Wednesday, August 17, 2005

More Than We Bargained For: Canadian Trade Policy After the Chaouili Decision

{ The following blog was written shortly after the Supreme Court's decision in Chaouli v. Quebec (Attorney-general) on June 9, 2005. A substantially revised version of the article appears in a peer-reviewed journal at the following citation: "Interactions: Trade Policy and healthcare Reform After Chaoulli v. Quebec," Healthcare Policy, Vol.1, No.2 (January 2006). Students or journalists who are writing on the intersection of trade and health policy should refer to the newer version!---M.C.}



“The GATS recognizes the rights of WTO Members to provide services in the public sector and Canada and other Members of the WTO are not prepared to compromise this right. Thus, our commitments with respect to “health insurance services” are clearly restricted to supplemental health insurance services provided by private insurers.”

--Government of Canada response to concerns voiced about Canada’s GATS commitments on private health insurance, May 2001.



Although it is seldom remarked upon, the ban on private health insurance has been a fundamental assumption of Canada’s trade policy ever since the North American Free Trade Agreement (NAFTA) and the WTO’s General Agreement on Trade in Services (GATS) took effect over a decade ago. The domestic legitimacy of both treaties in Canada depends in large part on the system of publicly funded health care under the Canada Health Act remaining secure against any challenge that it violates NAFTA or GATS obligations. This separation between health policy and trade policy depends in turn on the maintenance of single-payer public insurance. Of course, whether the reasoning behind the Supreme Court decision in Chaoulli v. Attorney-General (Quebec) will ultimately lead to a removal of the ban on private health insurance across Canada, and, even if it does, whether a de facto government monopoly can legally be preserved through other means, is yet to be determined. We may also wonder just how much it matters that medicare be insulated from NAFTA and the GATS. Is this just a “legitimacy” problem, based on popular fears and misconceptions about trade agreements, or are trade treaty obligations really at odds with the most valuable features of Canadian health care?

Maude Barlow of the Council of Canadians has correctly pointed out that the NAFTA exemption for health care only clearly applies to a publicly funded system delivered on a non-commercial basis. Once a certain threshold of privatization is passed, U.S. private hospital chains would have the right to the same treatment as Canadian for-profit companies. Her next inference—that “in no time, the public system would be bankrupt and we would have an Americanized corporate health-care system”—is characteristically provocative, and more controversial. (It assumes that Canada’s NAFTA obligations sharply distinguish Canada’s situation from that of some European countries relied upon in the Supreme Court’s ruling.) For its part, the WTO admits that provision of services on a commercial or competitive basis would cause them to be covered by the basic “most-favoured nation” (MFN) obligation to extend any advantages conferred upon one foreign service provider to all other WTO Members. It insists, however, that “the implications of MFN are minimal: monopoly suppliers can be maintained, established or reestablished, for example; limitations of any other kind can be imposed on foreign supply.”(“GATS: Fact and Fiction”, 2001). GATS critics suggest that the MFN obligation might nonetheless make it more difficult to reverse privatization and commercialization, since it can have the effect of consolidating commercialization wherever it occurs.

More seriously, it appears that Canadians failed to anticipate the possible repercussions of making full commitments at the WTO in the area of private health insurance in 1995. Even those GATS critics who expressed alarm at the decision were mostly concerned about the need for a stronger Maginot line—i.e. to guard against the possible interpretation and application of GATS rules in WTO dispute settlement panels. (The Charter of Rights has not generally been viewed as the more serious threat in globalization debates.) Of course, when the complex and changing nature of health care services funding and delivery is combined with the broad and largely untested scope of GATS and NAFTA rules, there are bound to be many mysteries and some surprises. But we can safely conclude this much: that the insulation of health care from trade treaties matters, because it affects policy options for health care reform. More specifically, it affects the choice, and cost, of health policy instruments, and the flexibility to reverse or modify market-based innovations in the future.

There are two main instruments for protecting public health care from trade actions. The first is a “carve out” from basic treaty obligations, such as the NAFTA reservation clauses or GATS exemption clause for public services. The scope, effectiveness, and endurance of such carve-outs will be determined by the legal development and application of certain objective criteria: the extent of government regulation and control over delivery of the service; the degree to which the service is provided by not-for-profit organizations; the presence of competitive and commercial markets; and, most importantly, the degree of public versus private funding. The second instrument is the limitation of private health insurance to “supplemental” or non-core medical services, lest obligations in respect of liberalized financial services interfere with the delivery of core health care as a public good (i.e. as something that markets fail to provide efficiently, let alone equitably).

The view that the scope of NAFTA reservations in relation to Health Services is sufficient to protect publicly funded health care in Canada from any NAFTA challenge is a reasonable interpretation from a static perspective, based upon the accepted definitions of public and private health services at the time of NAFTA’s inception. Canada’s Annex I Reservation states that all provincial government measures that were in force as of January 1, 1994 are outside the NAFTA rules relating to national treatment, MFN, and some other disciplines relating to local presence requirements for cross-border services and nationality requirements for senior managers. Any future measures or amendments, however, that exclude or otherwise discriminate against US and Mexican providers of services are contrary to the NAFTA, unless they are saved by the Annex II Social Service Reservation.

Under Annex II, each Party reserved the right to adopt or maintain any measure relating to health services that may be characterized as being with respect to a “social service established or maintained for a public purpose”. The precise scope of this Social Service Reservation is the subject of much debate and speculation. The US Trade Representative in 1995 suggested that the reservation is intended only to cover services “which are similar to those provided by government, such as childcare or drug treatment programs,” so that if those services are supplied by a private firm on a profit or non-profit basis, Chapter Eleven (Investment) and Twelve (Services) would apply. The Canadian government has claimed that, to the contrary, the broad ordinary meaning of “service established or maintained for a public purpose” reflects an intention to permit each Party to NAFTA to decide for itself whether it views a particular service as falling within the reservation. Both of these views appear to be extreme and unlikely to be followed. Legal academics generally agree that an objective test based on general criteria for what constitutes a public service is necessary. Where full state funding is combined with extensive government control over delivery, then there is a very strong case for the application of the reservation. T. Epps and C. Flood argued in the McGill Law Journal in 2002 that full state funding alone is sufficient, even where governments permit competition and for-profit delivery in the interests of efficiency.

There appears to be widespread agreement, therefore, that the degree of public funding is the most important single criterion for what falls within the Social Services Reservation. Accordingly, the simple fact that insured services designated by a provincial government as “medically necessary” are paid for by a public authority is a good indication that such services are also outside the NAFTA. This is probably as true of provinces such as Nova Scotia, Newfoundland, New Brunswick and Saskatchewan, which have no outright prohibition against private insurance of services insured under the Canada Health Act, as it is of those provinces that do. Due to long waiting lists in the public sector, however, a niche for private sector financing has nonetheless begun to appear. If this niche is filled in the marketplace, the condition of government-funded monopoly will disappear. It is already apparent that the Social Services Reservation does not protect measures related to for-profit privately funded services of physicians and other health care professionals; or privately-funded home care or nursing home services. Allowing private insurance for services designated as “medically necessary” would further reduce the scope of this NAFTA reservation.

Canada’s GATS obligations present a similar picture of current insulation coupled with increasing future vulnerability to coverage. The GATS contains an exemption from the most basic MFN and transparency obligations for services “supplied in the exercise of governmental authority”, which are defined in Article I:3 as any service, which is “supplied neither on a commercial basis, nor in competition with one or more service suppliers”. As with the debate over the scope of NAFTA reservations, there has never been a consensus on what exactly these words mean, beyond general agreement that a pure government monopoly that does not charge for its service would meet this definition. While the legal meaning of “competition” in services is unclear, it probably involves consumers being able to choose between “like” services offered by different suppliers. Such a choice between public and private suppliers has not generally been allowed under most provincial health plans, or under the terms of “Public Administration” and “Comprehensiveness” as defined in the Canada Health Act. Similarly, any finding of supply to be “on a commercial basis” would need to consider a range of criteria: whether a service is supplied on a for-profit basis; whether user fees are charged; whether any revenues earned in excess of cost are devoted to fulfillment of a not-for–profit purpose; and the degree of government involvement and control over conditions of service delivery. Most of these criteria, when applied to core medical services as they are currently supplied in Canada, would not indicate their classification as being supplied “on a commercial basis.”

The most onerous WTO/GATS obligations, however, are those which are incurred through specific commitments to accept national treatment and market access obligations in specific sectors. A look at Canada’s Schedule of Specific Commitments show that Canada has avoided undertaking obligations in respect of “health and public education”, consistent with its pronouncements, with one notable exception: private insurance, such as Blue Cross, is categorized as a ‘financial service” for GATS/WTO purposes, just as it is for NAFTA purposes, and Canada in 1995 made a commitment in “life, accident and health insurance services”, subject only to the limitation on market access that these services “must be supplied through a commercial presence” (i.e. through direct investment and establishment within Canada).

Some critics and health policy advocates have worried that public health insurance is possibly already covered under Canada’s GATS commitments on financial services. In response, the Government of Canada has repeatedly assured Canadians that “health care is off the table”, stressing the flexibility of the GATS scheduling methodology and Canada’s preservation of its flexibility to adopt or maintain measures with respect to health services. The government has also maintained that Canada’s commitments with respect to “health insurance services” are clearly restricted to supplemental health insurance services provided by private insurers, since the GATS excludes governmental services that are not ”in competition with one or more service suppliers.” The assumption that medically necessary services are “public” and that supplemental insurance is “private”—that the two areas of insurance are mutually exclusive--- underlies the Government’s decision to make commitments in life insurance and has been repeatedly expressed in its communications with the public.

Clearly, the current insulation of Canada’s health care sector from trade treaty obligations (whether GATS or NAFTA) is bound to come under stress as Canada’s public health system changes, regardless of whether the system expands or contracts. If levels of public funding and public delivery are reduced, health care may be subjected to the higher levels of obligation that attach to newly privatized services; and if publicly funded health care is expanded to cover new kinds of health services, there may well be an obligation to pay compensation to foreign (or, at least, US and Mexican) investors that formerly provided those services. Canada’s position is thus fragile and likely to erode over time, but is nonetheless defensible as having struck a balance between our trade policy and health policy objectives. Knowledgeable and incremental acceptance of constraint and obligation for the sake of mutual international benefit is a meaningful expression of sovereignty and policy autonomy in a globalized world. Domestically, risks of NAFTA and GATS obligations can be weighed carefully in any consideration of market-based reform proposals such as those recommended in Canada by the Kirby and Mazankowski reports. Governments are able to make informed and reasoned judgments about the potential risks and costs (in terms of policy constraint, NAFTA financial compensation to investors, or GATS compensation in terms of trade concessions to affected Members) of such policy options as: the expansion of public funding to areas presently covered by private insurance; the withdrawal of public funding from areas that would then be covered by private insurance; expansion of for-profit private health care delivery, or delivery which involves competition between suppliers to the public; and any actions affecting control of foreign entry into the health sector.

In the Chaouili case, however, an unexpected judicial ruling concerning the boundary between public and private health insurance has potentially upset this balance. In the eyes of international law, this was merely the decision of a different branch of government; it is still an expression of Canada’s sovereignty. But from the standpoint of Canadian governments, health policy communities and citizens, the increase of private and foreign service providers, eager to supply insurance for “medically necessary” health care in competition with public insurance, would bring with it a very different set of costs and benefits from those that have been politically bargained for. In the absence of NAFTA or WTO precedents, it is impossible to precisely estimate the net effects, but neither are we limited to mere speculation. There is little doubt that it is the nature and extent of public funding that is the most important criterion for the application of the NAFTA Social Service Reservation, the application of the “governmental authority” exclusion from basic GATS obligations, and the determination of when the GATS obligations of national treatment and market access are triggered in the context of health insurance. And it is precisely the nature and extent of public financing that was challenged in Chaouili.

While we wait for the judiciary to determine the exact boundaries and conditions of the government health care monopoly, and scramble to reduce waiting lists for surgery in case they are deemed to be an unjustified infringement of Section 7 of the Charter, we should consider one other course of action that could help to restore and secure our domestic health policy space. Renegotiating our general NAFTA and WTO obligations may not be a realistic option, but Article XXI of the GATS sets out the procedures for the withdrawal or modification of Members’ specific commitments. The Member concerned must give at least three months’ notice, and then negotiate compensatory adjustments with other countries whose trade interests have been affected, with the compensation applied on an MFN basis. If an affected Member is not satisfied with the compensation offered, it can refer the matter to arbitration. The ability of WTO Members to withdraw their commitments has long been touted by the WTO Secretariat and Member governments as a flexible feature of the GATS. Canada should now put this claim to the test by withdrawing, or at least modifying, its 1995 commitment covering private health insurance. Whatever the cost or difficulty of such a procedure, we can be reasonably certain that it will never be purchased at a lower price.

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