Canada Implements a Universal Pharmacare Plan
Scenario:
An American health insurance company obstructs the implementation of a Canadian universal drug coverage plan.
Timeline of Canadian Pharamacare
1947 - The Saskatchewan Government introduces the first provincial hospital insurance program In Canada.
1957 - Paul Martin Sr. introduces a national hospital insurance program.
1962 - Saskatchewan’s CCF government introduces the first public health care program.
1966 - Pearson minority government creates a national public health care program
1984 - Canada Health Act is passed unanimously by parliament
1989 - The Free Trade Agreement takes effect for Canada and the US
1994 - Start of NAFTA trade regulations between Canada, The US, and Mexico
1997 - Quebec introduces the country’s first mandatory pharmacare program.
1997 - The Ethyl Corporation, a U.S. chemical company, used chapter 11 to challenge a Canadian ban on the import of MMT. Canada had to pay out damages of $15 million
2005 - Jacque Chaoulli wins Supreme Court of Canada case. Results in increased calls for a two-tiered private insurance and for-profit health care deliver
2018 – Federal Finance Minister Bill Morneau calls for parliamentary study into a national pharmacare plan
Canada’s current health care system is characterized by both high government intervention, as well as a high degree of private delivery.[1] In Canada, government intervention in the health care system is justified “to ensure a distributive goal of access for all Canadians to important health services.”[2] Though Canada’s constitution gives the provinces jurisdiction over insurance and health related issues, the federal government uses its spending powers to ensure that there are national standards.
Background
CURRENT TRENDS
The current mechanism used to achieve these national standards is the 1984 Canada Health Act (CHA). The act ensures that Canadians are given access to medically necessary hospital services and medically required physician services. The CHA also prevents the development of a two tier system through “a requirement that the federal government claw back from the provinces any amounts that patients pay in the form of user charges and extra-billing.”[3]
Thus Canadians cannot buy higher-quality hospital or physician services within Canada as they would when they buy other goods and services such as legal or investment services. That being said, there are a range of goods and services that are not covered by the CHA including drugs used outside of hospitals, dental care, and home care. In fact, more than 30% of total expenditure on health comes from private sources such as private insurance plans and/or out of pocket payments.[4]
Scenario
The public-private nature of Canadian health care and the pervasive ramifications of NAFTA’s trade provisions may make it difficult for Canada to implement health care reforms. To fully comprehend the way these two issues converge, it is important to examine how they would affect Canada expanding drug coverage nation-wide and implementing some form of national pharmacare. Though some provinces have expanded drug coverage plans for individuals based on age and/or income, for the purpose of this scenario, one will have to imagine that Medicare provisions have been expanded to include universal coverage for all prescription drugs.
Two different models for a national pharmacare plan will be examined.
1. In the first model, the Canadian federal government would amend the CHA to add prescription drugs to its insurance plan. The provinces, not wanting to lose their federal funding, would have to create legislation to prevent a two tier system by inhibiting the purchase of private insurance and coverage plans.
2. In the second model, the federal government and the provinces could create a system of highly regulated market competition between private insurers. In a regulated market competition model there is a general agreement between the employer and the employee, both of which contribute to a pool of money which also includes money generated from general taxation revenue. The provincial government controls the pooled money and then private insurers compete within a highly regulated capacity to gain the business of its customers. However, while private insurers are still allowed to compete with each other, insurers are not allowed to charge different premiums, nor are they allowed to discriminate membership based on age, sex, state of health etc.
In both of these models there are difficulties that may arise due to NAFTA related provisions.
Roadblocks
In 1994, the North American Free Trade Agreement established a free trade area in Canada, the U.S. and Mexico. NAFTA’s provisions extend to all economic sectors, including the Canadian health sector, except where exceptions or reservations have been applied. One of the most crucial provisions in NAFTA is the national treatment role. It requires Canada to treat, investors, service providers, corporations etc. and other relevant entities from the U.S. and Mexico no less favourably than it treats its own Canadian bodies. Essentially, American and Mexican bodies must be given the same rights and opportunities as their Canadian equivalents.
Another crucial aspect of NAFTA is Article 1110, also known as the expropriation provision. The provision makes it difficult to retreat from trade liberalization or privatization. Essentially, no country can directly or indirectly nationalize or expropriate an investment of “an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment except: [7]
FOR A PUBLIC PURPOSE
ON A NON-DISCRIMINATORY BASIS
IN ACCORDANCE WITH DUE PROCESS OF LAW AND ARTICLE 1105(1)
ON PAYMENT OF COMPENSATION
That is to say, if the Canadian government attempt to fund or provide health care services in a field that was already privately financed or open to private providers, such action might be perceived as nationalization or expropriation, thus, allowing a company or investor to sue for compensation for lost business. Moreover, it was determined that in a claim brought against the Canadian government by S.D. Myers Inc, “other kinds of legislation and regulations that impact on (but do not explicitly preclude) foreign participation may or may not be used as the basis for a successful expropriation claims.”[8] If a company’s access to the Canadian market is hindered, impacted or blocked due to government regulation, it may “sue” Canada for compensation under NAFTA. This is also known as NAFTA’s investor-state dispute settlement provision. Two final relevant provisions in NAFTA regarding health care are the Annex I and II reservations. When originally negotiating the trade agreement, the three parties of NAFTA were permitted to make certain reservations that would protect particular sectors from the full effect of the agreement. NAFTA’s Annex I reservation allows Canada’s provinces, territories and local governments to maintain existing health care measures. However, the reservation also requires any new health care measures to be compatible with NAFTA rules. In terms of health care, the most important reservation rests in Annex II. According to the reservation:
[Canada] reserves the right to adopt or maintain any measure with respect to the provision of public law enforcement and correction services, and the following services to the extent that they are social services established or maintained for a public purpose income security or insurance, social security or insurance, social welfare, public education, public training, health and child care.[9]
For Canadian negotiators at the time, this reservation was intended to protect Canada’s health care sector from the full force of NAFTA because it was deemed a social service with a public purpose.
The Canadian government and its trade representatives have often preferred a broad interpretation for the Annex II reservation. Canadian reservations have emphasized “government intent” as a means of determining whether a service is provided for public purpose. Government intent is often defined by an explicit indication that government action is supposed to have, or it can be inferred from the circumstances.[10] For example, Canada can explicitly say its health care is for public purpose, or it can claim that it is for public purpose based on the fact that health care services are funded through general taxation to ensure universal public access. The American government and its Trade Representatives have expressed views in the opposite direction. Instead of a broad interpretation, Americans prefer a narrow interpretation of this Annex II reservation. Instead of focusing on public purpose, they focus on the social services aspect of the reservation. According to Americans, if a social service is provided by a “private firm” then it is subject to the full force of NAFTA.[11] This creates an issue for Canada because currently there are public and private forms of drug coverage in Canada. For example, while Ontario does offer drug coverage for all individuals under 25, there are various private health insurance providers that also provide health insurance for the same demographic. Therefore, the social service of “drug coverage” though provided in part by some provinces, is also provided by private companies. If the American interpretation were determined to be the correct interpretation, then this would have the prospect of obstructing Canada’s ability to provide universal public drug coverage.
Likely Scenario Outcomes
If the federal and provincial governments move to prohibit the purchase of private insurance, as suggested in the first model of the scenario, American companies might find grounds under NAFTA to undermine these sorts of reforms. According to a 2015 study by the Canadian Health and Life Association, just over twenty percent of private health and life insurance providers in Canada were American.[12] Of the coverage offered by these American companies, drug coverage represents about one-third of their overall business. [13] That means if Canada were to implement its own form of universal drug coverage, thereby expanding public coverage and eliminating the opportunity to purchase a private drug plan, these American health insurance companies would stand to lose at least a third of their business. In the first model, in which Canada implements a national pharmacare plan that prohibits the purchase of private insurance, under NAFTA’s expropriation provision, American companies could sue for compensation for a loss of nearly 30% of their business. The Canadian government could claim that a universal pharmacare plan was for “public purpose” and thus exempt from NAFTA provisions. However, using their interpretation of social service, the Americans would hold that because prescription medications used to be provided by private insurers, it is a service subject to the full effect of Article 1110.
In the second model, in which regulated competition reform was implemented, it is hard to see how the Americans would not hold a similar opinion. The U.S. Trade Representatives could similarly argue that a system in which private companies are providing services is hardly one that is a social service with a public purpose. Moreover, in a system of fixed premiums, American health insurers could make the case that this regulation has a disparate effect on them, tantamount to expropriation that affects their ability to compete in the Canadian market. Their ability to price services and goods would be greatly hampered and their revenue generating ability would be certainly hindered. Using this line of argument, the companies could again bring their case against the government of Canada. At this point, it is important to note that it is expensive and time consuming to bring an expropriation claim against a government. Most insurers would not bring a claim unless there was proof that would sustain losses equal or greater to the cost of bringing a claim. However, the mere threat of expropriation claims may discourage expanding Medicare’s coverage where they believe that to do so might result in costly compensation payments.[14] With the amount of existing fiscal constraints acting as an impediment to a system in well need of reform, the threat of a compensation claim under Article 1110 would only serve to deter Canadian action. Theoretical risks might not actually turn into a realistic threat, but the mere theoretical risk posed by NAFTA may serve as a deterrent towards the implementation of a national pharmacare plan.
Figure 1 Paul Ryan discusses the repeal and replace of Obamacare (Win McNamee/Getty Images)
Next Steps
1
Canada and the United States have very different interpretations of what the reservation means. They must move to refine the reservation and define social services and especially public purpose. With NAFTA negotiations ongoing at the time of this writing, the Canadian government has an excellent opportunity to do this. The Canadian government would find it beneficial if it pursued a definition of public purpose which allowed the government to explicitly dictate what the purpose of a particular policy or program was. This would allow the federal government and the provinces an opportunity to express what programs were for “public purpose”. If it could not achieve this, at the very least a definition of public purpose could focus on how a particular policy or program is financed. For example, a program may be for public purpose if it is financed through a public taxation plan for the purpose of opening access to all Canadians.
2
The Canadian government should look to push the United States on the investor-state dispute mechanism. During the seventh round of negotiations, Mexico and Canada applied pressure on the United States to come to an agreement on the investor-state dispute mechanism.[15] During the eighth round, Canada should again continue to apply pressure with the added help of Mexico to either have the mechanism scrapped or have an option to opt out to of the dispute settlement. To date, Canada has had to pay out $314 million due to the investor-state dispute mechanism.[16] Therefore, for Canada to implement a national pharmacare plan with any fiscal responsibility it needs to ensure it will not be sued for compensation by an American health insurance company. One way of doing this is by amending or dropping the investor-state dispute mechanism.
Figure 2 Foreign Affairs Minister Chrystia Freeland with U.S. Trade Representative Robert Lighthizer and Mexico's Secretary of Economy Ildefonso Guajardo Villarreal. (Manuel Balce Ceneta/Associated Press)
3
The 2018 Federal Budget said that the government would study the implementation of a national pharmacare plan. Back in September of 2016 the federal government asked the Parliamentary Budget Officer (PBO) to provide a cost estimate report of implementing a national Pharmacare program. This report was then cited by Finance Minister Bill Morneau during his budgetary policy proposal as a sign of the viability of a national pharmacare plan. The problem with the PBO’s report was that in generating the cost for such a program, it did not look at how the implementation of such a program would be affected by free trade agreements such as NAFTA.[17] If a U.S. company were to sue Canada for compensation due to expropriation, this would be an unseen cost that could affect the economic viability of such a reform. Therefore, in their final study of a national pharmacare plan, the government needs to study the effects that NAFTA and other free trade agreement may have on Canada’s ability to efficiently implement a pharmacare plan.
Figure 3 Bill Morneau delivers the budget in the House of Commons (Chris Wattie/Reuter)
4
The Canadian government should be wary of the export of Canadian health services and goods. Trade deals and their benefits do not ever flow one way. For example, if Canadian firms look for increased opportunities abroad i.e. providing private health insurance in the United States, Canada may be forced to grant reciprocal treatment to foreign interests which could undercut Canada’s ability to reform and/or expand Medicare. Thus, moving forward, Canada should be looking for safeguards and permanent features of treaties which make it clear that no commitment in any sector affects the Canadian health care system and its ability to protect the health of Canadians. Conversely, as a good reciprocal global citizen, Canada will need to ensure that it makes no requests to pressure other countries to open up their health services industry and their ability to regulate said sector.
Chrystia Freeland and Canada’s Overall Objectives
A scenario in which Canada attempts to reform its health care system is a telling example of how the domestic and international interact and even more telling about the relationship between the United States and Canada. The issue of Canadian health care reform shows how free trade agreements are more than just about economics. Trade treaties can be extremely intrusive and their deregulatory nature means they are often hazardous to public/social services such as Canada’s Medicare. In many ways, Canada’s ability to reform its health care system represents something more than just the health of Canadian citizens. Medicare has been described as, “a unifying force, a national obsession, and, not least, one of the few features that allows Canadians to differentiate themselves from their neighbours to the south.”[18] Canada’s health care system is often characterized as being, “embedded' in Canadians' perceptions of their political culture.[19] It is fair to say that Canada’s ability to protect its health care program goes to the core of being Canadian. In her foreign policy speech in 2017, Chrystia Freeland stated
The path we choose must be one that serves the interests of all Canadians and upholds our broadly held national values.
Therefore, if Medicare and open and equal access to health care represents one of Canada’s most cherished national values, then Canada's foreign policy must ensure that it is not only protected as it stands, but that it is protected in a way that allows Canada to expand, reform and improve their system. Moreover, Canada’s ability to expand its drug coverage represents key aspects in Canadian-American relations. Canada has long struggled to define itself in the face of its economically, culturally, military and politically pervasive southern neighbour. Canadians have always found comfort in distinguishing themselves from their American counterparts through its health care system. If Canada cannot protect its health care system, it stands to lose more than just the physical health of its citizenry, it may also lose a sense of its independence. The Canadian government, both federally and provincially, needs to secure treaty commitments to secure the protection of Medicare and the ability to reform its provisions to meet the changing dynamics of Canadians health. The expansion of Medicare represents not only Canada’s ability to protect its vital services, it also demonstrated Canada’s capacity to act as an independent, autonomous actor capable of fighting American lobbying power.