Rethinking the Welfare State: The prospects for ... - e-Library

Health care 101
service basis. That is, for each procedure performed they or their hospital employer bill
the provincial insurance plan at the prescribed rate, which is periodically negotiated
between provincial governments and provincial physicians’ associations.
Perhaps the most significant flaw with the single-payer/fee-for-service system is the
incentive structure that it yields. For the consumer, there is an incentive to seek health
care services even in cases where the marginal health benefits are small relative to the
costs of providing the services. The obvious reason for this is that the expected private
benefits (that is, those to the individual consumer) are still greater than the private (but
not the public) costs of the service. Although policy-makers have sometimes raised the
possibility of implementing a user fee co-payment system to curb patient abuse, the
notion is a highly contentious one in Canada, although most of the “universal access”
nations in the OECD apply user fees or co-payments of some sort. 18 Critics argue that
rather than targeting abusers of the system, user fees discriminate against the poor who
will be more price sensitive. Moreover, they argue that there is little evidence that
patient-driven demand for unnecessary medical services accounts for a significant
percentage of overall health care expenditures and that severe information asymmetries
between patient and physicians render the latter the key decision-making agents in health
care utilization decisions. 19
The perverse economic incentives faced by physicians in a heavily subsidized, fee-forservice
environment are of central concern. Because physicians are paid solely for the
services that they provide to their patients, they face incentives to increase the number of
those services as a means of enhancing their revenues or to externalize costs to other
elements of the system through, for example, unnecessary referrals, because they do not
bear these costs. 20 The result has been an increase in in-patient hospital care, an overuse
of testing, a sharp increase in billings by specialists, and an over-prescription of
pharmaceuticals, all of which are expensive services for which more cost-effective
alternatives often exist. 21 Thus, despite their designated role as gatekeepers to the health
care system, in a pure fee-for-service system, general practitioners have few economic
incentives to be sensitive to the cost-effectiveness of the various services they supply or
recommend. 22 The long-term effects of this perverse incentive structure include the overuse
of health care services, unduly high costs, and a growing concern over the resultant
rationing of services through queuing (especially for secondary care and specialist
services where capacity constraints are more binding).
Finally, there are perverse incentives facing hospitals in the Canadian variant of the
single-payer/fee-for-service model as well. Because hospitals are allocated annual
prospective global budgets on the basis of their previous operating budget and capital
costs, it is advantageous for them to operate at maximum capacity, even if the medical
benefits do not justify the costs. 23 Recently, this concern has led some provinces to adopt
“case-based” funding systems, which attempt to reimburse hospitals for the mix and
volume of cases they actually treat. 24 On a larger scale, there continues to be ongoing
debate in Canada regarding the effective governance of publicly funded health care
institutions, the need for improved accountability with respect to public spending, and the
need for more community input into decision-making processes. 25
Having identified the frailties of the single-payer/fee-for-service system, it is
important not to overlook its benefits. First, the system largely eliminates concerns of
insurance market failure. Because health care providers receive government funding for