; any surplus ofrevenue over expenditures must be returned to the reimburser or ploughed back intooperations.  There is no “residual claimant” legally entitled to pocket such a surplus asincome.  Whatever motivations may lie behind hospital behaviour, profit is not amongthem.Private physicians, on the other hand, have a clear title to the net revenues of the practicesthat they own – that is their net income.  But the presumption behind professionalization,and the substantial protections that it provides against the open competition of themarketplace, is that profit per se is not the predominant motivation for practicebehaviour.  Physicians are expected to offer and recommend services to their patients onthe basis of their best judgement as to what will benefit the patient, not the practicebottom line.Mixed motives – professionalism versus profitsYet the motivations are always mixed, and recognition of the need to protect and enhancethe role of professional judgement, and limit that of profit-seeking, lies behind traditional                                               4 Coach Lombardi explained to his Green Bay Packers that “Winning is not everything.  It’s the onlything.”  And they did.11prohibitions on “fee-splitting”5, and on physician ownership of pharmacies and drugfirms, as “unethical”.  The danger in such arrangements is that they give the physician adirect financial incentive in recommending particular additional services that may not bejustified by the patient’s condition.  The reality of these dangers is clearly illustrated byrecent examples of “self-dealing” by U.S. physicians who own their own diagnosticfacilities (see below).  Both the rates of referral of patients, and the prices charged forreferred services, are dramatically higher when the referring physician has an ownershipinterest in the facilities.A more subtle variant on this relationship arises when a physician sets up, with thefinancial support of a drug firm, a diagnostic facility (such as a bone mineral densityscreening clinic) that will lead to long-term prescriptions of that company’s drug.Patients on the drug will need to return regularly to the clinic for monitoring and re-screening.  Both practitioner and drug company now have a direct financial interest in thenumber and frequency of referrals to the clinic, and the proportion of patients identifiedas “requiring” therapy.  The patient is now a lifetime “customer” of both practitioner and(for profit) drug firm (Green et al., 1997).Other subtle forms of “fee splitting” have a long-standing history in relationshipsbetween individual practitioners and strictly for-profit firms, particularly drug firms.  Theinsidious practice of providing perks (e.g. trips to conferences, meals and entertainment)is an old but still very troubling story (Wazana et al., 2000; Tenery, 2000).  Morerecently, physicians have begun to be paid substantial sums for enrolling their patients indrug trials (Eichenwald and Kolata, 1999).  This both reduces the cost to the company ofrecruiting patients for its own trials, and forms a financial relationship that can be helpfulin marketing the drug post-approval.  The physician’s motives, in choosing to prescribe aparticular drug to a particular patient, become less clear.In addition to enrolling patients, the physician may be accorded status as a “researcher”and authorship rights on the publications emerging from the trial, whether or not thephysician actually puts ‘pen to paper’.  Again, this relationship ties the physician to thedrug in question, and is likely to have an influence on subsequent drug prescriptiondecisions.  In addition, if the physician has an academic base, the number of suchpublications could influence the level of academically-derived income and status.  This,in turn can enhance the physician’s influence over both other colleagues, and students.The case of private laboratories provides another interesting example of mixed motives.Laboratory services in Canada are treated as medical services, either funded throughhospital global budgets, or reimbursed as billable items in the provincial medical feeschedule.  As such, they must be provided by a licensed medical practitioner.  Yet west ofthe Ottawa River, large for-profit publicly traded companies dominate the laboratorysector.  Their billings must pass through one or more individual pathologists (corporatepractice of medicine would violate the medical practice acts) but these are in some formof legal and financial relationship with the laboratory company.  If that pathologist is also                                               5 “Fee-splitting” refers to the practice of paying a percentage of the fee received from a patient to anotherpractitioner who referred that patient.  In other settings it might be called a “kickback”.12a shareholder in the company, again mixed motives emerge.  And if the pathologist alsohappens to be the director of a hospital laboratory, the pattern of financial incentivesbecomes even more complex.As we go across the spectrum of provider organizational forms and embeddedmotivations, from more professionally motivated to more profit motivated, the incentivesincrease for both “revenue enhancement” – increased sales – and “cost control” per unitof service.  The concern over the latter is that it may lead to quality degradation andpatient selection, along with or instead of increased efficiency of production.  Theconcern with the former is that it may lead to increased output of inappropriate services –the original argument against “fee-splitting” – as well as increased efforts to circumventprice controls.Private delivery and private payment:  Distinct in logic but not in practiceThe categories in Figure A.1 are logically distinct, but dynamically linked in importantways.  Most obviously, private insurance coverage requires that there be private out-of-pocket payments for insurers to reimburse.  Correspondingly private insurers tend toadvocate a limited role for public insurance – mopping up the bad risks and those withfew personal resources – and substantial user charges in whatever public coverage isprovided.  On the other hand, as noted above private health insurance typically dependsupon the provision of a quite substantial public tax expenditure subsidy.  It is an openquestion as to whether private insurance could survive on any significant scale withoutpublic subsidy, but in any case unsubsidized private insurance is politically unlikely inCanada and not common world-wide.The form of organization of the provision of care has in practice been associated with theadvocacy of particular forms of payment.  Not-for-profit organizations and theiremployees tend to exert continuous pressure for more public funds, with less interest inprivate funding.  Self-employed practitioners, with a mix of professional and profitmotives, have tended to argue for more private finance on top of a public system.  Forprofit drug firms, however, have so far successfully fought off universal coverage, andpreserved a mix of public and private insurance and out-of-pocket payment – anAmerican-style system with an American-style pattern of cost escalation.Finally, there are linkages across the different forms of provision.  Private motivationstend to push across the spectrum of organizational forms from the purely profit-drivensector into the purely professional or mixed-motive sectors – see above.  Theevolutionary dynamic appears to be toward a mix of motives ever more dominated byfinancial or profit considerations.  From the perspective of for-profit firms the concern toprotect professional motives and behaviour from the intrusion of financial considerationsis turned on its head.  On the contrary, the most profitable strategy is to subvertprofessional motives, and to tie the financial interests of the practitioner as closely aspossible to the objectives of the for-profit firm.13The over-riding message of the above is not that private (or public) provision isfundamentally good or bad.  We already have a system with significant components ofboth public and private provision, and with several different forms of the latter.  But thedevil is, as usual, in the details.  Different forms of private organization embody differentpatterns of incentives -- different mixes of professional and financial motivations.Different financial motivations, in turn, lead to interests in different mixes of public andprivate payment.C: Extending Private, For-Profit Provision: Rationales, Risks andBenefitsCould private, for-profit hospitals help meet “unmet needs”?6As noted above, Premier Ralph Klein is very explicit that his proposal addresses theprovision of medical services, and does not change the source of financing.  What then isthe basis for opposition?  Alternatively, however, one might ask what is the rationale forhis determination to push through a measure that is obviously very controversial, and thatmay carry substantial (and not widely understood) risks to the entire institution ofMedicare, both inside and outside Alberta?  Do the benefits outweigh those risks?  Towhom would such benefits accrue?7One of the principal justifications offered is that of “meeting unmet needs”, of expandingservice capacity to deal with shortages and waiting lists for care.   Premier Klein hasreferred to “shortages of beds and doctors, waiting lists, crowded emergency rooms, andstreams of wealthy Canadians heading to the U.S. for treatment” (Klein, 1999)  But inand of itself, this argument seems at best seriously incomplete.Claims of “underfunding” and unmet needs are as old as Medicare itself.  They do notseem to depend on actual levels of provision. Some alleged indicators, like the streams ofCanadians heading south, are largely fictitious (Barer et al., 1999; Katz et al., 1998).Others, like waiting lists and seasonally crowded emergency rooms, are real but linkedmore to organizational and managerial problems than to overall resources (McDonald etal., 1998).  Even if such claims do now correspond to a genuine shortage of services,however, they do not make a case for private delivery.                                               6 Section 1 of the Alberta legislation, Bill 11, very specifically forbids the operation of a “private hospital”.What it permits are “designated surgical facilities” in which patients may remain overnight (or presumablylonger, if necessary) – i.e. hospitals in all but name.  The Bill also contains language that appears to addressa number of the concerns raised below, but on careful reading seems to offer address without redress.7 An obvious answer, of course, is to the private company that secures the contract.  The Albertagovernment’s proposal does not arise in a vacuum; it is a specific response to the Health Resources Group(HRG) that has been “lobbying tirelessly for the change proposed by Klein” (Cairney, 2000).  HRG is theCalgary corporation, now providing private hospital services to WCB and other private clients, that hasevery expectation of receiving a contract from the Calgary Regional Health Authority to provide inpatientservices.  Its former CEO, Jim Saunders, moved to that job after being the Chief Operating Officer of theCRHA (Fuller, 1998).14As opponents have quickly noted, such a rationale would provide equal reason to expandpublic capacity. After all, the Alberta government has previously imposed radical fundingcuts on the public system.  Between 1992 and 1995, Alberta cut provincial governmentspending (per capita) on hospitals by 30%, from $874 to $614.  Premier Kleinsubsequently admitted that there was no plan behind these draconian cuts.  “It wouldhave been nice to have had a vision, but there wasn't a common one at the time”(Steinhart, 1996).  Some of this funding was later restored, but by 1999 provincialgovernment spending on hospitals was still estimated to be 14.5% below the 1992 peak,at $747 per capita (Canadian Institute for Health Information, 1999).Alberta was not, of course, unique; hospital funding was cut all across Canada after 1992.But the national average bottomed out at $742 in 1997, only 10.3% below its 1992 peakof $828.  The preliminary national estimates for 1999 are $796, only 3.9% below the1992 level, suggesting that most of the cuts have now been restored – although withoutadjusting for either inflation or population aging.  Hospital spending in Alberta – arelatively high-income province -- fell from 5.6% above the national average, to 6.2%below, a relative move of about 12% in seven years.8   Moreover, relative to provincialGDP, the Alberta government’s expenditure on hospitals was, in 1999, estimated to be22.4% below the national average (2.01% vs. 2.59%) (Canadian Institute for HealthInformation, 1999).There is nothing magical about the national average.  But it would seem difficult toargue, in the face of these numbers, that Alberta would be out of line were it to increaseresources for public hospitals.  Nor is the Alberta government likely to be short of moneyin the near term. There is thus no basis for the claim that increasing support for publichospitals is not an option.  By February of 2000, the Alberta government seems to havereached the same conclusion; its most recent budget includes a substantial increase inhealth spending.  But that decision would appear to undercut much of its argument forprivate hospital care.The new budget also appears to fly in the face of the Premier’s earlier and quite validpoint that “[m]oney alone won’t fix the problem.  It never has.” (Klein, 1999).  In this heis in agreement with the conclusions of a series of Royal Commissions and other publicinquiries and consultative bodies over the past fifteen years, down to the National Forumon Health in 1997.  Thirty-five years  (up to about 1992) of adding ever more money tothe health care system was not sufficient to ‘meet the needs” or end the underfundingclaims.  Nor has it in any other country in the developed world.   In 1977, the Americanpolitical scientist Aaron Wildavsky formulated the Law of  Medical Money; “…costs willincrease to the level of available funds.” (Wildavsky, 1977:109).  There is never enough.Accordingly most observers of health care systems have concluded, as has Premier Klein,that indeed “the status quo [but with more money] is not an option.”  Much moreattention must be given to the more effective management of the considerable resources                                               8 The national average of course includes Alberta, so the move relative to the rest of the country was evengreater.15already going into the Canadian health care system, to pruning away the inappropriate,ineffective, and unnecessary activities and finding more efficient ways to delivereffective care.  In short, both “Doing the Right Things”, and “Doing Things Right.”Despite the present atmosphere of “crisis” and widespread public concern there is in factstill room for disagreement over whether more money is needed, and if so how much.But there is no doubt that, although progress has been made on some fronts, manyimportant changes must still be carried through if public confidence is to be restored.The Premier’s proposal cannot therefore be justified on the ground (whether or not solid)that health care services in Alberta are inadequate to meet the public’s needs.  Rather itmust rest upon a presumption that contracting with a private, for-profit provider is a morecost-effective way of meeting those needs than simply restoring some of the fundingpreviously cut from the public system.  The province, or its regional authorities, face a“make versus buy” decision.  The Premier would appear to believe that his proposal is amore efficient approach to expanding the supply of needed services, that private sectororganizations, operating under the incentive of profit opportunities, can provide as goodor better quality care at lower cost.But are for-profit providers more efficient?  A look at the evidencePerhaps they can, but the case is far from self-evident and to date has not been made.  Acertain ideological school holds that private, for-profit organization is by definition moreefficient than public, in all fields of endeavour.  But if one looks for evidence andargument, rather than expressions of faith, most of the current evidence indicates that, inthe delivery of health care services, public and not-for-profit systems have a significantcost and/or quality advantage. The standard arguments supporting for-profit organization,however relevant elsewhere, are simply inconsistent with the realities of health care.The evidence on the comparative costs, quality and effectiveness of private for-profitfirms relative to public and not-for-profit comes (predictably) largely from south of theborder, where there has been ample experience with a mix of public and privatefinancing, and a rich mix of non-profit and for-profit delivery arrangements.  The mostdirectly relevant research evidence is that which compares for-profit and not-for-profithospitals.  But there is also a significant body of evidence from mental health,rehabilitation hospitals, HMOs and even home care, and a quite separate but clearlyrelated literature on the effects of various forms of fee-splitting, or physician self-referral.These literatures examine a variety of indicators, including “efficiency”, profit margins,costs, and quality.A comprehensive and detailed review of that literature would be a monumental task wellbeyond the scope and intent of this paper.9 But a consistent theme emerges from thefindings of virtually all studies.  Health care organizations motivated strictly for-profit dobehave differently from those with more diverse objectives.  In broad summary, and just                                               9 Partial reviews can be found in Taft and Steward (2000) and Woolhandler and Himmelstein (1999).   TheTaft and Steward study is particularly useful in demonstrating how the Fraser Institute reaches itsidiosyncratic conclusions (Zelder, 2000).16as the discussion in part A above would suggest, they adopt whatever behaviours willmaximize the margins of revenue over cost.  These behaviours differ according to theexternal environment – the nature of their product, the forms of reimbursement, and theextent of competition from other organizations.   But however they are achieved, for-profit firms show larger margins.Studies of U.S. hospitals, for example, have found that in the years prior to price-sensitive “managed care” purchasing, “investor-owned chain hospitals chargedsignificantly more, and were more profitable, than all other types of hospitals exceptfreestanding for-profits …” (Renn et al., 1985 p.219).  “…[T]otal charges … and netrevenues per case were both significantly higher in the investor-owned chain hospitals,mainly because of higher charges for ancillary services…[and] significantly higheradministrative overhead costs...” (Watt et al., 1986, p.89) “…[I]nvestor-owned chainhospitals generated higher profits through more aggressive pricing practices rather thanoperating efficiencies…” (ibid.).  The researchers conclude “[I]nvestor-owned chainhospitals did not have lower costs of providing patient care services than did comparablenot for profit hospitals, and thus were not more efficient.” (ibid. p.95).A study of California hospitals found that “both costs and charges were higher in for-profit than in not-for-profit hospitals….for profit chains…used aggressive marketing andpricing strategies to generate high rates of profitability and growth” (Pattison and Katz,1983, p.347).  The investor-owned chains used basic services (room charges) as “loss-leaders” for high margin ancillary services: “…for all profitable ancillary services, thenumber of service units administered per patient-day or per admission was higher in theinvestor-owned chain hospitals than in the voluntary hospitals.  In the case of clinicallaboratories and pharmacies, the difference was extreme” (p. 350).   These findings ledPattison and Katz to suggest that “…the tension between profit maximization andmedical appropriateness may lead to different styles of medical practice in [investor-owned] hospitals” (Ibid.).Furthermore, in the environment of retrospective reimbursement that characterized theU.S. prior to the predominance of managed care, increased competition was found to beassociated with lesser, rather than greater efficiency (Robinson and Luft, 1985; Wilsonand Jadlow, 1982).10  The nature of the competition among hospitals in thatreimbursement context served, perversely, to raise costs and lower efficiency.What behaviour is most profitable?  That depends on the contextReimbursement processes in the U.S. have become much more price sensitive since thesestudies were done: “[w]hat the previous system rewarded, the new system will apparently                                               10 Wilson and Jadlow also found that in the particular hospital department they were studying, nuclearmedicine, for-profit hospitals were more efficient in their use of both staff and capital.  More recentlyGriffiths et al. (1994) found for-profit renal dialysis facilities to be more efficient than not-for-profits.These findings suggest that in specialized clinical areas with a limited range of activities, the powerfulincentives of for-profit ownership can lead to increased efficiency.  But in the earlier study theseefficiencies were dissipated as the environment became more competitive – possibly in marketingactivities.17penalize” (Pattison and Katz, 1983, p. 353).   Not surprisingly, one finds a change in thecomparative findings.  For- profit hospitals continue to show higher overhead costs andprofit margins (Woolhandler and Himmelstein, 1997),11  but studies are now showing for-profit organizations with charges comparable to those in not-for-profits, and with lowercosts of production (Sear, 1991).  (On the other hand, Meurer et al. (1998) report highercharges for hospital treatment of childhood asthma at for-profit than at non-profit andpublic hospitals.) These lower input costs, however, appear to be associated withevidence of lower quality or poorer outcomes in for-profit settings (Garg et al., 1999;Himmelstein et al., 1999).12   Concerns about “the tension between profit maximizationand medical appropriateness” remain.In this new environment, there is some evidence that for-profit organizations are findingways to reduce their costs of operation and protect their larger operating margins.  Butapart from concerns about the deterioration of quality, it would appear that the samepowerful incentives that encourage cost control within the organization, also stronglydiscourage passing savings on to purchasers in lower prices.  To the extent that reducedcosts in for-profits do represent real efficiencies, and not just lower quality, the benefitsof these cost reductions appear to be appropriated by shareholders as higher profits.Indeed Silverman et al. (1999) find that when Medicare expenditures are analysed on apopulation-wide basis, regions with high levels of for-profit provision show significantlygreater overall spending (per capita, age-adjusted).  Moreover, regions in which allhospitals converted (between 1989 and 1995) to for-profit status showed much morerapid rates of cost escalation than those where all hospitals remained not-for-profit.“…our data do not demonstrate any cost savings associated with for-profit ownership.Our findings are consistent with the possibility that for-profit hospital ownership itselfcontributes to higher per capita costs...” (Ibid. p. 425).Furthermore, the finding of higher costs was not limited to the hospital sector.  “Spendingin for-profit areas was greater than in not-for-profit areas in each category of service                                               11 Altman and Schactman (1997a) argue that higher administrative costs should not be regarded asproblematic, if they are associated with lower costs overall – efficiency, after all, requires management.They reported, on the basis of an unpublished ProPAC study, that costs per Medicare case treated werelower in for-profit hospitals, even though overhead margins were higher.  This finding, however, was basedon a misunderstanding.  They inadvertently compared data unadjusted for hospital teaching status.  Whenthe data were adjusted, their initial conclusion was reversed (Altman and Schactman, 1997b).12 Studies based on hospital-wide mortality rates show a more mixed pattern.  Hartz et al. (1991) and Kuhnet al. (1994) found higher adjusted mortality rates in for-profit and public hospitals than in private, not-for-profits.  Shortell and Hughes (1988), however, found no association between ownership and overallmortality rate.   More recently McClellan and Staiger (2000) find not-for-profit hospitals to have lowermortality rates than for-profit hospitals for elderly heart disease patients, after adjusting for hospital size,teaching status, urban or rural location, and patient demographics.  The authors find, however, that thisdifference disappears, and indeed the for-profits have a slight advantage, when adjustment is made forlocation.  For-profits, in their study, tend to be located in areas with worse outcomes overall.  Since it isunclear why they should choose to locate in such areas, one is left with the chicken –and-egg question: arethe areas with concentrations of for-profits lower quality overall because they have a concentration of for-profits?  If so, adjustment for “location” adjusts away the effect of interest.  In any case, McClellan andStaiger observe that quality variance within ownership group is much greater than the difference betweengroups, leading them to conclude that factors other than ownership status dominate.18examined: hospital services, physicians’ services, home health care, and services at otherfacilities” (p.420).   The observation of a spending differential for all types of services issignificant because of the potential for cost-shifting across sectors.  “[I]t has been welldocumented that for-profit hospital firms inflate their revenues by discharging patientsearly from the acute hospital (for which they receive a fixed payment regardless of lengthof stay) to a rehabilitation hospital owned by the same firm (which receives additionalpayments)”  (Himmelstein and Woolhandler, personal communication).13Profits versus professionalism again – conflicting physician interestsThese observations are consistent with more general findings that economic incentivesmodify patterns of patient management and medical decision-making.   As emphasized inSection B above, “… ownership does affect clinical decision-making” (Schlesinger et al.,1989, p.255).  The most troubling of these concern “self-dealing” by physicians who havean equity interest in services to which they can refer their own patients.   Physicians withsuch arrangements have been shown to have very much higher rates of referral, forservices carrying much higher charges, than physicians without such an equity interest(Hillman et al. 1990; Swedlow et al., 1992; and also Mitchell et al.,1992, but seeO’Grady, 1993).  The profitability of these non-arm’s-length arrangements for bothclinics and practitioners has led to a significant expansion of so-called “joint ventures”.The conflict of interest and potential for skewing clinical decision is obvious.  “[A]doctor who thinks there should be no concern about self-referral as long as it is disclosedand…monitored is analogous to a purchasing agent … who discloses to the … CEO thathe has a vested interest in certain vendors with whom he does business… the CEO wouldprobably fire the purchasing agent on the spot." (Relman, 1992).  Nor has this situationescaped the attention of regulators (Crane, 1992; Priest, 1996).   More recently attentionhas shifted (back) to the range of ways in which for-profit drug companies haveentangled the economic interests of prescribing physicians with the marketing of thecompany’s products.   The objective is to shift the balance of professional and economicconsiderations bearing upon the prescribing decision (Wazana, 2000).  Attempts by theAMA’s Council on Ethical and Judicial Affairs to police physician interactions with drugcompanies have recently been undermined by the CME [continuing medical education]imperative.  “In the last several years … [i]ndustry money and influence has permeatedvirtually all levels of physician CME in the form of complimentary meals andentertainment, consultation fees, and pseudo-CME courses” (Tenery, 2000, p. 392).Monitoring and prosecuting fraud -- a neglected cost?The attempts by for-profit firms to influence medical decision-making, while ethicallyvery questionable, are for the most part within the letter of the law -- although the law inthe United States has been changing to try to deal with them.  More recently, however,several cases have emerged in which prominent firms or their employees have been                                               13 Studies of rehabilitation and psychiatric hospitals show patterns similar to those in acute care  (McCueand Thompson, 1995; Dickey, 1994; McCue et al., 1993).  For-profit facilities show higher revenues andexpenses per adjusted discharge, and higher profits.19convicted of outright fraud, on a major scale, and heavily fined or jailed. The intensepressure for escalating earnings imposed by the private capital market has led in thesecases to deliberate criminal behaviour.  Several of these prosecutions are currently on-going.For example, executives of the giant Columbia-HCA hospital chain in the United Stateshave recently been convicted, fined and jailed for fraud in the latest stage of a wide-ranging and long-running prosecution by the U.S. Department of Justice.  WhileColumbia-HCA declares that the company did nothing wrong, others believe that theseconvictions could lead to further indictments, and strengthen a case that could costColumbia-HCA as much as $1bn. USD (Heldman, 1999).  National Medical Care (nowFresenius Medical Care North America), the world’s largest provider of kidney dialysisservices, has just been convicted of fraud and fined a record $486 million USD.Prosecutors described National Medical Care (NMC) as a deeply corrupt company, andare continuing to investigate the activities of its executives (National Post, 2000).While the criminal activity at NMC appears to have stopped after the company waspurchased by a German firm, another German giant, the Bayer pharmaceutical company,is the centrepiece of a recent expose in Fortune magazine (Behar, 1999) concerningcriminal activities carried out by firms contracted by the company as part of its world-wide “dirty little war” against manufacturers of generic drugs.14  And closer to home,Ontario has launched suits in both Ontario and Wisconsin courts against NationalMedical Enterprises -- one of the largest health care corporations in the United States – torecover a total of $305 million in billings for excessive, inappropriate and unnecessarymental health care services provided to patients recruited or “lured” from Ontario toresidential facilities in the U.S.  NME has previously pleaded guilty to criminal chargesin the U.S., and paid out over $700 million to settle “the largest case of health-care fraudin American history” (McCann, 1998).The point to note is that these are not “fly-by-night” companies, fringe players in theworld of for-profit health care.  They are the industry leaders, the biggest companies intheir fields, and the pattern of behaviour is systematic.  (Perhaps that is why they havebeen so successful.)  This behaviour is a natural outgrowth of the drive for profit, insertedinto the world of health care provision.  As a former manager of a number ofColumbia/HCA hospitals (and member of the Saunders/Lombardi school) in the U.S.recently pointed out, “Columbia hospitals exist to make money – period.” (Lagnado,1997).That is not to say that various forms of questionable behaviour – including criminal fraud– do not occur outside the for-profit sector, nor that all for-profit corporations inevitablyengage in fraudulent practices.  But it does point clearly to the need for careful,continuous, and costly, monitoring.  Furthermore, the scale of these fraudulent activitiesand the prominence of the perpetrators are something quite new, and appear to date from                                               14 Nor is such behaviour confined to the pharmaceutical industry.  Documents recently made public by thetobacco giant BAT reveal an extensive and long-term covert corporate strategy of promoting smugglingand tax evasion (Maguire and Campbell, 2000).20the change in the U.S. reimbursement environment, referred to above, superimposed on asector with a large for-profit component.  The charges, convictions and settlements nowbeing reported reflect behaviour over the past five to ten years – in the Ontario case theygo back to the late 1980s.  Payers dealing with for-profit providers will have to beprepared, as the Ontario government has discovered, to pay the additional cost ofmonitoring, suppressing, and where necessary prosecuting such behaviour, or to bear thefinancial consequences.  Whether or not explicitly accounted for, these costs become partof the administrative overhead associated with for-profit provision.Is evidence from elsewhere relevant?  Profit motives are the same everywhereThe evidence on the relative prices, costs, quality, and general behaviour of for-profit andnot-for-profit organizations in health care is extensive, and largely consistent, but onemight question its relevance.  The Alberta Government’s proposal does not involveprivatizing an entire hospital or delivery system, but rather the provision of overnightcare to patients in specialized facilities providing a very narrow range of surgicalservices.  Potentially, this would permit provider teams to organize patient flow formaximal efficiency, as well as to hone their skills and provide high quality care.  TheShouldice Hospital in Ontario, specializing in hernia repair, and the Gimbel eye clinic inCalgary are given as examples (see also note 10 above).Such a question, however, would miss the main point from the body of empiricalevidence. “[T]he tension between profit maximization and medical appropriateness” isinescapable, and universal -- for physicians.  For-profit firms suffer from no such“tension headaches”.  Their task is only to find ways to induce the physician to resolvethe tension in favour of profit – and they are very good at this task.The case for specialized and streamlined surgical clinics, as both more efficient andpotentially of better quality, seems plausible and might be persuasive.  But if so, suchclinics can equally well be established within the public hospital system.  Why contractfor these services from for-profit corporations?  An answer might be that there areorganizational and incentive features of large, not-for-profit institutions that make moreefficient provision difficult to achieve in practice.  The objectives of the institution, or itsmembers, are not necessarily congruent with those of the public that support it.   But theincentives that drive for-profit organizations can also lead to behaviour that subvertspublic objectives.  The pursuit of private profit is only to a limited extent consistent, forwell-understood reasons, with the purposes of a public health care system.  When the twocome in conflict, will it be possible in practice to ensure that public objectives prevail?In light of the evidence on for-profit behaviour reviewed above, the answer would appearto be “No”. Demanding as the task of improving public sector efficiency may be, it hasbeen done, and the odds of success look better than those from introducing for-profitdelivery.21“For-profit”, not “private”, is the issue: Motives matter mostIt is important to be clear that the concern is with the for-profit delivery of clinicalservices, not with their private delivery.  After all, most physicians practicing in Canadatoday are already private ‘entrepreneurs’. They simply derive the majority of theirprofessional income from provincial medical insurance plans.  But the Alberta proposalintroduces two subtle but crucial changes.First, under current arrangements, physicians are reimbursed by the public plan for theprovision of their professional services.  But surgical services are provided in not-for-profit facilities whose capital and operating costs are funded through separate (public)budgets.  This proposal opens up new opportunities to bill privately for the facilitycomponent, in effect transferring those facility costs from hospital global budgets to theprivate fee-for-service sector.Second, the revenue from these latter billing opportunities becomes accessible to non-physician corporate interests, whose motivations are entirely profit-driven – a move alongthe spectrum described in Section B above, away from professionally-dominatedmotivation.  While only a licensed physician can bill for professional services, the facilityitself may be owned by a publicly traded corporation or by a partnership involving non-physicians.Privately profitable strategies with public costs(i) Transparency – what are the costs?This raises a number of issues, of transparency, of cream-skimming, of appropriatenessof services, and of opportunities for extra-billing.   The issue of transparency arises fromthe necessity to negotiate a reasonable fee for the facility component, to cover all non-professional (capital and operating) costs.  This will presumably require somecomparison with costs in the public sector, as well as a clear idea of the nature andvolume of services being provided in the private facility.  But there is no readily availableinformation on the costs of providing surgical services in public facilities; the costaccounting frameworks have simply never been developed.  And such information on theprivate side would be proprietary.  In short, there is no official information on which tobase the comparative costs of surgery in public and in private facilities.  In the case ofcataract surgery, informal estimates suggest that the facility fee paid by the region may be50%-125% higher than the cost of equivalent care in the public system (Armstrong, 2000;CBC, “The Magazine”, February 29, 2000).The Calgary Regional Health Authority has not revealed the details of its contracts, andnot surprisingly the private clinics are not advertising the true cost of providing theprocedure.  One might have expected that if the private option represented a ‘good deal’,the Health Authority would have made the cost information known.22Privately profitable strategies with public costs(ii) Cream-skimming and cost shiftingApart from the adequacy or availability of the information base, comparative costing ishampered by the possibility of a variety of types of cream-skimming.  If surgeons areable to work in both public and private systems – as they are at present in Alberta – andhave an equity interest in the private facility, it will be economically advantageous tosteer their most straightforward cases to the private facility.  This represents anothermodern form of “fee-splitting” – introducing an additional economic motive to influencethe professional’s judgement.  It also makes difficult or impossible the comparison of unitcosts between the two systems.Furthermore, to the extent that the private facility is able to offer a more congenialworking environment – regular hours; pleasant surroundings; no shift work; predictablecaseload – it may be able to siphon off the more competent and productive supportpersonnel.  If the private facility is also non-unionized, it may gain a further costadvantage.   And finally, even if costs for comparable patients were available, these willdepend in part on the relative volumes of patients in the public and private facilities, thesize of the bases over which their respective overhead costs can be spread.Because relative costs are likely to be a black hole, the setting of overhead/facilitycharges will reduce to a matter of relative negotiating skill and persuasion, with theinformation advantage being held by the private facility owners.  Without very carefullydetailed analysis and oversight, it will never be possible to compare costs in the publicand private systems.Opening up private facilities for overnight stays may also open up other profitopportunities through cream-skimming higher paying, as well as lower cost patients.  Inaddition to serving the less complex and costly Canadian patients, we might expect aprivate facility to market its services to Americans.  The huge discrepancy between feesin Canada and those in the U.S. leaves plenty of room for undercutting the latter whilestill charging well above Canadian rates (Vancouver Sun, 2000).  If a private clinic couldattract a sufficiently large American clientele, it would have no economic incentive tocare for Canadians at all – unless they were prepared to pay extra, in some form or other.In this case, the shortages of physicians and other personnel allegedly faced by Albertanswould be exacerbated, not alleviated, by private care.These practical problems arise from the inherent mis-match between the objectives of apublic health care system, and those of a private, for-profit organization.  Profit is thedifference between the revenues of an organization, and its costs; accordingly for profitorganizations focus on increasing revenue and decreasing cost.23Privately profitable strategies with public costs(iii) Extra-billing the patients under a new nameBut revenues can be enhanced both by increasing price, and by increasing volume.  Ifprices for insured professional services are constrained – as by a provincial reimbursingagency – the natural response is to create an expanded product line.  Overhead or facilityservices can be sold to the province as part of the insured service; ambience or amenityservices can be sold directly to the patient but tied as closely as possible to the insuredservice.  The separations become fuzzy, to the patient and to the province.  The publicobjective may be value for money; the private objective is simply money.Canadian physicians have always chafed at the constraints imposed by globallynegotiated fee schedules and have argued for the opportunity to extra-bill their patientsfor their professional services.   The private clinic provides motivation and opportunity topromote additional, uninsured services, which carry substantial profit margins.  Theseservices may appear to be merely “offered” to patients, to choose or reject.  But inpractice they may be packaged with the insured service such that they are not optionalextras but part of the overall service.  In any case the patient is typically at a substantialinformational disadvantage, with no way of evaluating the real value, let alone the truecost, of the extras.These concerns are more than just speculation.  There is already information availablefrom for-profit health care providers in Alberta (Armstrong, 2000).   In Calgary allcataract surgery is done in commercial clinics, and eighty percent of Calgary cataractpatients pay an average of $400 out-of-pocket (some have paid up to $700) for theprocedure.  For this the patient receives a foldable lens implant, offered as being ofhigher quality, and a variety of other services which can include a video of the procedure(Armstrong, 2000).  The foldable lenses themselves can be manufactured at a cost that“probably does not exceed £10 [$25] anywhere” and “are generally sold at three to tentimes this price”, depending upon the negotiating power of the purchaser (Allan, 2000,pp. 73-4). 15  As Allan notes, while development costs are high, the market is massive.Thus there is plenty of room for negotiating price discounts.How does the cataract patient know that the “superior quality” lens on offer for severalhundred dollars extra provides no additional advantage in therapeutic outcome, or that theprice she is being charged is several times the actual cost, or that in public hospitals inother jurisdictions16 the extra cost of the foldable lens is simply absorbed by the hospital?Perhaps she could find out, if at the time of the offer she could contact a number of                                               15 The price paid by clinics in Calgary is unknown, but if bulk purchasing yields such major priceadvantages, the obvious strategy for providers is to purchase through a provincial or national purchasingagency and make the lens available as a Medicare benefit.  Purchasing “at retail” is just stupid – except forthose collecting the marked-up price from patients.16 In Lethbridge, for example, all cataract surgery is done in public hospitals, and the foldable lens implantis provided at no charge to the patient (Armstrong, 2000).  The public hospital has much less incentive tomarket services or to mark up charges over costs, because no individual in the organization can take theprofit home as income.  It would be worth finding out how these lenses are purchased, and at what price tothe hospital?24different ophthalmologists, not all associated with the same private clinic, and knew whatquestions to ask, and was willing to go through the referral process again.  Perhaps….butit does not happen.  Just before going into surgery is a bad time to begin haggling overprices.  But if the buyers of these services are unable to judge their value or cost, or areconstrained in their choices, the increase in clinic revenues represents cost withoutbenefit to the provincial population.One might hope that the Regional Authority as a public agency, or provincial governmentthat established it, might act as a “prudent purchaser” on behalf of patients, or at leastprovide information and advice, to remedy the information gap.  Instead, only theinitiative of a voluntary organization, the Alberta branch of the Consumers’ Associationof Canada, brought these practices to light.  The Regional Authority seems to have takenno interest or if anything to have acted as the agent of the private interests.Privately profitable strategies with public costs(iv) Increased services do not necessarily meet needsAs for volume of output, the presumption of both advocates and opponents of privatecare is that more services are needed – and will be provided.  But it must be rememberedthat volume of output contributes to profit, whether or not it contributes to meeting needs,so long as it is sufficiently reimbursed.  Providers of care may not like to talk about them,but inappropriate and unnecessary provision coexist with unmet needs, and theseproblems are more severe in a fee-for-service environment.   Fee-for-service medicinehas for decades been critiqued on the grounds that it provides a strong economicincentive to over-servicing.  Indeed the Auditor-General of Alberta raised the sameconcern in his 1996-1997 Report: “In past years…I noted that the fee-for-servicepayment system contains no obvious strategy to promote more cost-effective services, ordiscourage unnecessary services. … Some believe that a volume driven payment systemposes the risk of encouraging the provision of unnecessary services” (Valentine, 1997, p.128).The check on economically-driven over-provision is the professionalism of the provider,and his/her sense of responsibility to the patient.  In the words of the American MedicalAssociation, “..physicians are not simply business people with high standards…in thespecial calling of healing…they are the fiduciaries of their patients.  They have differentand higher duties than even the most ethical business person” (AMA, 1992).  For-profitorganizations recognize no such duties – the shareholders do not grant them that luxury.A shift in organizational motives, away from professional concerns and toward those ofthe bottom line, will be associated with greater pressure to “sell” and less professionalrestraint.  The for-profit setting strengthens the incentive to over-servicing, both becausefacility costs are now on the table, and because of the change in mix of ownership andmotivations.The profit-driven pressure to expand output underlies confusion as to the influence ofprofit motives on costs.  For-profit organizations have a powerful motivation to controlunit costs, but no interest in controlling total costs of care.  On the contrary, the pressure25to increase service provision (sales) will be reflected in increased total costs for healthcare.  If the increased output does in fact meet real needs, then more services at lowercost appears as a clear gain.  But once again, while the public objective is value formoney – effective care efficiently provided – the private objective is just money.  So longas the service is reimbursed, at a price sufficient to cover its cost, the contribution tohealth is irrelevant.  The sale is its own justification.There may be risks associated with selling products or services that do no good at all, ordo actual damage.  The latter may abruptly turn off or indeed reverse the flow of money.On the other hand, there is ample evidence that health products can maintain theirmarkets after being found on evaluation to be useless or harmful.  Clinical services ofdubious value also enjoy remarkably long survival times.The point is not that people and organizations in the non-profit sector do not also behavebadly on occasion, but rather that the more intense the pressure to produce profits, themore likely it is that sales will over-ride other considerations – even to the point of overtcriminal behaviour.  There are an increasing number of examples of such behaviour.Minimizing unit costs -- increased efficiency, quality dilution, or incomeredistribution?  It depends.Moreover the efforts to minimize unit costs can take a number of different forms.  Someare consistent with wider public objectives, others pose a direct threat.  In general, costreduction is achieved either by using fewer or less costly inputs in producing services orgoods, or simply paying lower prices for those inputs.  If the former yields the samevolume and quality of outputs, which in the health care field ultimately means equivalenteffects on patient health and satisfaction, then the cost reduction is a pure gain inefficiency – as good or better care at lower cost – and public and private objectivescoincide.  If on the other hand cost reduction is associated with poorer health outcomes,then public objectives have in fact been sacrificed to private profit.Private profits are also increased, however, if costs can be shifted onto someone else’sbudget.  From a private perspective, cost shifting is as good as cost reduction – because itis cost reduction.  But from a system-wide perspective overall costs may not be reducedand may even increase.  This is the essence of the “cream-skimming” problem – selectionof the less complex, lower-cost patients while leaving the complex cases in the publicsystem.  “Privatize the profits, socialize the losses” is an old but still very effectiveformula for business success.Costs may also be reduced by simply paying the suppliers of inputs less.  In this case,even if there are no adverse effects on volume or quality, the coincidence of public andprivate objectives is not so apparent.  If for example, the private provider is able to moveservice provision from a unionized to a non-unionized environment, wage and benefitcosts may be reduced for essentially the same mix of personnel.  This results in reducedcosts, but from an economic perspective there is no gain in efficiency because the same26resources are being used up in producing services.17  Rather, income has been transferredaway from the workforce.  The gainers may be either the provincial government –ultimately taxpayers – if the prices paid for the care fall, or the owners of the facility –the residual claimants – if they do not.  A transfer from workers’ wages to shareholderprofits, consequent upon a shift of care to a non-union shop, with no change in publicoutlays or health consequences, is at best neutral from the point of view of general publicobjectives.  But to the owners (who may include non-Canadians) it is pure profit –unequivocally a good thing.  The workers may take a different view.More Illusions of efficiency – private capital is not a charitable donationAnother “efficiency illusion” arises with respect to the costs of capital.  The “make orbuy” decision may be skewed by the impression that it is cheaper to “buy” by contractthan to “make” in the public system, because “buying” avoids the necessity of investinglarge amounts of public capital.  A moment’s reflection, however, reminds us that sinceprivate investors are not in general charities – at least not on purpose – the price at whichservices are bought from a contractor will have to include an amount to provide a returnon the capital invested.  And since governments can raise capital more cheaply thanprivate firms, the cost of capital will be greater when it is paid for through a privatecompany.  Private firms can of course also raise capital in equity markets, but sharepurchasers demand an even higher return, on average, than bond-holders, and in addition,as pointed out by Taft and Steward (2000) the firm incurs significant additional costs for“investor relations” – maintaining share value, and preserving future access to the equitymarket.  Private markets can indeed generate almost unlimited amounts of capital – for aprice.A second consideration may be that contracting is a more flexible approach.  Rather thanmaking an irreversible commitment to, say, build a hospital that may last for decades,whether or not it remains needed, governments can simply contract on a pay-as-you-gobasis.  But this too is an illusion.  The buyer’s flexibility is the contractor’s risk, andinvestors must be compensated for accepting risk.  Either the contract terms must includecompensation for early or unexpected termination, or the contract itself must be long-term.  If the buyer insists on complete flexibility, it will come at the price of asubstantially higher cost for the services themselves – to compensate for the risk.  Thereis no free lunch from private investors.Accounting illusions – private contracting as off-budget public borrowingThere is yet a third form of efficiency illusion that may be very real politically forgovernments.  Capital expenditures by governments show up as public expenditures atthe time they are made.  Private contracts, involving long term commitments, are in effecta form of long term indebtedness, but only the current year expenditures show on the                                               17 On the other hand if shifting production to a non-unionized environment permits more flexible andeffective use or personnel, the substitution of capital for labour, or more generally the reduction ofoccupational “turf protection” and “featherbedding”, then these efficiency gains are very real.  This may bean unspoken objective of the Alberta initiative, but if so it is clearly not the only one.27government books.  A government that is trying to show low public expenditures, to anelectorate most of whom are not accountants, may find this form of illusion, of “off-budget” financial commitments, politically valuable.All three forms of illusion have been very clearly and expensively illustrated by thePrivate Financing Initiative (PFI) in the U.K. National Health Service. “Investment underthe Private Financing Initiative has cost more than public sector procurement.  Theannual charge for the use of privately financed facilities is between 9.1% and 18% of theoriginal construction costs, whereas government can borrow at interest rates of 3.0% to3.5%.”  “The amount of risk transferred to the private sector under privately financeddeals has been exaggerated, leading to spurious attributions of additional value to privatesector options.” “The extra cost of private finance is disguised by the Treasur[y]…”(Gaffney et al., 1999).  “The Private Finance Initiative is presented as using privatemoney to pay for the infrastructure developments that are needed for public services, butit is still paid for through the public purse… Unfortunately the schemes produce moreproblems than solutions, partly for the simple reason that private capital is always moreexpensive than public capital.” (R. Smith, 1999b)Capital outlays may be a particularly sensitive issue in Alberta, where the long termeffects of the hospital spending spree from 1978 to the late 1980s are still being felt.With oil money pouring in, and a rural electorate clamouring for their own hospitals, thebuilding program was politically successful.  The exceptionally high capital costs in thoseyears could be paid for relatively easily; after all, there was more money coming in thananyone knew how to spend.  But the longer-term effect was an oversupply of beds andinstitutions that pushed Alberta’s operating costs well above the national average.  It isnow quite obvious that better use might have been made of the money in earlier years.The Alberta government may be understandably fearful of making old mistakes, but thatis no justification for making new ones.Harnessing the profit motive for public benefit – What prospects for “competition” ordirect regulation in health care?The above may appear to be simply a litany of possible problems, a “chorus ofhypothetical complaint.”  But the sceptical reader should recall Lagnado’s (1997)description, above, of Columbia-HCA hospitals, “ [they] exist to make money -- period.”The tremendous dynamism of for-profit enterprise is rooted precisely in the drive tosurvive, through identifying and exploiting any and all profit opportunities, howeversmall.  If the opportunity is identified, it will be taken (if not by you, then by yourreplacement).How, then, are potential mis-matches between profit incentives and public objectivesreconciled?  Adam Smith described one mechanism two centuries ago, when heportrayed the self-interested businessman being “…led by an invisible hand to promote28an end which was no part of his intention” (A. Smith, 1937, p. 423, our emphasis).18  Thecompetitive marketplace can, albeit under quite restrictive conditions, compel privatefirms to behave in ways that meet public objectives.  But the conditions – informedbuyers of well-defined products in competitive markets with free entry and exit -- arequite restrictive (as Smith knew, even if many of his later celebrators have missed thepoint) and they obviously do not apply to health care.Contracting in the commercial sector – the contrasts with health careContracting out for services – “buying rather than making” -- in private sector industriestakes place in a context of multiple bidders offering to provide a well-specified service orproduct.  The party letting the contract defines the specifications, and is normally able tomaintain detailed oversight to make sure they are met.  Competition among bidders bothcreates the incentive to minimize costs, and ensures that contract prices will reflect this.Product or service quality is monitored by the informed and interested buyer.  And, ingeneral, self-dealing would be severely dealt with if exposed.  One would not expect thepurchaser for a private corporation to be able to maintain a financial interest in thevendor(s) from which (s)he is buying.The problems faced by a public buyer are in fact quite similar to the situation of anindividual patient faced with the “offer” of additional uninsured services to be paid forout of pocket.  Buyers who are unable to judge the value/appropriateness of services, ortheir true cost, or who are constrained in their choices, fare badly in private markets, andwill find themselves paying too much, for services they do not need.The advantages (for buyers, or those they represent) of a competitive process are alsodependent upon the presence of multiple independent bidders. Such competition is not asufficient condition, but it is necessary. In its absence, any benefits that do arise fromprivate provision are more likely to accrue to the providers themselves.  It is difficult toimagine how such competition can be achieved in the Alberta setting, even in large urbancentres. Competitive bidding works best, from the buyer’s perspective, when there is asurplus of providers.  If as some claim the province is suffering from a shortage of keypersonnel, the market advantage accrues to the bidders.  Potential suppliers, who are forthe most part known to each other, can easily see that there is enough, and more thanenough, work to go around, and can equally easily see the disadvantages to themselves ofundercutting each other on price.  The rapid development of some form of overt orimplicit collusion or cooperative market sharing seems highly likely.19  Accordingly itshould come as no surprise that the advocates of an expanded role for private clinics inAlberta are not simultaneously calling for a more openly competitive delivery system.                                               18 “I have never known much good done by those who affected to trade for the public good.  It is anaffectation, indeed, not very common among merchants, and very few words need be employed indissuading them from it.” (Ibid.)19 Collusion over prices, or agreements to share markets, are criminal offences under the federalCompetition Act. But the Act does not apply to provincially regulated industries or occupations, such asproviders of health care.29Yet they may end up with one, whether they like it or not (see below on NAFTA andWTO risks).The absence of a competitive market could be overcome if the party letting the contract isso well informed about the process of production, and has a sufficiently powerfulbargaining position, as to be able to bargain for the terms that a genuinely competitiveprocess would have yielded.  In reality, however, the informational advantage will all beon the side of the providers.  The party letting the contract will not generally have evensufficient information to be able to specify the nature and quality of the product to beprovided – or judge that of the producers.  The problems of “cream-skimming” and lackof transparency of costs, arise precisely because the buyer is at an informationaldisadvantage with respect to the detailed nature and needs of individual cases, and cannotmonitor exactly what is being provided and paid for. The problems faced by a buyer arenowhere better illustrated than in the circumstances of the cataract patient (describedearlier) faced with the “offer” of a “superior” foldable lens to be paid for out of pocket.If we generalize to the entire set of services for which a public purchaser enters into acontractual relationship with a private clinic (or clinics), and recognize that, in general,the public purchaser will be no better informed about the details of the services beingpurchased than the patient was about the lens, the “informational disadvantage” begins to‘live’.These problems can arise in any contracting process in the health care sector, includingpublic sector contracts.  But they are exacerbated, not mitigated, when the contracting iswith private, for-profit interests, and especially if the contracting providers are able towork both in the public and in the private sectors, and can direct patients to either on thebasis of their relative profitability.  The market provides no constraint on this form ofopportunistic behaviour.Regulating for-profit enterprise, or replacing (moderating) the profit motive –professionalism and self-regulationIn the absence, or ineffectiveness, of market competition to constrain provideropportunism, modern societies rely on various forms of public oversight and regulation inan attempt to align more closely private behaviour with public ends.   But in the healthcare sector, direct public regulation shares with private contracting the problems ofinformational disadvantage and difficulty of enforcement.  The complexity of theregulatory task has led almost all countries toward a mix of direct regulation, delegatedself-regulatory control, and non-profit provision, with a very limited role for for-profitfirms. A great irony is that the outstanding exception, the United States, has the mostheavily regulated health sector.   Experience in that country demonstrates that the detailedregulatory oversight is singularly ineffective at creating the conditions for efficientlyfunctioning health care markets.  Despite all the regulatory machinery, the Americanhealth care system is far and away the most costly, inequitable, and inefficient on this(and perhaps any other) planet.30It is possible that a regulatory framework might be devised that could overcome theseproblems.  One might require providers to work either in the public hospital system, or inthe private contracting system, but not both.  One might forbid contractors from selectingpatients individually, and require them to accept a “package” of cases, both simple andcomplex.  One might forbid private contractors from accepting any separate paymentfrom insured cases, or from caring for non-insured patients (e.g. Americans).  One mightrequire private firms to open their books to public scrutiny, regardless of proprietaryconcerns, so that their actual cost-structures could be ascertained.  But the chances ofachieving such transparency and foreclosing opportunistic profit-seeking are vanishinglysmall.They vanish altogether in a political environment where the government has made it clearthat it wishes to encourage the growth and prosperity of private delivery organizations,and is relatively unconcerned about side-effects.  It was, after all, the government ofAlberta, not the Alberta Medical Association, that requested from the federal governmenta “working understanding” providing, among other things, that the province would not bepenalized, under the Canada Health Act, if its physicians worked and billedsimultaneously in the public and private sectors.  Regulating for-profit providers of healthcare in the public interest is, as the Americans have learned, a very difficult task at thebest of times.  It becomes inconceivable under a regulatory authority sympathetic to thoseprivate interests.20Smoking in the powder magazine: International trade agreements and the threat topublic health care“It’s better to experiment than to plan”Jim Dinning, ChairmanCalgary Regional Health AuthorityCBC, “The Magazine”, Feb. 29, 2000“There’s no turning back”Tom Saunders, CEO HRG(as quoted in Cairney, 2000)But even if the government of Alberta could devise, and wished to implement, an “ideal”regulatory structure that would perfectly harness the for-profit drive to (almost)universally accepted public objectives, they would probably not be permitted to do so.There is a larger trap here, a trap that may well catch not only Premier Klein and thepeople of Alberta, but the rest of Canada as well.  His proposal risks underminingMedicare across the whole country, by exposing it to the full force of the “privatizing”thrust of current international trade agreements.  Both the North American Free TradeAgreement (NAFTA) and the General Agreement on Trade in Services (GATS) of theWorld Trade Organization have as their over-riding objective the removal of all barriers                                               20 Indeed, some members of the regulatory authority may even participate in those private interests, whichwould appear to constitute an obvious and serious conflict of interest (Taft and Steward, 2000).31to international trade in goods and services in any form, including health care services,and correspondingly the reduction in the jurisdiction and powers of governments.Appleton, for example, concludes that NAFTA “irreversibly protect[s] the trend towardsprivate health care, while eroding the ability of governments to reverse this trend.” (1999,p.87).  Member governments are permitted to reserve certain sectors of their society fromits provisions, and preserve their scope in these policy arenas, and Canada has done sowith respect to “health”.  But the language of this reservation is far from clear.21  “Thedifficulty is in ascertaining [its meaning] since the wording is clothed in a language moreakin to diplomacy than law.” (ibid. p. 95).  The Canadian government favours a broadinterpretation of the terms  “social service” and “public purpose”, thus ensuring acontinued wide scope for public policy.  But as of 1995 the U.S. Office of the TradeRepresentative “[held] that where commercial services existed, that sector no longerconstituted a social service for a public purpose.” (ibid. p.96).Two major points emerge from the NAFTA, that are reiterated and reinforced in theGATS.First, all sectors that are not explicitly and exclusively reserved for public action are to beopen to international trade and competition, if not immediately then as soon as possible.Signatories bind themselves to accept this objective.  Under Article 19 of the GATS,member countries are expected to pursue “a progressively higher level of liberalization”in any service sector involving a mix of public and private ownership.  In a 1998background note (WTO, 1998) the World Trade Organization Secretariat gave theirinterpretation of GATS to imply that countries where the hospital sector is a mix ofpublic and private ownership, or where there is private insurance or user fees, cannotargue for exemption under Article 1.3.22Second, this opening is a one way process.   Jim Dinning may believe (or want us tobelieve) that he is simply engaging in a social experiment which, if unsuccessful, couldbe terminated.  The WTO seems to take a different view and, in any dispute, would likelyprevail.   Tom Saunders is right (supra).  Once the Article 1.3 exemption is withdrawn itis unclear whether or how it could ever be restored.  In any case for Canada, NAFTA isclearer.  If a government chooses to enter a new field of activity, or return to onepreviously vacated, it incurs potentially prohibitive penalties in the form of compensationto any commercial interest that can claim lost business opportunities (Appleton, 1999).Once the dike is breached, it becomes impractical to get the water back onto the otherside.                                               21 The relevant Canadian reservation reads: “Canada reserves the right to adopt or maintain any measurewith respect to the provision of…the following services to the extent that they are social servicesestablished or maintained for a public purpose: income security or insurance, social security or insurance,social welfare, public education, public training, health, and child care” (NAFTA, ann. II-C-9 as quoted inAppleton, 1999, p. 95).22 This Article exempts “government services” from other provisions of the GATS.   A “governmentservice” “is supplied neither on a commercial basis, nor in competition with one or more service suppliers.”32As soon as the Calgary RHA puts in place a contracting arrangement with a privatehospital, under WTO rules “the [hospital] sector should be open to foreign corporations.”Article 19 then commits all of Canada, not just Alberta, to moving in this direction.23Failure to do so with sufficient rapidity to suit any one of its trading partners (read: theUnited States), could trigger a dispute settlement process under the GATS (Price et al.,1999). And there may be no way back.This is of course only the opinion of the WTO Secretariat, interpreting the intentions ofthe GATS from their particular perspective.  One might well argue that, while in theiropinion it is impossible to be just a little bit pregnant, the real world is more nuanced.Also the growing international understanding of the implications of the GATS is leadingto growing opposition to its agenda.  The Secretariat’s interpretation may not turn out tobe as authoritative as they might like to believe.Here, as everywhere in the “Brave New World” of international trade agreements, what ismost clear is that nothing is clear.  As Appleton points out, disputes will have to beresolved by various tribunals applying international, not domestic, law, and until the caselaw has emerged from this process, the outcomes are impossible to predict.  Internationallaw does not even define terms like “social services” and “public purpose”.What is certain, however, is that the Alberta government does not hold all the cards inthis game, and cannot know or control the outcome.  Its  current proposal clearly expandsthe scope of private provision of health care, by corporate entities that have internationallinks (Taft and Steward, 2000).  Whether or not the proposed legislation would initiatethe risk of NAFTA or WTO involvement, it certainly raises the probability, and (at leastin the case of the WTO) for all of Canada.  The genie that may be let out of the bottle isnot one whose behaviour anyone can predict.  Whatever assurances may be given aboutthe limited and controllable effects of Alberta’s initiative, there is no way for anyone toknow whether they can be backed up.  When the Alberta government’s web site(http://www.health.gov.ab.ca/health_protection/questions.htm) responds to questionsabout NAFTA vulnerability with “Absolutely not”, their confidence is absolutelybaseless.  On the international trade stage, Alberta is not even a player.This inherent uncertainty encourages the differences of opinion over the seriousness ofthe threat posed by these international agreements.  But the disagreements, at least in thepublic record, are remarkably asymmetric.  Those who express concern – sometimesextreme concern -- support their argument with chapter and verse from the internationalagreements and supporting documents.  Those who dismiss or ignore the problem, showa disconcerting unwillingness to provide argument or evidence.  “No problem” seems toend the matter.  If there is some basis for this nonchalance, it would be comforting to seeit.                                               23 Canada, not Alberta, is signatory to the GATS; the WTO considers that failure to meet the terms of theArticle 1.3 exemption anywhere in Canada is a Canadian failure, and opens all of Canada to foreigncorporate competition in the hospital sector.33So what is Premier Klein’s real aim?  “Two-tier” care by inadvertence, indifference, orstealth?This leads one to wonder yet again why Premier Klein is so determinedly pushing thisproposal in the face of public opposition in and out of Alberta.  It raises questions aboutthe sincerity of his commitment to the preservation of universal public coverage, if he iswilling to take such risks with its long-term survival, for such uncertain and questionablebenefits. Why does he insist on smoking in the powder magazine?  Given thisgovernment’s past record of explicit support for the introduction of private medicine withprivate payment, it is legitimate to consider whether this proposal may not be a stalking-horse behind which it continues to pursue the real long-term agenda of rolling backuniversality and establishing a private tier of health care delivery and payment.Yet this is an outcome which, as the government itself has made clear, Albertansdefinitely do not want (Alberta Ministry of Health and Wellness, 2000).  And such aninterpretation would appear to be in direct contradiction to the Premier’s very clearlyexpressed statements, that the proposed legislation will address only the delivery ofservices and that reimbursement of insured services will continue to be entirely public.But the qualification, “of insured services”, may be significant in light of the experiencewith eye surgery in Calgary, and with private MRI clinics.  The opportunity provided tothe private eye clinics to make very substantial profits from “enhanced” and uninsuredservices is obviously very valuable to them.Conceivably, this valuable opportunity may have been “purchased” indirectly in the formof very favourable terms offered by the private contractor to the Regional HealthAuthority.  (These contracts, however, are not open to public scrutiny.)  If so, this wouldamount to a saving in the public budget, offset by a substantial increase in costs imposedon patients.  Private profits rise and public expenditures fall, raising the spectre of anunholy alliance between providers and government to foist a de facto two-tier system onan unsuspecting public.  Such a change would precisely reverse the effect of Medicare,which has contained provider incomes while transferring costs from private to publicbudgets.  Yet all “insured” services would still be covered.The concurrence by the federal government in 1996 with a modified version of the twelveprinciples put forward by the Alberta government as a “working understanding” appearsto open the door for much more of such de facto privatization of funding (Kennedy,2000).  Changing the definition of what is “medically necessary”, as for example toinclude the timeliness as well as the nature of a procedure (an MRI is medicallynecessary, but an MRI this week is not) makes possible the transfer of a wider range ofservices from the insured to the uninsured category.  Again costs are shifted from publicto private budgets, though it remains technically true that all “insured” services arecovered by the public plan.Certainly the privatization of funding is an openly expressed objective of a number ofCanadians of Premier Klein’s political persuasion.  The motivations behind that agendaare readily apparent from an analysis of its redistributional effects.  Who would gain and34who would lose, in straightforward economic terms, from the opening up of a privatemarket in health care in Canada for ”those who can afford it”?   (Proponents’ claims ofgeneral benefit are easily shown to be false.)   In briefest summary, when the burden offunding is shifted from the public to the private sector the healthy and wealthy gain at theexpense of the unhealthy and unwealthy (Evans et al., 1994).  Medicare, or publicfunding in general, shifts the burden in the other direction.  But there is more to the story,and we provide a more detailed analysis in the Appendix to this paper.More generally, however, how is it that ostensibly reasonable people disagree soprofoundly about whether to preserve our system or dismantle it?  They disagree becausedespite the common rhetoric, they do not all share the fundamental values on whichMedicare is based.  To see this clearly, follow the money.   Under privatization, despiteclaims to the contrary, more money goes to providers and shareholders, and services goto those who can afford them  -- not necessarily those who need them.Those who favour a public system are concerned primarily with equity of access on thebasis of need, not ability to pay.  They also favour a single bargaining agent -- the state --to counteract the power of provider organizations and unions.  They want to holdadministrative costs down.  Perhaps most fundamentally, they view health care as apublic good to be used prudently and effectively, rather than as a commodity to bemarketed for profit.Is it possible that Alberta-style proposals are consistent with these same concerns?Certainly the rhetoric accompanying them would have us believe so.  Yet the analysisabove suggests otherwise.  This inconsistency points to the possibility that the Albertaproposal may have quite different intentions, and its proponents fully understand whatthey want.  Their position may be perfectly rational from their perspective, but must becloaked in the vocabulary of enhancing Medicare in order to be more widely palatable.Know what they are up to and judge them by their deeds, not their words.D: Summing Up -- Potential Benefits and RisksThe balance sheet just doesn’t seem to balancePremier Klein has put forward his proposal as a way of improving the Medicare system,of expanding its capacity to meet serious and growing needs for health care within theframework of universal public coverage for hospital and medical services.  Yet ifAlbertans’ health is threatened by a shortage of resources in health care, the obviousquestion is: “Why not just put them back?” into the public system where they came from.And indeed the Alberta government continues to do so.  The case for the Premier’sproposal has to rest on the argument that it is a more efficient, less costly way ofincreasing service capacity, that private facilities  will yield more “bang for the buck”.References to waiting lists, aging populations, and the largely fictitious “streams ofwealthy Canadians heading south” are just window dressing that do not address thiscentral issue.35The efficiency argument cannot be dismissed out of hand.  In making it, the Premier isaligning himself with a wide range of Canadian analysts and investigative bodies, overmany years, who have sounded the same theme -- ways must be found to improve theefficiency and the effectiveness of the health care delivery system.  Unlike his proposal,however, most of these other calls for greater efficiency have been for improvementswithin the public delivery system.  In this, there is no shortage of possibilities (Rachlis etal., 2000).And to a considerable extent, particularly faced with the very constrained budgets of themid-1990s, the public system has responded.  In the present environment, highly chargedpolitically and amid the almost universal clamour of “shortages”, it may be difficult tokeep track of the fact that very substantial improvements in efficiency and effectivenesshave been made in the 1990s, particularly in the hospital sector.  Not everyone is happyabout this, least of all those hospital workers who have lost jobs through “downsizing”,but the gains are very real nonetheless, and are in fact well-known to all participants.They indicate that the public system can adapt and improve, given the right ‘incentives’.The critical point that cannot be over-emphasized is that the very powerful incentivedriving for-profit organizations is to make profit.  Period.  It is not to improve theefficiency of the health care system, or to provide high quality care, or to advance thehealth of the population.  If these turn out to be profitable strategies, well and good, theywill be pursued as means to the over-riding end.24  But they have no intrinsic value inthemselves to the for-profit organization.If instead the organization concludes that anti-social behaviour – cream-skimming theleast costly patients, misleading or pressuring patients to pay privately for extra services,for example – is more profitable, then that is what it will do.  The private capital marketis unforgiving of failures to exploit profit opportunities, whatever their effects on the restof the system or the community.  Indeed as noted above several recent high-profile caseshave shown that explicitly criminal behaviour is also acceptable, providing it promisesprofits and is expected to escape detection.The evidence from other jurisdictions shows that in general private, for-profit deliverysystems do not have a cost advantage over not-for-profit organizations, but that (indifferent studies and settings) they are more expensive and/or provide lower qualityservices.  While there is some (mixed) evidence that for-profit firms can achieveeconomies in the unit costs of particular clinics or divisions, such economies are notpassed on to purchasers. Moreover they introduce significant distortions into patterns ofclinical decision-making, in ways that add to costs without corresponding benefit topatients, and there are increasing reports of large-scale criminal fraud.                                               24 When Tom Saunders, CEO of HRG,  “[insists that] in the larger scheme of things…it isn’t about profit”,he is not being “up front about HRG’s profit-driven nature” (Cairney, 2000).  HRG is not a registeredcharity.36In short, for-profit firms do whatever they believe is necessary to maximize their profits.Experience with the private delivery of ophthalmology services in Calgary shows that theopportunities to exert professional influence on patients and sell over-priced, highlyprofitable, and  “medically unnecessary” services, are in fact taken up.  For-profitdelivery has been a vehicle for the introduction of extra-billing in another form.In the private commercial sector, contracting with external, for-profit suppliers is normalpractice, but takes place under conditions very different from those in the health caresector.  Opportunistic exploitation by suppliers is held in check by informed buyers,selecting among competitive suppliers, within a well-defined regulatory environment.The difficulty or impossibility of creating these conditions in the health care sector, isprecisely the reason that most societies have tried to limit the role of for-profitparticipation in health care delivery.Conceivably, with a detailed information base and a tight and aggressive regulatorystructure, regional authorities might be able to ensure that their contracting out of healthcare services met the standards of normal commercial enterprise.  But that is far fromassured in the most favourable of circumstances – we do not find examples in experienceelsewhere.  And the Alberta circumstances are far from favourable – the provincialgovernment has not shown any inclination to try to put in place the necessary regulatorystructure, or even any understanding of why it would be necessary.  The flow ofpersonnel between the provincial government, the CRHA, and HRG itself casts doubt onthe possibility of an arm’s length relationship.There appears to be a complex web of business relationships linking members of theRegional Authority responsible for letting and monitoring contracts to those having aninterest in provider firms  -- and to the provincial government (Taft and Steward, 2000,Chapters 5 and 8; Fuller, 1998).   These linkages create a potential for conflict of interestand  “self-dealing.”Under these circumstances, it seems quite possible that purchaser and provider will takeadvantage of the several ways of showing illusory gains in efficiency described above.Some of the alleged benefits turn out to be accounting illusions.  Private firms are notcharities; they do not supply capital for free.  In fact the costs of raising capital are greaterthrough the private sector, but they are spread out over time and thus do not appear assuch in the public accounts.  Similarly any reductions in labour costs that result fromshifting surgical work to a non-union, lower wage environment represent transfers ofincome from workers to either shareholders or taxpayers, rather than true improvementsin economic efficiency.It is easy to get confused in this area, and part of the intent here may be to confuse. Butthe overall costs of a health care system whose capacity has been expanded through thisroute will not fall and may well go up.  In any case the risks to the integrity of theMedicare system are very substantial, and the benefits, relative to a policy of bothincreased funding and more aggressive pursuit of efficiency gains in the public hospital37system, have not been shown.  It is hard to believe that Premier Klein would be willing totake such a bet with his own money, rather than with that of his constituents.Nor is Premier Klein betting only on behalf of those who voted for him.  As outlinedabove, the provisions of the General Agreement on Trade in Services suggest thatopening the door to for-profit delivery in one part of a public health care system, alsoopens the door to entry by multi-national (in practice, mostly American) corporateinterests into the whole system, nation-wide.  This may not be the Premier’s intent.Nevertheless, those south of the border looking for Canadian opportunities have preciselythat objective.  And once the window opens a crack, the WTO will try to ensure that they,not the Canadian proponents, get what they want.  This process is unlikely to be under thecontrol of national, let alone provincial governments.Stripped to the bone, the Alberta proposal appears to be little more than taking lousy oddson a very small potential payoff, and gambling with the health of Canada’s health caresystem, for the sake of a few health care providers who would stand to gain considerablyin the short term.  The suggestion that the Alberta government may be pursuing a long-term strategy to undermine and eventually replace Medicare with a system moreresponsive to the economic interests and concerns of these providers (and better-offAlbertans) is inevitably speculative, though it seems consistent with ideologicalpredisposition and past behaviour.  But if that is not the objective, one is still left with theproblem of making sense of the current proposal.  What is the motivation for putting theentire national system of Medicare at risk?38AppendixOpening the private medical market: who gains and who loses from“two-tier” care?The standard argument for “two-tier” health care“Two-tier” health care generally refers to the continuation of a universal system of publicreimbursement for hospital and medical services (presumably without user charges) butwith the addition of an “upper tier” in which “those who could afford it” could purchasecare in whole or in part with their own money.  This care would be provided bypractitioners and organizations that may also serve and bill the public system.The question of whether this would also open up a market for private insurance againstthe costs of care in this private tier is not always made explicit.  The question isimportant, however, because as noted in Section B of the main paper, in Canada, as in theUnited States and several other countries (but not all), private health insurance providedthrough an employer enjoys a large and highly regressive, but hidden, ”tax expenditure”subsidy from the public treasury.   A “private” financing tier that was privately insured inthis form would thus in reality generate substantial public costs, but “through the backdoor” as a tax concession rather than explicit public spending that shows up in the publicaccounts.Advocates argue that this would increase the total amount of resources available forhealth care, and relieve the present pressure on the public system.   This argument islogically erroneous and dangerously misleading.  Although the proponents of thisapproach claim that it would improve health care for all Canadians, its actual effectwould be to advance the interests of the relatively well-off at the expense of the generalpopulation.Arguments for increasing the flow of private money – user payment or private insurance -- in the Canadian system typically rest on two fundamental propositions:251) Serious needs for care are now going unmet, because Canada’s health care systemis “underfunded” and desperately requires more money; and2) Canadians are currently “taxed to the limit” and therefore no more public moneycan be allocated for health care.It would appear axiomatic that unless private money is raised, from payments by theusers of care with or without supporting private insurance, the health of Canadians willbe increasingly threatened by the inadequacies of our health care system.  (In effect                                               25 There is an argument, derived from basic economic theory, that user charges (without private insurance)would lead to lower rates of utilization, lower overall costs (less money for health care) and greater“allocative efficiency”.  But this argument rests on several forms of confusion, and does not appear to playany role in the present debates, in Canada or elsewhere.  It is confined to the academic economics journals.39“There Is No Alternative” (TINA) – Margaret Thatcher’s slogan.)  Day after day, thelurid anecdotes are assembled to drive this point home.Flaws in the fundamental assumptions – both argument and evidenceIn fact, each of these TINA propositions combines a logical non sequitur with anempirically unsupported factual claim, backed only by loud assertion.  [As the sermonnotes of the legendary Scottish preacher put it: “This point very doubtful.  Shout likehell.”] “Underfunding” claims are as old as Medicare, and are in fact made in all healthcare systems at all times.  But those who make them confuse – often deliberately – theadequacy of care with the rate of reimbursement of providers of care.  “More money” canmean either more services, or just higher incomes.  The Reduced Activity Days campaignwaged by B.C. physicians over the last few years makes the point clearly.  They havebeen quite deliberately and explicitly withholding services – trying to create a shortage --in order to protect their fee levels.  They argue that the B.C. government has not beenproviding sufficient funding to pay for an increased number of medical services, but infact the conflict is actually over the rate at which those increased services are to bereimbursed – the fee level.As for whether the Canadian health care system really does now need more resources,rather than better management of the very considerable resources it already has, this pointis open to legitimate debate.  There certainly are an increasing number of observationsand episodes that suggest significant shortages of particular personnel and services atparticular times and places.  But the question remains open as to whether these reflect anoverall shortage, or simply the lack of overall system management.For example, claims about long and growing waiting lists exist in an informationvacuum.  Individual physicians are, by and large, the custodians of the country’s waitlists; there is little cross-physician list coordination, little systematic list management, noindependent audit of lists, and so on (Sanmartin et al., 2000).  Yet again, the backlogs inemergency rooms are very real.  But it seems equally clear that seasonal backlogs are notat all new, and reductions in acute bed capacity are not the source of the problem.  Ratherit appears that the current “crisis” reflects inadequate patient management, and capacity,in long term care.  The wrong diagnosis could easily lead to egregious errors inprescription.  (A more detailed discussion of alternative and more promising prescriptionsis provided in Rachlis et al., 2000).As for taxation, even if Canadians really were taxed to the limit, a government that isrunning large surpluses and projecting even larger ones, can increase the flow of publicmoney into health care without raising overall taxes.  The trade-offs are between morepublic money for health care, or for other public services, as against cutting taxes (or debtreduction) – and indeed some of each is clearly possible.No one enjoys paying taxes, and those who pay most – the wealthy – least of all.  ButCanadians are not in fact overtaxed relative to other developed nations; comparative40international evidence does not support the “taxed to the limit” rhetoric.26  Furthermore,even if it were true there would still be plenty of room to put more public money intohealth care – if we wanted to.  The Federal budget of February 2000 is an explicitpolitical choice not to do so, to make large reductions in federal taxes instead, but it wasnot a forced choice.The mis-match between arguments and policy: “Two-tier” health care does not addressthe problem that its advocates (claim to) perceiveBut these are arguments for another place and time.  The principal purpose of thisAppendix is to show that:Even if the twin TINA propositions above were both valid and beyond allquestion, they would not support an argument for the two-tier health care systemoutlined above. To see why, consider two alternative systems for raising private financing for health careto supplement public resources.  One we might call one-tier health care with user charges,and the other would be a completely segregated private market for health care.  Each ofthese would represent a possible response to the alleged circumstances described by thetwo propositions above -- unmet needs and no more public money.  But both differ incritical respects from what is usually offered as “two-tier” medicine.  These differencespermit one to see more clearly the real effects, and presumably the objectives, of thelatter policy.One tier health care with user chargesPrior to the passage of the Canada Health Act in 1984, some provinces required hospitalin-patients to pay a per diem charge for acute care.  Extended care patients still pay sucha charge, all across Canada.  Earlier still, Saskatchewan briefly introduced a per visitcharge for physicians' services.  Provincial drug benefit plans, not covered by the CanadaHealth Act, all impose some form of user charge; one or more of: a deductible, a fixedcharge per prescription, or a patient co-payment of some portion of the cost.If the two propositions above held, Canadian governments might respond by requiringeach recipient of hospital or physicians’ services under the public plans – an office oremergency room visit, a specialist consultation, a day of inpatient care or a day surgeryepisode -- to pay one or more of these types of charges at specific pre-determined rates.The additional revenues raised by these charges would then be available to add to thepublic financing for health care.                                               26 Nor, apparently, do most Canadians.  The “tax revolt” seems to be largely a media event sponsored bythe representatives of the wealthy.  Polls consistently show that tax reductions rank low in the list of publicpriorities – the public would prefer more funding for health care and education.  The federal budget ofFebruary 2000 has made major reductions in personal income taxation – an estimated $38 bn. or about 60%of the estimated federal surplus of $95 bn. over the next five years.  But it has given most of the reductionsto the wealthy – who really wanted them.41Proposals for such charges have come forward repeatedly over the years since Medicarewas introduced – as noted above the present debate is not new.  Their disadvantages havealso long been recognized. “One tier plus user charges” raises serious concerns aboutboth equity and access, as well as problems of administrative cost and feasibility.Correspondingly, schemes for alleviating those concerns and problems have almost aslong a history.  Yet these have never found political support.Problems with user charges – and a partial responseFirst the concerns.27  User charges that are uniform across the population bear much moreheavily on people at lower incomes.   Lower-income people tend also to be sicker, buteven if illness were unrelated to income, the same level of charges represents a muchlarger share of the income of a lower-income person.  Even if some people are exempt, asin practice they must be, the burden will still be regressive across those who must pay.And at any given level of income, the accident of illness will draw financial liability withit.  If illness is random, and “unfair,” so are user charges.Second, in order to make any significant contribution to the costs of health care, suchcharges would have to be quite large.  When hospital inpatient days cost upwards of$500 each, and intensive care goes beyond $1000, a $10 or $25 per diem is not going tobe noticeable in the overall picture.  It may not even repay the cost of collection.  So theuser charges will have to be financially significant to the individual patient, if they are tobe financially significant to the system as a whole.  But large user charges raise concerns– and indeed the reality – of access problems for those at lower incomes.  Those concernswere what motivated Medicare in the first place.Third, the collection of these charges would presumably be the responsibility of hospitalsand private practitioners.  These would then have to incur costs of financialadministration and collections.28  If there were various forms of exemption, these wouldcreate further administrative problems and costs to determine eligibility for exemption.The introduction of Medicare was associated with significant reductions of administrativeoverheads in physician offices, as bookkeepers were replaced with practice nurses(Enterline et al., 1973).  Sufficiently high user fees would invite the re-emergence ofprivate insurance in Canada, with similarly high administrative costs.  In the U.S., acomplex payment system adds over ten percent to overall health care costs in the form ofadministrative waste motion (Himmelstein and Woolhandler, 1991).Finally there are risks of “opportunism” by both governments and practitioners.  Howwould one ensure that the new money raised in charges would go into increased healthcare spending?  Some of it will be siphoned off into the inescapable administrative                                               27 For a more extended analysis and critique of user charges in practice, see Barer et al. (1979) Evans et al.(1995); and Barer et al. (1998).28 User fees that were related to the actual costs of the care received by a patient would require a whole newhospital accounting system; in Canada hospitals cannot at present identify the costs associated with the careof an individual patient.  And even under the most comprehensive accounting system individualized costswould be merely estimates, resting on a number of arbitrary assumptions.42activity noted above.  Even if the remaining funds are somehow earmarked, andsegregated in government budgeting, governments might still offset the increasedrevenue by reducing their allocations to health care from other tax sources.  Alternatively,once permitted, and indeed expected/required to bill patients for some portion of the costof their services, might some physicians not simply add to that bill, and pocket the extra?It is not difficult for a patient to notice the difference between a bill, and no bill.  But ittakes much more knowledge to compare the actual bill with the fee schedule and theapproved user charge.  Physicians who for years have believed that they should have theright to determine the price for their services (and so extra-bill their patients), and whonow see government requiring the patient to pay, might quite understandably take theview that they, too, should be entitled to a bit extra.  Why is billing the patient legitimateif government does it, but not if the practitioner does it?But for thirty years, various analysts have suggested that some, at least, of these concernscould be mitigated by integrating user charges with the income tax system (Feldstein,1971; Ontario Economic Council, 1976; Rice and Thorpe, 1993; Gordon et al., 1998).One could, for example, simply cumulate the total payments made on behalf of eachindividual from public sources, and add this to taxable income.  The amount of the usercharge would thus automatically be adjusted to the user’s ability to pay, and the problemsof collection would be absorbed into the general administration of the income tax.  Noadditional costs would be incurred by practitioners.  If one is thoroughly convinced thatthe twin TINA propositions above do hold, and private charges must be imposed, thenintegration with the income tax is clearly the least complex and inequitable way to doso.29  Yet in contrast with the advocacy of “two-tier” care, proposals for “one tier withtax-integrated user charges” have never drawn significant political support, or evenpublic attention. Why?There are of course a number of very good substantive arguments against tax-linked userfees as an alternative or supplement to universal, first-dollar coverage (Lewis, 1998).  Ingeneral, tax-linked schemes have almost all the same problems as unlinked systems,though to a lesser degree.  They may be less regressive overall than unlinked user fees,and indeed this is the argument made by Rice and Thorpe (1993) in the United States.But there, many patients are currently at risk for large, capricious and potentially ruinousout-of-pocket costs, and a tax-linked approach would mitigate this burden.  In Canada,with full public coverage for hospital and medical care, a tax-linked user fee schemewould serve  primarily to shift a proportion of the health care cost burden from taxpayersto users of care, from the healthy to the sick.   And since the healthy tend to be richer thanthe sick, what is in theory a progressive form of revenue generation becomes in practice aregressive transfer.  (It is very doubtful if the tax system would or could embody asufficiently complex and sophisticated structure of rates, ceilings, floors, and exemptionsto avoid a significant transfer of burden from higher to lower income people.)                                               29 There are some obvious problems for very ill people who have very little money.  Their “taxableincome” and tax liability might be well above their actual income.  But one could in principle adjust byformula the proportion of the cost of care that is actually added to taxable income, putting a ceiling, forexample, on either the total amount or the proportion of income to be added.43The point here is not, however, that “one tier with tax-linked user charges” would besuperior to Medicare on equity, efficiency, or any other grounds.  Obviously it would not.Our point is rather that if one were firmly convinced of the validity of the TINAassumptions, and that private payments, whatever their faults, cannot and should not beavoided, then this would appear to be an obvious option.  The contrast between theenergetic advocacy of two-tier care, and the total lack of any public interest in tax-linkeduser charges, may offer clues as to the real basis for two-tier arguments.The real agenda behind “two-tier” proposalsOne major disadvantage of the tax-integration schemes may be their politicaltransparency.  They make it crystal clear that the user charge is a tax on illness, or at leaston the associated use of health care.  Of course all user charges, of whatever type, linkfinancial liability to use of care – that is the very definition of a user charge – and as suchfunction as taxes on illness, particularly if the revenues raised are a substitute for thosethat would otherwise come from other tax sources.  But putting the amounts of liabilityright on the individual’s T-4 slip leaves no room for rhetorical confusion.  If you are sick,you pay, and the sicker you are, the more you pay.  Faced with that brute fact, nojurisdiction has been willing to implement this option.  User fees, yes, but tax linkage,no.30But an alternative – or additional – explanation for its unpopularity may be found in whatthe “one tier” approach does not do .  Unlike the “two tier” system, it does not give“those who can afford it” preferential access to (actual or perceived) superior qualitycare.  Nor does it give the providers who serve “those who can afford it” the opportunityto increase their incomes by charging fees to “private” patients that exceed the feeschedules of the public plans.  And it provides no market for private care insurers,drawing on the large but hidden public subsidy, to underwrite the costs of these benefitsand thus add to the administrative overhead costs of the overall system.  In short while itredistributes costs from the ill to the healthy, it re-distributes benefits only to a limiteddegree, if at all, in favour of the well-off and their providers, and the (would-be)financiers of care.Viewed from this perspective, it may come as no surprise that suggestions for “one tierwith tax-integrated user charges” have never drawn any public awareness, let alonepolitical support.31  On the other hand support for a “two-tier” system seems to begrowing – though it may be that its advocates are simply becoming more strident.                                               30 A user charge is paid to a provider, and looks like a form of market transaction, a payment for benefitsreceived.  The fact that it is an alternative to taxation is not readily apparent.31 Indeed the only proponents seem to be economists, many of whom have a quite idiosyncratic view of therole of user charges.   Drawing on elementary economic theory, and with little or no familiarity with therealities of health care, economists tend to think of user charges as a way of reducing overall costs andbringing about a more “efficient” allocation of health care.  Despite logical fallacy and overwhelmingempirical refutation, this view has persisted within a particular ideological school for whom a particulareconomic theory is a religious conviction rather than an analytic tool.44Preferential access to superior careAdvocates of “two-tier” care argue that everyone benefits, when “those who can affordit” purchase some or all of their care in the “upper tier”, because they leave fewer peopleto draw on the limited public resources in the universal system.  But it is an essentialfeature of “two-tier” systems, that an upper tier implies a lower tier.  Unless the careavailable in the upper tier is at least perceived to be superior, why would anyonevoluntarily choose to pay for it?At the very least the upper tier care must be more readily and rapidly available – no, orsignificantly less, waiting.  The question of therapeutic equivalence is trickier.  The mosteffective form of marketing is of course to create patient perceptions that outcomes arebetter in the upper tier.  On the other hand if the general public come to view their healthas being put at risk in the lower tier, this could set off a competitive cost expansionprocess.    Political pressure to increase funding for the public system and close theperceived gap would be followed by further efforts at “gold-plating” in the private tier torestore it – quite likely inducing a medical technology “arms  race”.   This situationwould be ideal for providers in both sectors, since all expenditure is also income; butwould leave payers, public and private, all worse off.  A sufficiently rapid escalation ofpublic sector costs would of course dash the expectations of “those who can afford it” fora reduced tax burden – as it has done in the United States.32The most stable situation may be one in which “those who can afford it” believe that theyare receiving therapeutically superior care, but the general public do not.  It is not clearwhether this can be achieved, but one might anticipate public statements that outcomesdo not differ in the two tiers, combined with reassurance to the private patients that theyare in fact getting better quality care.  Since monitoring quality of care has always beenthe Achilles’ heel of public accountability, the actual situation is likely to be obscure,particularly if the private tier is less open to public scrutiny.33Preserving the private advantage: Manipulation of public access by private providersQuite apart from the question of potentially different outcomes, however, the standardform of differentiation is waiting time.  This is a very old story from the British NationalHealth Service; long waiting times in the public system, short or non-existent in theprivate.  But the heart of the problem in the NHS is that the same consultants are workingboth in the public and in the private system.  The surgeon who deplores the extended waittimes in the “underfunded” public system can offer the patient immediate care – in returnfor a private payment.                                               32 The United States, while having a public system only for the elderly, the poor, and certain other selectedpopulations, now faces public costs (per capita) for health care that are among the highest in the world, inaddition to private costs – insurance and out-of-pocket – that are several times those in any other system.Providers are very well off.33 The United Kingdom may offer an example of a two-tier system in which this division has beenmaintained for decades, but has now broken down quite dramatically as the central government hasrecently had to promise massive increases in funding for the public system.  .45Without those deplorably long NHS waits, however, who would accept the privateoption, and how would the surgeon collect the extra income?  This extra income is nottrivial, it can amount to tens of thousands of pounds in ophthalmology (cataracts) andorthopaedics (joint replacement).  But the surgeon who profits from the private care canalso choose how to allocate his or her time and effort between public and private care.There are contractual obligations in the NHS, but they are not well monitored or enforced(Light, 1996).  And most importantly, they are obligations in term of time, notproductivity.  Surgeon productivity is reported to be very low in the public system, muchhigher in the private, for the same surgeon.  Standard economic interpretations of humanbehaviour would predict that surgeons would allocate their time and effort where theyreceive the highest return.  If in the process they contribute to long waiting lists in thepublic system, so much the better; that serves to ensure a good supply of private patients.Evidence of similar behaviour has been found in comparisons of cataract surgery inprivate clinics and public hospitals in Manitoba  (Decoster et al., 1999).  Public waits arelonger where there is a private clinic, and the same ophthalmologist sees patients in both.The economic motives faced by a practitioner who works “both sides of the street” in atwo-tier system are both very clear, and very strong.  He/she has both powerful motiveand opportunity to ensure that public sector care remains inferior to private.  And ifpeople do not like the inferior care, the answer comes easily – put in more money!  Butthe universal experience with waiting lists in two-tier systems is that putting in morepublic money never seems to provide anything like ‘permanent’ relief (McDonald et al.,1998; Sanmartin et al., 2000). Once one recognizes the economic motivations of thoseproviding services in the upper tier, it is not hard to understand why.The practitioners’ interest in a two-tier system is clear, but what about the patients?Here the distinction between “two-tier” and “one tier with user charges” is critical.  In thelatter, more money is raised through user charges, to improve the standard of care foreveryone.  There is preferential access for “those who can afford it”, insofar as the usercharges price those who cannot out of the system, leaving more room for those who can.If the user charges are large, and access to private insurance is also income-dependent,this effect may be quite serious.  But there is not a separate system with shorter waitingtimes or (actual or perceived) higher quality care for those who pay more.  If the wealthywant more or better care, they must pay for a similar standard for everyone, througheither taxes or higher user charges.  And if the latter are tax-linked they will bear moreheavily on those at higher incomes, though also more heavily on the sick at any incomelevel.“Those who can afford it” pay for themselves, but not for others.  Higher charges,lower taxes, and better access to careFrom the point of view of the relatively well-off, this option is at least superior to simplyputting in more tax money.  The Canadian tax system is either roughly proportionate toincome, or progressive (see note 3 above); in any case higher income people pay moretaxes than lower income people.  They will pay a substantially lower share if health carefinance is expanded through user charges rather than through taxes.  But if the user46charges, for reasons of equity, administrative efficiency, and preserving access, areintegrated with the income tax, much of this advantage disappears.In contrast, a two-tier system permits the wealthy to purchase better care for themselves,without having to contribute to a similar standard for everyone else.  If one acceptsproposition #1 above, that the present Canadian system is underfunded not just in thesense that those who work in it would like higher incomes, but that it is incapable ofmeeting the health care needs of Canadians, two-tier care enables “those who can affordit” to ensure that at least their needs are met, first and best.The claim that its advocates are also concerned to relieve the pressure on the publicsystem, and leave more public resources for those who cannot afford to pay their ownway, tends to be undermined by the common observation that advocates of two-tier carealso tend to be advocates of lower taxation, and opponents of deficit financing, which inturn implies lower public spending.  Yet health care is the largest single public spendingprogram.  As noted above, the present financial situation of the Canadian federalgovernment is such that more public spending on health care does not require furthertaxation, only less tax cutting.  (Provincial governments that have made a priority of taxcutting are, of course, placed somewhat differently.)But even without lower public spending on health care, the oft-heard claim that allowinga second tier would relieve pressure on public waits simply rings false for anyone whobothers to spend more than a few seconds thinking about it.  The second tier care canonly be provided (in Canada) in one of two ways.  It may be provided by practitioners“working both sides of the street” in which case we may expect the experience notedabove in the UK, mirrored in other countries such as Israel (and beginning in Canada) toprevail.  Or it may be provided by practitioners who work only in the second tier.  In thelatter situation, this would mean siphoning off already (allegedly) scarce personnel fromthe public system, to work in the private.  It is hard to see how either scenario willshorten wait lists or times in the public tier.  Only if the second tier did not ‘use up’scarce Canadian human capital could it possibly lead to reduced wait times for patients inthe public tier.A completely segregated private market, but a small one -- The American “upper tier”Some advocates of a two-tier system argue that Canada already has such a system, in thesense that “those who can afford it” can always go to the United States for immediate(and highly intensive, if not always more effective) care.  So, why not open a private tierin Canada, and keep all that money here?  The United States does indeed offer an uppertier, not just to Canadians, but to the world.  But it differs from a domestic upper tier in afundamental way.  It is in fact an example of the case referred to above – from aCanadian perspective it is a completely segregated private market for health care.Those who go to the United States for care – that is, the true “medical refugees” who gospecifically for that purpose, not the snowbirds in Florida for the winter, or thevisitor/accident victim -- must pay the full cost of their care, to providers who have no47interest in or control over any element of the Canadian system.  They are certainlypurchasing care with quicker or easier access or of perceived better quality, withouthaving to contribute to a similar standard for other Canadians.  But they also really dorelieve the pressure on the Canadian public system, by removing needs (or demands) andlowering utilization, without using or diverting Canadian resources.They do not relieve very much pressure, however, because they are very few.  Systematicefforts to find such people in the U.S. health care system, either in border states or inhigh-profile “magnet” institutions, find remarkably small numbers (Barer et al., 1999).And the findings are consistent with survey responses in Canada34.  The “streams ofwealthy Canadians” heading south for care unavailable in Canada, are a media fiction,deliberately promoted by those on both sides of the border who have an economic interestin portraying Canadian health care as underfunded or simply inadequate.Highly publicized examples of Canadian provincial governments purchasing specificforms of care for their residents in the United States (such as the current situation inQuebec and Ontario for radiation therapy for some cancer patients) raise another set ofissues.  But they are not germane here, because these services are paid for by the publicplan.  This is not two-tier medicine, but “one tier with service imports.”Apart from not being there, however, the “medical refugee” has no other impact onCanadian health care.  Canadian providers do not work on both sides of that fence; theyhave neither incentive nor opportunity to steer patients into a more remunerative caresetting.  Unlike the consultant in the British NHS, they cannot benefit by ensuring thatthe waiting lists in the public sector remain long.35  Quite the contrary, the Canadianphysician whose patient goes south loses the work, and the billings.   (S/he may refer apatient south for professional reasons, but there is no economic incentive -–unless theCanadian provider has invested in a facility below the border.)But the most striking aspect of Canadian “medical refugees” is the contrast between theirhuge numbers in the Canadian and American media (and therefore perhaps in the mindsof at least some of the public), and their tiny numbers when they finally reach the UnitedStates (Barer et al., 1999).   (The loss rate at the border seems to be quite extraordinary.)There is just not much demand, in reality, for “upper tier” care that is truly segregatedfrom the public system.  So why do advocates believe that a two-tier system would farebetter in Canada?Would a domestic upper tier be larger than the foreign one?There are, we believe, two principal reasons for this belief.  The first, already discussedin detail, is the critical difference when providers can work simultaneously in the public                                               34 The 1998 National Population Health Survey found 0.11% of respondents who had received care in theUnited States in the most recent year and had gone to the U.S. strictly for the purpose of receiving that care.35 Nevertheless, there may be advantages to keeping ones’ own list long.  Long waiting lists may beperceived by others as indicative of superior quality; they may also be an argument for a larger allocationof OR time or other hospital resources.48and in the private system.  The universal experience is that when providers can work inboth, they steer patients to the more remunerative setting, and ensure that it remains moreremunerative by undermining the public system.  This works; no amount of additionalfunding in the public sector will ever be permitted to close the quality gap.36The second reason for expecting that a home-based upper tier might draw more patientswas captured in the reference to the fact that Canadian “medical refugees” must pay thefull cost of their care in the perceived “upper American tier”.  Fundamental insuranceprinciples make it impossible for the private insurance industry to offer coverage for suchcare on an individual basis.  Insurance companies do not, if they plan to stay in business,sell contracts to people who expect to need care.  It is one thing to sell coverage tosomeone who is out of the country for other reasons, and happens to fall ill.  But noinsurer will (knowingly) sell coverage for an individual’s choice to seek care out of thecountry.  What sorts of people, after all would want to buy such coverage?  Only those towhom a for-profit firm would not wish to sell it.But an in-country private tier might be different, particularly if the coverage could benegotiated through an employer.  In that case, the hidden public subsidy comes intoeffect.  Premiums paid by an employer for an employee are tax-deductible expenses, butthey are not a taxable benefit in the hands of the employee.  The coverage is in effectpurchased with “before-tax dollars”.  Thus private payments for upper tier health care,that are privately insured, would draw money out of the public treasury just as do publicpayments.The differences are two-fold.  The subsidy does not show up in the public accounts, as ittakes the form of taxes not collected, rather than tax money spent. But since the subsidytakes the form of a tax exemption for a particular form of employment benefit, it is alsomost valuable to those in the highest income brackets.  The larger your marginal tax rate,the bigger your subsidy from a non-taxed benefit.  It is hard to see how such a subsidycould survive open public scrutiny; it does survive precisely because it does not receivepublic scrutiny.Privatize the profits, socialize the losses – The implausibility of a self-supportingprivate tierThis form of subsidy to private care, however, arises only to the extent that it can becovered through employer-provided insurance coverage – as has happened with theprivate tier in the U.K.  A more general problem is that of whether, even in the absence ofprivate insurance, it is possible to have a truly segregated private system.  The economicincentives for the providers in the private tier are very strong, to “privatize the profits andsocialize the losses.”  Unexpected costs are transferred to the public system, and fees are                                               36 In principle one might be able to imagine a completely segregated second tier in Canada, in which bothphysicians and the facilities in which they work were required to be “all in or all out”.  If they chose to billprivately for insured services, they could not bill the public plans at all.   But this is not what advocates arecalling for, and it is hard to see how such a truly private tier could be attractive to more than a smallminority of physicians.  (Most of their patients would probably be Americans.)49collected essentially for providing preferred access to public as well as to privatefacilities.Private fertility clinics are a leading example of the former.  The techniques for treatinginfertility significantly increase the probability of multiple births of low birth weightinfants, requiring neonatal intensive care.  This is extremely expensive, and is providedthrough the public system.  The private contract between the fertility clinic and itspatients includes no provision for these extra costs borne by the public, consequent uponthe fertility treatment.  In a truly segregated market the private clinic, or its customer,would be responsible for all the costs associated with the treatment.37The latter case is illustrated by private MRI facilities in Alberta offering acceleratedservices for patients waiting for MRI in the public system.  The private facility ispermitted to offer patients an immediate MRI scan, at their own expense.  The groundsfor this are that the patient’s condition does not appear to warrant an immediate scan,therefore it is not “medically necessary,” is not an “insured service” under the CanadaHealth Act.  But of course if, contrary to expectation, some condition is discovered by theprivate MRI that warrants “medically necessary” early intervention, that patient willproceed to the intervention.  In effect, then, the private clinic is profiting by sellingpatients the possibility of earlier access to public facilities, of queue-jumping.  (It isdoubtful if patients have the necessary information or analytic skills to assess the relevantprobabilities. In any case, for those with sufficient money, the probabilities don’t muchmatter.)A truly private private tier of health care within Canada is thus impracticable andprobably impossible in reality, and in any case is not what proponents are advocating.Rather they contemplate a private tier interwoven with the public – in effect a“public-private partnership” supported by various forms of more or less invisible publicsubsidies.  Providers, working in both systems, could influence both access andproductivity in the public system, steering patients as they saw fit.  Meanwhile “thosewho can afford it” would have ready access to (actual or perceived) higher quality care,without necessarily having to pay its full cost, and without having to pay the taxes thatwould provide a similar standard for the rest of the population.  The attractions areobvious, and provide a sufficient explanation for the continuing popularity of thisalternative.  Whether they also lie behind the current legislative proposal in Alberta, andits antecedents, is an open question.                                               37 And in the case of IVF treatment, those other costs are unlikely to stop with neonatal intensive care, andmay include higher lifetime education, health care, housing, legal and other costs (Baird, 1997).50ReferencesAlberta Ministry of Health and Wellness (2000), “We Are Listening -- Here’s WhatWe’ve Heard: A summary of Albertans’ views on the Policy Statement on SurgicalServices”, Edmonton, February.Allan, B. (2000) “Intraocular lens implants” (Editorial) British Medical Journal320(7227): 73-74 (January 8).Altman, SH and D. Shactman (1997a), “Should we worry about Hospitals’ HighAdministrative Costs?”, New England Journal of Medicine 336(11):798-99.Altman, SH and D. 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