CD Howe fiddles while Canada's health care system burns

Don Drummond, through the CD Howe Institute, has recently published a paper on Canada’s Health Care system. It is an interesting piece of work. The interest is not so much because of the conclusions it reaches, there isn’t much there that’s new or innovative, but because it is an example of what is wrong with the health care policy debate in Canada. There is a blatant and conscience effort to avoid discussing changes that can be made to the single/public-payer model. That is to say, no one wants to talk about private financing in Canada’s health care system.

The report itself is an effort to come up with ways that health care spending could be reduced without touching the financing of health care. Mr. Drummond discusses creating incentives that will reduce overuse on the part of the patients and encourage efficiency from suppliers. He suggests that fees to providers should constantly be reviewed to reflect innovations and cost changes. He wants funding to shift from one area of health care to another where he believes that demand is rising.

Throughout the whole paper he completely ignores the fact that there already exists a method that would accomplish all of this in one shot: price signals.

Price signals allows for the consumers to act as if they know without actually knowing how much supply there is available of a good. Price signals encourage providers to adjust to changes in demand and the accompanying profit motive gives them an incentive to be more efficient. Price signals will do everything that Mr. Drummond wants done, but he won’t even talk about it, because for price signals to work private financing would have to be introduced to the system.

To the CD Howe Institute’s credit they are pretty blunt about why they won’t talk about financing. The president of the Institute writes that changing the financing “would be so politically inflammatory as to block reforms.” What he means is that he is too afraid of a public backlash to speak truth to power.

The truth is that governments can fiddle with the administration of the public funded system all they want but all they are doing at best is kicking the can down the road.

The single/public-payer model is at the core of the unsustainability of Canada’s health care system. It is the inability to solve basic knowledge problems of supply and demand through the price signals that creates waste and inefficiency. A central planner simply cannot mover fast enough nor can it know enough to replace prices as a solution.

The public is not being well served by respected academics like Don Drummond refusing to talk about this issue. The health care debate in this country is incredibly incomplete, with only a few individuals or organizations, like the Fraser Institute, willing to address it. Fear of the public not liking what it hears is no excuse. Real change does not happen from following a crowd but by leading it.

Federal government's pension proposal is better than CPP expansion

The federal government is set to announce today a new method for Canadians to save and invest for their retirement. I am unsure about the details of this plan and I imagine that I could easily find something objectionable about it once I learn the details, but it is already clear that it is better than the alternative. There has been pressure on the government to increase CPP payments, and that would have certainly been a bad idea.

First of all the claim that the CPP is cheaper to manage than a private firm is at the very least exaggerated but could also be simply false. The claim is based on the administration costs of the CPPIB (Canadian Pension Plan Investment Board) versus the usual costs of a private investment firm. The problem is that the operational budget of the CPPIB does not cover all the costs that private firms face. These costs are carried by other government agencies (such as Revenue Canada), so the straight one on one comparison is false.

Secondly and more importantly, the proposed plan is another voluntary method rather than government mandated. Putting aside the morality of forcing people to invest in something that they don’t want to invest in, it disadvantages some individuals. In general it is a good thing for people to invest in retirement, but there can be pretty compelling reasons why that money is needed more immediately (or perhaps needed for another long term project such as a new business). By allowing the individual to choice we are allowing them to set their own priorities and not disadvantaging those that wish or need to do something else with that money.

Thirdly CPP is not the safe investment that its proponents claim. It has the same disadvantage of any defined benefits plan. It is possible if not likely that the liabilities will outstrip the contributions. At which point it becomes unlikely that younger investors will get their full return. Also it is subject to the whims of governments that might change the contribution levels or benefits at will.

Fourth and finally, the CPPIB is about at the end of its effectiveness as an investment manager. Neil Mohindra of the Fraser Institute released a study a few months back that looked at the literature on the diseconomies of scale for investment managers. The study demonstrated that there are several disadvantages to having a too large money pool. These disadvantages can be offset in limited ways by various practices but the CPPIB has already put these methods into place. The return of an enlarged investment into the CPP is very likely to be minuscule because the diseconomies of scale would be too great.

The government’s new plan would have to be pretty awful to be worse than the disadvantages I have just mentioned. So even if it is not perfect, and I am sure that it will not be, I am confident that it will be the better of the two policy options.