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Should Public Drug Plans be Based on Age or Income?

Author

Listed:
  • Colin Busby

    (C.D. Howe Institute)

  • Jonathan Pedde

    (C.D. Howe Institute)

Abstract

Drugs have become an increasingly critical part of healthcare services in Canada over the last few decades – with nearly $30 billion spent on prescription drugs nationwide in 2013. But it’s not clear that the current design of most provincial drug plans can withstand the financial pressures of an aging population and offer equitable access to public benefits. Owing to budgetary constraints, each province has designed unique, non-universal drug coverage to fill the gaps where private insurance does not exist. Provincial drug plans offer coverage based on an individual’s age, income, availability of private insurance (through one’s employer), or some combination of the three. We look at the most common age-based provincial plans – as well as the trend towards income-based plans. Age-based plans, which usually apply only to seniors, have major drawbacks. These include a cost structure that will be pressured from an aging population and inequities in benefit access: seniors with income and drug needs similar to a working-age family without private drug coverage pay a much smaller share of their drug costs than the family does. Provinces with age-based plans also extend benefits to those on social assistance, making transitioning off welfare difficult for families with drug needs. Further, low-income workers are those most likely to be under- or uninsured in provinces with age-based plans, which include Ontario, Alberta, Prince Edward Island and Nova Scotia. Income-based plans have challenges as well. They must be designed carefully to avoid significantly increasing in public costs and hindering access to prescribed drugs. Plus, provinces must consider how income-tested benefits can have negative incentive effects on work. High marginal tax rates reduce the incentive to work and earn. And when combined with reductions in the plethora of targeted government programs, badly designed income-based plans can create high marginal tax rates. We compare the advantages and pitfalls in moving from an age-based plan to one based on income. Further, we glean lessons from provinces with income-based plans – British Columbia and New Brunswick, which will have a new plan in 2015. On balance, we find that the benefits of an income-based plan make them superior to age-based ones. An income-based plan would apply to all individuals and families without private coverage, including those on social assistance and seniors. Although much of the discussion for reforming Canada’s drug coverage to date has focussed on creating a universal federal drug plan, other options must be explored absent political traction in pursuit of this approach. Age-based plans might have been a cost-friendly option decades ago when the ratio of seniors to workers was low, but the wave of retiring baby boomers will rapidly makes these plans less affordable. Income-based plans are a better alternative for cash-constrained provinces.

Suggested Citation

  • Colin Busby & Jonathan Pedde, 2014. "Should Public Drug Plans be Based on Age or Income?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 417, November.
  • Handle: RePEc:cdh:commen:417
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    File URL: https://www.cdhowe.org/public-policy-research/should-public-drug-plans-be-based-age-or-income
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    References listed on IDEAS

    as
    1. Steve Morgan & Jamie R. Daw & Michael R. Law, 2013. "Rethinking Pharmacare in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 384, June.
    2. Colin Busby & William B.P. Robson, 2011. "A Social Insurance Model for Pharmacare: Ontario's Options for a More Sustainable, Cost-Effective Drug Program," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 326, April.
    3. Finn Poschmann & Alexandre Laurin, 2014. "Who Loses Most? The Impact of Taxes and Transfers on Retirement Incomes," e-briefs 189, C.D. Howe Institute.
    4. Morgan, Steven G. & Agnew, Jonathan D. & Barer, Morris L., 2004. "Seniors' prescription drug cost inflation and cost containment: evidence from British Columbia," Health Policy, Elsevier, vol. 68(3), pages 299-307, June.
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    Cited by:

    1. William Robson & Colin Busby & Aaron Jacobs, 2014. "Healthcare and an Aging Population: Managing Slow-Growing Revenues and Rising Health Spending in British Columbia," e-briefs 195, C.D. Howe Institute.
    2. Wang, Chao & Li, Qing & Sweetman, Arthur & Hurley, Jeremiah, 2015. "Mandatory universal drug plan, access to health care and health: Evidence from Canada," Journal of Health Economics, Elsevier, vol. 44(C), pages 80-96.
    3. William Robson & Colin Busby & Aaron Jacobs, 2015. "Managing Healthcare for an Aging Population: Are Demographics a Fiscal Iceberg for Newfoundland and Labrador?," e-briefs 200, C.D. Howe Institute.
    4. Benjamin Dachis, 2018. "Fiscal Soundness and Economic Growth: An Economic Program for Ontario," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 505, March.
    5. William Robson & Colin Busby & Aaron Jacobs, 2014. "Managing Healthcare for an Aging Population: Ontario’s Troubling Collision Course," e-briefs 192, C.D. Howe Institute.
    6. Colin Busby & Ramya Muthukaran & Aaron Jacobs, 2018. "Reality Bites: How Canada’s Healthcare System Compares to its International Peers," e-briefs 271, C.D. Howe Institute.

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    More about this item

    Keywords

    Social Policy; Health Policy;

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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