The Canadian healthcare system and its stakeholders are facing increasingly critical challenges regarding the sustainability of the $142 billion system. There seems to be difficulty striking a meaningful balance between public and private systems. Chief executive officers, chief financial officers and human resources professionals are facing real and serious challenges over the next decade. The issues of outcomes and cost management for healthcare and medical insurance have never been so critical. No longer viewed as an unrelated aspect of broader compensation programs, benefit programs are now having a meaningful impact on business performance and employee engagement levels.

Paradoxically, healthcare benefits and associative medical insurance are two of the most costly forms of employee compensation awarded in this country.and yet some of the least appreciated. Given the statistical trends and societal expectations involved in this area, it is expected these soaring costs will further swell unless use of cost-sharing, user-pay and other limiting approaches is expanded.

Organizations that don’t have a clear vision of how these costs affect their long-term recruitment and retention plans may well see their strategic competitive advantage fading and their key staff leaving for greener pastures. A new Canadian healthcare industry is evolving to respond to changes in society, politics and healthcare.and this evolution has important implications for everyone responsible for employee benefits across the country.

Successfully creating and implementing organization-wide healthcare and medical insurance strategies depends on a number of factors. One of the most crucial of these is understanding how healthcare costs and medical insurance expenses look across Canada.

From internal research, it has been discovered that the growing healthcare spending is, in fact, driving the increases in health insurance premiums across the country. Overall, 2005 healthcare spending in Canada is estimated to be $142 billion. Factoring in governmental gross domestic product(GDP)figures, this means that Canadians spend fully 10.4% of the country’s GDP on healthcare.

Interestingly, almost 70% of this spending was in the public sector, with the remaining roughly 30% being paid by the private sector. According to the Vancouver-based Fraser Institute’s 2005 paper How Good Is Canadian Health Care?, with the notable exceptions of Ireland and Switzerland, Canada spends more on healthcare than any other Organization for Economic Co-operation and Development (OECD)country providing universal healthcare.

Important differences in how these services are funded, however, distinguish the Canadian model and make it especially important for plan sponsors to understand the challenges ahead. Public sector funding is where Canada differs from the majority of OECD countries with universal healthcare. In most of these countries, the share of public sector funding ranges from 75% to 85%, but private sector substitution is available.that is, few limits are placed on individuals purchasing private healthcare.

More worrisome for those responsible for making up the difference between the public and private sector is that this gap is forecasted to grow. This is because provincial governments across Canada are actively working to trim healthcare costs over the next decade. Some project that public funding levels will drop to 64% in the next 10 years as provincial governments off-load additional therapeutic services and further restrict prescription drug allowances. B

etween 1995 and 2004, Canadian health insurance premiums grew by an average rate of 7.7%. As this significantly exceeded the combined rate of GDP growth and general inflation, this trend is problematic and clearly requires changes in societal expectations, political exigencies and healthcare realities.

While the Canada Health Act continues to mandate the public sector pay for “medically necessary” services, an increasing number of these procedures are being redefined as either “not necessary” or “elective” in nature. The result is that today, an increasing number of health services are almost exclusively paid for by the private sector, even those which were previously covered under public plans until just a few years ago.

There are three key components or drivers of change within Canada’s healthcare system. The first of these involves the country’s changing demographic profile and aging population. As Canada’s population ages, it becomes increasingly expensive to maintain overall levels of good health. According to forecasts provided in the United Nations’ report World Population Prospects, 2002, life expectancy in Canada will increase from 79.3 years in 2000 to 83.3 years in 2050. Although this is obviously good news, this statistic will continue to put pressure on healthcare spending for payers within an aging demographic.

To make matters more worrisome, the ratio of people aged 20 to 64 to those 65 and over will dramatically decrease.a reduction from 4.75 in 2006 to only 2.42 is projected for 2031. This Statistics Canada figure effectively means that the increasingly aging population will have to rely on fewer people in the active workforce to support them.

Given these factors, employers may have little choice but to continue reducing post-retirement benefits. The effect of this will likely be an increased demand for individual health insurance policies to fill in the gaps in both post-retirement policies and receding levels of public funding. It follows, therefore, that the size of the private healthcare market, both in terms of services provided and premiums charged, will grow as the absolute number of retired seniors increases. Those seniors who can afford it will spend additional sums on healthcare, either directly or indirectly.

Plan sponsors should know that attitudes about healthcare are changing within Canada. A recent Pollara Strategic Public Opinion and Market Research Survey found that 54% of those asked were willing to pay more for a wider range of services or improved timeliness(essentially, they were willing to “jump the queue”). Further, a Decima Research poll conducted in August 2005 estimated that fully five million Canadians would “subscribe to a service that charged $2,300 a year, with a $1,700 initiation fee, to screen for early signs of disease and manage chronic problems.”

So while a significant portion of the Canadian population may want to stay with the fully publicly funded healthcare model, support for private funding and insurance will increase. This is mainly due to an aging, yet well-to-do, population that will not accept a lower standard of healthcare services.

The OECD found that doubling a country¡¯s national wealth increases healthcare spending by approximately 135%. As Canada’s national wealth grows, we should take care to ensure that healthcare costs increase proportionately, not exponentially.

Recent findings from Statistics Canada have shown that growth in healthcare productivity is limited by at least three factors: inefficient operational processes, limited use of information technology(IT)to improve administration, and management and low levels of capital investment.

In addition, looming labour shortages within the healthcare sector will likely drive up service costs and limit access. Innovation is underway, but at the current pace is unlikely to materially improve productivity and sustainability. comprehensive change of the entire healthcare system is needed, and inevitable.

There is limited fiscal room for most provinces to meet forecasted healthcare commitments. Even in well-financed so-called “have” provinces such as Alberta, independent analysis predicts a deficit by 2016-17 due to increased healthcare costs. Thus, private employers looking to reduce health benefits to limit growing liabilities are considering measures such as moving to a system of defined contributions where the risks associated with inflation or catastrophic illness costs are placed back on the individual.

Despite the need to make changes, political decision makers will be slow to do so in the current political environment. While the need for widespread and comprehensive changes is recognized, there are clear political challenges in making healthcare more fiscally viable over the longer term.

In short, the majority of voters and stakeholder groups do not welcome change, particularly when change increases their taxes or decreases their services.or both. For a vocal group, “no changes to the public healthcare system” is the primary decision criterion when they vote for a political candidate. Some provinces, notably Alberta, British Columbia and Quebec, seem more willing to make significant changes in their respective healthcare models, but movement is relatively slow. This is an unintended outcome of the Canadian model: one in which a national policy is mandated, yet left to individual provinces to implement.

Recent legal decisions such as Chaoulli and Zeliotis v. Quebec have created new healthcare “rights” for Canadians. These legal decisions may force political and policy decisions earlier than they would otherwise occur. While the general population clamours for more healthcare funding. and legal decisions backing this remains to be seen how this will happen.

In the short term, one can expect that the underlying pressures on healthcare will continue to build. Rising costs, an aging population, high public expectations and relatively low productivity growth cannot be reconciled within the current structure of Canada’s healthcare system. Significant change in the funding and delivery of healthcare is necessary to avert widespread social and financial bankruptcy. What remains unclear is when a shift in our fundamental healthcare philosophies will take place and what a new healthcare system should ultimately look like.

However, some predictions are possible. First, the fiscal, demographic and social circumstances of provinces vary greatly. One can reasonably expect increasing diversity in the definition and delivery of universal healthcare between individual provinces. This, in turn, will challenge large national employers that seek to harmonize employee benefits across Canada.

Second, the impending healthcare labour shortage will be closely linked with overall productivity, and the only viable options will be for governments to modernize facilities, equipment and operations. Over the next decade, private-public partnerships are the most likely candidates to help ensure access to new sources of investment and facilitate operational improvements through competition.

Finally, as healthcare funding shifts to the private sector and plan sponsors find they can no longer accept this cost, individuals will become directly responsible for an increasing share of their healthcare costs. New health benefit products will be needed for individuals, and wellness programs should gain in popularity as a cost-effective tool to support employee health.

When significant change does come, plan sponsors may need to respond quickly. Once fiscal and labour sustainability is exhausted, we will no longer talk of the “looming crisis in healthcare.” Once the crisis is acute, rapid change will be the only treatment option.

Ashim Khemani is chair and chief executive of Aon Consulting. Robert Carlyle is vice-president of Aon Consulting’s Aon Intelligence Unit. Both are located in Toronto.;

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