Daniel McCaw President, William Mercer Ltd.
EMPLOYERS' ROLE IN CANADA'S HEALTH-CARE CRISIS
Chairman: David Edmison
President, The Empire Club of Canada
Head Table Guests
Gareth Seltzer, Vice-President, Private Banking, Guardian Capital Advisors and a Director, The Empire Club of Canada; Caitlin Hayward, OAC student, North Toronto Collegiate Institute; Kenneth Hennessy, Executive Director, CANFAR, The Canadian Association for AIDS Research; The Rev. Edward Jackman, Historian, Archdiocese of Toronto; Judith Wahl, Executive Director, Advocacy Centre for the Elderly; George Currie, Managing Consultant, Coopers & Lybrand, the successor firm of Currie Coopers & Lybrand and founding Director, The Sunnybrook Foundation; Duncan Jackman, Investment Officer, Personal Trust and Investment, Cassels Blaikie and a Director, The Empire Club of Canada; John Brooks, Principal and Senior Consultant, Buck Consultants; Barbara Larcina, Director of Benefits and Business Administration, The National Hockey League Players Association; David Hawkey, Vice-President and CFO, RBC Dominion Securities; and Earl Pearce, Senior Vice-President and CFO, George Weston Ltd.
Introduction by David Edmison
Several years ago a writer for the Washington Times wrote: "If you think health care is expensive now, wait until you see what it costs you when it's free." His comments were directed at the health-care bill being debated in the U.S. Congress, which it was argued would place more burden on the private sector.
In Canada we have lived with universal health care since the medicare bill was passed in the early 1960s. Several generations of Canadians have grown up and never had to pay for a visit to the doctor. While we pride ourselves on the fairness of the system, we must never be lulled into thinking it is "free." In fact it is estimated we spend $70 billion each year on health care. Approximately 70 per cent of these costs are financed by our governments which cover basic medically necessary care, while the remaining 30 per cent is largely covered by private employer-sponsored benefit plans.
Recently there has been a move to shift costs from public to private plans as governments attempt to control their expenditures and reduce deficits. This has placed more of the health-care burden on employers who are searching for ways to control these expenses. On the surface, it would seem that the easiest way to control costs would be to cut benefits. This, of course, could lead to employees becoming sick or disabled and ultimately cost more in lost productivity. So there is a movement towards preventative medicine among many employers, looking to the root causes of illness and searching for solutions with their insurers to prevent illness before it happens.
With us today to discuss employer initiatives to improve the effectiveness of the health-care system and deal with mixed signals from governments is our distinguished guest, Daniel McCaw. Mr. McCaw is well qualified to address this important subject as he heads the largest benefit consulting firm in Canada. William M. Mercer Ltd., founded in 1945, has 12 offices across Canada, employs 800 employees and services 3,000 clients. The William M. Mercer Companies operate in 107 cities around the globe employing 8,000 people.
Our guest graduated from the University of Manitoba in 1968 with an Honours Degree in Commerce. He qualified as a Fellow of the Society of Actuaries and Canadian Institute of Actuaries in 1972. He joined William Mercer Ltd. in 1973 after spending five years in the life-insurance business. He has consulted to many of Canada's leading companies in a variety of industries including steel, banking, trust, investment, education, health and retail. He is a member of the Board of Directors of William Mercer Ltd. as well as the Board of Directors of William Mercer Companies Inc., the worldwide company.
Mr. McCaw has offered his talents to a number of worthy causes and professional organisations. He is a former board member of the Canadian Stage Company and currently serves on the 1996 Campaign Cabinet of the United Way of Greater Toronto.
Ladies and gentlemen, it gives me great pleasure to welcome today a person who can share with us the insights he's gained on health care from the employer's perspective, our special guest Mr. Daniel McCaw.
First, I would like to say how pleased I am to have been asked by The Empire Club to speak to you this afternoon on one of Canada's most important challenges, the future of our health-care system. This is a challenge that must be faced by governments, employers, and the provider community if Canadians are to maintain our quality of life from both an economic and a health perspective.
But before I begin, there are three personal matters that I would like to share with you. First, as you heard in the introduction, I am an actuary. I know that actuaries are often equated with accountants on the charm and charisma scale. In fact, we are often accused of originally wanting to be accountants, but not feeling that we had enough personality. I'm here to assure you that there are extroverted actuaries. In fact, I'm going to give you a hint on how to recognise an extroverted actuary. You will know you are speaking to one if you find him looking at your shoes.
Second, I must disclose a possible conflict of interest; my wife is an orthopaedic nurse. I am sure you will understand that my own good health requires me to tread very carefully on certain health-care issues.
And the third issue is the fact that although I have been in the consulting business for more than 20 years, I am not a health-care expert. Although health-care consulting is the second-largest consulting discipline at Mercer and I am involved with the health-care issues, my consulting career has been confined to pension plans and other forms of capital accumulation programmes. So this may be a first for many of you: a talk by an actuary on a subject on which he is not a self-proclaimed expert.
I would like to divide this presentation into two sections. First, I will deal with the current situation in Canada's health-care system, including some of the pressures and challenges we face as we move into the 21st century. And second, I would like to share with you the perspective on health care of a group of employers who have banded together to form the Employer Committee on Health Care-Ontario.
We can all see that Canada's current economic difficulties are having a tremendous impact on the nation's health-care system. We have a total federal and provincial debt that amounts to approximately 100 per cent of our Gross Domestic Product. Among the G-7 countries, only Italy has a larger debt. We continue to spend about $25 billion per annum more federally than the government takes in in revenues. And 35 cents of every dollar that the government does take in each year in revenues goes to service our enormous debt position. Despite this, Paul Martin said in his recent budget that things are "under control." I'm sure we all found those words reassuring.
But in fairness, the federal government does recognise the need for deficit reduction. And one of its solutions, if you can call "passing the buck" a solution, is simply to reduce transfer payments to provinces. And this programme begins in earnest this year, with close to a $3-billion reduction in transfer payments to provinces for health, education, and social assistance, with a further $2billion reduction in the transfer payment in 1997-98. By then, these transfer payments will be 15 per cent less than 1995-96 levels. The provinces have been at work as well, with many changes in their programmes to shift health-care expense from the public sector to employer-sponsored health-care plans and to individuals. This shift includes reductions in the number of drugs covered for citizens over age 65, limits on out-of-country services, and even a $20 increase in the deductible for ambulance service.
It is interesting to review the current distribution of our overall health-care costs in Canada. Provincial governments have been paying close to 50 per cent of the total. A little more than 20 per cent comes from federal transfer payments, and nearly 30 per cent comes from employer-sponsored health-care plans and individuals. We often think of Canada's health system as being almost entirely public, but 30 per cent of the funding comes directly from the private sector. And there is considerable pressure by government to shift costs further and to increase the private sector's 30-per-cent share. Too often however, these government-initiated changes are implemented without adequate consultation and without a complete study of long-term consequences.
Currently Canada spends in excess of $70 billion, or 10 per cent of our GDP, on the health-care system, a figure that was only seven per cent of GDP 20 years ago. One question we should be asking about the current system is whether or not we are getting value for this money.
It is interesting to compare Canada's 10 per cent of GDP spent on health care with two of our G-7 colleagues--Japan and the United States. Japan spends seven per cent of GDP on health care while the figure in the U.S. is 14 per cent. Now, I've picked Japan and the United States because they represent the extremes of G-7 countries on health-care expenditures.
If we compare what these countries spend on health care to the results, two measures of the quality of a health-care system are infant mortality rates and life expectancy. In Japan, according to recent OECD figures, the infant mortality rate is about one-half that of the United States, and 60 per cent of Canada's. This is exactly the opposite result that one might infer from the relative health-care expenditures in these three countries.
My second measure of the quality of health care is life expectancy at birth. In Japan this is currently 79 years, while in the United States it is only 76 years. Canada is slightly better than the U.S. at 77 years. These statistics would suggest that health care is not necessarily improved by spending more money, or conversely, and here's where there is a ray of hope for us, perhaps Canada can maintain the quality of its current system with less funding.
At the same time as governments move to cut their commitments to financing health care in Canada, the Canadian population is getting older. This is a result of several demographic factors:
• declining fertility rates since the end of the baby boom births in the mid-60s;
• slow population growth through immigration; and • healthier lifestyles in conjunction with medical advances, leading to longer life expectancy.
Close to one-third of the population of Canada was born between 1945 and 1965, and almost all of these "baby boomers" are going to reach retirement, and are going to draw all forms of social benefits for many years. Thirty years from now we will have twice as many people over 65 per working Canadian as we do today. The incredible impact of this phenomenon is difficult to quantify, and can best be illustrated with an example.
We currently have close to 3.5 million Canadians, age 65 and over. Let's assume that there are an additional 3.5 million retired Canadians today. In effect, we'll assume that the number of retirees per working Canadian doubles today, rather than in 30 years. Let's also assume that on average they draw the same pension and health benefits, and pay the same taxes as today's average retiree.
If we also assume that we finance the additional costs of these 3.5 million retirees through an increase in our current seven per cent GST, the Canadian Institute of Actuaries has published a paper suggesting that GST would have to move from seven per cent to 25 per cent to cover these benefits. The aging problem may only be incremental on a year-by-year basis, but it will be enormous for our children, unless we accept our social responsibility to deal with it.
Given the current situation of reduced government health-care funding and the potential for long-term healthcare cost increases through demographic pressures, some employers have taken action. This includes ensuring that the design of the employer's health-care plan does not leave them automatically picking up benefits previously provided by government, putting caps on retiree health-care benefits, and redesigning their plans (often through the introduction of flexible benefit programmes) so that employees take more responsibility for both the choice and the cost of their health-care benefits. Although justified, the net result of many of these actions is to move the costs governments tried to shift to employers, on to the employees.
But employers also need to participate at the policy level, where changes to the long-term system will be instituted. To this end, Mercer facilitated the establishment of the Employer Committee on Health Care-Ontario, or ECHCO. In fact, Mercer helped establish similar groups in Alberta and Quebec, and we are currently working with employers in B.C. to form a group in that province.
ECHCO is a group of 30 of Ontario's largest employers who are very concerned with both the effectiveness and the long-term viability of our health-care system. It employs 350,000 people in Ontario alone. Its benefit programmes impact not only these active employees, but an additional 150,000 retirees.
In total, including dependants, they cover about 1.1 million residents of the province, or about 10 per cent of the population. Their combined payrolls are $15 billion in Ontario and more than $26 billion Canada-wide. Their investment in health and dental benefits in 1994 exceeded $700 million in Ontario and more than $1 billion Canada-wide.
The members of ECHCO all play a major role in promoting good health and illness prevention among their own employees, and are strong believers in the long-term relationship between good health and work force productivity.
ECHCO's objectives are threefold:
• First, to increase their own knowledge and awareness of the health-care system;
• Second, to influence the future direction of quality health care in the province;
• And third, to identify opportunities to improve the effectiveness of employer-sponsored programmes. The focus of their efforts is not adversarial. They bring a business perspective and experience to the table and can, working with the other stakeholders in the healthcare system, make a significant contribution to improving the quality of health care while managing costs. They have stated that they want to accomplish change in the system through partnership with the other stakeholders.
I stated earlier that the current health-care system faces enormous short-term and long-term cost pressures due to the reality of our current economic situation and the emerging demographics in Canada. The ECHCO members recognise this challenge and believe that the status quo is simply not sustainable. As employers, they understand the need to deal with significant economic restraints in their own businesses, and by restructuring, many of them have reduced their operating expenses without compromising the quality of the products and services that they deliver to their clients and customers.
In 1990, members of ECHCO had health and dental benefit expenditures of approximately $400 million. By 1994, this figure was $700 million, a 75-per-cent increase in a four-year timeframe where the consumer price index increased by about nine per cent. Increased costs of medical services and increased utilisation of employer-sponsored health-care benefits were major contributors to this significant cost increase. However, much of this increase was due to cut-backs in government-sponsored services that were picked up by the private system, and Ontario's decision to apply retail sales tax and premium taxes to private health-care plans. There is a sad irony attached to a government reducing expenditures by shifting health-care costs to the private sector, while at the same time increasing revenues by taxing these privately sponsored health programmes.
ECHCO members have some strongly stated views on these government actions that all too often happen without consultation with the private sector, and without adequate study of the long-term consequences. They believe the consequences of these actions include:
• First, no ability for employers and employees to plan ahead. After the fact, employers must choose to assume higher costs or to ask employees to share in these cost shifts, or perhaps even to reduce health benefits.
• Second, ECHCO members are concerned that most changes in the public sector have simply resulted in cost shifting. They believe that cost shifting is not in itself an effective strategy because it does not address quality improvement or overall cost cutting within the system. Without re-engineering the design or delivery of health-care services, reducing costs in one part of the system, namely government, simply results in increased obligations elsewhere, namely the private sector, with unstudied consequences.
• And finally, downloading health-care costs does not address the cause of the increases in overall healthcare costs in the system. Furthermore, simply pushing these costs to the private sector has a significant financial impact on employers and the overall health of the provincial economy. ECHCO has determined that government cost shifting and additional taxes on health programmes cost their members about $100 million in 1994. This impacted both job creation in the province and our competitiveness in international markets.
Consultation in advance of change provides employers with an opportunity to share with the health-care community the impact on their companies, and to make a contribution to policy deliberations. ECHCO members want to work in partnership, to share their experience and to join forces with government and others to address the problem of rising costs to our mutual benefit.
ECHCO has organised their activities through four subcommittees, dealing with issues that pertain to:
• Dental Services
• Health Care Practitioners and Hospitals • Government Liaison
These sub-committees have met with stakeholders in each of these areas, in effect, covering all aspects of delivery, effectiveness, and funding.
In recent years, governments have attempted to contain the cost of health care by limiting the supply of services and funding. ECHCO members believe that real on-going savings, in terms of both dollars and the health of the population, will come from better management of the demand side. There are three areas that they are recommending need change:
• First, information and education. They believe that reform depends upon reliable information about costs and related health outcomes, that incentives in the system can improve dramatically when stakeholders can base decisions on a comparison of relevant outcomes and their prices.
• Second, streamlining and co-ordinating services. They believe that significant savings can be achieved through streamlining and co-ordinating services and ensuring more cost-effective modes of delivery without adversely affecting the health of the population.
• And third, illness prevention and the promotion of good health. ECHCO members have invested significantly in programmes to create awareness of common causes of ill-health and to promote well-being. They also believe that health-promotion education should stress the advantages of individual choice and the empowerment of the health-care consumer.
Personally, I am very impressed with the progress made by ECHCO to date. I admire its goals and its efforts to partner with governments, and the other players in the health-care system. I am especially impressed when you consider the mixed message it seems to be receiving from government.
The mixed message I am referring to is the tax status of the private health system. Canada has long recognised that incentives for retirement savings encourage both employers and employees to set aside capital for retirement, thus reducing the dependence of the retiree on government programmes. However, even as they move more of the cost of the health-care system into the private sector, Ontario has applied retail sales tax and premium taxes to private health-care programmes. The federal government continues to consider taxing employees on employer contributions to health-care programmes. Governments need to review the taxation issue with ECHCO and other interested parties, and perhaps rethink the long-term impact of this taxation strategy on the health-care system.
In conclusion, I applaud ECHCO and the other employer groups for their efforts to work with government to come up with long-term solutions for our health-care system. ECHCO has realised that the solutions involve much more than money, or who pays for health care. Money and health do not have to be tradeoffs.
Economic prosperity contributes to the overall health of a community, while unemployment and job stress are associated with increased demands on a health-care system. The challenge will be to integrate the health of employers and the health of employees into a strong growing economy.
The appreciation of the meeting was expressed by Gareth Seltzer, Vice-President, Private Banking, Guardian Capital Advisors and a Director, The Empire Club of Canada.