There were good reasons for excluding outpatient drugs from medicare back in 1968, and there are good reasons for including them now, but we should also take this opportunity to reconsider how we cover various types of care.
Proponents of such a national plan generally see it as being structured along the lines of our current hospital and physician insurance plans. That would be a very serious mistake.
The system at present is funded on a pay-as-you-go basis, meaning that current spending is funded out of current tax revenue. Since we tend to make more use of care as we get older, it also involves an intergenerational transfer, from younger current taxpayers to older current beneficiaries.
As the population ages, that structure is going to come under increasing strain, not just because the older population is growing but, more importantly, because the ratio of taxpayers to beneficiaries will be steadily shrinking.
In building a national drug insurance system, we need to recognize that there are three types of coverage to consider.
The first is coverage for acute illness – cases where you either recover or die within a year. That kind of illness can be handled within a standard insurance program, where current premiums cover current expenditures. A lot of us have that kind of drug insurance, obtaining it through our employers. Still, all we need to do with that coverage is separate it from employment, so we can take it with us when we change jobs, and subsidize coverage for the lowest-income groups.
The second type of coverage is for headline-grabbing illnesses. There have been reports in the media recently about children with rare diseases, whose drugs cost hundreds of thousands of dollars a year. Those drugs are expensive at the individual level but the number of patients involved is so small that at the population level, they’re cheap. They could be covered out of separate programs.
The problematical case is that of chronic illness. Chronic illness isn’t insurable, under traditional plans, because once you develop one, the probability that you will need drug treatment approaches 100 per cent. An illness like that isn’t insurable because standard insurance is based on sharing risk, and when you’ve got a chronic illness there’s no more risk to share. It’s for these cases that we need a new structure.
We need a form of lifetime drug insurance, a mandatory program that we all pay into each year (with tax subsidies for the lowest-income groups) that effectively securitizes insurance. Think of it as making annual payments for a security that will pay off in the form of an annuity if you develop a chronic illness, where the annuity’s annual payments will cover the annual cost of drugs. Or think of it as buying into a guaranteed, renewable insurance policy, where you are insuring against a lifetime risk, at an actuarially appropriate premium, but spreading your payments out over your entire life, overpaying in your healthy years to fund payouts should you develop a chronic illness in later years. But above all, think of it as a mutual insurance pool of which we’re all members.
Our national health insurance system encourages us to act as if someone else – the government – is paying for our care, rather than acknowledging that we are paying for it and that the government is simply managing the funds.
Whatever the final details of a national pharmacare plan, it must be at arm’s length from government and must be actuarially sound, on a lifetime basis. We have to see it as a mutual insurance pool into which we all pay and from which we might or might not have to draw.
Basically, we have to set it up so that we are saving for our future pharmacare needs, rather than assuming that at some point in the future, governments will find somebody they can tax in order to pay for what they’ve promised us.
Brian Ferguson
is an economics professor at Guelph University and Fellow in Health Care Economics at the Atlantic Institute for Market Studies, a public policy think-tank in Halifax.