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Pay Now, Medicate Later

Economist proposes pension-like system to pay for drugs as Canada’s population ages

March 4, 2010

Health-care costs in Canada are growing faster than the economy (they have been for some time), and by next decade will account for more than half of Ottawa’s program spending. Prescription drugs represent one of the fastest growing segments of health-care expenditure.

As policy makers grapple with the formidable question of how to finance health care as the baby boom generation begins to retire and the workforce shrinks, economist Mark Stabile, an associate professor at the Joseph Rotman School of Management, is looking to Canada’s pension system for solutions.

In a new study from Montreal’s Institute for Research on Public Policy, Stabile and Jacqueline Greenblatt, a policy analyst for the federal government, are proposing a “pre-funded” approach to pharmacare, as opposed to the current pay-as-you-go system.

Their idea is to create an independently administered pooled fund, modeled on the Canada Pension Plan Investment Board, that will invest the proceeds from a proposed mandatory contribution from individuals earmarked specifically for pharmacare costs.

The use of prescription drugs is growing rapidly because of advances in medical science and the higher prevalence of complex chronic conditions in an aging population.

At present, government-purchased prescription drugs (those administered in hospitals and through group plans, such as for the elderly or low-income earners) are paid for through general tax revenues collected by both Ottawa and the provinces.

Stabile, who is also the director of the school of public policy and governance, is suggesting a system of capped monthly contributions geared to income that are collected either through payroll deductions or through tax filings. “As individuals retire,” he says, “their cohort would have this fund available to them.”

He’s not aware of any other government that’s taken this approach. But Stabile points to the landmark 1999 pension reforms –which involved a combination of premium increases, the establishment of the investment board and the move to diversify the investment mix for pension contributions – as an example of how Canadian governments developed sustainable solutions for the problem of long-term savings.

“Whether we pre-fund drugs or we don’t, that’s the conversation we’ll have to have over the next decade,” says Stabile. “How are we going to pay?”


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