Proceedings of the Standing Senate Committee on
Social Affairs, Science and Technology
Issue 62 - Evidence
OTTAWA, Wednesday, June 12, 2002
The Standing Senate Committee on Social Affairs, Science and Technology met this day at 3:52 p.m. to examine the state of the health care system in Canada
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Our witness today is Mr. Jack Mintz. Three or four weeks ago Mr. Mintz and some of his colleagues released a paper that actually adopted the model that this committee had put forward for discussion in what some of us had called the ``Tom Kent'' model. We called it that because it went all the way back to the original proposal for medicare. I realize that the original model did not have the numbers that Mr. Mintz's model has. In addition, Mr. Mintz recently chaired a weekend seminar with a group of people on the issue of additional alternatives for funding health care. Today, he will speak to his specific proposal and the broader context.
Mr. Mintz, please proceed.
Mr. Jack Mintz, President and CEO, C.D. Howe Institute: It is a pleasure to come before the Standing Senate Committee on Social Affairs, Science and Technology. This is actually my first visit to this particular committee.
Senator Kirby has done a fine job of introducing the work of the C.D. Howe Institute. We have published five papers over the past eighteen months and I am sure some of them are familiar to you. The first paper was by Mr. William B.P. Robson on demographic impacts that will affect the cost of health care over time. In this paper, the numbers are consistent with work done by the Organization for Economic Cooperation and Development, OECD, for Canada. The figures in both areas agree in terms of the overall impacts.
We have also published two papers recently that you may have seen: One looks at whether the Canada Health Act violates section 7 of the Charter of Rights and Freedoms; and the other paper, which was written by Mr. Shay Aba, Mr. Wolfe D. Goodman and me, looks at a tax-based co-payment system for health care. It does not include health care benefits as part of taxable income. That is where it differs from Tom Kent's proposal. I will briefly explain it later.
As an economist, I will begin with three assumptions, some of which this committee might agree with. The first one is that I believe — and I am speaking on my behalf and not the C.D. Howe Institute — there is a problem of sustainability with respect to health care costs. In his paper on demographic impacts, Mr. Robson has estimated the un-funded liability associated with health care. If people put money into a fund now that earned a 6 per cent return over the years, how much money would someone have to set aside to pay for costs in the future? He estimated that un- funded liability to be in the order of $600 billion to $800 billion, or roughly 55 per cent to 75 per cent of GDP.
When you think about it, that is roughly the same as a current national debt. It is the same as the current debt associated with the Canada Pension Plan, even after the changes we have had up to this time. In Canada, when you put all of this information together, it would seem that we are facing a debt of about $2 trillion that we are leaving to future generations.
Costs, estimated by Mr. Robson and the OECD, will rise to at least 10 per cent by the year 2040 from the current 6.5 per cent. When I say this, I mean the public share of health care costs and not the private share. Mr. Robson also estimated the impact of health care costs as part of provincial budgets. This committee is aware that those health care costs will absorb well over one-half of the provincial budgets by the year 2040. In fact, it will be in the area of 60 per cent to 65 per cent, depending on the province.
There is a problem of sustainability. When you look at the overall debt that we are leaving to future generations, it becomes apparent that we have a problem. Health care constitutes one-third of that problem in terms of the burden that we will leave to the future.
My second assumption is that even if we entertain ideas, whether privatization or de-listing of services, which is effectively privatization of the health care system, governments will need more revenues because of the rising public share of health care costs over time. Therefore, we must think carefully about how we want to fund the public provision of health care. What is the appropriate way of financing that? This is an important question that Canadians should be asking themselves, because that will be an increasing burden for Canadians as a whole.
Third, and this is not an assumption but really a summary of economic literature, general revenues are not necessarily the optimal source of financing for health care. I base this on three arguments.
First, when you apply insurance principles, as recent economic literature has done, and once you recognize that individuals and providers of health care can influence the health care costs incurred under an insurance system, it is appropriate to have some form of co-payment system, deductibles or bonuses for those who try to save money for the system. In other words, putting incentives in our payment system would not be wrong, and, therefore, one would actually improve the efficiency of funding health care as a whole.
Second, from the point of view of tax policy principles of efficiency and fairness, there is an important argument made in the literature that, at times, one would like to use the benefit principle for taxation, at least in part, because people who benefit from the program should, perhaps, contribute more to the cost of that program than others. This is, one could argue, not only good in terms of efficiency but in fairness as well, because if one person has greater use of public services perhaps that person should contribute more to the cost of those services than others with similar resources who do not use the services.
The third issue is one which we now address more in today's climate, and that has to do with the demographic changes to which I referred earlier. When you look at the current revenues that governments raise in Canada, a significant part of those are payroll taxes and income taxes, and they tend to hit the workers more when compared to the elderly. In fact, the OECD has estimated that, as the population ages, the tax/GDP ratio in Canada will fall by 1.5 points. This is because elderly people, once they retire, tend to have lower incomes and, therefore, pay less tax than workers. There may be some taxes that would be better if you were going to fund health care expenditures, because the majority of health care expenditures are weighted heavily toward the elderly in the last years of their lives. Therefore, as the population ages and the benefits paid out to the elderly increase, if you have taxes that are particularly falling on working Canadians they will have to bear a bigger responsibility for those benefits. Thus, there may be some taxes that are smoother over the life cycle of individuals. That would mean less burden would be imposed on the working population as we get more health care expenditures associated with the elderly.
When you put those three things together, let me raise some issues for you in your discussions about the funding of health care, and these will be drawn by some of the work we are doing as well as some of my own particular perspectives.
If we do have this rise in costs for public health care, the question one might raise is: Should there be a dedicated tax or a greater reliance on certain taxes to fund the greater burden associated with health care expenditures that we can expect over time? There are four candidates for particular consideration.
First, one can consider health care premiums, which I will call ``flat-based premiums.'' These are a certain amount paid by either an individual or a family, regardless of income and independent of usage of the system. This, of course, is the kind of health care premium you see in Alberta and British Columbia, although there is a reduction in the health care premium for very low-income individuals in the two provinces.
Second, payroll taxes can be used to fund health care. This is what is found in the European countries, as well as in the United States with social security taxes.
Third, one could increase income taxes in general.
Fourth, consumption taxes could be raised. In the case of Canada, it would be the GST at the federal level or provincial retail sales taxes, which are general broad-based sales taxes in Canada.
Which one of these sources might be better from the point of view of the three issues raised with respect to efficiency, equity and demographic issues? Health care premiums would dominate in terms of efficiency, and demographic effects, because they would be paid by the whole population at similar amounts, regardless of age. Whether a person works or not they would still have to pay the amount. This would be the least distortionary of the types of taxes that could be levied, and the one most conducive to the demographic issues we will face down the road.
At the same time, in terms of equity, flat-based premiums do tend to hit low-income Canadians the hardest, although there could be some income relief possible to ameliorate that problem. However, we need to remember that middle-income Canadians would have to pay the same amount of health care premium as rich ones, regardless of their source of income.
A second source would be consumption taxes. These are interesting to look at because consumption taxes have been found to have lower distortionary costs to the economy and they tend to be more efficiently imposed. They are smoother than, for example, income taxes over the life cycle of individuals because working income tends to peak during working lives before falling off in retirement years. At the same time, consumption tends to be lower than income during the years in which people are accumulating savings, and consumption tends to be high in retirement years relative to income as that is when people are drawing down assets to consume during their retirement years. Consumption taxes also tend to be proportional to the consumption of individuals over a life cycle. One could make it progressive by having a tax credit, such as the GST tax credits which provides relief, particularly for lower income Canadians.
A third source would be payroll taxes. These taxes tend to be a little less efficient than consumption taxes in their application. They do tend to create more distortions in the economy, as most of the studies show. The biggest problem with payroll taxes is that they tend to hit workers harder than retired individuals, and that will mean that the working population would have to bear a bigger burden of funding health care costs as compared to a consumption tax or a health care premium. One could also make payroll taxes progressive by allowing them to vary over payroll if one chose to do that.
The fourth source would be increasing income tax. Income taxes tend to have the highest efficiency costs associated with them out of all these cases. That is because taxes on savings and investment tend to have high inefficiency costs associated with them and tend to drag down the economy more. Income taxes are more progressive. In terms of demographic effects, they would tend to hit the working population harder, although it would not be as serious as with the payroll tax. However, it would have some undesirable demographic features associated with it when comparing it with consumption taxes or healthcare premiums.
In terms of choosing different approaches, I side more to the consideration of health care premiums and consumption taxes as ways of trying to deal with funding extra costs in the health-care system as opposed to relying on payroll taxes and income taxes, which currently make up a much larger portion of general revenue. There is some argument for looking at dedicated revenues in this sense.
A second issue is one raised by my colleague Bill Robson of the C.D. Howe Institute, which is whether we should consider pre-funding health care costs in the future, as we do with the Canada Pension Plan. As we see in a number of other countries such as the United States, there are some specific social security taxes that also go to the funding of health care.
This is a difficult sell, because when one talks about the idea of trying to prefund health care today, that is taking into account the future costs of tomorrow. In today's world, where we are worried about funding the current system, it is something to start asking governments to increase not only the resources that are going into the current system but also to ask people to put money aside for future costs.
On the other hand, this is a significant issue. To give you an illustration with the Canada Pension Plan, prior to the reforms of 1997, it was noted that if nothing was done taking into account demographic effects, contribution rates in Canada would have to rise to 15 per cent by the year 2030 or 2040. We came to an agreement in 1997, between the federal and provincial governments, to increase the amount of payroll action taxes to be paid today and to increase the funding available to the Canada Pension Plan. Other important changes were made in that reform to allow for smoothing contribution rates to 9.9 per cent over the next 40 years.
We have the same problem with health care costs. If we do no pre-funding at this time, future generations will have to cough up the money to pay for the costs of health care down the road. There is an argument for pre-funding. That is something that we must think about today, whether it is individuals pre-funding for themselves or governments pre- funding the public share of health care costs.
A third issue is whether any of these sources of taxes that are being considered should be done at the federal or at the provincial levels. Here is an interesting question because most of the expenditures are being done at the provincial level. We know there is the Canada Health and Social Transfer that the federal government makes to the provinces, which funds health care and previously social services and education post-secondary education costs.
I have thought that the provinces should be the ones that need to look at new sources of revenue to cover these burgeoning health care costs. However, there are some contexts in which the federal government might have a role in helping with the funding of costs. My colleague, Mr. Robson, has suggested the introduction of a transfer to the provinces that would be based on age. His idea was, for example, that the federal government would give $3,000 per person to the provinces for every person who is over 65 years of age. In a recent paper that he has done — and, it has not been published yet — he asked the question ``What would be the contribution rate that you would have to make today in order to fund this particular age-related transfer to help fund health care costs in the future as the population ages?'' He estimated that today, you would have to add, on average, 1.2 per cent of the personal income tax base to everyone's personal tax to fund this amount in the future, or increase the GST rate from 7 per cent to 9.6 per cent in order to fund this particular grant that would be given by governments to provinces. That is an interesting idea, and one that should be put into the hopper as ideas to consider in terms of funding health care.
The fourth issue that I will talk about are incentive-based health care financing methods. These are ones that the C.D. Howe Institute has particularly explored. We have published the two papers already mentioned by Senator Kirby and myself and we will have another paper along these lines coming out in the fall.
The incentive-based health care financing idea really takes up the idea of having some user-pay related charge for health care that would be a substitute for general revenues or for personal income tax revenues as a way of funding health care. The idea is that people would actually have to get a report from provincial health authorities on the value of the services that they receive. This is not an easy project. Provinces do not do this now. To make the system work, you would have to develop a pricing model and undertake the kind of work required to price exact services that are provided by hospitals and physicians — something that is not available in the current system.
I would argue that is a huge benefit because it would allow for more measures of costs and benefits associated with different health care procedures. Currently, people are largely in the dark about them because they cannot make those kinds of cost evaluations.
Second, if you have a charge that is faced by users, it engages the public generally in the whole question of pricing of health care services and understanding what the value of services they receive from governments for the services that are provided to them. That, in itself, will lead to a political calculus in terms of how people will regard the cost of health care services over time, especially if they have to pay at least part of those costs that are incurred on their behalf.
There are two particular proposals on my two-page sheet here. One proposal that I have from Mr. Aba and Mr. Goodman is that every time individuals go to a doctor or to a hospital, they would receive a chit in which they would be told how much the value of the services were. The provincial health authorities or the doctors in the hospitals would then report to the provincial health authorities the actual costs that they incurred on behalf of particular individuals. That would go into a database and a T4H form would be sent to individuals in terms of health care that they received.
This is a basic model, but we looked at different versions. People would pay a 40 per cent charge on the health care services and would be then subject to a income limitation so that you do not hit too hard people who have extraordinary costs in the year. That one that we particularly modelled would be an income limitation of 3 per cent of income in excess of $10,000. In other words, if you have $10,000 worth of health care expenditures on behalf of yourself in a particular year, you would then pay $4,000, which would be 40 per cent of the costs. However, if your income is $110,000, 3 per cent of that would be $3,000. Therefore, you would pay only $3,000 and not $4,000 for your health care costs because the income limitation would kick in. If you were a poor individual — that is, someone with less than $10,000 in income — you would pay nothing as a charge.
This system would raise close to $7 billion in revenue, based on numbers that we were able to get based on expenditures, and so on. This $7 billion could be used to reduce personal income tax rates at the provincial level as a way of substituting a user-pay related charge rather than having general revenues to be used for it. There would also be some utilization savings, close to $6 billion, based on economic studies that we used. That would allow governments more capacity to provide health care services, as there would be some savings in utilization costs.
The other proposal is by Poschmann and Reuber. They looked at having a tax credit of $1,000, instead of a straight tax. If no health benefits are received during the year, the full amount of the tax credit can be applied against personal income tax. If health benefits are received during the year — and they had about a 20 per cent charge on health care services — that amount would be applied against the $1,000 tax credit. Thus, there would be a lower tax credit and, therefore, a lower reduction in personal income tax.
The difference between this approach and our approach is that ours would raise money while theirs would cost money because it is a credit and there would never be a negative tax credit. However, they expect their system would pay for itself because of the reduction in health care utilization costs and therefore there would be no net loss to the government. I do not think that departments of finance will necessarily base their budgetary decisions on potential savings in utilization costs because those are always difficult to predict, until you see what actually happens in the system.
Those are some ideas and issues. I hope that is helpful information for you, honourable senators, in terms of the issues you are discussing.
The Chairman: I thank you for preparing the comparisons of the alternative options for funding and for having Professor Monahan, Associate Dean, University of Toronto Law School, and Mr. Stanley Hartt write the paper on whether there is a right to health care. This committee put that idea forward in a fourth report — whether it is just and reasonable in a free and demographic society for a government to both ration the supply of an essential service and deny the right to buy it in a timely fashion. We were, to put it modestly, pilloried by many people. It is nice to know that other people are picking up an idea that we floated.
In your model, you use a 17 per cent drop in utilization rate. You say that will occur among people who do not hit the maximum. Let me make it 20 per cent for easier calculations. That means that $1 of every $5 spent on medical care does not get spent. That implies to me that there is a 20 per cent abuse of the system, or your utilization drop means that people who need medical care will not receive it because they will not go for it. That troubles me.
My question is: How did you derive the figure of 17 per cent? How do you respond to the concern that this could well lead to a situation in which people who need medical care do not seek it?
Mr. Mintz: First, the figure of 17 per cent is based on our review of various economic studies that have been done on the impact of pricing for various services under health care and how that might impact on the demand for health care. There have been sophisticated studies done in the economics literature. There was one survey written by Mr. Jonathan Gruber at the Massachusetts Institute of Technology on the price impacts.
The number we chose was at the low end of the estimates. For example, there was a study done in the United States to look at what happens when you start charging for ambulatory services in the United States. They looked at a city in which this occurred and they found that utilization of ambulatory services went down by 50 per cent as a result of pricing — going from something that was absolutely free to a fee-for-service system. I understand that in Alberta, they already charge for ambulatory services.
The Chairman: They do in many provinces, such as Ontario.
Mr. Mintz: I have not used an ambulance and I was not aware of that. That is an example of something people have picked up on.
The Chairman: I agree with you that, if you put a price on something that was previously free, some people will not use it. I was curious about how you decided on the number. How do you respond to the question about people that will not use the service being the ones who actually need the service?
Mr. Mintz: First, the actual estimates can reflect the actualities. It would look at the kind of calculations that people make when deciding whether to access the services. They would be affected and, certainly, you could impact on people's decisions to utilize fewer services. Using the ambulatory services as an example, if someone knew they had to pay for it they may simply jump in a cab instead. In some cases, that may have been a good decision because they really did not need the ambulance. Perhaps they could have gone to hospital in another way.
In other cases, it could present a real problem if someone decided not to pay for an ambulance when that service was truly needed. That problem will occur any time you start pricing goods. You worry about low-income individuals because they are the ones who might be less willing to make that kind of expenditure, as a result of such a system.
Our scheme, which provides income relief to low-income Canadians, would provide an opportunity of ameliorating some of the problems associated with people not undertaking health care services that they need when the price is too high. For middle-income and upper-income Canadians, the idea of paying up to 3 per cent of income for costs of health care services is not necessarily a huge burden. There could be some positive utilization impacts from this system and I am not sure that they would necessarily deny themselves something that is absolutely urgent or needed to be done simply because costs would be associated with that. The income utilization takes away much of that concern.
The Chairman: You would use 3 per cent of gross income minus $10,000; it is not calculated after deductions; and it is not net taxable income on the income tax.
Mr. Mintz: It is calculated on the assessed income — the gross income.
The Chairman: Of the $6.8 billion that your model saves, how much of that is federal and how much is provincial?
Mr. Mintz: It is all provincial. We assumed this would be a provincial premium levied by the provinces, so we estimated for each province. There is no federal revenue associated with that.
The Chairman: I thought you had done it in the same way as the income tax form — calculate total tax payable and then divide it?
Mr. Mintz: You would run it through the income tax.
The Chairman: I understand. You have done no calculations on the basis of a similar scheme generating money for the federal government.
Mr. Mintz: No.
The Chairman: If we give you a set of numbers, could you run that?
Mr. Mintz: One could do that. In fact, I would suspect the numbers would probably be similar. Remember that we have the same amount and the same $10,000 exemption by province. We did not vary that by province. The federal role would be to run it through the tax collection agreements allowing the provinces to do this on a form that would be attached.
The Chairman: If the provinces did not do it, the federal government could still do it and add it to the income tax.
I listened carefully to your comments comparing the sources of potential revenue, particularly your comments on a GST add-on or a premium. What if you had a national premium that varied with income groupings in the sense that people who were paying income tax did not pay any premium, and you had a token non-linear premium at a low level that would be discreet? It would vary with income. I raise that because you like premiums and consumption taxes, and your big argument against premiums was the lack of equity because you had a uniform premium.
Could you get around the equity issue with a graded premium? That is my question, but I want to put it in this context: One of the arguments against your proposal is that it is, in a sense, a tax on the sick. You are saying it is a tax on people who use the public service, but, on the other hand, most people do not use the public service voluntarily. They have not decided to go out and use some other kind of public service such as water for their garden; this is a service that is involuntary because you are sick. There will be considerable opposition to that model.
On the other hand, the notion of buying an insurance policy to protect you in case you get sick, like automobile insurance, seems to have a greater degree of public acceptability. I wonder if you could arrive at a premium model with a variable premium depending on income to solve the issue of the tax on the sick that still meets many of your objectives?
Mr. Mintz: First, if you said let us have an insurance policy that people could contribute to as a premium, I could say if there is a deductible provision associated with that you would be back into something similar to our current system. That is a great way of selling our system because that is all it is. Like other insurance, I do not see what is special in this case.
I do want to remind you there are many public services available that have charges, and people do not have a choice. For example, transportation gasoline charges are usually related to the use of the service. Municipal services and development charges are put in to capture the costs of providing services to the population, and one could argue that is appropriate from the principle of efficiency and equity.
With respect to the health care premium, yes, you are right, you could try to base it on income. Alberta and B.C. do that, with very low-income individuals receiving a reduction on the health care premium, or not paying any health care premium at all. One could attempt to make that graduated. The more you do that, the more it becomes adding to the marginal tax rate of an individual based on income. As soon as a person's income rises, if they work more and earn more income they will pay more of a premium, that is added on to the additional taxes a person pays, and adds on to the marginal tax rate of the individual. One would compare that to having an increase in personal income tax rates.
Senator Keon: I wish to take you back to premiums, which, with the appropriate formulas, would be the fairest way of doing this. Let us go back to the evolution of the system in Ontario, for example, where we had hospital insurance premiums and PSI. I was not particularly directly involved at the time. However, I do recall that, as a citizen, the premiums were going up, and then they disappeared. They disappeared, I believe, because it seemed like the political thing to do. We had utopia for a few years, and now we are back to reality where the money is running out.
Would you comment on what was wrong with that, other than there were two separate systems, and was it a mistake to drop them and go to the big pot of funding to pay everything from one source? Can you recall that?
Mr. Mintz: In the case of Ontario, it was the David Peterson government that decided to move away from the Ontario premium and adopt the education and health tax, which was a payroll tax on businesses. One of the issues that had to be dealt with was that many of the premiums were actually paid, at least in part, by many businesses. You were actually switching from one type of benefit that businesses were covering for individuals as part of the Ontario health premium to a payroll tax that had to apply to them. Of course, many small businesses were exempt because the payroll tax only applied to payrolls over and above $400,000 in total.
We switched then from a flat-based premium, that affected the whole population independent of whether people were working or not, to a payroll tax. That payroll tax still exists in Ontario.
Alberta and B.C. did not make that decision and kept their premiums. After the Mazankowski report, Alberta has adopted the policy that the Alberta health care premium will be set as a certain proportion of health care costs every year and will rise according to those costs. I think the proportion is 20 per cent.
Senator Keon: If you go back further, the physicians were not initially covered in the system, so they set up their own PSI.
Mr. Mintz: This part I do not remember.
Senator Keon: There is no point in pursuing it. I just wonder whether we are pursuing the same the same thing all over again. However, from my own perspective, premiums probably would be a reasonable approach.
Mr. Mintz: I must admit I think premiums would be particularly reasonable and good to use if we do try to bring them in on an incentive basis, which means, like any insurance policy, you bring in a notion of deductibles where a person's usage will impact on how much premium they will pay.
Senator Keon: The other thing we are all ducking is just where are we prepared to go as a percentage of GDP? We do not know what target we are shooting for.
Mr. Mintz: Both the OECD and Bill Robson's estimates at the C.D. Howe Institute suggest that the public share of health care costs will rise from 6.5 per cent of GDP to over 10 per cent by 2040. They looked at aging impacts, fertility rates, the change in demography and the fact that health care expenditures vary by class.
That gives you some estimate of how much it will rise by, but it also assumes that the numbers will vary according to whether health care costs rise faster or less than the rate of growth in the economy. The 10 per cent number is based on health care rising at the same rate of growth as the economy. On the other hand, if you look at health care costs in the past few years, they are rising at 10 per cent per year, which is much faster than growth in the economy, and that 10 per cent number can look bigger down the road.
Senator Keon: The other question is what that 10 per cent will cover. We keep skating around that.
Mr. Mintz: That is assuming we have exactly the plan that is in place now with no change. Physicians in hospitals would get fully covered. You have some sharing of drug costs and some sharing of home care and long-term care, although most of that is private.
The Chairman: I have a supplementary question. Do you think the total share of GDP spent on health care is relevant measure? I do not think so because that is not the question. The question is: What is the public share? That is why you focused on public share, right?
Mr. Mintz: Yes, because that must be tax based.
Senator Morin: I appreciated your remarks. I agree with your assumptions. The matter of pre-funding is an interesting idea, but difficult under the federal role.
Concerning the taxes, everyone addressed the issue of premiums. I will not talk about that, although it is interesting to see that the U.K. recently decided to remain with income tax. If you have a view of that, I would be interested in that view.
I would like to talk about consumption tax. An OECD paper on the tax system and options for changes for Canada stated that with respect to the cost of raising tax, for Canada the least distortionary view was a sales tax. They recommended strongly that if there were to be an increase in tax in Canada, it should be along the lines of a sales tax.
All polls have shown that Canadians are prepared to pay more in taxes as long as it is dedicated and they are sure it will go to health. Could this be applicable to a sales tax? How would that be acceptable? We feel that premiums would be acceptable because people are used to paying premiums. They pay premiums for personal insurance and for unemployment. This country has a tradition of premiums. However, with the GST, the tradition is the opposite. People do not like the GST.
What do you feel would be the acceptability of Canadians toward a 2 per cent increase that you mentioned? Would that give us $6 billion a year? Is that what you said?
Mr. Mintz: No, I did not. This was to fund it.
Senator Morin: I realize that, but the same amount would come out of it.
The Chairman: One cent of GST, minus that for low-income earners, yields around $3.4 billion.
Senator Morin: This is a ballpark figure. This is an interesting idea.
How can we be sure it is a dedicated tax? What is your view on acceptability? I realize that it would be difficult to have co-payment on that, but it could be arranged.
Finally, I should like to address the major issue of tax-based co-payment contributions. I do not think that disease is the same thing is food or clothing or public transport. It is more in the line of disasters; it is more like fire or theft or floods. It is like having someone who has just lost his house to a fire but they have to pay for the firefighters or someone who has had a theft and they have to pay for the police.
Let us take the case of a patient with a chronic disease such as multiple sclerosis or Crohn's disease or juvenile diabetes. There are many expenses associated with that. In addition to having the financial costs of having chronic disease, you would penalize this person by having this person pay extra income tax as compared to the person next door who is healthy and living a healthy life and pays less income tax.
I do not share your view concerning the 17 per cent of incentives. For one thing, half of the costs associated with health care are during the two last years of our life. Most of this is in intensive care. You do not have that much control over expenses. I realize that it does save money, but I feel that the problem of under utilization in the health care is greater than over utilization. Last week, the Canadian Medical Association published a report containing a number of suggestions relating to the tax policy in support of health. For example, they say that the tax system should be used to encourage healthy lifestyles: health eating, exercise, smoking cessation, and so on. Another suggestion was to use tax credits to support informal caregivers and use the tax credit as a way to promote healthy behaviour and improve the system generally.
The chairman has referred to some of these objections; otherwise, I would insist on them. I would be happy to get your thoughts on the sales tax as a way of supporting this.
Mr. Mintz: First, on the sales tax, one of the problems is the issue of dedicated taxes. For employment insurance, we have fully integrated part of the federal budget. It is not really a dedicated tax in the sense that the money is set aside and can be spent on unemployment benefits. If there is a surplus, it goes to the federal government to use as they wish and if there is a deficit, then the federal government needs other sources to cover that.
If you mean a dedicated tax of that type, it would be more acceptable, particularly to the federal government in adopting it. There is a concern about using particular taxes and then funding it for particular things. Many people want to do this for various taxes. If you carry this too far as a principle, you end up putting yourself in a strait jacket because you could be running a surplus on one type of use and dedicated tax and running a deficit in the other but you cannot combine them together.
The Chairman: I absolutely understand that, carried to the extreme, you could not run the system that way. On the other hand — and I feel strongly about this — if you are to persuade Canadians to pay more for health care, you must convince them that it is out of the reach of the Minister of Finance.
Senator Morin: With the disaster we had in the 1990s with all the budgets, if we had a dedicated tax at that time the government could not touch this. We would not have known that. One of the reasons is acceptability by the public and the other one is that we want stable funding. Health needs do not vary with economic cycles. We must put in place a stable revenue system that does not vary with these cycles. The Minister of Finance may not agree with this, but I think that is what Canadians want and I think they are right.
Mr. Mintz: I will raise two other quick points particularly on the GST. First, as a tax, it is a better tax compared with some other taxes that we have in the system in terms of their efficiency costs. We also must remember that the GST now is dedicated for retiring government debt. Still, the GST revenues are lower than the total amount of debt payments. We keep forgetting that.
A health care premium, in terms of the economic costs of the health care premium, would be superior to the GST. The only thing about the health care premium is that at least GST payments will rise with person's consumption. If a person is richer and consumes more, then they will pay more compared with a health care premium. That would be the value of the GST premium being used over the health care premium. Health care premiums would be sensible to use if they are viewed as a payment for the system — particularly if you introduce the notion of deductibles or something else that is related to use.
I think you are being unfair about our proposal in the following sense: If you look at fire insurance, if someone has a fire they pay. There is a deductible if a fire destroys their house. Insurance will cover almost all the costs, which could be huge, but people will still pay something because there is always a deductible involved. Why? If they are smoking in bed or do not check their electrical wires they might cause a fire, or they may not be taking action to prevent fires.
I would suggest that our proposal is very much along those lines. It does not mean that when someone goes into the hospital for a major operation they will pay thousands of dollars. That is not our proposal. In fact, they do not have to pay a user fee at that point. They will not be charged thousands of dollars and then need to settle later on. Instead, they will be told that was their service. Later on, there is a settlement that would be based on income, and they will never pay more than 3 per cent of their income. If someone has $50,000 in income, they will not pay more than $1,500 for the procedures they received in a particular year. You can change the numbers and set it at 1 per cent or 2 per cent, I do not mind. It is not much different from the concept of having a deductible under an insurance system, and we must think about it that way.
With respect to the figure of 17 per cent, I want to mention that these are numbers based on various studies. You are absolutely right, if someone is elderly and toward the end of their life and they have to pay for the cost of something, they may still want to pay for it and not change their payment.
That is an interesting question. If someone is at the last part of their life and they have a choice between having some procedure costing thousands of dollars to extend their life for 20 days versus leaving more money to their kids, they may decide to be left alone.
That is a difficult ethical question.
Senator Fairbairn: Returning to the consumption tax — the GST — the part of the population who were probably most outraged at the time was the seniors on a fixed income. When you combine the fixed income with the accelerated requirement for health care assistance, can you tell me how that factors into your thoughts? Is there some way that seniors in that position could have some relief of sorts?
Mr. Mintz: You would have to increase the GST credit. This way very low-income people would not be impacted as much by the increased tax, if you went that route.
Senator Fairbairn: I was speaking specifically about seniors who do not have any income other than the OAS and the supplement. Are you thinking of that kind of assistance to the lower end of the regular earnings scale, for example, single mothers with very little?
Mr. Mintz: That is what I mean by increasing the credit. That is what we did when we introduced the GST. You would have to carry out some policy like that to relieve low-income people.
Senator Fairbairn: You might have to give a special thought to what kind of credit it would be, as the credit could mount up quickly because of the expenses due to illnesses and age.
Mr. Mintz: I agree, but medical items are usually not taxable under the GST, so it would not be related to those expenses. Simply increasing the GST rate would be a bigger burden on lower income Canadians, and seniors would be more affected that way. Therefore, the relief would have to be something like increasing the GST credit in order to reduce some of that burden.
It would be interesting to examine the Alberta case, because the elderly pay the health care premium. My mother is in Edmonton.
Senator Fairbairn: Is she happy about it now?
Mr. Mintz: She is not exactly happy about it, and does not support it, naturally. That is obvious compared with a GST increase. It is a bigger burden on lower income individuals, and again, you would need to provide some sort of relief at the lower level for the premium not to hit the lower income seniors so hard.
Senator Robertson: I should like to concentrate on Mr. Mintz's last proposal, the one I believe he is recommending to us, the 3 per cent. That seems to be the preferred proposal.
Mr. Mintz, I have many questions about it. I wonder why, for instance, you have a flat rate of 3 per cent and not a progressive rate; the greater the income the higher the contribution rate? Is there a fairness element there? I suppose your mathematical structures would bring you to your cut-off of 3 per cent.
I heard you say that people with an income below $10,000, who would be living in poverty, would be exempt. The income of $10,000 cannot be lived on. If you raised the $10,000 to $25,000, or something like that, how does that rearrange your configuration? Again, you are probably talking about seniors. I am not sure what the OAS/GIS total is now, but if the only income a senior has is OAS/GIS, there is surely not enough money left over to do anything else. They are lucky to have a roof over their head. The same thing is true with single mothers with two or three children. They do well to put food on the table.
I am very much concerned about the $10,000 structure. I would like you to give us the relevant data if you raise that to a sensible level that really reflects people in low incomes; $25,000, maybe more.
If I understand this correctly, it seems to me that the 3 per cent is not designated. I understand your point that the Employment Insurance payments are designated but they are used for that designation. Some of us object to that, but that is another issue.
I would be nervous about having a designated fund feeding general revenue and having the Minister of Finance put his or her hot little hands on it. I think it would vanish in the night. It certainly should not go toward the reduction of taxes. If we are to add money to the system for health, then let us try to have some stable funding out of this so that in years of decline of revenue, we will not have to do what we had to do this past decade.
The Chairman: As a long-time Minister of Health in New Brunswick, Senator Robertson understands whereof she speaks when it comes to the natures of ministers of finance.
Senator Robertson: We have a saying down East that we are really much better managers than the rest of the country because when you have no money, you must be more innovative. The rest of the Canadian provinces do not need to be so innovative.
If we were to have a designated tax, I would challenge you that it should go to general revenue. I would like you to give us another answer to that to keep it out of the hands of the little clutches over there in finance. It would just be gone, and that would be the end of that money.
Your explanation of the different systems is good and the premiums are not bad. Again, you have to look at the different levels of income. I will have to review my notes about what you said, Mr. Mintz, but regardless of what we do, please tell us how we can finance the money required without inflicting any more hurt on seniors living in poverty and people living below the poverty line? I would like some response.
Mr. Mintz: Those are all interesting and useful points.
First, on the 3 per cent flat charge, or income limitation charge, I should mention that we modelled a progressive income limitation. Originally, when we started off, we tried 1 per cent, 3 per cent and 5 per cent, depending on the income level. It was easy to model it that way. The more important point of our proposal is the idea that the payment will be somewhat related to usage and there will be an income limitation associated with it. That is the important principle.
The numbers are subject to debate. We put a specific proposal forth because people have to fix on something to discuss so that the proposal can be varied. It is an idea.
I did not like the 1 per cent, 3 per cent and 5 per cent rate figures because when people hit the income limitation, you are effectively adding 5 percentage points to their marginal tax rate. If they earn more income, they have to pay more of their health care benefits. I was worried about having that high of a marginal tax rate added to the current system of marginal tax rates. We have been so busy trying to lower those rates in Canada, I went with the 3 per cent. I thought it was easier and simpler. I recognize that there could be a graduated rate schedule.
The 3 per cent rate came partly from the medical expense credit. Right now, people are able to write off private medical expenses that are greater than 3 per cent of their net income — not the gross income figure that we use. We modelled it to see how much revenue we could raise and, if we thought that we would raise over $5 billion in revenue we would stick with it. That is a choice variable and people may want to do more modelling to see what kind of revenue they could drum up. Perhaps a greater number than 3 per cent would be required.
Concerning the $10,000 in income, I find your comments appropriate. In fact, they should be directed to the Minister of Finance. Currently, the personal exemption in Canada at the federal level is less than $10,000. I cannot remember the exact number.
The Chairman: It is certainly under $10,000.
Mr. Mintz: We are being more generous than the current income tax system because, once people hit over that income level, they start paying income taxes, on top of GST and other things. I am sympathetic to your comments. That is a number that could change under our model. These are choice variables to be played around with in the model. I do not think that you have to take the number that we are suggesting; it was merely for the sake of discussion. In Alberta, I think the personal exemption level is around $12,000 and twice that if there is a spouse and/or family. One of the things mentioned in the report is that you can consider doubling the allowance for families, as well.
Finally, in response to whether you would want to have a dedicated tax or new funding, my comments are consistent with what I have been saying over the past several years. I do not believe we have a taxation problem in Canada such that there is not enough revenue for governments. All governments in Canada raise revenues that are 44 per cent of GDP. We must seriously ask how much bigger does government need to be in this country? It is a question of priorities and where we spend our money. In this particular model, I was not about to put out a proposal to raise the overall level of taxes in the economy. I am willing to accept the idea that you do not need to lower personal income taxes or that you could cut some other expenditures to make the numbers work. I violently object to raising more taxes in this economy when our governments are bigger than ever, and especially in a world where we have to worry about competitiveness and productivity. That is not the way to go.
Senator Robertson: We have the GST at 7 per cent and I think all political parties have tossed about the notion and almost promised to reduce the GST. Rather than raise taxes, it would be sensible — in line with your comments on the excessive taxation that Canadians have — to dedicate 3 per cent of the GST to health care. In that way, we would not be raising the taxation rate and we would be honouring certain comments. Would you comment on that?
Mr. Mintz: I do not think it will help very much, but that is certainly a way of trying to avoid raising taxes. Now, we know that health care expenditures are approximately $60 billion and tax revenues are greater than that. You could dedicate 3 per cent of the GST toward health care financing, but it would not have any impact on what we are doing now. It is just a change of label. I do not see that as being particularly helpful.
The Chairman: If you took the proposal to move three of the seven points of the GST and dedicate them to health care, that amount of money — roughly $10 billion — is no longer available for other government programs. In effect, what you have done is to cut government programs by $10 billion in order to add that to health. That is not new money into the system.
Senator Robertson: I understand that. We are talking about surpluses here.
Mr. Mintz: I am not necessarily assuming you are going to cut $10 billion in expenses.
The Chairman: In effect you suggesting we could pay for it out the surplus.
Senator Callbeck: I have a few questions and I will give them to you all at once.
You mentioned that by the year 2040, health care would take up 60 per cent to 65 per cent of the provincial budget. Is that to sustain the system we have right now, or are you assuming new programs such as Pharmacare and home care?
On the flat-based premium, has the institute done any work on that? If we were to have a uniform premium do you have a ballpark figure as to how much that might be?
On the proposal that you presented to us, you are going to come up with $6.8 billion, and then you thought there might be another $7 billion saved.
Mr. Mintz: About $6 billion saved.
Senator Callbeck: That would represent approximately 14 per cent of the overall cost of the health system in Canada. Is that the money you feel we need to sustain the present system, or to add new programs? I wonder why those figures.
I look at this proposal and I wonder why any government would go through trying to sell a new tax to the public and end up with the same amount of money?
Finally, we consider pre-funding health care costs for the future. How can we even think about that when we have a problem financing the present?
Mr. Mintz: First, with respect to the figure of 60 per cent to 65 per cent, I quoted on provincial budgets. That is assuming no introduction of any new programs. That is the current system as we have it, so there is no change in what we are doing now. It would be based on current policies. Of course, if you introduced anything new that will be added on top.
With respect to the flat-based premium, no, we have not done any work on that. My colleague, Bill Robson, has been working on pre-funding, and he is working on a paper now. We have a current draft of this paper and he did model the consumption tax and income tax that would be required for pre-funding.
I have suggested that he consider health care premiums and payroll taxes to complete the picture, but I do not know if he will be doing that. We may have something along those lines in the future. I will take that up with him as a question of this committee.
With respect to your question about these particular costs, with this proposal, I was trying to bring in a system that would enhance accountability in health care financing and provision where people would be more conscious of the costs of service that are provided to them. Therefore, I did not look at this as a new premium to raise new revenues as opposed to substituting away from general revenues. Our main point is to say that general revenue is not the optimal source of funding, that revenues coming from a user-pay related charge would be appropriate.
However, when you think of the dynamics over time where costs will rise and governments will have to increase revenues every year, as they do, it is quite possible to introduce this type of program, or tax, as opposed to raising other taxes that would help fund the system. Therefore, I am raising the idea of thinking about the appropriate funding source. The incentive-based one is the really the way to go into terms of some of the financing we require for the public system in order to get some changes down the road.
Finally, on your pre-funding question, I agree that it is a hard sell to talk about pre-funding now when Canadians feel they do not have enough money in the current system. However, this suggests that if we think we have a problem now with funding health care, imagine what we will have down the road in 30 to 40 years.
Tax rates on the working population by that time will be very high to fund all these elderly benefits — not just health care but also pension-related benefits and other things. We have an immense problem with respect to the demography. The OECD has estimated that Canada's primary balances will worsen by 10 per cent of GDP by 2050. In the U.S., it will be 5 per cent.
This means that, in Canada, with a current revenue-to-GDP ratio of 44 per cent, we will be looking at 53 per cent by 2050. The United States will be looking at 38 per cent. If we think we have a problem of productivity and differences in tax rates between Canada and the U.S. and all the issues involved with that now, we will have an even bigger problem down the road. We will have to think about how we will address this issue, which gets to the sustainability issue.
The Chairman: As I understood your response to one of my earlier questions, if we ask you to run your model with different parameters, is that possible?
Mr. Mintz: We can talk about that.
The Chairman: We will be in touch.
The committee continued in camera.