Should Public Drug Plans Be Based on Age or Income?

32 Pages Posted: 10 Dec 2014

See all articles by Colin Busby

Colin Busby

C.D. Howe Institute

Jonathan Pedde

University of Oxford, Merton College

Date Written: December 3, 2014

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 focused 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.

Keywords: Social Policy, Health Policy

JEL Classification: I10; I18

Suggested Citation

Busby, Colin and Pedde, Jonathan, Should Public Drug Plans Be Based on Age or Income? (December 3, 2014). C.D. Howe Institute Commentary 417. Available at SSRN: https://ssrn.com/abstract=2535505 or http://dx.doi.org/10.2139/ssrn.2535505

Colin Busby (Contact Author)

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada

Jonathan Pedde

University of Oxford, Merton College ( email )

Oxford
United Kingdom

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