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Perhaps inspired by the recent healthcare debate south of the border, the economics department at TD has decided to turn its attention to healthcare in Ontario.   Last Thursday, they released a 34 page treatise called “Charting a Path to Sustainable Healthcare in Ontario” which included ten recommendations to “to restrain cost growth without compromising quality of care”.

Unfortunately the fine folks at TD Economics have missed the mark.  Having more than a few years of healthcare experience under my belt, I’d like to comment on some of their assertions.

Firstly, I disagree that this report contains new ideas.  I would also question their assertion that their recommedations could be implemented in a 1-5 year time line.  Anyone who has worked in the Ontario healthcare sector knows that change happens VERY slowly.

I do however whole heartedly agree that the “current governance structure for the province’s hospitals should also be looked at.” I would start with the Local Health Integration Networks (LHINs). 

The report also encourages an expanded private presence in Ontario’s healthcare sector, yet they also recommend that physician compensation be shifted towards salaried remuneration.  Pharmacies are also largely private; yet curbing generic drug costs has been a momentous struggle for the province.  Is more private sector influence the answer?

I’d like to address six of the ten proposals for reform in the report.  (The remaining four are already being addressed by the Ministry.)

1. Expand information technology use in the system.

• The report points to a relative lack of electronic records in physician offices as impacting health system performance.  However, electronic health records created by a physician are the physician’s private property, and not subject to Ministry performance evaluation.  The billing information obtained by OHIP when a physician requests payment is limited to OHIP #, tombstone information, billing code and perhaps a diagnosis.  Electronic health records in hospitals already exist, and are used for analysis by hospitals and the Ministry of Health and Long-term Care (MOHLTC).
• An increase in data collected is only worthwhile if the information created is material, and results in improved quality and/or decreased cost.  Case in point, how many people have hospitals hired to collect wait time data, none of whom contribute to front line care?  Wait time designated surgeries have crowded out other types of surgeries.  Stories of patients driving themselves to their own cataract operations signal that supply outweighs demand.
• Another example is the recent expansion of the Ontario Healthcare Reporting Standards (OHRS) to include the nursing home sector.  Is this increase in the detail of their reporting, which will require hiring more office staff going to yield better frontline healthcare? If the expansion of OHRS in the hospital sector is any indication, I’d say no. 

2. Establish Commission on Quality and Value for Healthcare

• I was really surprised that a bank would make this recommendation! Giving the Ontario bureaucracy permission to study something is like giving them permission to breed.  At about $125k per analyst for salary and benefits, it is yet another expense that doesn’t contribute to front line care.  As the report points out, many arms-length bodies and academic research institutes exist in Ontario who have capable health researchers and policy analysts.  A commission is an unnecessary expenditure of tax dollars.

3. Alter the way doctors are compensated

• As mentioned earlier, the report’s recommendation to move physicians to salary and away from fee-for-service is contrary to its desire to increase the private sector presence in healthcare.  Physicians are private providers after all.  The authors are correct in pointing out that salary based service provision will lead to gaming of the system by physicians as pilot projects have indicated, and will require more data to monitor physician activity. This in turn will require additional bureaucracy and IT systems to create the data, thus reducing any gain to be had from the suggested changes.
• It seems that the report implies that a physician’s chosen care plan may not always be based on the patient’s best interest.   To imply that a physician would provide a service or perform a procedure on a patient that was for reasons other than appropriate patient care is a serious claim. One the Ontario Colleges of Physicians and Surgeons and Family Physicians are in place to determine and address.

4. Change approach of funding hospitals from a global budget system to one based on episode of care

• First.  Diagnosis-Related Groupings (DRGs), the U.S. acute care grouping methodology is not use in Canadian hospitals. Our equivalent is known as Case Mixed Groups (CMGs).  See the following link for a history on this point.
• Second. MOHLTC has recently announced a new hospital funding methodology to be rolled out April 2011.  While not episodic based, the new method is patient based and more sensitive to demographic and other factors faced by each hospital.
• A change to episodic-based funding would require the CMG methodology for acute inpatients, along with a host of other groupers that exist for ambulatory, chronic, rehab, and mental health patients, to be improved upon.  One reason would be that these measures do not currently adjust for the severity of a patient’s condition, and thus the hospital would not be accurately compensated for the episode of care. Also, these grouping methodologies are based on average actual historical performance, not on best practice, quality or efficiency. 
• Even with these improvements, setting up an episode-based payment system would be infinitely more difficult to accomplish than any system in the financial sector.  MOHLTC’s Assistant Deputy Minister Adalsteinn Brown is famous for his illustration of the complexity of MOHLTC data.  It demonstrates just how completely overwhelmed the Ministry is by the data it already has.  
• To further convert to episodic-based funding not only includes costly IT systems (the healthcare system is littered with failed IT projects), but additional labour as well – none of which will contribute directly to frontline care.

5. Establish pre-funding for drug coverage

• This proposal seems to have its incentives confused – It uses CPP as its structure of choice, which we contribute to and see as a good thing to collect on.  If a seniors’ drug plan were structured in a similar manner, would we want to live a longer, sicker life so we could get our money’s worth?

6. Incorporate a healthcare benefit tax into the income-tax structure.

• The report effectively talks itself out of this idea when the inequities and risks to individual health are considered.

While the document is a good primer on some of the issues facing the healthcare sector today, it amounts to what Charlie Munger referred to as “chauffer knowledge”.  I know from past experience as a senior economist that TD Economics is a fine group with a great deal of analytical smarts.  I think their talents could be more productively applied however to issues of a more financial nature – perhaps in tackling the (less complicated!) problems currently facing the Euro zone.

When the Ontario government hands them lemons, Loblaw will make lemonade.

Loblaw has crunched the numbers and anticipates that they can still come out on top despite the low margins on generic prescription sales resulting from government reforms.

A new strategy

Loblaw announced on May 4^th that they will extending their hours and services at most of their 500 in-store pharmacies, and more than double the number of onsite medical clinics to capture customers who are shopping around for a provider that offers the service they seek.

This is thanks to the droves of customers they predict will come their way from smaller non-diversified pharmacies who can no longer make a go of it, and larger players such as Shoppers Drug Mart, who have driven their customers away by cutting their hours and service.

Their strategy assumes that the customer will drop off their prescription at the Loblaw pharmacy and then browse the rest of the store, picking up higher margin items such as health and beauty products, or other grocery items.  They are betting that these sales will more than make up for any losses on the prescription side.  To minimize costs, Loblaw will be instituting automatic pill counting machines.

At what cost?

This development raises broader questions. If Loblaw is correct it points to a fundamental change in how we as consumers will be able to purchase prescription drugs.  We are shifting from a market of many players of different sizes with varying levels of service to a few large players who control the dispensing of drugs in Ontario. 

Will oligopolistic behaviour ensue?  Will these larger players raise their dispensing fees to increase their margins, and if so will private insurance companies react?  Or will they exercise their market power towards the generic drug manufacturers, to get a better price in return for exclusivity?

Health Minister Deb Matthews is reportedly pleased with Loblaw’s plans, but is the Ontario government sacrificing service in the name of cost? What will become of small pharmacies?  Or underserviced areas where there is no Shoppers or Loblaw?

Pharmacies of all sizes are fighting back with an aggressive campaign against Liberal MPPs including radio ads, mailings and a website portraying the elimination of professional allowances as “cuts to frontline healthcare”.   It will be interesting to see what the public and government response is to such an overtly negative campaign.

One thing is for sure, we will see some innovative pricing strategies resulting from the reforms.

For more background on this issue, see my post “Generic drug manufacturers are the key to solving pharmacy woes”.

By now we’ve all heard about the Ontario Government’s plan to lower prescription drug prices by banning professional allowances paid by generic drug manufacturers to pharmacies.

Drug companies provide these allowances or discounts to pharmacies in return for exclusively stocking their brand of generic drugs.  It is subsequently built into the price that is passed on to the consumer.

A significant portion of a pharmacy’s revenue comes from these allowances. This is particularly so for smaller independents then larger corporate chains who depend less on their prescription related revenue.

What is not being said however is that the generic drug companies also stand to lose as a result of the reforms.  Without the professional allowance arrangement they will lose their exclusivity with pharmacies.  Therefore the drug companies have a strong incentive to find a solution to the pharmacies’ perceived loss as a result of the Ontario Government’s reforms.

How will the generic drug manufacturers address this issue?  They might consider borrowing a trick or two from their name-brand cousins.

Brand name drug companies already deal with a similar situation vis a vis physicians, who are subject to OHIP regulations and the Canada Health Act.  In return for prescribing their name-brand drugs, physicians receive incentives including free samples, conferences and trips, and research funding.

I think in the months to come we will see the generic drug companies using some innovative pricing strategies to once again secure pharmacies’ allegiance.

One final though.  What is the Ontario Government doing to lower the price of name-brand drugs?