Special Report

Stretching the Medicare Envelope

Mary Janigan April 3 2000
Special Report

Stretching the Medicare Envelope

Mary Janigan April 3 2000
One of the most intriguing experiments with privately run hospitals took place almost 20 years ago in a small Ontario farming community perched on the Ottawa River. In 1982, the fourdecade-old Hawkesbury and District General Hospital was so dilapidated and debt-ridden that it could not even borrow funds to rebuild. In desperation, the board hired new management that could obtain financing: American Medical International Inc., a California-based corporation. In return for a set fee of $300,000 per year, AMI overhauled the management structure and continued operating the hospital as a publicly funded, nonprofit institution. The result: Hawkesbury hospital has not run a deficit since 1982, it paid off its debt in 1997 and it has been putting its annual surplus—an estimated $580,000 in 1999-2000—into a fund for new capital expenditures.

So why does hospital president Michel Lalonde reply so tentatively when asked about Alberta Premier Ralph Klein’s legislation to allow privately owned, for-profit surgical facilities? Lalonde has run Hawkesbury hospital for 16 years, starting as AMI’s sole Canadian employee and remaining after the contract was cancelled in 1990 because of provincial discomfort over the U.S. presence. He points out that when AMI was in control, provincial overseers closely scrutinized the hospital’s activities to make sure it did not stint on tests or turn away patients requiring more costly treatment simply to save money. As a result, Lalonde says, he absorbed valuable lessons from AMI on how to control unnecessary costs, while being able to resist any pressures to reduce necessary costs. “Privatization is not a dirty word,” he says. “But you don’t have to privatize to change the way management works.” If, after a full dialogue with the community, the decision is to privatize, “you must also be prepared to regulate,” says Lalonde, “to put the hospital under careful scrutiny.”

Lalonde’s even-handed approach has become a rarity since Alberta’s Conservative government introduced its health-care privatization legislation, Bill 11, on March 2. “There is almost no one in the middle on this,” observes health-care consultant Michael Decter of Toronto. Advocates of the bill contend that publicly managed facilities are inefficient union-controlled relics that are unable to use scarce funds in the best interests of their patients. Critics insist that patient care would suffer as private providers pushed up the public tab for health care in their quest for profits. Each side has buried the other in conflicting U.S. studies that rarely take account of important factors such as patient outcomes. “We have not done a good job of figuring out how to judge the overall efficiency of the health-care system,” says Dr. Vivek Goel, chairman of the University of Toronto’s health administration department. “We don’t know enough to judge private for-profit. We need pilot projects.”

WHILE ALBERTA CONSIDERS MORE PRIVATIZATION, THE IMPLICATIONS AND POTENTIAL GAINS ARE STILL UNCLEAR

The problem is that pilot projects may be irreversible. Although Klein has carefully stipulated that the facilities will not be “hospitals,” there remains a serious risk that he is enlarging the role of private, for-profit providers in the healthcare system by permitting them to offer so-called core services, such as knee replacements, which could require overnight stays. That could prompt U.S. or Mexican investors to invoke the 1994 North American Free Trade Agreement—and demand the right to deliver similar surgical services to Albertans. If a NAFTA panel agreed with them, it would be almost impossible—and very expensive—to dislodge them because they could sue for future losses if Alberta decided to return to a policy that only public facilities should provide such surgical care. “The problem for Alberta is that social policy innovation will become a one-way street,” warns Barry Appleton, a specialist in international trade law. “Anyone who says otherwise is being willfully blind.”

The Alberta bill has also sparked widespread fear that it could start an inexorable cross-Canada move towards private providers and private purchasers. Bill 11 would permit the new surgical facilities to offer “enhanced medical goods or services” that go beyond what is required in generally accepted medical practice. What happens to the health-care system if surgeons can offer extra tests or more advanced products? Will wealthier patients in other provinces start to demand the right to pay for extra medical goods and services out of their own pockets? Will paying patients receive faster treatment? Toronto law professor Colleen Flood, who specializes in health policy, says that Bill 11 could lead to a second tier in the health-care system, which could violate the Canada Health Acts insistence on universal, comprehensive care. “I am really concerned,” she says. “I did not worry so much about the fact that care was going to be privately provided—as long as it remained publicly funded. But this bill could be a cunning way to permit privately funded care.”

The contribution of the private sector to health care has been a source of controversy for decades. Vancouver orthopedic surgeon Brian Day is medical director of the city’s private, for-profit Cambie Surgery Center—and he also practices in the publicly funded University of British Columbia Hospital. The Cambie center, opened in 1996, provides orthopedic care to injured visitors from other provinces, clients of provincial workers’ compensation boards and foreigners. The B.C. government will not pay for the facility’s for-profit services. So ordinary Vancouver residents wait 18 months for orthopedic surgery paid for by medicare—while patients covered by workplace insurance plans wait less than a month for Cambies for-profit care. “We have offered to do contract services for the B.C. government at 60 per cent of the public system’s cost,” says Day, clearly frustrated by the refusal.

Efficiency, of course, is not the sole preserve of for-profit facilities. The Toronto area’s private Shouldice Hospital does hernia operations on a not-for-profit basis. It is one of six private hospitals across Canada that were operating prior to the passage of provincial laws to prohibit new private facilities after the adoption of medicare. The Shouldice delivers a single, clearly defined service so successfully that it is a Harvard business school case study. Last year, it performed 7,400 hernia operations, pocketed $3 million from the Ontario health plan to cover Ontario-based patients, collected funds from other provinces and foreigners—and balanced its books.

COULD REBUFFED AMERICAN INVESTORS SUE FOR DAMAGES?

The simple fact is that the formula for efficiency remains elusive. Single-service providers like the Shouldice and Cambie facilities apparently have an advantage. “There is a lot of evidence,” notes Decter, “that very focused factories—that is, clinics that do a high volume of the same service—can be very efficient.” But too many of those “factories,” he adds, could diminish the ability of general hospitals to deliver those same services efficiently to a small number of patients with multiple problems. There might be too few patients for hospitals to be able to afford the needed equipment—and surgeons could lack expertise. “That,” says Decter, “is the tension.”

Studies to determine if public or private ownership in itself makes an institution more efficient are open to interpretation. Such analyses must often rely on U.S. data that usually track the cost of medicare patients in for-profit institutions compared with the cost in nonprofit and/or public institutions. Martin Zelder, health policy researcher at Vancouver’s Fraser Institute, detected a slight advantage in for-profit hospitals when he examined 24 U.S. studies: seven showed better for-profit performance, five lauded the nonprofits and 12 found no difference. But Edmonton policy analyst Kevin Taft, who was critical of Bill 11 in a Parkland Institute study, dismisses Zelder’s interpretation of the U.S. research as “misleading.” He cites an editorial published last year in the New EnglandJournal of Medicine that states: “For decades, studies have shown that for-profit hospitals are three to 11 per cent more expensive than not-for-profit. No peer-reviewed study has found that for-profit hospitals are less expensive.” Frequently lost in the uproar over Bill 11 is the fact that private, for-profit providers already play a large role in the Canadian medical system. Most physicians are private providers who contract their services to the government. Private clinics provide numerous public services ranging from blood tests to radiology and dialysis. The Canadian Institute for Health Information estimates that more than $26 billion of the $86 billion in total health-care spending last year came from private sources (such as individuals and employers) — paying for drugs and dental care, among other services.

The question is not whether there should be privatization—but how much further Canadians want to go in that direction. The NAFTA complication arises from the fact that Canada protected health care from foreign intrusion by tucking it into a so-called reservation clause to exempt it from key provisions of the treaty. But the protection only applies “to the extent that they are social services established or maintained for a public purpose.” Because treaty reservations are always interpreted narrowly, that should set off alarm bells: the United States has argued that when private providers enter a social service sector, that sector becomes a commercial service. If NAFTA arbitrators agree, U.S. or Mexican investors would be able to apply for Alberta contracts. (It is not likely that the ruling would extend to other provinces.) They could request compensation if they were unfairly treated—and sue for damages if Alberta returned to public-only surgical facilities. And while Alberta argues that government purchasing practices for health care are exempted from NAFTA’s investment obligations, Appleton, the trade law specialist, says that provision applies only to the federal government. “Once you understand the reservation,” he says, “you understand why what Premier Klein is doing is particularly provocative.”

In the end, Canadians must ask themselves how Alberta’s approach compares with other ways of reforming the healthcare system. “Ralph Klein has provoked people who really want to save medicare into doing some serious soul searching,” says Toronto health policy analyst Dr. Michael Rachlis, who argues that provinces must change the way that they deliver services—while preserving public payment. “But Alberta’s proposals would probably increase costs—and they might even decrease quality.” Rachlis argues that governments could save far more money by encouraging doctors to work in multidisciplinary teams, which include nurse practitioners and dieticians, in order to provide better preventive care to patients with chronic illnesses. There could also be more palliative and home-care programs. “The only hope for real change and improvement is a public debate,” says Hugh Segal, president of the Montreal-based Institute for Research on Public Policy. Bill 11 has put the entire system under a microscope—and forced Canadians to look.