Is the Canadian system as good as it looks for employers?

Is the Canadian system as good as it looks for employers?

For now the skies are calm. But experts say there are storm clouds on the horizon

Employers up north aren't sweating and struggling over health care costs, thanks to Canada's national health insurance program, which pays for most medical services for the country's citizens and delivers care far more cheaply than the United States does.

"Coverage isn't an issue for Canadian employers. Cost isn't a concern. We don't worry about plan design or spend hours looking for ways to cut back on benefits," says Donald McGrath, vice president of Towers, Perrin, Forster & Crosby in Toronto. "Health care is out of our hands."

Nor are Canadian employers wrangling with unions and employees over benefit cutbacks and cost sharing plans. During labor negotiations, health care often isn't even on the agenda.

Canada's system looks good, especially at first glance. But medical costs are rising up north, too. In a system that's supported by taxes and direct premium payment, what does this mean for employers and their workers? Are the glory days of indifference to health care spending coming to a screeching halt?

A recent survey by Hewitt Associates in Toronto asked 3,000 Canadian employers what their benefits would look like in the year 2000. More than 70 percent of those who responded predicted benefit costs will increase markedly as a result of greater cost shifting from the government, more rapid medical inflation, and rising prescription drug costs.

Experts forecast higher taxes on supplementary benefit plans provided by employers. They emphasize the need for tightening the rein on health care spending. Ironically, a number of firms are beginning to adopt American methods such as copayments, deductibles, flex plans, and managed care.

Meanwhile, here in the states, some employers are looking wistfully at the Canadian system. Although corporate America once flinched whenever there was talk of a national health program, some U.S. executives, fed up with soaring premiums, now find such an idea intriguing.

"The Canadian system has a lot to offer," says Jack Shelton, manager of employee insurance at Ford Motor Co. "It delivers comprehensive, quality care to its citizens at a cost two-thirds of what the U.S. pays. For Ford, our costs for employees are much less in Canada than in the U.S., even though benefits are similar.

"I'm not saying we should move to Canada's system, but it's an option, among others, that we should explore," Shelton maintains.

What can we learn from Canada? Here's a closer look at the role employers play in Canada's national insurance plan, how they are faring, and what lies ahead for Canadian companies.

How the system works

Health care falls under the domain of Canada's 10 provinces and two territories. Under the country's health system, each province provides insurance for all of its residents.

The plan is financed either through direct premiums from residents, payroll taxes paid by employers, general tax revenues; or some combination of the three. The federal government also provides up to 40 percent in direct cost sharing with the provinces.

Except for elective procedures such as cosmetic surgery, provincial plans pay for all doctor and hospital treatment. Laws prohibit private insurance for any province-covered service.

Although not legally required to do so, most employers offer additional benefits. Employer plans pay for such added coverage as dental care, prescription drugs, and semi-private hospital rooms. Indeed, more than 95 percent of employers provide some form of supplementary plan, according to Mike Sanford, senior account executive of Maritime Life Insurance Co. in Toronto.

At the moment, most supplementary benefit packages are free-of-charge to employees. Of the plans that Maritime Life sponsors, nearly 70 percent require no employee contribution, deductible, or copayment, says Sanford.

In provinces that levy premiums on residents, some employers pick up all or part of the charge. Employees are taxed on these employer-paid premiums. Companies with more than 15 employees must let them pay for premiums through payroll deductions.

Monthly health care costs run on average only $75 [Canadian] per employee, according to McGrath of TPF&C. Others cite even lower figures: $5 to $15 for an individual, double that for family coverage.

The tax burden

The monthly dollar estimates include only out-of-pocket costs, not taxes. To finance the health program, provinces slap high taxes on businesses and citizens. Rates on average are 15 to 20 percent higher than in the United States.

Taxes disguise the real cost of health care for Canadian employers, says Sanford of Maritime Life Insurance. But even after taxes, "Canadian employers pay less for health care than do businesses in the U.S.," he maintains.

"Taxes are part of doing business," he argues. "When we talk about health care costs, whether here or in the U.S., we're talking about how much we spend directly on health care. Our out-of-pocket expenses are lower."

In contrast, U.S. automakers paid about $5,800 [U.S.] last year for every active employee. In 1988, Chrysler alone spent more than $702 million on health care.

Not only are the wallets of Canadian employers possibly fatter as a result of their health care system, but their balance sheets also may be stronger. Unlike U.S. companies, they aren't absorbing double-digit increases in health insurance premiums; coping with costly new accounting and non-discrimination rules; and spending time and money second-guessing physicians, insurers, and employees --all of which make a dent in earnings.

Unlike their U.S. counterparts, Canadian employers also don't have to worry about retiree medical benefits and long term care. Provincial plans cover most of the charges for nursing home and chronic care services. Ontario, for example, pays two-thirds of the daily cost of nursing home care.

Another bonus of Canada's system: Canadian companies spend less on administrative overhead than American employers.

Labor relations

Then there are the more intangible rewards of the Canadian system, including less volatile labor relations. William Hoffman, director of the Social Security Department, International Union, United Auto Workers, gives an example.

"Say a company builds fusillades in California and engines in Canada. In both places, there's collective bargaining. In California, health care is a major confrontational issue. In Canada, it probably isn't even brought up," he says.

"In one case, when we sat down at the bargaining table with a Canadian employer, we argued about whether or not shampoo should be included under prescription drug benefits. That was our greatest concern. I can't imagine that happening in the U.S."

A big worry for U.S. employers is the long-term effect benefit cutbacks will have on employee recruitment. In Canada, health care isn't a recruitment issue at all, says Cathy Zander, administrator of benefits compliance, Boise Cascade Corp., Boise, Idaho, which has a number of plants in Canada. "Since the government picks up most of the tab for health care, companies don't have to compete with each other when it comes to medical benefits."

With a few exceptions such as the steep tax rate, the Canadian health care system, at first glance, seems like a paragon compared with that of the United States--especially from the point of view of Canadian employers. But upon closer inspection, it appears that our northern neighbor also has some serious problems on the horizon.

Rising costs

The Achilles' heel of Canada's plan is that there's no imperative or incentive to control costs. Canadians feel entitled to full and free medical insurance.

"Because of our medicare system, we created a whole country of people who don't expect to pay a cent for medical care," observes McGrath of TPF&C in Toronto. "But as American companies know all too well, when people don't pay anything, they don't make smart choices about health care."

When medical inflation in Canada lagged far behind that of the United States, such freewheeling attitudes were acceptable. But Canadian health care costs are going up rapidly for both employers and provinces.

For employers, the cost of prescription drugs in Canada is soaring just as it is in the United States. Prices are going up 10 to 12 percent a year, says Sanford of Maritime Life. Nearly 75 cents of every dollar spent on supplementary benefits goes toward prescription drugs, he adds.

In Ontario alone, health care costs rose more than 8 percent last year and now eat up almost a third of its budget.

Many provinces also are running deficits. And with a per capita national deficit higher than that of the United States, Canada's government is caught in a familiar tug-of-war, pulled by budget considerations on one end and by medical and social ones on the other. Rather than risk a voter backlash, the government is threatening to shift more costs onto both the private sector and individuals, say experts.

"In the battle over budget priorities, there's been talk of taxing dental and prescription benefits and initiating user fees," says Daphne Woolf, a consultant with William M. Mercer Co. in Toronto. "There's no doubt that employers will be picking up more of the burden, but no one knows just how much."

In the future, Canadian employers also may have to pick up more of the health care costs of the elderly and of the chronically ill. "In Canada, the focus is on acute care hospitals," says Sanford. "Many people would be better cared for in long term care facilities, but there aren't that many of them.

"The government doesn't want to pay for long term care. So, the big question is who will pay for it?"

With the government tightening its purse strings and facing rising costs, Canadian employers are slowly, but increasingly, becoming concerned about employee medical expenses.

Familiar solutions

Ironically, while U.S. employers are looking to Canada for solutions to their health care problems, Canadian employers are adopting some home-grown American remedies.

A few are ending the free ride for employees by shifting more costs onto them. Other companies plan to follow their lead. In the Hewitt benefits-in-the-year-2000 survey, more than half of employers who responded plan to introduce co-insurance and increase deductibles during the next 11 years.

"No longer can companies be so generous with their benefits," says McGrath of TPF&C in Toronto. "For a nation not used to paying anything for health care, it'll be a shock to have to share the cost. But it may be the only way to educate people about health care."

Deductibles and co-insurance aren't enough to stem the flow of dollars spent on health care. To get a handle on their costs, some employers are pressing for more rigorous claims adjundication.

"Among insurers, there's a move to record claims history," says Sanford of Maritime Life. "It's hard to believe that we never before kept track of who filed claims; we just paid the bill. But times have changed."

Just like in the United States, more and more Canadian employers are offering flex plans. Should the Canadian government tax individuals on their supplemental medical and dental benefits --which is threatened in every budget deliberation--the number of flex plans will soar, say experts.

But unlike in the United States, the main impetus behind flex plans is to give employees more benefit choices, not to give employers an added weapon in controlling costs.

"Flex plans are growing to meet new work force demographics--more women, more working couples--not to control costs," says Woolf of William M. Mercer. "Companies that begin such a plan just to contain costs are fooling themselves. Of course, everyone hopes that flex plans will help to control costs."

Plans of the future

Other benefit changes are in sight. In the next decade, the new buzzword for Canadian employers, just as it is today for U.S. companies, may be "managed care." According to the Hewitt benefits 2000 survey, more and more employers will be exploring managed care in the future.

The first managed care plans will probably cover employer-paid dental services. A few Canadian companies already are talking about dental capitation plans and provider networks.

While no one is certain what Canadian-style managed care will look like, experts say it will only barely resemble what the United States has. One reason for the difference: Under Canada's full-access, free-choice system, there's no way to limit which doctors people can use.

The shift to U.S.-style managed care would demand a fundamental change in the way Canadians think about health care--and perhaps would even require scrapping the entire universal insurance plan. That won't happen.

"No matter how much employers worry about costs or how much Canadians complain about the long queues, we love our system," says Sanford of Maritime Life. "We don't want to move anywhere near the U.S. system of health care."

Canada is feeling the aches and pains of a 20-year-old health care system. Whether these are symptoms of chronic or perhaps even fatal problems, only time will tell. But in light of severe budget constraints, the prognosis for the health care system doesn't look good. If that's the case, Canadian employers, forced to pick up a greater share of the burden, would face a tough road ahead.

COPYRIGHT 1989 A Thomson Healthcare Company
COPYRIGHT 2004 Gale Group