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The Health System & NAFTA: Is it Any Surprise That the Health System is in T
Date: Thursday, June 24 2004
Topic:


The Health System & NAFTA: Is it any Surprise that the Health System is in Trouble?

by Nathan Say


After 10 years of the NAFTA, and 15 years of “free trade” in Canada, it may be too soon to see the effects of the agreements; however at the same time it may be too late to learn lessons about these agreements that constrain governments when it comes to public policy. Due to the chapters on investment and services (chapters 11 & 12, respectively) there are strict limitations on the ways governments can implement public policy & services. The NAFTA is set up to protect and encourage government measures that increase market liberalisation, including in the health sector, and locks it in so that future governments cannot revert back to public ownership and delivery. Note that this is fundamentally at odds with the general principle of a national, publicly funded & operated health plan. As we will see, the NAFTA provides unprecedented rights for foreign investors to profit from health care delivery in Canada.



The Heath System & “Free Trade”

At the time of the 1988 FTA between Canada & the United States, Canada was a small-time exporter of services, while the United States was a major exporter of services and during the Uruguay round of the GATT negotiations (1986), the US government tried on behalf of their corporations to include free trade in services in the GATT agreement. Since 1982 the US had been trying to address barriers to trade in services. To begin the process of liberalizing trade in services, they proposed “national treatment,” where foreign corporations are treated the same as domestic ones; they also wanted “transparency”, meaning that all new government regulations had to explicitly state their impact on trade in services; and a dispute settlement mechanism relating specifically to services. A report released by the US Office of Technology Assessment published in 1987, recommended that “although immediate payoffs in terms of US jobs and US exports will be small, the long-run strategic importance of services makes the goal a vital one. The negotiations promise to be lengthy and difficult: far more than in manufacturing, trade (and investment) barriers in the services - almost always non-tariff in nature - have domestic policy rationales.” [1] Luckily for them, the Mulroney government’s negotiators, when they were negotiating the 1988 FTA, “…paid amazingly little attention to the implications of free trade in services and the problems they would cause Canada. In the agreement the US has received extraordinary concessions from Canada in the area of services – considerably beyond what the US was pushing for.”[2] This report of the Office of Technology Assessment didn’t single out Canada’s health system in particular, however given the repeated attempts by the US government on behalf of their corporations to include “free” “trade” in services in such agreements as the OECD Multilateral Agreement on Investment (MAI), WTO General Agreement on Trade in Services (GATS) and the Free-Trade Area of the Americas (FTAA) it certainly seems determined to remove barriers to trade in services.


In the 1988 FTA the US corporations got national treatment, so US & Canadian businesses operating in Canada are treated as equals. It even (strangely) allows a provincial government to discriminate against Canadian firms based in another province, even though they must treat American ones as if they are local provincial ones. In other words, US firms have greater rights in Canada than other Canadian firms; this leads to serious job losses in industries where services can be provided outside the country since US firms don’t have to be inside Canada. For example, due to technology and communications, a radiologist can examine someone from a remote location, possibly thousands of kilometres away. The US corporations also got a dispute-settlement mechanism. Until that point, there had been no effective dispute-settlement mechanism for services. Under section 301 of the 1974 US Trade Act, the US government is technically able to remedy foreign government practices which affect the competitiveness of American service firms.[3] One might wonder what the Mulroney government was thinking when they negotiated the first free-trade agreement: “The intent of the agreement is clear – to integrate the service sectors of the two nations…The [Mulroney] government has little understanding of the true significance of the service sector in generating wealth and income in this country, and even less understanding of the impact of increased American penetration in our service markets.” [4] (Incidentally, if you watched the recent federal leaders’ debate you’d know that, just as clear is Stephen Harper’s desire to integrate the service sectors of Canada and the United States. I wonder what services he meant by that, health services, education, financial services, services that don’t require a local presence?)


A nearly unanimous majority of Canadians agree that “Canada’s public services should be delivered by public sector workers accountable to elected representatives and the public, not by corporations accountable to shareholders.”[5] This is likely because of our sparse population, reliance on resource-based economy and our proximity to a large, powerful neighbour. One thing that comes up constantly in writings about the effects of NAFTA/FTA with regard to services is the so-called “ratcheting effect”, which constrains governments to only liberalise their economies. The advocates of the NAFTA claim that the existing social programs are exempt from this since Articles 1101.4 and 1201.3(b) of the NAFTA say that: “Nothing in this chapter shall be construed to prevent a Party [NAFTA country] from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security, social welfare, public education, public training, health and childcare, in a manner not inconsistent with this chapter.”[6] So it would appear that the health system is protected, however, this will lead to gradual deterioration of services because of the requirement that publicly-provided services must satisfy the strict rules in the chapter, particularly national treatment. Annex II-C-7 also states that: “Canada reserves the right to adopt or maintain any measure with respect to the provision of public law enforcement and correctional services, and the following services to the extent that they are social services that are maintained for a public purpose: income security, public training, health and child care.”[7]


How safe the public services (including health care) are depends upon how this statement is interpreted. In 2000, Alberta’s Bill 11 (formerly called the Health Care Protection Act) was passed, which allows private corporations to operate facilities for “day surgery” procedures. Surgeons bill the province with no direct cost to the patient, that is, private for-profit facilities bill the government in a manner reserved for non-profit organisations. US trade representatives claim that if Canadian firms are allowed to provide hospital services which were previously provided by the non-profit sector, Annex II-C-7 doesn’t apply because the services would then be provided for a commercial purpose rather than for a public purpose. [8] Thus Bill 11 could lead to a dispute resolution process which takes place in a secretive NAFTA tribunal. Contrary to the Klein government’s assurances that Bill 11 is “one of the strongest pieces of legislation in Canada to protect the health system” [9] (whatever that means), a legal opinion from international lawyer Steven Shrybman said that “once US corporations gain entry to Alberta’s health care system, it will be virtually impossible to stop or reverse a foreign private takeover of our health care system – not just in Alberta, but across the country.” This is because “the dispute resolution process is designed to protect foreign investors, not public services” and is a “highly coercive enforcement mechanism” which is “available only to corporations.”[10] It is not very surprising that only 39% of people in Alberta were in favour of the Bill.[11] Instead of confronting the potential trade issues that Bill 11 created, the federal government was happy to stand by and merely “ensure that the Canada Health Act is not violated”[12] (which it is, by the way). Incidentally, the federal Minister for International Trade at the time was Pierre Pettigrew, who was also trade minister throughout the FTAA negotiations, and has been Minister of Health since Paul Martin became Prime Minister. (!)


The NAFTA doesn’t state what a service is (done on purpose, I assume); it only states what a service provider is (someone who provides a service and someone who wishes to provide a service), and what a service is NOT. Financial services are not included in chapter 12 (on cross-border trade in services), they are in another chapter, as are subsidies and grants. The local-presence rules are gone, and since new technologies make cross-border services possible, a radiologist in the US can examine a patient in Canada, thousands of kilometres away. There are also new professional licensing rules. Article 1210.1 says that governments must “endeavour to ensure that any measure adopted or maintained by a Party [NAFTA country] does not constitute a barrier to trade” and to do this, any measure must be based on “objective and transparent criteria, such as competence & the ability to provide a service”, which sounds fine, but it must “not constitute a disguised restriction on the cross-border provision of service.”[13] Governments are not required to harmonise their standards, however they are strongly encouraged to.


In contrast with services, NAFTA gives a very broad definition of investment, indeed, it is so broad that much of Canada’s health system counts as an investment under international trade law, and is covered under NAFTA. An investment includes a business (incorporated or not incorporated), shareholdings, loans made to foreign companies for more than three years, real estate, intellectual property and goodwill. (I’m not sure why investment and intellectual property are in a trade agreement though). It obliges Parties to protect the investments of NAFTA nationals and their business entities in chapter 11 which protects investors’ rights. One of the things that has likely caused many governments problems is the broad use of ‘expropriation’ in the agreement. Like the word ‘service,’ expropriation is not defined. However under international law it is “any act of government used to deny benefit of property”, and it is necessary to establish that a government has unreasonably interfered with the use of private property. As noted, the word is used in a much broader sense, such as “a measure that is tantamount to nationalisation or expropriation”, in other words, “any substantial interference with a property right is likely in the nature of an expropriation and almost certainly a measure tantamount to expropriation.” So expropriation can take place whenever there is substantial and unreasonable interference with a property right. If a government wants to provide services in a sector where there is existing competition, it could harm the property of a NAFTA investor (i.e. cut into profits, market share, goodwill, etc). [14] So clearly, once something is privatised, there is no turning back. In the words of Toronto international trade lawyer Barry Appleton, the NAFTA is, in effect, a “one-way street” towards privatisation. [15]


There has been quite a bit of discussion of Americans coming to Canada to buy drugs here, since they are much cheaper than they are in the United States. [16] Since preferential treatment is not allowed, there is nothing we can do if the Americans are buying enough of our drugs that the price for Canadians goes up, or worse, so that we simply don’t have enough for ourselves. Bill C-91, was passed in 1993, combined with NAFTA’s Article 1709(6) ended Canada’s system of compulsory licensing, which had a moderating effect on drug prices. Before that time, the health system paid for 13.8% of its budget for pharmaceuticals. Afterwards, though much of the costs were downloaded to the provinces. The conditions under which such a system could be reintroduced are very narrow. [17]


Throughout the history of Canada-US relations, a long-term goal of Canada’s was to have a common definition of a subsidy with the United States. Even a NAFTA working group under the Chrétien government was unable to find a workable definition of “subsidy” that we could use with the US. The NAFTA though, says that new subsidies, or existing subsidies that give preference for purchase of domestic goods or performance requirements, etc are not allowed. [18] Since the word subsidy is not clearly defined, one of our senior trade negotiators, Mel Clark, has written that the health system itself could be argued to be a subsidy to Canadian exporters since health insurance costs US corporations much more than domestic Canadian ones, due to the publicly-funded & operated health system. This is the reason he gives for the deep cuts to social services in the 90s; it’s because if we fund the system “too much” it would become an unfair (and illegal) subsidy to Canadian exporters. [19] Barry Appleton has written that if we increase funding the system too much, it would compete with the private corporations, undercut their market share and ability to operate profitably in Canada, in effect harming the property of the NAFTA investor, i.e. an expropriation. [20]


Public vs. Private

There are a few reasons why there has been a gradual increase of a private health system in Canada:

- Constraints on the fiscal capacity of governments, reduction of services funded by the public health plans. Provinces have reduced out-of-province coverage and dropped some services like dental, chiropractic. Newer, cheaper procedures have not been listed in health plans where older, more expensive procedures remain

- Reductions on the length of in-hospital patient stays have changed the need for auxiliary services and increased the need for recuperative care facilities and home care support.

- The development of private health organisations has already begun. Corporations that provide comprehensive, quick in-house patient medical evaluation for life or disability (quick for those who can pay). They rely on an exemption in the Canada Health Act and have become prototypes for Canadian HMOs[21]


What’s wrong with a private system? According to a typical study by an armchair theorist economist (not from the medical community) who advocates a parallel private for-profit health system, “the Canada Health Act [which protects a publicly-funded & operated health system] is the single greatest barrier to the creation of a world-class health care system in this country” and that “The rules, interpretations and principles of the Act have harmed Canadian patients and taxpayers,”[22] so we need to do the following things, and for the following reasons which were published in a Fraser Institute occasional paper:

1. Privatise hospitals and other health facilities. This is to get the costs of the facilities off the governments’ books, since the money would be better spent on other things, and would improve care in general.

2. Define the roles of regulator, purchaser & provider. That is, a provincial government should reduce its role to only that of a regulator of the system, funder of regional health authorities (RHAs), and monitor of contract obligations between health care facilities.

3. Introduce a new payment system for hospitals and surgical services. As the system is now, the provincial government controls hospital expenditures, resulting in fewer services & a lower standard of care since it disconnects funding from provision of services. Changing the way that this is done would create “powerful incentives to deliver a greater quantity and quality of services without leading to dramatic cost increases”.

4. Consider public-private partnerships (P3s) for the construction and operation of new health services infrastructure, in which the private sector participant can be a for-profit business or a non-profit organisation.

5. Remove all restrictions on a parallel private health-care system.

6. Move from the single-payer purchaser model to a system of many competitive insurers where individuals are required to be insured for a basic set if health services. [23]

It all makes sense, doesn’t it? The profit motive ensures that people will be well-cared-for since a corporation wouldn’t want to lose its reputation; the governments wouldn’t have to worry about costs, and the funds can be spent on other things; have a parallel private system so that people who need care immediately can get it, etc. But these are precisely the same reasons the medical community gives for the higher mortality rates and higher costs of a private, for-profit system!


With private and P3 hospitals, the private companies build and own the facilities and then lease them back to the government over the course of 30-60 years, at the end of which, the private owners, not the public, own the building. Everywhere P3s have been tried it has been a disaster: there have been ceiling cave-ins and mechanical failures due to cutting corners when building the facilities; P3 hospitals in Britain cut hospital staff by 30 percent. A P3 system is much more expensive as well. Hundreds of millions of dollars have been spent on consultant fees; there are huge legal fees due to the private owners trying to get out of contractual obligations. Nova Scotia cancelled its P3 schools program but is left with expensive 35-year leases and $32 million in extra costs; the school construction was poor, the public access was limited and the students even had to drink bottled water for a year after arsenic was found in one school’s water supply. Not surprisingly, the school’s owner wouldn’t take responsibility. In PEI the government cancelled a P3 hospital when it found out how expensive it would be; in BC a P3 information system at Vancouver General Hospital didn’t save $72 million as predicted, but cost $82 million more; in Alberta the public board of a P3 school is paying for cheap building techniques. [24] It is no wonder that most Canadians are in favour of direct public investment to improve our public infrastructure. [25] All this has been packaged and sold to the public as “fiscal prudence” and as “necessary” to keep a balanced budget.


Regarding a parallel private system, the fact that it would be much more expensive and have a higher mortality rate than the current public system is possibly one of the most highly-warranted (scientific lingo which means “true” or “fact”) conclusions that has come out of the medical community in the last few decades. For decades, “studies have shown that for-profit hospitals are 3 to 11 percent more expensive than not-for-profit hospitals; no peer-reviewed study has found that for-profit hospitals are less expensive.” Despite the fact that for-profit hospitals typically spend less on personnel, avoid providing charity care and shorten stays, their administration and ancillary services, their total costs are much higher than in a not-for-profit system. [26] Indeed, the US spends far more than other countries on health [27], and if the US adopted a more efficient Canadian-style single-payer health system it would save them $294.3 BILLION annually [28][29], which could be saved - or better yet - spent on Humvees, tanks, nuclear weapons and Star Wars. In comparison, if Canada were to adopt a private, for-profit, US-style health system, our costs would increase by 19%. If we were to convert only half of our hospitals to private for-profit facilities it would cost us $3.6 billion more annually. [30]


The market doesn’t weed out the corporations that offer inferior products at inflated prices either, simply because the textbook model doesn’t exist, and cannot exist in the health system. Hospitals operate as monopolies; most people live in an area where there is no competition between hospitals; hospital chains set up where they can control much of the market. An informed choice is also impossible in health care. That is, the health care consumer cannot comparison shop, reduce their demand if the price is raised, nor can they accurately appraise quality (i.e. most patients cannot decide whether a 7-day hospital stay would be better than a 2-day hospital stay followed by 12 days in a hospital-owned nursing facility). Since the consumer cannot accurately appraise a product they cannot determine whether or not the price was fair. Last, neither patients nor employers pay for most of the costs of health care, governments do; a real free market would have many independent buyers & sellers.[31] (Surely this is what the Conservative Party is referring to when it criticises the Liberals for their “waste and mismanagement” in allowing private & P3 clinics to spread during their 11 years in government.)


As noted above, private for-profit facilities, in particular hospitals and dialysis facilities, have a higher mortality rate than not-for-profit ones. Typically, investors expect a 10-15% return on their investment. Administrators also receive bonuses for achieving or exceeding certain profit margins. Private for-profit facilities also must pay taxes. Furthermore, they must do this while providing approximately the same level of care as not-for-profit facilities. Private, for-profit hospitals and dialysis facilities employ fewer highly-skilled personnel (more LPNs and fewer RNs), which is strongly associated with higher mortality rates; in the case of dialysis facilities, the length of treatment is shorter, also resulting in higher mortality rates. So between administrative costs, taxes and the number of highly-skilled personnel, generally a for-profit facility would opt to minimise staff and skill level of staff, resulting in a higher risk of death for the patient. [32][33] One study concluded that “The Canadian health care system is at a crucial juncture with many individuals suggesting that we would be better served by private for-profit health care delivery. Our systematic review raises concerns about the potential negative health outcomes associated with private for-profit hospital care. Canadian policy makers, the stakeholders who seek to influence them and the public whose health will be affected by their decisions should take this research into account.”[34]


I am sure, that to some people anyway, it makes little difference how many tens of millions of patients are studied, how many tens of thousands of facilities are studied, how many tens of millions of patient-hours worth of data are analysed. There are some who simply want to privatise things, regardless of the consequences or cost to the social fabric of Canada. Indeed, “Market medicine’s dogma, that the profit motive optimizes care and minimizes costs, seems impervious to evidence that contradicts it.”[35] Also, “privatisation has other benefits. If working people depend on the stock market for their pensions, health care, and other means of survival, they have a stake in undermining their own interests: opposing wage increases, health and safety regulations and other factors that might cut into profits that flow to the benefactors on whom they must rely, in a manner reminiscent of feudalism.” [36]


Towards the Future

With NAFTA, there’s no going back to a completely publicly-funded and publicly-delivered health system. Politicians may try to assure the masses that private facilities and delivery are only an “experiment,” but to say that it is merely an experiment would imply that those things can be reversed. Now that the door has been opened for private and P3 facilities and health plans, market forces will start pushing in other places, regardless of what the general public thinks of this. In 1992 the government of Salinas in Mexico created major liberalisations in the Mexican economy, and was worried that “a future government could undo the … changes and revert back to state controls and public ownership. A free trade treaty with the United States would prevent such backsliding by increasing the links between the two economies to the point where future renationalization and reregulation would be impossible.”[37] The Mulroney government was right in the middle of this, no doubt knowing that it would be difficult (or impossible) to reverse the changes he made from 1984-1993, like privatizing Air Canada, rolling back of the National Energy Program, abolishing the Foreign Investment Review Agency, etc. Contracting-out of public services started in 1993, and has increased by a significant amount since then, and due to the expropriation, national treatment and preferential treatment clauses in the investment and services chapters leaves our health system, and public services in general, wide open to US corporations.


Our Constitution has no property rights in it; including property rights was considered by the Trudeau government, but they decided against it so they could have greater public policy flexibility (I didn’t think that a Constitution was supposed to protect the rights of the State!) One recommendation I came across which I hadn’t seen anywhere else, but is worth considering. That is to amend the Charter of Rights & Freedoms to better protect property rights of Canadian nationals since the NAFTA acts as a de facto amendment to our Charter of Rights, except that it gives foreign investors greater freedoms than Canadian citizens have. [38]


Some general recommendations to protect our public services given by others are:

- performance requirements and other forms of regulation to ensure that foreign investments benefit Canada

- strategic public investments to support Canadian companies

- expanded training and adjustment programmes

- tax reforms to increase corporate tax revenue and make the personal income tax system more progressive

- spend more on public infrastructure [39]


If someone were to go back to 1992, and during the NAFTA debate, try to say the US government wants to break down barriers to trade in services and that our public services, including the health system, would gradually deteriorate and eventually be privatised, I would think that such a person would be called ‘alarmist’ or a ‘conspiracy theorist’. But that is exactly what has happened. NAFTA affects the health system in many ways, the most significant being the reduction of government involvement. In historic terms, the NAFTA is still in its infancy; however it is not too early to see that it has become one of the most important considerations for future developments in the national health system. Most Canadians do not agree that foreign corporations should be able to set our domestic policy. [40] Whether we only renegotiate the NAFTA to exclude the health system and other services from it, or walk away from the agreement altogether, the survival of the health system through this period of free trade and liberalisation of services is ultimately up to the Canadian people.


Notes

[1] United States Congress, Office of Technology Assessment, International Competition in Services OTA-ITE-328 (Washington, DC: U.S. Government Printing Office, July 1987) 9

[2] Cameron, Duncan, “The Free Trade Deal” (Toronto: James Lorimer & Company) 142

[3] Cameron, “The Free Trade Deal” 144

[4] Cameron, “The Free Trade Deal” 151

[5] “Canadians’ Views on Public-Private Partnerships,” Ipsos-Reid, 8 Apr 2004

[6] “North American Free Trade Agreement,” NAFTA Secretariat,

[7] NAFTA,

[8] Samuel Shortt, “Alberta’s Bill 11: Will Trade Tribunals set domestic health policy?”, Canadian Medical Association Journal 164 (2001) 788-789

[9] Lisa Priest, “Clash in Canada,” Modern Healthcare 13 Nov 2000: 36-37

[10] “Legal Opinions Blast Klein’s Health Bill,” Canadian Union of Public Employees,

[11] Alanna Mitchell, “Just 39% in Alberta back Klein’s Health Bill,” Globe and Mail [Toronto] 21 Apr 2000: A01

[12] Shortt, “Alberta’s Bill 11….”

[13] NAFTA,

[14] Daniel Drache, Terry Sullivan, eds., Market Limits in Health Reform (London: Routledge, 1999) 92-93

[15] Priest, “Clash in Canada”

[16] “Controversy over cross-border Rx drugs heats up,” CBC News 13 June 2003

[17] Drache, Sullivan, 88

[18] Drache, Sullivan, 97-98

[19] “Submission to the House of Commons Standing Committee on Foreign Affairs and International Trade: Hearings on International Trade Priorities and Concerns (WTO and FTAA),” Canadian Union of Public Employees, 30 Apr 1999

[20] Drache, Sullivan, 93

[21] Drache, Sullivan, 98-99

[22] “Kill the Canada Health Act,” editorial, National Post [Don Mills] 7 May 2004B
[23] Cynthis Ramsay, Nadeem Esmail, “The Alberta Health Care Advantage” Public Policy Sources 81 (2004) 72-77

[24] Michele Landsberg, “‘P3’ disasters elsewhere should be a warning,” Toronto Star, 4 May 2003

[25] “Canadians’ views on public-private partnerships,” Ipsos-Reid

[26] Steffie Woolhander, David Himmelstein, “When Money is the Mission – The High Costs of Investor-Owned Care,” New England Journal of Medicine 341(6) (1999): 444-447

[27] “Health Spending in Most OECD Countries Rises, with the U.S. far Outstripping all Others,” Organisation for Economic Cooperation and Development, 6 Mar 2004

[28] Andre Picard, “Let’s not get tangled up in America’s red tape,” Globe and Mail [Toronto] 10 June 2004: A21

[29] Steffie Woolhander, David Himmelstein, “Costs of Health Care Administration in the United States and Canada,” New England Journal of Medicine, 349(8) (2003): 768-775

[30] P.J. Devereaux, et al., “Payments for care at private for-profit and private not-for-profit hospitals: a systematic review and meta-analysis,” Canadian Medical Association Journal, 170 (2004): 1817-1824

[31] Steffie Woolhander, David Himmelstein, “The high costs of for-profit care,” Canadian Medical Association Journal, 170(12) (2004): 1814-1815

[32] P.J. Devereaux, et al., “Comparison of Mortality Between Private For-Profit and Private Not-For-Profit Hemodialysis Centers,” Journal of the American Medical Association, 288(2002): 2449-2457

[33] P.J. Devereaux, et al., “A systematic review and meta-analysis of studies comparing mortality rates of private for-profit and private not-for-profit hospitals,” Canadian Medical Association Journal, 166(11) (2002): 1399-1406.

[34] Devereaux, et al. “A systematic review…” 1405

[35] Woolhander, Himmelstein, “When the market is the mission…” 444

[36] Noam Chomsky, Hegemony or Survival: America’s Quest for Global Dominance (New York: Metropolitan Books, 2003): 120

[37] Martin Feldstein, Kathleen Feldstein, “Mexico’s Maestro,” World Monitor (The Christian Science Monitor Monthly) July 1992: 43-49.

[38] Drache, Sullivan, 100-101

[39] Cameron

[40] “Canadians’ Views on Trade Agreements,” Ipsos-Reid, 6 May 2004







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