Archive for April, 2013

Chronic Condition by Jeffrey Simpson, Review

April 22, 2013

Western governments struggle to organize and finance healthcare, education and defense. Unlike the case of cars, wheat and whiskey, these three broad areas involve a complex production and distribution process. While each has a long history, no simple best way of delivery has emerged.

Here the focus is on healthcare, a complex system of production and delivery which is subject to rapid technological change and demographic pressures requiring increased funding.

Canada congratulates itself on its universal heathcare system. Any politician suggesting otherwise won’t last long in office. The facts tell a different story, and Jeffrey Simpson explodes the myth that all is well in the healthcare sector. Read the book to appreciate this irrefutable conclusion, and read it especially if you are interested in the care you are likely to receive as you progress from youth through adulthood to old age, the last a particular concern of mine. If not broken, the system is on life support.

Healthcare is a layered process, involving several interested parties including hospitals, drug companies, doctors , nurses, healthcare professionals, and individuals whose lifestyle decisions affect their demand for healthcare throughout their lives. When the system is publicly funded, my lifestyle choices  such as driving recklessly, consuming alcohol, overeating, engaging in extreme sports means that others pay for my expenses.

The layers include the decisions of individuals, treatment required for particular illnesses, and the costs associated with an ageing population. Healthcare delivery also has to be prepared for unexpected man-made and natural disasters such as wars, terrorism, earthquakes and tsunamis. This is a far cry from the car manufacturer who is concerned with the production, distribution and maintenance of cars. Even a massive recall is not the same as dealing with the contamination caused by a damaged nuclear reactor.

Chronic Condition examines the parts of the system which produce and deliver healthcare and shows how difficult it is to reform a complex system which has many interested parties. One example, and there are many, is what happens when governments allocate more money to the system. The immediate response is not to increase the health services but to lead those involved to ask for higher pay, whether doctors, nurses, technicians or administrators. The highest paid provincial official in Ottawa is the CEO of the Ottawa Hospital.

Simpson’s analysis and conclusions are based on numerous studies and reports both in Canada and in comparison with other OECD countries where Canada does not compare well. The difficulties of intercountry comparisons are flagged. One reason is because countries use different combinations of government insurance, private insurance and self-insurance or cash payment.

Two aspects for comment are:

1. Time magazine for March 4th, 2013 devoted almost the entire issue to examining the cost of healthcare in the US. The findings are astounding in terms of the different prices paid according to whether the service is paid for by government, a patient with private insurance or a patient paying cash. I encourage everyone to read this issue. It’s relevance to Canada is that we too have a mix of these payments – provincial government, private insurance and self-insurance or cash – sometimes with all three involved for part of the same procedure.

For example, in Ontario, hearing aids are reimbursed at $500 per ear by OHIP, part by private insurance and the remainder by self-insurance or cash. The share of private insurance depends on the terms of the policy. In my case, after the $1000 paid by OHIP for two aids, it reimbursed up to 80% of $3000 which was said to be the customary charge in my area. Unfortunately my supplier charged $4000 not $3000 leaving me with $1600 to pay instead of $800.

A patient has to be aware of the terms of the insurance and then go around to negotiate a fee. This is possible in the case of hearing aids which may seldom involve a critical treatment, but for other procedures, where time may be of the essence, the patient is in a poor position to negotiate a price with a healthcare provider. It is likely that if my audiologist had been told that a competitor was ready to supply the procedure for $3000, he would have lowered his price after telling me that the competitor was a less reliable source of supply.

2. While Chronic Condition is based on published studies, inquiries and interviews, providing the reader with valuable insight and anlysis of current conditions and how Canada got there, it has almost no value as a reference source. The absence of both footnotes and bibliography means that future students of healthcare will question whether the analysis is soundly based. They will have to go elsewhere to find the sources mentioned in the book.

Why the publisher, Penguin, would publish such a flawed piece of work is a puzzle to me, unless it wanted to save the firm money. The book has an index, but this does little to aid the reader in finding the sources referred to in the text, many of which would be available online. As an undergraduate essay, the text would be unacceptable. The book can be read as an informative lengthy magazine article, but not something considered to be a reliable piece of work, which, as far as I can tell, it is, and would be accepted as such if the publisher had insisted on a different format.

Return of a King by W. Dalrymple

April 17, 2013

Return of a King by William Dalrymple, Penguin 2012

In 1839, England invaded Afghanistan for the first time in that century and then twice more over the next 80 years. The reason was British concern that Russia would move south, take control of Afghanistan and obtain a southern outlet to the Indian Ocean. If control of the land route from Europe to India was lost, then British trade with the jewel in the crown would be threatened.

The Anglo-American occupation of Afghanistan in the 21st century is in many ways a repeat of these first three wars, although today the threat is not Russia but various terrorist gangs which reside in Afghanistan making life miserable for the West. The end result is likely to be the same today with now the American, Canadian and British troops withdrawing without leaving behind a friendly Afghan regime. (Russia was evicted a few years earlier.)

There is no Afghan regime today. Rather there is a piece of real estate called Afghanistan occupied and ruled by a series of Afghan tribes. Sometimes they cooperate and sometimes they fight each other. Outsiders who get involved have to decide which group to back knowing that these local allies may at some point turn on them. What is taking place today is a repeat of what Dalrymple writes about in Return of a King and the first Afghan war, 1839-1843.

The first Afghan war was fought by the private army of the British East India Company, not directly by Britain. On the ground this army liaised with Britain’s representative in India (which then included Pakistan and Bangladesh) who was the Governor General appointed by the British government, and later became Viceroy. Mountbatten was the last Viceroy at independence in 1947.

Dalrymple’s description is an historical masterpiece of the events surrounding the war making use of reports, letters, and diaries of those involved on both sides.  Although a listing of the principal players is provided at the outset, together with maps, it became challenging for this reader to follow who was doing what to whom, where and when. In some ways the impact of the events are lost in the amount of detail provided, and the need to continually refer back to the list of players and places.

Around the time of the first Afghan war, Gilbert and Sullivan were born. Between 1871 and 1897 they collaborated on 14 comic operas which are still performed today. Much of the comedy could have been extracted from the wartime events. Consider the following. The British army of the Indus in 1840 consisted of 1,000 Europeans, 14,000 East India Company sepoys (Indian soldiers), 6,000 irregulars and 38,000 Indian camp followers. The guns and baggage were carried by 30,000 camels with a General requiring 260 camels to carry his kit, and a Brigadier 50. The military wine cellar required 300 camels and a junior officer might have 40 servants. One regiment brought its pack of foxhounds, and its officers would have jams, pickles, cheroots, potted fish, and  pate served on tables with plate glass crockery and wax candles. Harrods and Fortnum and Mason had a good start supplying foreign markets with fashionable delicacies.

Some tribes and tribal leaders served with the Afghans and some with the British. Members of the losing side would often join the winners leaving the British at times with a bunch of losers. The brutality inflicted by both sides makes Abu Ghraib and Guantanamo look like nursery school, and harks back to the butchery of England in the 14th century when people were hung, drawn and quartered. One just doesn’t expect this in the 19th , 20th and perhaps the 21st  centuries. Women were active participants with the opposing armies but performing duties which to-day would be considered inappropriate, except perhaps by General Petraeus.  One of the best kept diaries often quoted by Dalrymple was kept by the wife of a British general. She and her husband survived, despite some unusual experiences.

Return of a King is a great read emphasizing the view that not much has changed in Afghanistan over the past 200 years, and may never change as long as tribalism survives financed by the opium consumed in both east and west.

Statistics Can Be Subversive

April 12, 2013

Introduction

The title is a play on Timothy Garton Ash’s 2009 book, Facts are Subversive.  I want to suggest how statistics are used in the public discourse on the Canadian economy often to distract, either by mistake or on purpose, from underlying economic changes.

Assume that there are three sectors (there are others) of the Canadian economy, agriculture, manufacturing and services, which is roughly how they are measured in terms of share of GDP and employment. Since 1900, the overall economy has grown as have all sectors, although not at the same rate so that their relative shares have changed.

Over time the share of agriculture in GDP and employment has fallen dramatically, although agricultural output has increased. For manufacturing, the share of GDP and of employment increased, but now both overall manufacturing’s share of employment is declining. Good paying jobs are being lost and some people are now working for less money in what were thought of as good paying jobs. This leads to the cry that Canadian workers are becoming hamburger flippers and low paid/unskilled retail employees. (In Ottawa there continue to be help wanted signs in retail outlets, which is curious when people claim to be unemployed in the same area.)

At the same time, there has been a large increase in the share of employment in services, and services output has increased. Some of these are low paying jobs and some are well paid skilled people in construction, the building trades and resource industries, computer programming, professionals like doctors, nurses, engineers and so on. Another statistic refers to the number of temporary foreign workers in Canada, about 300,000 at any one time, doing jobs that unemployed Canadians are either unwilling, or are untrained to do.

Reference to any one of these statistics provides a partial and often distorted view of the economy. Together, they start to put together a story of how the Canadian economy has and is changing. What do they suggest?

Share of labour force by sector and share of GDP (StatCan):

                                      % share of Employment              % share of GDP

 Year                              1950          1990          2012                     2012

Agriculture                      16                  3               2                           2

Manufacturing                25               66              13                          13

Services                            32               71              78                          70

In employment terms, agriculture accounts for a much lower share of total employment today than it did 60 years ago. Manufacturing’s share rose from 1950 and has since declined to about 13%, while the share of services shows a rising trend and now rests at 78% of total employment. In GDP terms in 2012, services share is at 70%, manufacturing 13% and agriculture 2%.

Less need for another udder

Agriculture

A remarkable statistic shows that in 2012 the average American cow produced 22,000 lbs of milk each year compared with 5,300 lbs in 1950, an annual increase of 5% for each of the past 60 years. I imagine a Canadian cow would be equally productive, although supply management may require it to work shorter days and take longer vacations. With 1950 model cows, today’s 33 million Canadians could be supplied with a pound of milk per day by about 530 cows. Sixty years ago it would have required over two million cows. A 2012 model cow represents an enormous increase in productivity and a saving for the environment, especially air quality.

In the agricultural sector there has been a marked increased in productivity with the introduction, among other things, of mechanization, together with animal and crop husbandry techniques. A striking contrast is the practice of Doukhobor women providing the women-power for plowing in western Canada around 1900, versus a present-day piece of farm machinery – see photos at Canadian West website, http://www.collectionscanada.gc.ca/canadian-west/052920/05292069_e.html

Fewer farmers now produce more with less, but in the 1920s, farmers worried about where their children would find work. This was soon forgotten as manufacturing grew to produce among other things the tractors, machinery, fertilizers and seeds which allowed for increased productivity. Also refrigeration and canning meant food could be stored and traded internationally. (Bananas from Central America were frozen while being shipped and then gassed to restart the ripening process. This happens today and benefits consumers with imported products.)

Manufacturing sector

As the agricultural sector grew in terms of output, it released labour for employment in the manufacturing and services sectors. Both output and employment grew. In manufacturing the share of employment is now declining especially with the loss of low paying jobs, similar in many ways to what happened previously in agriculture. The reason is a mix of competition from imported manufactured products, and the substitution of capital for labour, for instance the use of robotics on production lines. Robots substitute for labour but require inputs in order to be produced. They will tend to replace less skilled labour but in turn will require inputs to be produced and maintained.

For automobiles, the stages of production or supply chain of inputs, leading to the final product, is divided between countries, between regions of a country and between manufacturing and service sector jobs. Robots need to be manufactured, but their operation requires computer programmers and persons who will maintain the robots which are often service sector jobs.

These changes are always taking place in a dynamic economy. If they did not we would be stuck with Doukhobor plowing technology in agriculture, and a Chaplinesque Modern Times version of production lines.

Service sector

Finally, consider the service sector, where the share of employment is over 70% and growing. Some see this is as a problem and a reflection of fast food, online shopping, and call centre employment requiring less skills and liable to be outsourced abroad to low wage labour in developing countries. (Some of it is outsourced and when managed incompetently, as in the case of RBC (April 2013), gives all business a deserved black eye.)

A myriad of tasks are undertaken by service sector employees. They include highly qualified professionals who have undertaken years of training and are required to receive ongoing retraining. Doctors and dentists employ assistants who may receive lengthy training. For example a dental assistant, who does more than dental hygiene, now requires to complete a three year course. For nurses it is even longer. Developments in information technology have led to jobs for programmers at different levels of expertise. And so it goes on.

What is happening with the job-type employment numbers is that the service sector as a whole is too broad a category for useful analysis. What is needed is to disaggregate the type of service occupations, for which the data exist in the Labour Force Survey, and examine how and why the demand for different types of occupations are changing. Statistics Canada addresses some of these issues in  http://www.statcan.gc.ca/pub/75-001-x/2008109/article/10694-eng.htm

Conclusion

The contemporary cry is that the manufacturing sector is shrinking in terms of its share of output and employment, with “good paying” jobs being lost. At the same time service sector employment is growing, but these are often lower paying jobs. Forgotten is that labour productivity in manufacturing is growing because of often well paid jobs in other sectors such as services.

The fact that Canada today appears to be more a service oriented economy, at least in terms of employment, is not a bad news story, as there are well paid service sector jobs in developed economies, as well as hamburger flippers shopfloor assistants. (The latter is not as glamorous an occupation as portrayed in the TV series Selfridges, where it appears in the 1920s the assistants might work more than eight hours, as a result of having after hours work.)

The moral of this story is not to be blinded by repetition in the public discourse of one statistic, in this case the loss of employment in the manufacturing sector. Job opportunities, some well and some less well paid, in all sectors change continuously. The fact that Canada, like other developed countries, is increasingly a service economy reflects changes in production processes and arrangements in all sectors.

Adjustment is never easy especially for older and less educated workers, and is not instantaneous. Policies which can alleviate the adjustment process relate to education, retraining, use of foreign workers (temporary and permanent), job sharing, outsourcing, but not subsidies, tax incentives and protectionism, which allow existing less efficient manufacturers to remain in business….until the time comes when they will be forced out. Technology, due mainly to the internet, has undermined Canadian cultural protectionism, and something will eventually conquer supply management in agriculture…..although perhaps not in my lifetime.

Canada’s Health Care Costs – are we paying too much?

April 1, 2013

Reasons for high and rising healthcare costs in the US is presented in lay language in a 53 page special Report in Time for March 4th, 2013, pp.18-55. Examples, and there are many, include a patient at the Seton Medical Center in Daly City, California who was charged $18 each for 88 diabetes-test strips that Amazon sells in boxes of 50 for $27.85, or 6 cents each. A 64 year old patient went to the emergency room at the Stamford Conn. hospital and received a blood test (Troponin 1) for a cost of $199.50. If she had been 65 she would have qualified for government insurance, Medicare, which would have paid Stamford $13.94 for the test.

While Time gave this topic mass market coverage, the writings of Professor Uwe E. Reinhardt as reported in the New York Times for March 29th, 2013 provide more detailed analysis going back to 2000.

Canadians are told by others, and some believe that we have one of the best healthcare systems in the world. Do we and should we worry that we too are paying too much? Following is a first small step to answer this question for which there should be numerical answers. In a qualitative sense, some argue that the Canadian system is barbaric when you describe how some patients are treated.

Are individuals being overcharged in Canada in a similar way to the US, even though Canada’s per capita healthcare costs are well below those in the US, as is the case for other OECD countries? The answer has to compare how healthcare costs are calculated and covered, and where costs may be too high. In Canada, as in other OECD countries, there are three sources of payment,

–          by governments

–          by individuals covered by private insurance

–          by individuals being self-insured and paying out of personal funds.

In the US, all three sources of funding exist with the charge for a given treatment depending on who is paying for it and the actual payment depending on how forceful the patient-consumer is.

In Canada, about 70% of overall healthcare costs are covered by a government plan and 30% by private insurance and cash (or self insurance). It is a mixed public-private system, although often described wrongly as a government system along the lines of the UK National Health Service. Canadians therefore pay taxes to fund the government system, premiums to pay for private health insurance and cash for self-insurance.

Follow the money

Using Ontario as an example, the provincial government through OHIP covers some but not all medical expenditures. Private insurance, if purchased by an employer or individual employee may cover some costs, while cash provides any balance owing. The Ontario provincial government pays for hospitalization and some other medical costs, but not for drugs consumed outside the hospital, and not for dental care, or for eye glasses. For hearing aids, OHIP pays $500 per ear with the balance paid by private insurance or cash. Why drugs, eyes, ears, and teeth are not considered part of general healthcare while noses, toenails and other appendages are is a mystery to me.

The price-cost reasonableness of healthcare funded by the Ontario government depends on the efficiency with which the covered hospital and non-hospital services are provided. It is not a competitive market but comparisons can be made with other provincial healthcare services. The payer is the government funded by the taxpayers, some of whom receive the health services. Taxpayers depend on the government negotiating a good deal on their behalf with healthcare providers such as doctors and hospitals.

For privately insured claims, the terms and conditions of the policy and the coverage provided are crucial and often not fully understood until a claim is made. The policy will have an annual premium cost which the individual and/or employer pays, but the amount paid out for a claim depends on the nature of the illness and the detailed wording of the policy. For example, the policy may have an upper limit for the amount to be paid out for a particular ailment, or an amount depending on whether it is a pre-existing illness, or a geographic limit depending on where the illness occurs. Insurance companies may arrange to fly patients back to Canada rather than be treated abroad so that they can be deposited into the provincial healthcare system.

When buying a private policy or accepting one from an employer as part of a benefits package, the individual does not know how much will be reimbursed until a particular situation arises, and has no idea whether the amount charged is reasonable or not. Thus the value of the private policy is largely unknown until a claim is made and the insurer responds to it. Some information may be gleaned by canvassing those, colleagues or others, who have a similar policy.

In the US case examined in Time magazine (March 6, 2013), the hospitals engage in price discrimination. They charge different prices for different patients for the same treatment depending on who is paying the bill. For a US patient covered by government funded Medicare and Medicaid, the hospital charges a much lower rate than for a patient covered by private insurance or a self-insured patient paying cash – see above example.

What the paying patients don’t realize is that the bill presented by the hospital is the asking price for the services provided and is subject to negotiation. In many countries, but not Canada and the US, it would be recognized that the price for any good or service is an asking price where the buyer is expected to bargain, so the seller starts high. Hospitals do that in the US, probably not in Canada.

The reason the supplier, namely the doctor and hospital, get away with this is because the services are often purchased under conditions of immediate need, where the patient is in distress, and is not in a position to bargain. The hospitals are large and permanent, and the consumers (patients) are small without the knowledge of what treatment is needed. The nature of the transaction is such that patients are often not in a position to discuss costs and shop around for alternative suppliers, as they might for hiring someone to cut their hair or complete a tax return. The conditions of the transaction give market power to the supplier.

Ontario

How does this apply in Ontario? OHIP is a large buyer and assuming it works efficiently it has the potential market power to reimburse reasonable prices from hospitals, doctors and other suppliers of healthcare goods and services, similar to the way Medicare and Medicaid reimburses healthcare providers in the US. It is difficult to assess OHIP’s prowess as a negotiator. Some cross-provincial and cross country comparisons should be possible.

Conditions and payments made under private health insurance programs are more difficult to evaluate, because the policy holder does not know how the insurance company gets the information to decide how much to reimburse for each particular medical condition covered, which becomes the basis for the premium charged to the consumer. Also for a particular illness the insurance may put an upper limit on the amount which can be paid out. This provides a safety valve for the insurance company. If they also do not cover preexisting conditions, another safety valve exists, especially with an ageing population where more things become pre-existing with time.

There are all sorts of tales of people making claims on private health insurers and having difficulty in collecting, especially in the case of claims outside of the country. When travelers depart Canada, they have only a rough idea of whether a claim will be reimbursed by whom and for how much when a particular illness arises.

 

An actual example in Ontario

Consider the case of coverage for hearing aids in Ontario. The audiologist quotes $5000.00 for hearing aids in both ears. OHIP provides reimbursement of $500.00 per ear leaving a balance of $4000.00 to be paid. When submitted to the private insurer, the policy coverage is for 80% of “eligible expense”, where “The eligible expense is limited to customary charges. Customary charges are determined by any professional fee guides and average costs in your area.” The eligible expense in the relevant area in this case is $3000.00, not the $4000.00 remaining after the $1000.00 OHIP reimbursement. Reimbursement is 80% or $2400.00. In this case, the government pays $1000.00, private insurance $2400.00 and the individual via self insurance $1600.00. Note, the individual pays in three ways, as taxpayer, as purchaser of private health insurance, and with cash.

In order to be an informed consumer, it is necessary to get the necessary quote and then take it to different hearing aid suppliers to find one who offers the customary or near customary charge in the area. If they all charge $5000.00, then there may be price fixing, or you may believe it is a competitive market where all charge the same price. If all follow the professional fee guide, then the profession is aiding the provision of identical quotes and the government is assisting the suppression of competition.

 

(In a future posting, an attempt will be made to get quotes for the case cited above, which the author accepted showing that he was not an effective consumer. But consider how a person might behave if the condition was for a far more serious condition and there was no time to get quotes.)