Fiscal aspects of health systems William Jack Georgetown University Motivated by “The fiscal sustainability of health care in Canada” Gregory Marchildon, Tom McIntosh, and Pierre-Gerlier Forest

Total health spending in Canada

Is spending sustainable?  : ~constant, 9-10% of GDP  But pressures lurk on the supply side:  New technologies  Prescription drugs …..and the demand side:  Ageing  How should additional costs be financed?

Outline of comments  Basic principles  Mixed systems  Some tax policy issues

Basic principles

Basic principles: I. Efficiency  Raise money with minimal distortions  Tax system design  Maybe link taxes to benefits  Spend money on the right things  There is such a thing as too much health care  Provide insurance  …..without diluting incentives

Basic principles: II. Equity  Redistribute from rich to poor  Use the income tax system  Generally, don’t use differential commodity taxation, or the health system  Redistribute from healthy to sick  This is insurance  Redistribute from low risks to high risks  Risk adjustment mechanisms?

Generating funds with mixed systems

Public-private mixes  Canada: separate by service type  Public insurance for physician and hospital services  Private (some public) insurance for drugs, dental, vision, long-term care  An alternative: separate by service quality  Public insurance for basic care (of all kinds)  Private insurance for higher quality care

Quality differentiated systems  Chile: public-private  Public health care: general tax finance  ISAPREs: risk-based premiums  Colombia: public-public  Basic “subsidized regime”: general tax finance  Higher quality “contributory regime”: payroll tax finance

Dual public-private systems  “Relieve the burden on the public system”  Assumes taxes on those who opt out remain in place  Allowing people to opt out with their taxes will not help budget position  Paying them to opt out could reduce net revenues  Compare with public-private education policies  Should governments subsidize private schools?

Insurance market competition  Can competition help us “spend the money well”?  Need to define the package – uniform or differentiated by risk?  Adverse selection – the good risks drop out  Affordability – package could be too expensive for bad risks and/or the poor  Administrative/marketing costs

Dual public-public systems  Price discrimination  Over-finance the higher quality public system  Use extra funds to expand lower quality system  Is this better than general taxation?  efficiency, equity, political feasibility?  Should the government get into other businesses to raise money for the poor?

Tax policy

User fees  Raising money or spending it well?  Is health care an efficient and/or equitable tax base?  or are user fees “taxes on the sick”?  “Distortionary” effects of user fees should in fact be positive  The impact on risk exposure and equity might not be

What is our model of demand?  Do user fees deter only the use of “unnecessary” care?  If not, then  (a) some people who need care are making bad choices, and  (b) some who don’t need care are being conned  Suggests the need for supply-side cost- sharing

Tax-subsidies to health insurance  Effects of tax-subsidy – too much private insurance  moral hazard?  or too little support for public insurance?  Is a tax-subsidy regressive?  (a) Effective MTRs can be high on the near- poor  (b) Optimally designed tax system might include deductibility of health

Tax treatment of out-of-pocket spending  Medical savings accounts  Use pre-tax income to pay OOP costs  Can this reduce moral hazard problems?  Nominal cost-sharing rate could increase  Include insured expenses in taxable income  Effect is to increase cost sharing  But nominal cost-sharing rate could fall  Is it efficient for different people to face different prices?