(1) Explain what is meant by the GDP share of Health Expenditure.
Taken from course link article: Health Expenditure in Canada 1: Looking at the Numbers (2001-0
According to the Canadian Institute for Health Information (CIHI), in 1998, health spending in
Canada was about $2600 per capita. That figure includes more than just the costs of physician
and hospital care: about 14% of it goes for physician services, 34% for hospital care and another
14% goes for drugs, totalling 62% of the total and leaving 38% for other items. The other items
include other professionals (dentists, denturists, optometrists, opticians, chiropractors, massage
therapists, naturopaths, osteopaths and private duty nurses), about 12% of the total, other
institutions (homes for the aged, facilities for people with alcohol and drug problems) for about
7% of the total, capital spending (about 3% of the total) and a broad “other spending” category,
accounting for 13% of the total and including spending on public health, health research, home
care, ambulances, hearing aids, training of health workers, occupational health programs designed
to promote workplace health and safety. Even the drugs category includes both prescription and
over the counter drugs, plus personal health products such as oral hygiene products.
Page 7 bottom, Page 9 has some additional information
Figure 11 shows, for the period 1960-98, the share of each country’s Gross Domestic Product
which it devotes to total health expenditure. Since Canada and the US use similar definitions and
similar accounting conventions in calculating their health expenditure series,
Canadian and American series are among the most directly comparable of all international
series5. In calculating the share of GDP devoted to health, we simply take total health
expenditure in each country in each year and divide it by that country’s annual GDP series.
(2) Discuss the relation between Canada’s health GDP share and that of the USA. Why has
this graph been interpreted as showing the effect of the introduction of Canadian
Medicare on Canadian health care costs?
(3) Explain how you analyze the change over time in a GDP share figure.
(4) Discuss why it is sometimes useful to plot the natural log of a variable like GDP share
against time. Relate this to your answer to Q 3.
The natural log is plotted on the vertical axis with time located on the horizontal axis. It allows you to
create a graph that displays the rate of change per unit of time. The slope of the line is the annual rate of
increase, which has always been the case for GDP share of health expenditure. In this sort of graph it
allows you to compare rates of growth with straight lines. If you were not to use natural logs you would
have to compare rates of growth using rates of curvature or curved lines. Instead using natural logs makes
it easier to compare the slopes of straight lines than cuved ones. If the line is steep the rate of growth is
going upward, and if the line is horizontal their is no rate of growth.
(Still need to relate to Question #3)
A logarithmic transformation of a time series data set has the attractive feature that the slope of the graph
between any two points shows the percentage rate of increase between the two points, which means that
in any periods in which the two countries’ lines have the same slope, the rate of growth of their real per
capita GDP series was the same. This relates to Q3 because it helps compare the growth rates of
healthcare share of GDP of the two countries while holding the effects of exchange rate and overall GDP
size.
-Partially taken from:
Expenditure on Medical Care in Canada: Looking at the Numbers
Brian S. Ferguson
Department of Economics
University of Guelph
Guelph, Ontario
Canada
September, 2001
(5) Using the results of the previous questions, discuss the factors which affected Canada’s
health GDP share from the 1960's to the early 1990s.
(6) Comment on the funding of Canadian Medicare from the 1960s to the late 1990s.
Funding for the insurance plans comes from the general revenues of the Canadian provinces/territories,
assisted by transfer payments from the federal government through the Canada Health Transfer. Some
provinces charge health care premiums, but these are in effect taxes (since they are not tied to service use,
nor to provincial health expenditures). The system is accordingly classified by the OECD as a tax-supported
system, as opposed to the social insurance approaches used in many European countries. Currently,
patients do not pay out of pocket costs to visit their doctor. Boards in each province regulate the cost,
which is then reimbursed by the federal government.
The initial funding agreement for Medicare was 50-50, with federal and provincial governments sharing the
cost. In 1977, the federal government dropped its share of medical funding to 20 percent. In Canada, the
government pays 70 percent of medical costs, while individuals and private insurance companies pay the
rest. (This proportion is reversed in the United States.)
1960 - The Canadian Medical Association opposes all publicly funded health care.
1965 - A Royal Commission appointed by Diefenbaker government and headed by Justice Emmett Hall calls
for a universal and comprehensive national health insurance program.
1966 - Pearson minority government creates a national Medicare program (Medical Care Act of 1966) with
Ottawa paying 50% of provincial health costs. Prior to this point, doctors charged whatever they wanted
and bankruptcy to pay for health care was common. Now citizens would receive portable, comprehensive
and universal access to necessary physician and hospital services, regardless of ability to pay.
1977 - Trudeau Liberals retreat from 50:50 cost-sharing and replace it with block funding.
1978 - Doctors begin “extra-billing” to raise their incomes.
1984 - Canada Health Act introduced by Trudeau’s health minister, Monique Begin, is passed unanimously
by parliament. Extra-billing is banned. The act allows the federal government to deduct one dollar from
federal transfers to any province for every dollar of direct patient charges in that province, and ended userfees for insured physicians and hospital services.
1995 - Paul Martin Jr. introduces Canada Health and Social Transfer (CHST), causing massive cuts in transfer
payments to health and social programs. Health Care spending drops from 10.2% (in 1992) to 9.2% of GDP.
2000 - Ralph Klein introduces legislation to allow private hospitals. Alberta Friends of Medicare mount
major campaign to protect Medicare from Bill 11
1997 -- National Forum on Health calls for Medicare to be expanded to include home care, pharmacare and
a phasing out of fee-for-service for doctors.
(7) What is meant when we say that Medicare was introduced as a cost-sharing program.
Explain the formula which was used to determine federal transfers to the provinces for
Medicare in the cost-sharing period. Explain what was meant by the 50-cent dollar.
Why was this term misleading?


A cost-sharing basis meant that if a province was to set up a health system than they would receive
a significant amount from the Federal government to help cover the costs
When Medicare was introduced it was suppose to be controlled by the provinces but receive
financial support from the federal government

This cost-sharing implies that the provincial government will receive a certain amount which would
go towards their health care program depending on the size of the population that is using it
Explain the formula which was used to determine federal transfers to the provinces for Medicare in the
cost-sharing period.
Per capita formula:
Per capita grant x Provincial population = amount provinces received
The amount received is based on the total physician expenditure in Canada, divided by Canada’s
population times 50%
Cost – sharing formula:
=.5 (Ec/Nc) Ni,
Where;
Ec is the total expenditure
Nc is Canada’s population
Ni is the provinces population
Later Federal contribution was calculated by:
=.5 [∑(Ei/Ni) (Ni/Nc)]
Where;
Ei is the provinces expenditure
This equation based the amount each province received strictly on the provinces population percentage
out of the total countries population percentage; shows the unfairness of how much some provinces got in
comparison to others (i.e. some would get more than 50% of one dollar spent, while others got less)
Explain what was meant by the 50-cent dollar. Why is this term misleading?




The 50-cent dollar was put in place to ensure that the federal government would pay 50% of the
insured costs (no drug costs out of hospital)
50 cents for every dollar spent would be covered by the federal government and transferred to the
provinces
This was established in 1968 when Medicare was first introduced
At no time did the Federal government pay with a cheque, they calculated the amount the
provinces received based on the per capita formula basis


Created bias in provincial spending because you would spend more on health care because you’ll
get 50% back, but if you put it into education you would get nothing in return from the Federal
government
Was misleading because Federal government did pay 50% of total cost in Canada, but not 50% of
individual provinces costs
o Some provinces put more into health care than others, which they didn’t get back from
Feds
o For example: Ontario would only get back about 33% of what they spent whereas New
Brunswick would receive up to almost 75% of what they spent per dollar (based on the
total they spent and population differences in these provinces)
o This caused a transfer of wealth between the rich provinces to the poor, allowing poor to
spend more on needed medicine
(8) Discuss why both the provincial and federal governments wanted to change the formula
by which Medicare was originally funded. What do we mean when we refer to the shift
to Established Programs Financing?
(9) The provinces often claim that, after the shift to EPF the share of Medicare costs paid by
the federal government fell from 50% to about 15%. The federal government argues that
this share stayed at about 50%. Discuss.
(10) Discuss the Coyte-Landon argument about the effect of the change from cost-sharing to
block-funding (EPF). What do they say was the result of the shift in terms of provincial
government spending patterns?
General Note from in Class:
Cost sharing is a conditional grant. The grant is Conditional on the level of spending by the local
government on certain services. Under cost sharing provincial governments claimed that the federal
government was only paying for 15% of the total physician costs. However the feds were actually paying
80% due to the cost sharing from EPF.
Feds pay Provincial = per capita grant * provinces population
Actual Formula:
Provincial Grant = [50% * (Ec/Nc)] * Ni
Ec = physician expenditure Nc = Canadian population Ni = Prov. Population
Block Funding is an unconditional grant. The grant is determined in a manner that is independent of the
pattern of local spending.
The two are methods used by the federal government to determine the size of their transfer $ to local
governments (states or provinces). A shift from cost to block would alter the relative price of different
services to local governments.
What they did? Coyte-Landon Article
Coyte and Landon analyzed the shift in Canada from cost-sharing to block funding of provincial
expenditures on hospital care, medical care, and post secondary education. There tests indicated the data
are consistent with two key implications of the model (homogeneity and symmetry). A test for structural
change confirmed that the behaviour of the provinces differed under the two methods.
What Coyte and Landon did to compare the results of the cost sharing to the block funding grant: cost
sharing values needed to be estimated after the year 1981 when block funding was applied for provincial
governments. Two adjustments were made to account for differences among the provinces in finding the
estimated values. The constant term αi in the share equation is allowed to differ across provinces and the
addition of variables which reflect preference differences across observations are added.
Result of the shift:
The results indicated that by changing the system from cost sharing to block funding there was a negative
effect on real spending by the provinces on hospital care and post secondary education. Fourteen of the
eighteen provincial forecasts for these services indicate that there was a negative effect on spending. Their
test of structural change indicated there was a significant difference in the behaviour of the provincial
governments. There was a real impact on social service spending as a result of the change in the transfer
from cost sharing to block funding.
(11) Discuss, using standard micro-economic theory, the difference in earnings of Male and
Female GPs under fee for service medical practice.
11) Discuss using standard micro-economic theory, the difference in earnings of Male and Female GP’s
under fee for service medical practice.
- Male Doctors tend to have different income/leisure preferences than female doctors. Female doctors
tend to offer a narrower scope of services than male doctors but at the same price.
I
M
F
L
-
The red curve above is the indifference curve of male General Practitioners and the blue one is that
of female doctors. The straight black line is the budget constraint which is equal for both male and
female doctors. The graph shows that male doctors tend to work more and take less leisure time
than female doctors. This implies that male doctors make more money than female doctors.
Doctors working under a fee for service system are always looking for fuller part-time work. 15% of
male paediatric doctors are looking for part time work and 45% of female paediatric doctors are
looking for part time work
Opportunity costs are a big chunk of costs and must be accounted for by looking at how much they
must earn in order to persuade them to give up 1 hour of leisure and work 1 hour more
-
-
MC
P
AC
F
MR
MR’
Q
-
The graph above shows that the optimal price and quantity is where MC=MR. If price falls then the
MR curve shifts downwards to MR’ and a lower price and quantity equilibrium is reached. The MC
curve acts as the supply curve for perfectly competitive firms.
-
Both male and female practitioners are price takers. Female doctors are faced by the same fees as
male doctors (same budget line) but have a higher MC curve. The male practitioners have a higher
indifference curve which implies that male and female doctors have a different marginal rate of
substitution between income and leisure.
P
MCF
MCM
MR
Q
Qf
-
-
Qm
Therefore females and male make different decisions on how much time to spend working when
they have the same costs. Female doctors offer fewer services but have higher marginal costs than
males. The opportunity cost of a female doctor’s time is higher due to the marginal rate of
substitution. This implies that it would require more money for a female doctor to give up one
more hour of leisure to work 1 more hour as leisure is more valuable to the female doctor.
Empirical evidence—USA-- GPs are having to decide whether to be salary employees or solo based.
If salary is above opportunity cost they will enter salary employment.
(12) Discuss, using standard micro-economic theory, the results of the 2004 NHS contract in
the UK permitting GPs to opt out of providing out of hours care in exchange for a
reduction in their NHS pay.
(13) Up until 2005, fee-for-service doctors in Ontario were faced with reduction in the fees
they were paid if their OHIP billings exceeded certain levels. For example, as of April 1,
2002, when a GP’s billings reached $350,000, fees were scaled down by 33%, at billings
of $375,000 the reduction was 66.7% and at $400,000 the reduction was 75%. When this
system was first introduced in the early 1990s it was claimed that as doctors reached the
first threshold, late in the calendar year, they would simply shut their offices for the rest
of the calendar year and re-open in January when they would once again be paid at 100%
of the listed fee, with no scaling down. Analyze this policy, using standard microeconomic
theory, and explain why very few doctors would, if they were profit
maximizers, shut their offices. Up until 2005, fee-for-service doctors in Ontario were faced with
reduction in the fees they were paid if their OHIP billings exceeded certain levels. For example, as of
April 1, 2002, when a GP’s billings reached $350,000, fees were scaled down by 33%, at billings of
$375,000 the reduction was 66.7% and at $400,000 the reduction was 75%. When this system was first
introduced in the early 1990s it was claimed that as doctors reached the first threshold, late in the
calendar year, they would simply shut their offices for the rest of the calendar year and re-open in
January when they would once again be paid at 100% of the listed fee, with no scaling down. Analyze
this policy, using standard microeconomic theory, and explain why very few doctors would, if they were
profit maximizers, shut their offices.
I apologize in advance for writing such a long answer, but it’s a pretty long question that I thought needed a
lot of explanation if you had missed the class when he discussed it.
Under a fee-for-service pay schedule, doctors will act in a perfectly competitive manner as a price taker,
supplying a quantity of services where their marginal costs of the last service performed are equal to the
marginal revenue received from that service. Assuming doctors only perform one single service, and OHIP’s
fee schedule pays $100 for that service, the first graph depicts how both medicare and doctors observe the
quantity of this single service that physicians are willing to supply for the price offered to them. Since the
amount physicians are reimbursed lowers after they surpass a total billing threshold, the amount billed and
the amount they receive will be as follows;
Total Billings
<$350,000
$350,000-$375,000
$375,000-$400,000
>$400,000
% of Total Billings to
be Reimbursed
100%
66.7%
33.3%
25%
Total Amount Reimbursed to
Doctors
$350,000
$350,000 + $16,675 = $366,675
$366,675 + $8,325 = $375,000
$375,000+
A doctor will receive 100% of his total billings submitted up until $350,000, but for billing beyond that and
up to $375,000 the doctor will only receive 66.7% of that $25,000 beyond the $350,000 which they are
reimbursed. On the graph, the red line is at the base amount which OHIP is willing to pay doctors per
service performed, $100. The yellow area on the graph represents $350,000 in total billings by a doctor, as
well as the total amount of revenue a doctor will receive for performing up to quantity Q1 of the single
service (which is equal to $350,000/$100=3500). The yellow + green + orange areas represent the physician
billing up to a total of $375,000 to OHIP for Q2 (3750) services performed. However, since physicians only
receive 66.7% of billings they file beyond Q1, the total revenue received by physicians does not include the
orange area, and is made up of the yellow + green areas. The yellow + green + orange + pink + blue area
represents a physician billing up to a total of $400,000 to OHIP for Q3 (4000) services performed.
Physicians are reimbursed only 33.3% of the list fee for performing the service if their total billings exceed
$375,000, so the revenue physicians receive is represented by the yellow + green + blue areas on the
graph. And beyond $375,000, their revenue is only the yellow + green + blue + purple areas.
Assuming this occurs in the short run, physicians will only be able to change the variable costs in their
practice, which are primarily made up of costs related to performing their single service each time. The
physician will also have fixed costs related to rent and utilities and the such. In an example where the
physician is initially billing above a threshold level when this policy is introduced, a physician will supply a
quantity of services until their marginal cost for performing that service equals the amount per service
OHIP reimburses them with (marginal revenue). Before this policy is introduced, OHIP reimbursed 100% of
the $100 fee a doctor submits to them, so they will supply services until their marginal cost equals $100.
After the policy is introduced, the physician is only reimbursed with $66.7 for every $100 claim he submits
to OHIP for each service performed above billing a total of $350,000. This means that the marginal revenue
physicians receive will also lower once they exceed each total billing bracket when this policy is introduced.
Because of this, the quantity of services supplied by a doctor will decrease until his marginal cost once
again equals his marginal revenue. Since doctors still have fixed costs in their practices (rent, utility bills,
secretary wages, etc.), the costs incurred while performing a medical service are not the only costs doctors
incur. In perfect competition, a firm will continue producing unless their average variable cost is higher
than their marginal costs, like it is for MC2. For a doctor with a MC of MC2, there is no point in the pay
structure that they would stay operating, and they would just shut down. As can be seen on the second
graph, since the physician supplies services up to the point where MR=MC, when this policy is implemented
a doctor who had a total billing of much more than $350,000 will not stop supplying services and shut
down their offices when they reach $350,000 in total billings, because for the most part this intersection of
MR and MC will lie to the right of the quantity that produces $350,000.
(14) Explain what is meant by an intertemporal optimization problem.
Question 14
An Inter-temporal optimization problem is a problem in which the object is to find the best of all possible
solutions so that an individual’s utilities in both periods can be maximized, subject to the individual’s
budget function of the two periods. For example, an individual’s utility function is U (Ct , Ht) in period t,
where Ct and Ht stands for the individual’s consumption and health capital in period t respectively.
Similarly, the person’s utility function in the next time period, t+1, is U(Ct+1, Ht+1). Then this person’s utility
function for these two periods (inter-temporal utility function) is is U (Ct+Ht) +βU(Ct+1, Ht+1), where βis the
discount factor. People put less weight on the future than they do on the present. Therefore, they discount
tomorrow’s utility. The discount factor is how much weight the person discounts the future utility. The
person’s total income that he/she can spend on the consumption and the investment in health capital is
Yt=PcCt+PIIr in period t. The total income is how much he/she can allocate in C and I. Similarly, the total
income in period t+1 is Yt+1=PcCt+1+PIIt+1. These two functions are the person’s budget constraints. The intertemporal optimization problem here is to maximize the utility function, U (Ct+Ht) +βU(Ct+1, Ht+1), subject to
the two budget constraints, Yt=PcCt+PIIr, and Yt+1=PcCt+1+PIIt+1
(15) Explain what is meant by the individual’s discount factor. What it its function in an
intertemporal optimization problem.
An individual’s discount factor used to determine how much an individual values the future. This can be
the value of future consumption, future savings or even the value of future health. This discount factor,
normally distinguished by the value of ‘β’ (beta), can range between the values of 0 and 1, where values
closer to 0 mean that they do not value the future and values closer to 1 mean that they do value the
future. This is determined by the value of the following expression:
Β = __1___
1+p
Where p is the discount rate and p is greater than or equal to 0 where a higher level of p means that they
value current consumption more, as a higher p value makes the value of B lower.
The function of B (beta) in an intertemporal optimization problem is that it tells which way the
consumer values their consumption, whether it is in the present period or the future period. In the
intertemporal model for health, as discussed in class, it was determined that those who discounted health
in the future were generally less healthy in the current period than those who valued health in the future.
We also made this connection of those who discount future health are also more likely to discount other
decision that require less consumption of either food or leisure or income today for a higher potential in
the future, such as pursuing higher education for a higher future income, or saving more money today for
consumption in the future.
(16) Explain why the Grossman model is referred to as a model of investment in health
capital. Why is it an intertemporal optimization problem?
The Grossman model is referred to a model of investment health capital because individuals choose how
much to invest in health capital today, but these benefits are not seen immediately they are seen tomorrow.
It’s an intertemporal optimization problem because it is a utility maximization problem where your making a
decision today will affect your well being tomorrow. If someone discounts the future heavily their behavior
will reflect this, and it’s the same for someone who discounts the future at a less value. If they value the
future less they will choose to consume more today and invest less today. For someone who puts more
weight on the future, they will choose to consume less today and invest more today. Individuals will choose
their combination of consumption and investment based on which will give them the highest utility.