Montreal, January 18, 2003  /  No 117  
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Jean-Luc Migué is a Senior Fellow of the Fraser Institute and author of Le monopole de la santé au banc des accusés, Montréal, Éditions Varia, 2001.
by Jean-Luc Migué
          The many reports recently published in Canada on health care reform represent two distinct schools of thought. One vision embodied in the Romanow Report opts for the status quo in terms of organization and funding method. A second school represented in the pages of the National Post, in the Mazankowski Report and in other studies including the Kirby Report, argues that the system needs fundamental restructuring. Both approaches have had to grapple with the thorny issue of how to compensate doctors for their services. The whole structure of the health care industry is implicated by this question.
The Romanow Report 
          In its dogmatic approach to the whole health care system, the Romanow Report sidesteps the issue in its mistrust of any private provision of services, including those of doctors. Any concern for restoring the right incentives into the system is totally absent from the report. More political and bureaucratic control is all that is required as a guarantee of good performance. The report sees no need to consider changes to how the health industry is organized, except for its blind faith in incremental improvement to the existing system along the neo-corporatist model. 
          To consider more freedom of choice for patients is out of the question. To question present funding of hospitals and family clinics is also ruled out. In a word it is out of the question to introduce any market-like processes into the temple of Medicare. To allow the smallest infringement on the public supply monopoly would be a grave sin against the new state religion. How could a right mind ever contemplate discussing incentives and cost/benefit calculus in an essentially moral debate? The main proposal of the Romanow Report is to make permanent the centralized planning system already in place, to amplify its deficiencies through injection of an additional 6.5 billion dollars (an arbitrary figure) and to widen its reach to diagnostic services, health centres, home care, rural services and pharmaceuticals. 
Hospital funding in the Kirby Report 
          In contrast with the Romanow Report, the Kirby Report shares a viewpoint expressed in a recent study of institutional structure by the C.D. Howe Institute. The current public system for funding hospitals is criticized for separately funding each component of the production process, without regard for the integration requirements between the public authority, hospitals, hospital physicians and front-line physicians. Hospitals do not have the effective power to manage the activities of physicians, and yet physicians determine how most of the services are allocated in hospitals. Doctors for their part do have the power to determine the allocation of resources, but owing to their mode of compensation, they lack the responsibility (financially speaking) to optimize the functioning of the overall hospital organization.  
          The Kirby solution was to give regional health authorities greater discretion in managing their budgets by allowing them to act as purchasers of services. Regional authorities would be given the task of negotiating services with hospitals in an arrangement conducive to decentralization, price competition for providers and market-like processes. Hospitals would be converted into financially autonomous businesses that would sell their services (defined as treatment units) to regional authorities. Hospital funding based on outputs (treatments) rather than inputs would prevail. Favorable incentives for the emergence of a more efficient industry structure would hopefully be in place. In the eyes of the Kirby Report, it should not matter that the provider be private or public, for-profit or not.  Sensitivity to patients' preferences and cost considerations would determine success or failure. 
Funding of physicians 
          In its impact on the structure of the health industry, fee-for-service funding (as we know it) of physicians is analytically different from fee-for-treatment funding of hospitals. While it is true that doctors have been turned into state-controlled employees under Medicare, their traditional mode of compensation remains basically in place. This is the very logic that explains the absence or the slow emergence of health teams or group clinics, deplored by politicians and others. Doctors in their office are compensated for strictly defined acts as opposed to other services and inputs which enter into the provision of clinical services. As a consequence, they have no incentives to set up integrated enterprises capable of optimizing input combinations, including greater use of paramedical personnel.  
     « Price and profit outlook drives entrepreneurs and get them to constantly adjust to preferences, to new technologies, and to the most efficient modes of organization. But this process of "creative destruction" has been banned from the hospital and medical industry. »
          Work that presumably could be performed more economically in community-based care is inefficiently performed in hospitals. In other words, doctors' solo practices underinvest, not so much in preventive measures, but in the inputs that are complementary to physicians' own services (such as paramedical personnel, space, diagnostic equipment, rehabilitation facilities, capacity to do one-day surgeries, etc.), because they are not compensated for doing so. It is significant that such a desirable outcome has naturally emerged in the US managed care system by the action of market forces alone. The end-result is that the rules of the game implemented by Medicare are directly responsible for the lack of inclusive multi-purpose community units, the new vogue in primary care theory.  
          The Kirby solution to doctors' compensation was to move toward payment on the basis of capitation, i.e. a fixed annual fee per patient who would have signed up for their care.  
          Another formula would make funding available, not to regional bureaucracies but to front-line physicians on the basis of unit cost per overall treatment. As the gateway into the system, doctors would "purchase" services from hospitals and other providers. In this case, some health centres would evolve toward more business-like concerns. All these changes imply the setting up of an elaborate cost accounting system. It is significant that after some forty years of operation, the public monopoly has not seen fit to gather information on unit costs of hospital and other services. 
Why settle for imitations? 
          In suggesting mechanisms resembling those of a real market, either approach to the funding of doctors and hospitals basically seeks to promote the emergence of an "internal market" for the explicit purpose of restoring the right incentives. The idea is based on a sound principle. If adopted, it would undoubtedly improve the system. It raises fundamental questions however. If incentives traditionally associated with the functioning of a real market are so desirable, why settle for imitations? Clearly, concern for realism and political pragmatism inspires those options, as much as convictions derived from economic principles. 
          The real question can be stated as follows: What is the optimal structure of the health care industry and, more importantly, how do we go about discovering and implementing it? Recall how integration takes place in a real market. Price and profit outlook drives entrepreneurs and get them to constantly adjust to preferences, to new technologies, and to the most efficient modes of organization. But this process of "creative destruction" has been banned from the hospital and medical industry. Individual choices and private production have been ruled out, profit (the reward for innovation) has been done away with, private capital has been criminalized, and then we bemoan the fact that the health system does not create the right rewards and is not innovative. This shows how the command and control of entire industries, in the manner of the former Soviet Union, are the stuff of what Nobel laureate F. A. Hayek called the "fatal conceit."  
          A formula has been advanced to reintroduce this spontaneous process into the development of a more adapted industrial structure for health care, while maintaining a single-payer system. By introducing individual medical savings accounts (MSAs) or a flat individual deductible, a politically sensitive distinction between funding and production would subsist. Not only would costs be cut and services improved, but patients more than doctors or regional bureaucracies would determine how the system develops. Competition in the service of people's preferences would encourage the emergence of an optimal industrial structure as the choice of hospitals and physicians. 
          Would this imply that fee-for-service payments to doctors vanish across the board? No. A proportion of medical services in doctors offices and in hospitals are just that, solo-practice services. As in all sectors, there is room for a wide range of organizations and compensation methods in the vast health care industry. Managed care in the US has not suppressed fee-for-service payments. 
          It is ironic that the reforms of the 1990s were predicated on the illusion that mandatory closing of hospitals and staff cutting would achieve significant savings and that community-based care would automatically take up the slack at great savings to taxpayers. The only additional reform called for was to turn doctors into civil servants by putting them on salary or capitation, only to realize today that incentives count more than computer models. 
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