Lessons From the North (Hard, cold truth about Canadian health care.)

A week before Independence Day, 37-year-old Debbie Thomas(1) found herself on a bus headed over the border to seek medications. This was not, however, one of the highly publicized stories of Americans going to Canada to buy cut-rate prescriptions.

This bus was headed the other way, from New Brunswick to Bangor, Maine, USA, and all 20 passengers were Canadians. A man suffering chest pain sought an echocardiogram, a procedure his Canadian doctor deemed necessary but couldn’t deliver until nearly four months later. Others merely sought pharmaceuticals, currently the subject of political strife.(2)

As most Americans now know, thanks to our political theater in Washington, D.C., pharmaceuticals are abundant and inexpensive in Canada. Indeed, this fall, entire political campaigns will be based on promises to import the central feature of the Canadian drug system — price controls — to the United States.

“The mere fact that the party has crossed the Rubicon on price controls bodes well for the party’s general direction on prescription drugs,” notes Nicholas Confessore, a writer for The American Prospect, a leading journal of liberal political thought and strategy.

Confessore is referring to a proposal by congressional Democrats that empowers government officials to bargain directly with drug companies, i.e. set prices.

“Why aren’t we for price controls?” Michigan democratic senator Debbie Stabenow wondered as she campaigned for her seat by ushering busloads of seniors across the border, according to The American Prospect.

The bus trip to Bangor, Maine recalls the axiom “be careful what you wish for.”

It wasn’t that long ago, after all, that many Americans were openly praising the Canadian system. U.S. Senator Edward Kennedy (D-Ma) has long advocated national health insurance ofthe type offered in Canada. U.S. Representative Jim McDermott (D-Wa) tirelessly promotes single-payer health care. Many feared that’s exactly what Hillary Clinton’s ill-fated health reform effort in 1994 would have produced. That year California voters rejected a ballot initiative that would have abolished private health insurance in the Golden State.

And, on November 5, Oregonians will cast their votes on Initiative 23, a single-payer proposal that would take funding from all existing public health care programs, including Medicare and Medicaid, and places them in one central health-care fund.(4)

“Like every other advanced country, we need a single-payer or consolidated payer system,” writes former editor of The New England Journal of Medicine and Harvard Medical School lecturer Marcia Angell.(5)

Some, like Angell, still advocate importing Canada’s single-payer health system to the United States. After state legislators shot down a single-payer proposal in 2001, voters in the city of Portland, Maine passed a resolution supporting a government takeover of the health insurance system. Meanwhile, the failings of Canada’s single-payer system are clear to anyone who honestly examines them.

The system consumes nearly 10 percent of Canada’s economic output, a sum exceeded only by Switzerland and the United States. Dr. David Gratzer figures that government-provided medicare costs working Canadians $.21 for every $1 earned. Writes Gratzer, “This means that Canadians earning $35,000 a year pay $7,350 for Medicare.”(8)

Yet even at this level of spending, the effort to control expenditures through global budgets has led to a severe underinvestment in technology, which in turn produced long waiting lists and suffering. Canada had only 2.5 mri units per million population in 1999.

This compares to an average of 4.9 mris per million for the 30 Organization for Economic Cooperation and Development (oecd) countries. Canada ranks 20th out of 30 oecd countries in mris per capita and 22nd in the number of ct scanners per capita.(9)

This produces absurd — and painful — results. For example, in 2001, the bureaucrats at the Queensway-Carlton Hospital in Ottawa decided to ration babies.

“They figured they’d save $600,000,” says Dr. Paul Legault, the hospital’s chief of obstetrics, who fought the quota and got it lifted to 2,500. “We felt we were being kicked out, penalized for providing service, which I thought was our job. I trained 12 years in order to do obstetrical care, not to sit in my office and refuse patients.”(10)

Canadians can purchase a cat scan for their pet, but they can’t purchase a pet (Positron Emission Tomography) scan for themselves. “Does it make any sense that your cat can get an mri at 2:30 in the morning and you can pay $20 to do that but your mother can’t,” asked Ernie Eves, a candidate for Premier of Ontario in January 2002. “Is your cat more important than your mother?”(11)

Eves refers to the 1998 discovery by The Toronto Star that St. Joseph’s Health Centre in London, Ontario was renting access to its mri machine to veterinarians for after-hours use while Canadian patients waited for diagnosis.(12)

It makes perfect sense given the incentives. Canadians pay nothing (at time of delivery) for the services they receive. As a result, providing them with expensive services costs hospitals and provinces money. Pet owners, however, pay for the services their pets receive.

Therefore, hospitals make money by providing them with extra services in off hours — hours that transform equipment from being cost centers to revenue centers. Yet when Canadians want to spend a paltry $4 for x-rays the government won’t allow it.(13)

Waiting is the price they pay for “free” care. Between 1993 and 2001, the median waiting time from referral by a general practitioner to treatment increased by seven weeks, from 9.3 weeks in 1993 to 16.2 weeks in 2001. Waiting times increased across all specialties and across nine of Canada’s 10 provinces. The most extreme results occurred in Saskatchewan, which saw its median wait time increase from 9.8 weeks in 1993 to 28.9 weeks in 2001, and in New Brunswick, from 12.3 weeks in 1993 to 25.8 weeks in 2001.(14)

Consider Positron Emission Tomography machines, or pet scanners, a diagnostic tool that employs radioactive chemicals to view molecular changes in cells and detect cancer. “It definitely changes the way we manage patients, avoiding lots of unnecessary surgery,” says Dr. Francois Bénard. “It helps us predict disease when other tests are negative. It saves a lot of pain and suffering for cancer patients.”(15)

That’s why by fall of 2001, there were more than 250 such machines in the United States, 48 in Japan, 45 in Germany, and nearly 20 in Belgium. But at $3 million each, they provide pain and suffering to the budgets of Canadian health-care planners so there were only two in full operation.

“In Canada, hospitals are not free to develop services such as open-heart surgery and transplantation, or to purchase expensive equipment such as magnetic resonance imaging (mri) scanners, without specific approval from provincial governments,” explain two admirers of the Canadian system. And when it comes to purchasing new pet scan machines or replacing old x-ray machines, the governments simply say no.

This skimping may save the bureaucrats money, but it doesn’t lower costs. It just shifts them to patients. This is fine from the administrator’s perspective, since the equipment doesn’t cost them money. But it’s understandable that patients see it from a different angle — from the back of a long line. Ottawa nurse Trish Besner had exactly that view in early 2001. The 31-year old mother started experiencing fainting spells and was told in October 2000 that she needed an mri to diagnose her condition.

“The doctors keep mentioning ms to me,” Mrs. Besner told The Ottawa Citizen. “That’s a very scary thing and I know that an mri can rule that out.” Unfortunately, Ottawa has only one mri for 555,000 residents, and more than 7,000 were already lined up for care. So while the government saved on the $3.5 million price tag of an mri machine, and the $2 million a year it takes to keep it running, Besner and her family bore many costs.

All her doctor was able to do was offer a raft of drugs — one pill for her anxiety, another for her sleeping problems, and yet another for her seizures. They didn’t work, which left her unable to care for her toddler. Her mother took an unpaid leave from her job to take care of her family. “She’s lost weight. She’s thin and drawn,” says her mother. “But we have no information as to what is wrong with Trish.”

Stories such as Besner’s have dampened the enthusiasm for instituting single-payer health care in the United States, although as Maine and Oregon’s efforts indicate, they haven’t entirely snuffed it out. The same can’t be said of Canada’s approach to pharmaceuticals. Debbie Stabenow, after all, was elected to the U.S. Senate after making bus trips to Canada the centerpiece of her campaign. The U.S. Senate recently passed a bill that would allow companies to re-import drugs from Canada to the United States. And Democratic campaign strategists and pollsters are salivating at the prospects of running against drug companies in the November 2002 elections.

“Essentially the public would be comfortable with the actual government imposition of prices,” says Jeff Blum of the liberal pressure group USAction.(18)

“In a survey last month for the Alliance for Retired Americans,” writes Hunt, “Democratic pollster Peter Hart found prescription drugs are the main voting issue for seniors, who turn out disproportionately in off-year elections; that hmos remain highly unpopular; and over three-quarters of seniors say they’d be more likely to vote for a congressional candidate favoring importing government-approved medications from Canada.”(19)

If the reimportation bill becomes law or Democrats are successful in importing Canada’s price control drug policy into the United States, seniors will soon be telling pollsters a different tale. Canadians will be grousing along with them. The result will not be cheaper or more accessible pharmaceuticals in the United States. Domestic price controls will merely kill new pharmaceutical innovation, which would mean no new advances in drugs for Alzheimer’s, AIDS, diabetes, or anything else. Reimportation will simply give Canadians higher drug prices or empty pharmacy shelves.

Debbie Thomas, who was traveling south by bus, will have no problem explaining the consequences of Canada’s price controls. Suffering from depression, she needed Paxil Control Release, a drug that, while long available in the United States, she couldn’t purchase in Canada. Her colleague wanted Glucophage XR, a once-a-day drug that would obviate the need for her to pop a pill thrice daily. Unfortunately, it isn’t available in her Canadian province.(21)

Scores of drugs are excluded from provincial formularies, forcing patients to do without them. “Some cancer experts note that there’s an even bigger problem than waiting lists — access to new drugs” notes a recent article in one of Canada’s national newspapers, The Globe & Mail. “Canada’s health bureaucracy is slow to approve them, and the provinces are even slower to pay for them because they are so costly.”(22)

Patients are suffering and may not even know it. “Doctors have a gag rule imposed on them if they’re working in cancer centers,” one clinical oncologist told the newspaper, before heading to the U.S. to take another job. “They can’t tell patients about the newest treatments which they know are being tested and probably work, because the director will come down on their heads.”(23)

It all goes back to government regulation and price controls. Before doctors can prescribe drugs, they must wend their way through a bureaucratic morass. At the federal level, the Patented Medicine Prices Review Board (pmprb), which is charged with ensuring that the prices manufacturers charge for drugs are not excessive, places all drugs into one of three categories, which determine acceptable prices.

New drugs that are extensions of existing medicines or of comparable dosage to existing medicines are placed in category one. A new drug placed in category one cannot increase the cost of drug treatment for a disease. A new drug that is the first to treat an illness, or is a substantial improvement over what’s already available, is considered breakthrough or a substantial improvement and is given a coveted spot in category two.

The price of drugs that are substantial improvements are not allowed to be set so high that a bureaucrat deems it would increase the costs of treatment in its therapeutic class. Category three is reserved for what are derisively referred to as “me too” drugs. They are usually a new dosage or form of an existing drug. As such, the government doesn’t consider them to add much improvement over what’s already available. These drugs, like those in category one, can’t increase the costs of therapy. The government meddling isn’t limited to simply setting prices. The board also keeps track of every prescription that’s sold. Companies are required to file detailed price and sales reports for every six-month period.(24)

If the government officials determine that companies are selling too much product at too high a price, they will demand that companies enter into a Voluntary Compliance Undertaking, an Orwellian euphemism, that results in industry give-backs to government and even fines.(25)

Provinces aren’t content to leave the regulation to the federal government. Formularies are the primary means by which they regulate the industry. One might expect that once the federal government cleared a drug, provincial approval would be a formality. One certainly would not expect drug approvals to vary across provinces except in rare cases, since the approval process is held out as being objective and science based. Neither is true.

Often a drug will be approved for inclusion in some provincial formularies but find itself shut out of others. Of 23 cardiovascular drugs approved by the national government between 1991 and 1998, one province covered only 10 while another covered all 28. 99 new drugs were approved by the national government from 1994 through 1998. Yet the Ontario formulary included only 25.(27)’

The reason is no mystery. Delay saves money. This course hurts patients, for whom the drug might provide added benefit.Other methods some provinces use to limit patients’ access to the full range of pharmaceutical products include “generic substitution” and “reference-based pricing.” Under reference-based pricing, government officials create therapeutic categories, each with two or more drugs that can be used to treat the category’s illness. The reference product is the one with the lowest price and provinces will only reimburse patients for this price, regardless of which drug is actually suitable to the patient’s condition.

The cheapest drug might not be the most effective, but that doesn’t matter to the government. It often does matter, however, to patients who are forced to change medication when the government decides to shift its favored products.

One in four physicians in British Columbia has been forced to send patients to the emergency room or admit them to the hospital due to the adverse effects of government-mandated changes in medication. The former chief coroner of British Columbia, William McArthur, was forced to admit a 64-year-old patient to the hospital after the government switched him to an older, cheaper, and less effective drug to treat his peptic ulcers. It only took three days on the new drug to cause enough bleeding for him to require a blood transfusion.(29)

This, of course, is simply another example of how the system controls drug expenditures by shifting costs to both patients and the larger health-care system.

This Rube Goldberg regulatory regime is often credited with keeping drug prices down in Canada. But it may have even failed at this, as is indicated by a representative sample of pharmaceutical products actually consumed by Americans. A study by University of Pennsylvania Wharton School business professor Patricia Danzon found that U.S. consumers, if they purchased the same bundle of drugs they actually purchase in the U.S. in Canada, they would have paid three percent more.(30)

The reason: generic drugs, which account for half of U.S. consumption, are less expensive under the competitive U.S. system than the price-controlled Canadian system.

Reimportation, if implemented, wouldn’t make a difference for Americans but it would be a disaster for Canadians. A brief refresher course in economics 101 shows why.

The industry’s cost structure, while not unique, makes it especially vulnerable to political muggings. Not only is the largest chunk of the cost of any given product already spent before the first batch of pills makes it to the local pharmacy, but the per-unit manufacturing cost is quite low compared to the retail sales price. In economic terms, the marginal cost of production is quite low compared to the average cost of production.

For some industries with this cost structure, such as airlines, the public can see that the average cost is driven by large fixed capital costs, the money it takes to pay for the airplanes, for example. But the pharmaceutical industry’s large fixed costs are spent on intellectual property, not planes.

Still, companies must charge enough to cover both the marginal cost of production and the total research costs. If a market is small enough, or poor enough, companies can profit by selling drugs at some level above the marginal cost of production but below the average cost of production, just as theaters charge seniors less for tickets than adults, and airlines charge leisure travelers less than business travelers.

Drug companies do this in Canada, a country with a population of 31 million, fewer people than California. What companies can’t do is sell at unprofitable prices to Canada and the entire United States. If patented drugs sold on the cheap in Canada come back into the United States and cannibalize the domestic market, the equivalent of having senior citizens purchase movie tickets for adults, companies will lose profitability.

North Dakota Senator Byron Dorgan (d), a sponsor of the reimportation drug bill, declared that his handiwork will “force pharmaceutical companies to re-price prescription drugs in this country.”(31)

If implemented, it will certainly force them to re-price their products, but to be accurate, Dorgan needed to be standing in another country. It’s not hard to predict what will happen and it won’t be Canadians who benefit.

Companies will limit the quantity of products they sell to the Canadian market to the amount necessary to satisfy domestic demand. Canadian distributors, given the open U.S. market and the opportunity to profit by sending pills south, will have to decide whether to sell in Canada at lower prices, forgoing a profitable opportunity, or serve the U.S. market, leading to shortages in Canada, which may end up passing a law allowing consumers to purchase drugs from the U.S. The end of the process is a much higher price for drugs in Canada, not a lower price for drugs in the United States.

“If Congress were to pass legislation requiring the same prices in Canada and the United States,” writes Canadian economist Herbert Grubel, drug prices in Canada would rise to the higher U.S. level, and the rate of introduction of new drugs in the world would slow to the detriment of all of humanity.”(32)

There’s no such thing as a free lunch, nor free health care. Politicians who speak in these terms deceive the public. And if the admirers of Canadian health care in the U.S. Congress get their way, there will soon be no such thing as a discounted pill. There will, however, be many more bus trips south as Canadians add Soviet-style lines for pharmaceuticals to the already long queues for health-care services. The lessons for the United States are clear.

Instead of demonizing drug companies and emulating a system in advanced stages of failure,

legislators should craft policies that promote innovation instead of quashing it. Better health care at lower costs will only come through policies that expand the health-care choices of Americans rather than restrict them.

This briefing is based on Sally C. Pipes’s forthcoming book, co-authored with Christopher Middleton, Canadian Health Care in America: It’s Here (summer 2003, co-published with the Fraser Institute).

2 For information on the bus trip, see Merrill Matthews, Jr., “On a Bus to Bangor, Canadians Seeking Health Care,” The Wall Street Journal, July 5, 2002.

3 Nicholas Confessore, “This is Your Party on Drugs: Can the Democrats Win on Prescription Drug Prices?” The American Prospect, July 15, 2002.

4 Joe Moser, “Oregon Ballot Initiative 23,” Galen Institute, October 21, 2002.

5 Marcia Angell, “Placebo Politics: Health care reform requires strong medicine, The election-year rhetoric makes us feel better — but it is deferring a real cure,” The American Prospect, November 6, 2000, p. 25.

6 Josie Huang, “Universal Health-Care Initiative Passes,” Portland (ME) Press Herald, November 7, 2001.

8 David Gratzer, Code Blue: Reviving Canada’s Health Care System, (Toronto: ECW Press, 1999), p. 175.

9 Michael Walker and Greg Wilson, “Waiting Your Turn: Hospital Waiting Lists in Canada,” 11th edition, Critical Issues Bulletin, Fraser Institute, 2001.

10 Quoted in Margaret Wente, “How to cut health care costs: ration babies,” The Globe & Mail, December 13, 2001, p. A25.

11 Quoted in Robert Benzie, “Health revolution spreads to Ontario,” National Post Online, January 10, 2002.

12 Theresa Boyle, “Access to MRIs varies widely among patients,” The Toronto Star, November 15, 2000.

13 “Quebec vows to block planned X-ray user fees,” The Gazette, July 27, 2001.

14 Michael Walker and Greg Wilson, “Waiting Your Turn: Hospital Waiting Lists in Canada,” 11th edition, Critical Issues Bulletin, Fraser Institute, 2001.

16 Michael Rachilis and Carol Kushner, Strong Medicine: How to Save Canada’s Health Care System, (Toronto, Harper Collins, 1994), p. 199.

17 Sharon Kirkey and L. Robert Morris, “’Suffering’ thousands wait seven months for an MRI,” The Ottawa Citizen, January 22, 2001.

18 Quoted in Nicholas Confessore, “This is Your Party on Drugs: Can the Democrats Win on Prescription Drug Prices?” The American Prospect, July 15, 2002.

19 Al Hunt, “… And Don’t Forget Health Care,” The Wall Street Journal, September 19, 2002.

22 Margaret Wente, “Desperately Seeking Care,” The Globe & Mail, March 23, 2002.

24 John R. Graham, “Prescription Drug Prices in Canada and the United States — Part 2: Why the Difference,” Public Policy Sources, Fraser Institute, Number 43, September 2000, p.3.

25 Devidas Menon, “Pharmaceutical Cost Control in Canada: Does It Work?,” Health Affairs 20, no. 3, May/June 2001.

27 William McArthur, “Prescription Drug Costs: Has Canada Found the Answer?” Brief Analysis No. 323, National Center for Policy Analysis, May 19, 2000, p. 2.

30 Patricia M. Danzon, “Making Sense of Drug Prices,” Regulation, 23 No. 1, 2000, pp. 56-63.

31 Quoted in “Sure, Cheap Canadian Drugs,” The Wall Street Journal, July 23, 2002.

32 Herbert Grubel, “Uniform Global Prices Mean Higher Prices for Drugs,” Fraser Forum, Fraser Institute, February 2002, p. 4.

Quote:

• Sally Pipes, president and CEO of the California-based Pacific Research Institute: "As a former Canadian now living in the U.S., I have witnessed first-hand the failure of national health care. Implemented in 1971, the Canadian system provides excellent evidence of what happens to the quality of care when government is the sole provider — long waiting lines for critical procedures, lack of access to current technology, increasing costs to taxpayers and patients, and a brain drain of doctors, who head south for better working conditions and more money."

(Ross Mackenzie [Tribune Media Services] in Town Hall, August 15, 2003)
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So maybe the Canucks don't have all the answers to everything after all.

Americans are desperate for socialized medicine.

After all, your Mommy didn't charge you for milk & cookies when you came home from school. Your Daddy didn't seek payment up front when he put a band-aid on your booboo.

Why, then, should you pay the doctor?

This is going to be the funniest thing to watch in this country's political life-EVER.

The facility is set to deliver 2,700 children per year, but that’s expensive under a system in which deliveries are “free.” The bureaucrats set the hospital’s quota at 2,100 newborns. If doctors delivered too many babies, they’d lose their jobs.

Babies don't know about quotas, they have a way of coming out - whether scheduled or not.

Waiting is the price they pay for “free” care. Between 1993 and 2001, the median waiting time from referral by a general practitioner to treatment increased by seven weeks, from 9.3 weeks in 1993 to 16.2 weeks in 2001. Waiting times increased across all specialties and across nine of Canada’s 10 provinces.

Yes, this is what we want. A wait of 4 months to get an MRI, or a CT scan. Talk about 3rd world.

What we should DEMAND is the same exact plan that our esteemed representatives have - nothing more and NOTHING LESS.

8,000 doctors call for national health insurance! According to the AMA web site, there are over 650,000 AMA members. If one divides 8,000 by 650,000, that's 1% of the total! I'm impressed. NOT! Does the Associated Press have an agenda?

Canadians HAVE available private health care - - - it's called the USA. I've heard many stories of people going to Wisconsin, Minnesota, Maine, etc. for life-saving surgery and chemo. I guess those that can't afford the trip south just wait to die.

Canadians don't need a military either with neighbors like the USA.

I also know a woman in Ireland who went to Connecticut for breast surgery and chemo.

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