The Canadian healthcare and social assistance sector falls under the NAICS classification. The sector entails a publicly funded healthcare system. The sector is guided by the provisions of the Canada Health Act of 1984 (Belchetz). The sector, relative to its peers in most other countries including the U.S and Mexico, is unique. Its uniqueness arises from the fact that despite being predominantly publicly funded, most of the healthcare services at the point of sale are provided for by private practitioners.
The Canadian healthcare and social assistance sector has been billed in many quarters as a model to be followed by other national healthcare systems. In its abstract sense, it serves the population well given that most of its services are free at the point of use - whether public or private. However, from an economics point of view, there are a number of issues that the Canadian healthcare and social assistance sector raises, which will be evaluated later in the paper.
In any economic relationship, it is important to have an evaluation of the primary economic agents: the buyers and sellers. From an abstract point of view, the sellers in the Canadian healthcare and social assistance sector are physicians in both private and public health facilities while the buyers are patients seeking medication or consultation from the healthcare practitioners.
However, the Canadian healthcare and social assistance sector is complex and cannot be simply reduced to the mere two economic agents. It is therefore critical to have an overview of the sector. As mentioned earlier, all insured services are fully funded by public resources under the Canada Health Transfer program (Belchetz). The program oversees federal transfer payments to Canada’s provincial governments and territories.
However, for these provincial governments and territories to receive the funds, they must prove to have fulfilled a number of conditions as spelled out by the Canada Health Act of 1984. Some of the conditions spelled out by the law include public administration in that the provincial government or territory must accept to run the program as a nonprofit. Provincial governments and territories should also ensure that the system is universal in that all those that are insured have access to all insured services regardless of their ability to pay. Accessibility is another condition for the devolved units to be eligible for the Canada Health Transfer program.
Despite enrollment into the Canada Health Transfer program being voluntary, all provincial governments and territories have enrolled into it. Therefore, by virtue of all insured services for all insured persons being provided for by the government, it implies that the primary buyer in the Canadian healthcare and social assistance sector is the government (both at federal and devolved level). The table below illustrates the huge extent to which the governments (both federal and devolved) have been entrenched in Canada’s healthcare and social assistance sector (the per capita consumption is in Canadian dollars).
Data from Statista
Consequently, it is evident that the Canadian healthcare and social assistance sector is funded by the public to the tune of 70%, with the remaining relatively small proportion being funded by out of pocket expenses, private insurance or both.
It is important to evaluate the various services and products that the government (on behalf of the patients) has access to from the country’s healthcare practitioners. All provincial governments and territories have their independent descriptions of essential or basic services. However, most of the essential services cover a wide range of medical services such as maternity. In provinces such as Quebec, infertility services are also covered.
Mental, home care and cosmetic care are not provided for and have to be paid by out of pocket expenses or through private insurance. Despite the Canadian healthcare and social assistance sector being universal, it does not cover prescription drugs. Services such as dental and optical care are also not covered and have to be paid by out of pocket expenses or private insurance. As a result of the universal nature of Canada’s healthcare and social assistance sector, the products and services offered are not limited by pre-existing conditions as is the case numerous other healthcare systems across the world.
Given the proportionately huge role that the public sector plays in Canada’s healthcare system (relative to other developed countries), it is raises concerns on the particular traditional micro-economic model that it falls into as a sector. From the abstract illustration above, the Canadian healthcare and social assistance sector can be presumed to be a monopoly.
Therefore, it is important to evaluate the attributes of a monopoly and how they relate to the Canadian healthcare sector. One of the primary aspects of a free market economy is that the market is the primary means through which prices for goods and services are determined. Prices are determined by the interaction between demand and supply. However, for a monopoly, the interaction between demand and supply is of no consequence since it is essentially the price maker. The figure below shows the price setting mechanism under a perfect competition form of market.
In this regard, the situation in the Canadian healthcare and social assistance sector certainly illustrates tendencies of a monopoly. This is because it is the provincial governments and territories that set the prices as opposed to the market being the primary price setting mechanism. This is achieved by restricting physicians both in the public and private sector from charging any price for essential services. In essence, provisions of the Canada Health Act of 1984 implicitly set the price for essential healthcare services at $0. Price fixing in the industry serves as a distortion.
There are numerous ways through which a monopoly can be created. Some of the means include vertical and horizontal integration. However, the most common means through which monopolies are created is through the imposition of legal barriers. While monopolization in the Canadian healthcare and social assistance sector has primarily been through legal barriers, integration has also played a role hence the process has been multilayered.
The chief legal barrier for the Canadian health sector is the restriction on privately funded healthcare by the Canada Health Act of 1984. There was however a wave of vertical and horizontal integration of the healthcare sector in the 1990s, which further served to reduce the level of competition in the industry.
The problem with a monopoly is double-edged. There are both demand and supply side inefficiencies (Stonebreaker). For the case of the demand side inefficiencies, the demand for quality health care for any rational consumer would be inherently very high. To worsen the situation for Canada, the demand for healthcare is essentially limitless. This is because healthcare practitioners must provide care for all patients for insured services, regardless of their ability to pay and in fact the practitioners are prohibited from charging the patients for essential services. This creates a problem as illustrated in the figure below.
In a contemporary market economy, healthcare providers will only provide care where the marginal cost is equal to the marginal benefit. As illustrated in the graph above, the actual marginal cost of healthcare is MC of providing care. However, the public effectively subsidizes healthcare such that the overall marginal cost reduces to MC to patient at a point where MC to patient=MB of care. It is evident that at a lower price, the patient can effectively consume more healthcare (Q1) where Q1 >Q0 (Stonebreaker). As a result of the demand inefficiency, patients can receive increased levels of healthcare at a perpetually lower cost. However, this runs counter to the law of demand since the greater the demand for a commodity the higher its price should be holding all factors constant.
This is regardless of the efforts undertaken by the government to increase both personnel and funding for the sector. It is because any increases however substantial are counteracted by the limitless demand. As a result, there will be a consistent demand and supply mismatch in the Canadian healthcare and social assistance sector. Such inconsistence introduces inefficiencies that are inherent in a monopoly market structure.
Where,
MC is marginal cost
ATC is average total cost
Firms produce at a point where the MC cuts the MR from below hence quantity Q1 and price P2. In this regard, such a firm (under perfect competition) makes normal profits. However, monopolies have two inherent advantages; they can either fix price or output but not both. In often instances, they tend to fix prices. From the graph above, a monopoly would fix the price at P1 hence the difference between P1 and P2 represents the supernormal profits that a monopoly makes.
Even in the event of adjusting output rather than price, a monopoly would still make supernormal profits as a result of economies of scale. The economies of scale arise as a result of the fact that there are no other players in the market (Mankiw 94).
However, for the case of the Canadian healthcare and social assistance sector, the government is the monopoly player in the industry. As opposed to the scenario within a firm, where supernormal profits are the primary bottom line, a supernormal loss is inherent for the situation. This is because one of the primary assertions of the Canada Health Act of 1984 is that for a provincial government or territory, it must fulfill the condition that the healthcare system must be for non-profit.
Secondly, the government as the primary financier of healthcare in the country is often faced with the primary economic problem; scarce reasons versus unlimited wants hence increases in public health expenditure cannot be perpetual without affecting other sectors dependent on public resources for funding.
As mentioned earlier, a firm produces where marginal cost cuts marginal revenue from below hence quantity Q1 and price P2. However, the government is faced with two conflicting situations in terms of economics; to increase the level of output while at the same time lowering the price. The two situations conflict with the law of supply, which holds that the level of supply rises as the price of a commodity rises holding all the factors constant (Mankiw 42).
As a result of the two conflicting aims, the government using public resources is forced to subsidize healthcare. Consequently, the price of healthcare will be offered at a price below P2 which is below the level at which a rational firm ought to produce (where MC cuts MR from below and MR=MC). The level of inefficiency is further raised by the legal mandate that insured services must be provide to all at an unlimited level hence healthcare output is further raised to a level above the economically feasible Q1. As a result, the government essentially runs an inefficient and uneconomic healthcare system.
Such an aspect may be attributed to the fact that healthcare as a public good deserves to be funded by the public hence in essence despite the government’s monopoly in the sector, the supernormal losses are merely in lieu of offering public service. It is because they represent a welfare gain.
However, regardless of this argument in favor of continued monopolization of the healthcare sector in Canada despite the supernormal losses, there are other inefficiencies arising out of a monopoly that still trouble the system. One of the primary inefficiencies arising out of monopolization of the system is long waiting times. Canada’s healthcare system is known to have among the longest waiting times in the developed world (Belchetz).
The waiting times are as a result of limitless demand versus limited supply of healthcare practitioners and healthcare resources. Therefore, despite basic healthcare being free in Canada, the long waiting times represent an opportunity cost for both the patients and the overall economy. Such could simply be cured by allowing market forces to take effect in the healthcare sector. Alternatively, the government could implement a mixed approach in terms of funding for essential healthcare.
However, there are some inherent advantages to the nation’s monopolized healthcare system. The governments (provincial and territorial) by virtue of being the representatives of the people gain a higher bargaining power with regard to healthcare practitioners (who may be viewed as suppliers in this context).
As a result, while the public would be assured of cheap healthcare, health practitioners would be assured of a high number of patients which would in the long run ensure they gain economies of scale regardless of the low charges. However, while this may be the case, it is not sustainable due to the fact that the rate at which healthcare resources include personnel can be produced is far lower when compared to the rate at which the general population demands healthcare services.
The other inherent disadvantage of a monopoly that is evident in the Canadian healthcare and social assistance sector is that consumers lack choice. It is because of the prevalence of a single player in the market. Canadian citizens can only access free healthcare when it comes to essential services. By virtue of only having access to essential services afforded by the system regardless of an individual’s tax contribution, their choice is restricted. The only means through which Canadian healthcare consumers can have a choice other than the essential services provided is if they pay out of pocket or through private insurance.
Secondly, private insurance is also limited in scope as it cannot be basic care. It implies that even in the event that a consumer is dissatisfied with the level of basic healthcare provided, they have no option other than to stick to the free services provided. Consequently, it calls for a strong regulatory regime that can ensure standards are adhered to at all times to prevent agitation for alternatives. In itself, such a regulatory system to ensure quality and uniformity of standards is expensive which may in the long run defeat the purpose of the universal healthcare in Canada (Holly). It is especially so considering that public resources used to fund healthcare are not limitless.
Works Cited
Belchetz, Brett. We Need to Rethink the Canada Health Act, and Fast. Huffington Post Canada
2017. Online
Holly, Mike. How Government Regulations Made Healthcare So Expensive. Mises institute
2013. Online
Mankiw, Gregory. Principles of Economics. Nashville, South-Western College Publishers
Statista. Public and private health expenditure per capita in Canada from 1975 to 2016 (in
Canadian dollars). Statista 2017. Online
Stonebreaker, Robert. The Joy of Economics: Making Sense out of Life-Healthcare. Winthrop
