What Paul Ryan, and His Critics, Can Learn From Canada

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By Evan Soltas

Paul Ryan's controversial plan for Medicaid takes a cue from a country President Barack Obama and congressional Democrats frequently cited during debates over the Affordable Care Act: Canada.

The Canadian experience shows that block grants can improve the quality of government health benefits, so long as they are structured properly. Liberals laud Canadian Medicare (Canada's health insurance program, not to be confused with the American program for seniors) for its single-payer structure and universal access, but they should note Canada's health plan for all is actually run by provincial governments and funded through block grants, the mechanism Ryan now proposes for Medicaid.

Under its block-grant system, the federal government of Canada provides provincial and territorial governments with a single large sum every year to fund Medicare, and they administer the program according to a set of baseline requirements. Once they meet the federal baseline, however, they are free to innovate and get the most for their residents' money.

By fixing the maximum federal contribution, block grants offer Canada's provincial and territorial governments far better incentives to reduce the cost and improve the quality of the medical services they purchase. When costs rise, the provinces that run the programs are forced to pay 100 percent of the added costs at the margin, unlike in the U.S., where state governments pay an average of 43 cents at the margin for every dollar of added Medicaid expense.

Decentralized administration gives provinces the flexibility and the accountability to design their programs according to their needs and particular local challenges, rather than federal "one-size-fits-none" imposition. It also creates opportunities for innovation. By sharing notes, provinces and territories learn from one another and improve their Medicare programs.

Canada has been using block grants for 35 years. After several years of ruinously high growth in Medicare expenses during the 1970s, their federal government abandoned a 50-50 cost-sharing plan in 1977. Through the Canada Health Transfer program, which gives states some money directly and some through tax-shifting agreements, Canadian provinces and territories receive equal per capita aid, regardless of actual health care expenditure.

Growth in aid has varied over time, but starting in 2017 it will match the three-year moving average growth rate of nominal gross domestic product -- which, on rough average, runs at 5 percent annually -- with an unconditional floor of 3 percent annual growth.

By comparison, Medicaid expenditure in the U.S. has grown rather consistently at 10 percent annually for decades, and nominal per-enrollee Medicaid expenditure has risen at roughly 8 percent annually.

The result in Canada has been successful cost control -- indeed, even at the aggressive scale Ryan anticipates for Medicaid. Canada spends far less on health care than its southerly neighbor: 10.9 percent of Canada's gross domestic product, or $4,196 per capita, versus 16.2 percent of GDP, or $7,410 per capita, in the U.S. The rate of health-care cost inflation is less problematic: a net 65 percent rise from 1993 to 2005 in Canada versus a 90 percent increase in the U.S over the same period.

And as Democrats did not hesitate to point out in passing Obama's health-care law, Canada's actual health outcomes are better on measures ranging from infant mortality to life expectancy. The provinces' activities bear witness to the fact that it's Canadian Medicare's fiscal federalism that has generated the innovation needed to improve quality and access without runaway costs.

Over the years, provinces and territories have experimented and shared lessons in mental health and long-term care, in training doctors and nurses, and in shifting from in-hospital to outpatient care -- all of which still represent burdensome and growing areas of Medicaid expense borne by American taxpayer.

Block grants are an important factor behind Canada's medical cost control, but they're not the only one. Canada also controls costs through the monopsony power of single-payer (the government, as the only buyer of health-care services, has unusual power to set prices) and went through an extended period of fiscal austerity during the 1990s, in which all government spending was restrained.

Although block grants would be new to Medicaid, they are already a common feature of public policy in the U.S. The first federal block grant came during the Lyndon Johnson administration with the establishment of the Partnership for Health program, which provided aid to states for public health services and medical research. Today, 20 percent of all federal aid to state and local governments comes via block grant, including major programs like Temporary Assistance for Needy Families, established during the Bill Clinton administration from a number of cost-sharing programs. The State Children's Health Insurance Program is also funded through block grants from the federal Department of Health and Human Services.

Canada shows how block grants can work, and Ryan should take some lessons from how Canada has structured its block grants. He plans for his block grants to grow at the rate of consumer price inflation plus population growth. Simply making block grants grow more slowly than medical costs won't cut total costs, as Canada saw early on in its block granting program; rather, it merely will shift them onto the states or the poor.

Ryan's block grants should grow at medical cost inflation plus the rate of growth in the Medicaid-eligible population, so that grants increase during hard times. Since Medicaid is not a universal program, the level of the block grants should be determined by Medicaid-eligible population, not by total state population, so that per-enrollee expenses are equal, matching Canada's practice of offering equal per-enrollee grants across provinces.

In arguing for Medicaid block grants, Ryan should look northward. Once the liberal exemplar, Canadian Medicare shows that block-granting is not necessarily an idea for Democrats or Republicans, but rather one which simply makes sense for government budgets and Medicaid recipients alike.

Evan Soltas is a contributor to the Ticker. Follow him on Twitter.

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Aug/19/2012 19:04 GMT