Have We Traded Away the Opportunity
for Innovative Health Care Reform?
The Implications of the NAFTA for Medicare
Tracey Epps and Colleen M. Flood*
The integrity of medicare depends on governments having
flexibility to respond to the changing dynamics of the health care
system. This article concludes that the North American Free Trade
Agreement (NAFrA”) has potential to place constraints on the
ability of Canadian federal and provincial governments to regulate
freely.
The health care system is a mix of public and private inter-
ests. At its core, “medically necessary” hospital and ‘”medically re-
quired” physician services are fully publicly financed, but often pri-
vately delivered. However, private financing is funding an increas-
ing number of important goods and services such as drug therapy.
Various proposals have been made for the reform of the health care
system, including national instuance programs for prescription drugs
and home care, and this article assesses some of these proposals in light
oftheNAFrA.
Canada has made reservations to the NAM’A to protect medi-
care but these reservations fail to recognize the publielprivate nature of
the health care system, resulting in uncertainty as to what services are
protected from application of some of the NAFrA’s key provisions.
The expropriation provision presents particular concerns for refom, as
the reservations provide no protection from its application. Further, the
dispute settlement process allows disputes to be heard away from the
light of public scrutiny.
Canada should work towards a political solution to these con-
cers. In all relevant contexts, both the federal and provincial gov-
ernments should clarify that their intention with regard to health care
is to act for a “public purpose”. The authors also emphasize the im-
portance of international trade negotiators working with Health
Canada officials to ensure appropriate treatment of health care in
international trade negotiations.
L’intgrit6 de rassurance-maladie depend de la flexibilit6 qn’ont
les gouvornements a rbagir aurx dynamiques changeantes du systme de
soins de sant& Cet article conclut que rAccord de libre-&change nord-
amnricain ( uA.Ao>) pent imposer des limites aux habiitds des gou-
vemements fa&laI et provincial A gouvemer libreinent.
Le systime de soins de sant6 est un melange d’int&ts publics et
privds. Au cocur de ce sysrne, les fonds publics financent les services
omdicalement nicessaires,>, alors que le secteur privd offre oes servi-
com. Les fonds pivds financent un nombre croissant de bies et de ser-
vices importants tels que la pharmacothirapie. Des programmes natio-
naux d’assurance pour les mddicaments de prescription et les soins de
santd i is maison figurent parmi les exemples des nombreses proposi-
tions faites en vue de la rforme du systane de soins de sant6; oet arti-
cle se penche sur quelques uses de ces propositions a la lumire de
]’ALfNA.
Les riserves 6nonces At ]’ALJNA par le Canada afo de prot-
get l’assurance-maladie n’ont pas su reconnaltre In nature publique et
privde du systame de soins de sand Ainsi. l’incer tide rgne quant h
relative &
savoir quels services sont proregs. La disposition
‘expropsiation soulbve des inquitudes pricises quant A la rdforme, car
les rservea nesises n’assurent aunune protection contre ]’application de
ia rforme. De plus, la procdure pour les rbglements de diffdrends
permet que les diffdrends soient entendus hors de in portde d’un exa-
men minutieux du public.
Le Canada devrait trouver une solution politique a ces problR-
rues. Les gouvemenents f&lrdal et provincial devrait 6noncer claire-
ment lene intention d’agir dans l’lintft du public dana le secteur de
soins de sanrl Leas antenrs solignent 6galement l’importance de i
collaboration entre les nigociatenrs do commerce international et les
fonctionaires de Sant Canada ain d’assurer Is traitement adiquat de
soins de sant6 dans le nigociation des accords de commerce international.
STracey Epps, B.ALL.B.(Hons.) (Auck.), LL.M. (Tor.). Colleen M. Flood, Assistant Professor,
Faculty of Law, University of Toronto. We would like to thank Michael J. Trebilcock for his com-
ments on an earlier draft. All errors and omissions remain those of the authors. An earlier version of
this paper was presented by Professor Flood at the Centre for Health Services & Policy Research 14th
Annual Health Policy Conference entitled “Trading away Health?: Globalization and Health Policy”
held in Vancouver, 9 November 2001.
McGill Law Journal 2002
Revue de droit de McGill 2002
To be cited as: (2002) 47 McGill LJ. 747
Mode de r6fdrence: (2002) 47 R.D. McGill 747
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 47
Introduction
I. Canada’s Health Care System
A. Medicare
B. The Mix of Public and Private Interests in Canadian Health Care
C. The Shifting Public and Private Mix: Recent Changes to Our Health
Care System
D. The Potential for Export of Health Care Services
E. Proposals for the Reform of Medicare
II. The NAFTA and Canadian Health Care Reform
A. The Relevant Provisions
1. National Treatment and Most-Favoured-Nation Treatment
2. Expropriation
3. Dispute Settlement
4. Reservations
B. The NAFTA’s Effect on Proposals for Reform
1. National Pharmacare and/or Home Care Programs
2. Managed Competition Reform
3.
4. Primary Care Reform
Internal Market Reform: Contracting Out to Competing Providers
Conclusion
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
749
Introduction
Canada’s publicly funded health care system (“medicare”) is the country’s most
cherished social program. It has been described as “iconic”, “’embedded’ in Canadi-
ans’ perceptions of their political culture'” “a unifying force, a national obsession,
and, not least, one of the few features that allows Canadians to differentiate them-
selves from their neighbours to the south “‘ Despite its hallowed status, tensions
within medicare are becoming increasingly obvious; the system is now frequently de-
scribed as being in crisis.4 Being a system upon which all Canadians must rely, at least
for “medically necessary” hospital and “medically required” physician services’ (for
which there are few private options), the trials and tribulations of medicare are never
far from the media spotlight and bedevil politicians of all political stripes.
The health care system is shaped by changing economic, political, and social cir-
cumstances. One of the most powerful economic and political forces of the past dec-
ade is globalization, encompassing the liberalization of international trade and in-
vestment. International trade agreements negotiated during the 1990s have trade and
investment liberalization as their primary goals and have altered the context within
which medicare must operate. The North American Free Trade Agreement
(‘NAFrA”) aims to create a free trade area between the territories of Canada, the
United States, and Mexico and is arguably the most important international trade
agreement to date in terms of possible implications for medicare. The Canadian gov-
ernment’s stated reasons for entering into the NAFTA include:
* Canada needs improved and more secure access to world markets to exploit
our economic strengths.
B. Rae, “Is the Canadian Public Really Ready for Health Reform?” (paper presented at the Health
Law and Policy Seminar Series, Faculty of Law, University of Toronto, 15 February 2001) [unpub-
lished].
2 A. Maioni, Parting at the Crossroads: The Emergence of Health Insurance in the United States
and Canada (Princeton: Princeton University Press, 1998) at 173.
‘C.D. Naylor, ‘Health Care in Canada: Incrementalism under Fiscal Duress” (1999) 18:3 Health
Affairs 9 at 24.
” See e.g. P. Barnett, A. Coyne, C. Flood, D. Gratzer, P. O’Reilly, panelists, & M. Enright, modera-
tor, “Medicare: Crisis, What Crisis?” CBC This Morning (broadcast 2 October 2000).
See infra note 14 and accompanying text.
6 North American Free Trade Agreement between the Government of Canada, the Government of
Mexico and the Government of the United States, 17 December 1992, Can. T.S. 1994 No. 2, 32 I.L.M.
289 & 605 (entered into force 1 January 1994).
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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More open access to foreign markets under fair-trade rules will help the
Canadian economy become even more competitive. This will eventually
pay off in more and better jobs in Canada, better deals for our consumers,
and increased national wealth to help us support and improve our social
programs.
There are two sharply contrasting perspectives on the implications of the NAFTA
for medicare. Critics argue that, rather than helping the government support and im-
prove medicare, the NAFTA will force Canada to open up medicare to entry by for-
eign (particularly U.S.) service providers and commercial insurers.! It is feared that
such an opening of the health care market will inevitably result in the erosion of medi-
care and a slide into a U.S.-style system of health care driven by for-profit insurers and
providers. By contrast, the federal government has given a number of assurances that the
NAFTA protects the health care sector and therefore poses no threat to the integrity and
sustainability of medicare
We assess which, if either, of these two contrasting perspectives is correct and
closely examine Canada’s obligations under the NAFTA in order to determine what
constraints it might impose on various proposals for the reform of medicare. While we
7 Canada, Department of External Affairs and International Trade, The NAFTA Manual: Focus on
Issues: Canada and the North American Free Trade Agreement (NAFTA): Information Papers for
Briefing Book/Media Kit and Public Info (Ottawa: Department of External Affairs and International
Trade, 1992), online: QL (NAFT).
‘ See e.g. Gottlieb & Pearson, “International Trade Standards and the Regulatory Power of Govern-
ments at the end of the 20th Century-with Special Emphasis on Public Health Standards and the Ca-
nadian Public Health System” (October 1999), online: Canada Health Coalition
Unions, “Privatization of Health Care Position Statement’ (February 1998), online: Canadian Federa-
tion of Nurses Unions
ber 2002); J. Nelson, “Dr. Rockefeller Will See You Now: NAFTA’s Bitter Pill for Health Care Sys-
tems” Z Magazine 8:5 (May 1995) 25, online: Z Magazine
9 See e.g. Canada, Department of Foreign Affairs and International Trade, Press Release 55, “Can-
ada’s Health Care System Protected under the NAFTA”
(2 April 1996), online: DFAIT
(date accessed: 1 November 2002). See also Canada,
Standing Committee on Foreign Affairs and International Trade, Evidence, 36th Parl., 2nd Sess.,
Meeting No. 57 (14 June 2000) at 1540 (Hon. P.S. Pettigrew), online:
(date accessed: 1 November 2002)
where the minister says, “As I have stated before, public health and education are not on the table in
any international trade negotiations. My government will maintain our right and ability to set and
maintain the principles of our public health and education. It is that simple. Those who wish to pick
away at issues, to find threats in every trade agreement to our values and our social system, are simply
wrong.”
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
751
conclude that the NAFTA will not lead medicare to be privatized “United States-style”,
the federal government’s assurances regarding the security of medicare paint an overly
simplistic picture. The NAFTA provides some protection for medicare, yet still poses a
number of roadblocks to reforms needed to modernize medicare, such as expanding
health insurance coverage to prescription drugs and home care. In the absence of these
reforms, and as the focus of health care moves away from physicians and hospitals to-
wards, for example, drug therapy, medicare will slowly but surely be privatized.
In Part I we examine Canada’s health care system, its underlying values, and how
it has changed in recent years. In so doing, we demonstrate the shifting mix of private
and public interests that forms its basis. We then present the specific proposals for the
reform of medicare that will be dealt with in this article. In Part I we turn to examine
the NAFTA provisions that are of the most relevance to Canada’s health care system,
paying special attention to Canada’s reservation under NAFTA Annex HI and to the arti-
cle 1110 expropriation provision, which applies regardless of reservations. We then go
on to examine the impact of these provisions on various proposals for reform, and draw
some conclusions as to what can be expected in the future regarding the impact of the
NAFTA on medicare and what can be done to ensure Canada’s best interests.
I. Canada’s Health Care System
A. Medicare
A high level of government intervention characterizes Canada’s health care sys-
tem. This is partly justified on the grounds that health care is subject to a number of
market failures,” but primarily government intervention is justified to ensure a dis-
tributive goal of access for all to important health services. Medicare is founded on
the belief that most hospital and physician services should be distributed so that all
Canadians have access to them according to medical need, and not according to their
ability to pay. Medicare is distinguishable from other social programs where eligibil-
ity for benefits usually depends on some criterion of financial need (i.e. some form of
income testing occurs). It also sharply contrasts with most other sectors of the Cana-
dian economy where services are allocated according to the capacity to pay (e.g.
someone with more money can buy more or higher quality goods and services, such
‘0 For discussion on market failure in health care systems, see C.M. Flood, International Health
Care Reform: A Lega4 Economic and Political Analysis (London: Routledge, 2000) c. 2 [hereinafter
Flood, International Health Care Reform].
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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as cars, houses, or investment services), as people cannot generally buy more or
higher-quality hospital or physician services within Canada.”
The Constitution of Canada has been interpreted as giving the provinces exclusive
jurisdiction over the insurance and supply of health goods and services.’2 The federal
government, however, uses its spending powers to maintain some national standards,
particularly with regard to access to services. The present vehicle used to achieve na-
tional access standards is the Canada Health Act, 1984 (“CHA”).’3 The CHA protects
and gives primacy to “medically necessary” hospital services and “medically re-
quired” physician services,” and establishes the following five criteria that the prov-
inces must comply with in order to obtain federal funding for such services:
comprehensiveness,” accessibility,” universality,” portability,'” and public administra-
tion.’9 The CHA effectively prevents the development of a two-tier system through a
“See C.M. Flood, M. Stabile & C.H. Tuohy, “The Borders of Solidarity: How Countries Determine
the Public/Private Mix in Spending and the Impact on Health Care” (2002) 12 Health Matrix 297;
C.M. Flood & T. Archibald, “The lllegality of Private Health Care in Canada” (2001) 164 Canadian
Medical Association Journal 825.
” Constitution Act, 1867 (U.K.), 30 & 31 Vict., c. 3, ss. 92(7), 92(13), 92(16), reprinted in R.S.C.
1985, App. H1, No. 5. See Schneider v. R., [1982] 2 S.C.R. 112 at 137, 139 D.L.R. (3d) 417, where
Dickson J. states: ‘This view that the general jurisdiction over health matters is provincial … has pre-
vailed and is not seriously questioned.’ See also Eldridge v. British Columbia (A.G.), [1997] 3 S.C.R.
624 at para. 24, 151 D.L.R. (4th) 577, La Forest J. [hereinafter Eldridge].
R.S.C. 1985, c. C-6.
Ibid., s. 2. The terms “medically necessary” and “medically required” are not defined in the CHA.
The provinces have discretion to decide which services are “medically necessary” as well as which
ones are “medically required”. This has an important bearing on what services are covered by provin-
cial health insurance plans.
practitioners, dentists, and hospitals.
5 Ibid., s. 9. Provincial plans are required to insure all insured health services delivered by medical
16 Ibid., s. 12(1). Insured health services are to be provided on uniform terms and conditions in a
manner that does not impede reasonable access to those services by insured persons.
” Ibid., s. 10. Provincial plans must entitle all provincial residents to insured health services on uni-
form terms and conditions.
” Ibid., s. 11. Provinces must insure all residents within three months of arrival in the province.
They must also cover the cost of services for insured persons temporarily absent from the province.
” Ibid, s. 8(1). Provincial insurance plans must be administered and operated on a non-profit basis
by a public authority. For further discussion of the five criteria listed in the CHA, see C.M. Flood,
“The Structure and Dynamics of Canada’s Health Care System” in J. Downie & T. Caulfield, eds.,
Canadian Health Law and Policy (Toronto: Butterworths, 1999) 5 at 18-24.
20021 T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
753
requirement that the federal government claw back from the provinces any amounts
that patients pay in the form of user charges”0 and extra-billing.’
The CHA’s protection of hospital and physician services, however, no longer re-
flects the reality of the range of goods and services that are viewed as medically impor-
tant.’ Goods and services not covered by the CHA include drugs used outside of hospi-
tals, home care, and alternative and complementary therapies.’ Indeed, the recent shift
of health care out of hospitals and into the home, along with other important changes
such as technological advancements and increased reliance on drug therapy, means that
large portions of health care now lie outside the protection of the CHA. Most of the calls
for the reform of medicare that we will examine in this article are in reaction to this shift.
Matters are further complicated by the presence of the NAFTA and its potentially nega-
tive impact on health care reform. An analysis of the relevant NAFTA provisions there-
fore becomes important to an assessment of whether medicare can survive recent
changes to the health care system given today’s context of trade liberalization. In the
next section we begin by describing the private and public mix that forms the basis of
the health care system. Describing this mix provides us with a framework within which
to understand recent changes to the system, and its nature becomes especially relevant
when we later assess the potential impact of the NAFTA on health care reform.
B. The Mix of Public and Private Interests in Canadian Health Care
Canadians are often surprised to find out that over thirty percent of total expendi-
ture on health comes from private sources (private insurance and out-of-pocket pay-
ments). ‘ They are even more surprised to find out that prescription drugs used outside
of hospitals are not protected by the CHA and that, as a consequence, over sixty-six
percent of spending on these drugs comes from private sources.’ Private financing
also plays a very large role in respect of dental services, vision care, home care, as
‘ CHA, ibid, s. 19. A “user charge” is any charge imposed by a province for an insured health serv-
2 Ibid, s. 18. “Extra-billing” means any charge to patients for insured services that is above the
ice that is not payable, directly or indirectly, by the provincial health care insurance plan (ibid., s. 2).
amount covered by the health care insurance plan of a province. Ibid, s. 2.
‘ The definitions date back to the inception of medicare in the 1950s. See Hospital Insurance and
Diagnostic Services Act, S.C. 1957, c. 28; Medical Care Act, S.C. 1966, c. 64. These acts were si-
multaneously replaced by the CHA, ibid., in 1984.
‘ See Sections LB. and LC, below. We return to this issue again in the context of the need for the re-
form of the CHA and the potential impact of the NAFTA in that regard.
24 OECD, OECD Health Data 2000: A Comparative Analysis of29 Countries (Paris: OECD, 2000).
See Canadian Institute for Health Information, Drug Expenditures in Canada 1985-2000 (Ottawa:
Canadian Institute for Health Information, 2001) at 8.
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well as complementary and alternative drugs and therapies (e.g. services provided by
chiropractors, homeopaths, and naturopaths, as well as the purchase of herbal and vi-
tamin supplements).”
It is important to distinguish the financing of health care services from their de-
livery. The method of financing has important ramifications in terms of access to
services, since private financing, all other things being equal, means that access is
based on willingness and capacity to pay and not on the basis of relative need. By
contrast, the means of delivery (e.g. for-profit clinics) does not affect access so long as
services are publicly funded. Thus, while the privatization of finance clearly raises ac-
cess and equity concerns, the privatization of delivery does not necessarily raise the
same concerns-although there may in some cases be concerns about the quality of
care delivered by for-profit as opposed to non-profit providers.”
While popularly described as a single-payer, public system, Canada’s health care
system is in fact characterized by a wide range of public/private relationships (see Ta-
ble 1). At the core of the system, “medically necessary” hospital and “medically re-
quired” physician services are fully publicly funded. Looking at the delivery side,
however, and contrary to popular understanding, very few publicly funded services
are actually delivered by public (government-owned) hospitals or other public entities.
In fact, publicly funded services are for the most part delivered by private non-profit
organizations (such as hospitals)’ or private for-profit professionals (such as physi-
” See Canadian Institute for Health Information, Health Care in Canada 2000: Annual Report
(Ottawa: Canadian Institute for Health Information, 2000) at 19, 38, online: Canadian Institute for
Health Information
November 2002) [hereinafter CI-I, 2000 Annual Report]. The Canadian Institute for Health Infor-
mation (“CIUI”) notes that the amount spent on alternative drugs and therapies is not known but that
studies in other countries suggest it may be significant. See e.g. M. Lau, “Acupuncture Petition
Seeks Health Coverage” Calgary Herald (18 December 2000) B1. The article reports how Calgary
acupuncture practitioners launched a petition to persuade the province to include their services in
medicare coverage, and suggests that many people will be unable to continue acupuncture treatment
because of financial constraints.
” For a recent study demonstrating poor outcomes in U.S. for-profit hospitals, see PJ. Devereaux et
al., ‘”A Systemic Review and Meta-Analysis of Studies Comparing Mortality Rates of Private For-
Profit and Private Not-For-Profit Hospitals” (2002) 166 Canadian Medical Association Journal 1399.
Although hospitals are private institutions, provincial governments play a large role in their regu-
lation and funding, and as a result it is often difficult to differentiate them from government-owned
hospitals. See A. Blomqvist, “Conclusion: Themes in Health Care Reform” in A. Blomqvist & D.M.
Brown, eds., Limits to Care: Reforming Canada’s Health System in an Age of Restraint (Toronto:
C.D. Howe Institute, 1994) 399 at 416.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
755
cians). 9 Outside the core of full public funding for all there are some goods and serv-
ices that are only publicly insured (in full or in part) for some groups. For example,
most provinces provide coverage for prescription drugs for those aged over sixty-five
and those on welfare, albeit subject to a range of different user charges. With regard to
delivery, there is again a wide and varied range of providers with, for example, drugs
being supplied by for-profit private corporations. Most provinces also publicly fund a
limited range of home care services for those whose family members cannot provide
the care they need in the home. These services are delivered by a mix of private for-
profit providers (e.g. home care services in Ontario), non-profit providers, and gov-
ernment employees.” Outside the realm of public funding of any sort are health care
services that are fully privately financed and delivered by either for-profit or non-
profit private entities (e.g. cosmetic surgery, dental services, laser eye surgery, and in
vitro fertilization services).
TABLE 1: RNANCINGAND DELIVERY OF HEALTH CARE SERVICES IN CANADA
Financing Delivery
Public
Private (non-profit)
Private (for-profit professional groups)
Public
Private (for-profit firms)
Private (non-profit)
Private
Private (for-profit professional groups)
Private (for-profit firms)
Example of Health Care Services
Public health departments
Hospitals
Physicians
Home care in Ontario; some private
facilities in Alberta
Charitable organizations, e.g.
Victorian Order of Nurses
the
Dentists; physicians providing serv-
ices not covered by the CHA
Long-term care facilities; laser eye
surgery clinics
Private physicians are for-profit providers to the extent that they are entitled to the revenues of
their practice; they are expected, however, to offer and recommend services that are in their patients’
best interests. See R.G. Evans et al., Private Highway, One-Way Street: The Deklein and Fall of Ca-
nadian Medicare? (Vancouver. University of British Columbia, Centre for Health Services and Policy
Research, 2000), online: Centre for Health Services and Policy Research
0 See e.g. Canadian Home Care Association, “Nova Scotia Fact Sheet-Final Version”, online: Ca-
nadian Home Care Association
(date accessed: 1 November 2002). Some home care services in Nova Scotia are delivered by the De-
partment of Health’s employees. Twenty-five percent of nursing-home care staff are directly em-
ployed.
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C. The Shifting Public and Private Mix: Recent Changes to Our
Health Care System
Canada’s health care system is a dynamic mix of public and private interests, and
the growing variety of public/private arrangements possible (such as contracting out,
exclusive contracts, licensing, and joint ventures) makes it difficult to distinguish what
is public from what is private.” In addition, medicare has undergone significant
changes in recent years due to factors such as fiscal constraints on the federal and
provincial governments, 2 changing medical practices, development of new technolo-
gies, changing demographics, and changing expectations and demands.
Provincial governments have delisted or deinsured some health services from
time to time due to fiscal constraints. That is, they have decided that certain health
services previously considered “medically necessary” or “medically required” are no
longer to be categorized as such and thus do not qualify for public funding. Fiscal
constraints have also made provincial governments reluctant to cover new technolo-
gies.3 For example, public funding for breast cancer testing was halted recently in
British Columbia due to a complaint by Myriad Genetic Laboratories. Myriad argued
that domestic providers of certain predictive tests were in breach of Myriad’s patent to
the BRCA1 and BRCA2 gene sequences-sequences identified by the tests-and that
provincial governments must therefore purchase those tests from Myriad or its licen-
sees. The Ontario government has said that it will fight Myriad’s claim and continue
to provide predictive testing. Reportedly, the Ontario government pays $800 per test
” For example, in considering whether the Canadian Charter of Rights and Freedoms, Part I of the
Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11 applies to a
hospital’s actions, the Supreme Court of Canada found that “the Charter applies to private entities in
so far as they act in furtherance of a specific governmental program or policy. In these circumstances,
while it is a private actor that actually implements the program, it is government that retains responsi-
bility for it.” Eldridge, supra note 12 at para. 42.
32 The proportion of provincial health expenditures provided as a direct cash transfer from the fed-
eral government fell from 50 percent at the inception of medicare to 30.6 percent in 1980. It fell again
to 21.5 percent in 1996 and to much lower levels in wealthier provinces. Naylor, supra note 3 at 12. If
one considers tax point transfers, however, the financial burden on the provinces is less than the re-
duced cash support suggests. The CII reports that in 1995 the federal share of health care spending
(including tax point transfers) was 33 percent. CIHI, 2000 Annual Report, supra note 26 at 18.
33 See e.g. B.C. Cancer Agency, “Policy Change: Hereditory Breast/Ovarian Cancer Genes (BRCA1
and BRCA2)” (2002), online: B.C. Cancer Agency
(date accessed: I November
2002).
20021 T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
757
from domestic providers, whereas the same test done by Myriad or its licensees would
cost $3850.’
Over the last five years, more than 275 hospitals in Canada have been either
closed, merged, or converted to other types of care facilities.” The proportion of total
health care spending on hospitals declined from 44.7 percent in 1975 to an estimated
31.8 percent in 2000.” This decline has been due not only to fiscal constraints in the
public sector but also to the increased use of drug therapy, gene therapy, new forms of
medical equipment and aids, as well as new forms of health care delivery such as
home care and telehealth. Because services not provided in hospitals or by physicians
fall outside the protections of the CHA, the result of these changes has been an in-
creased reliance within the system on private financing. This process of shifting care
out of hospitals and into homes is described as “passive privatization’.”
In order to help cover the costs of private care many Canadians hold private in-
surance. As of December 2000, 22 million people had some form of private health in-
surance” to provide coverage for a range of services, including dental expenses, semi-
‘ Ontario, Ministry of Health and Long-Term Care, ‘Myriad Gene Patent Issue” (Speech by Hon.
T. Clement, 19 September 2001), online: Ontario Ministry of Health and Long-Term Care
C. Perkel, “Ontario Defies U.S. Gene Company over Cancer Test, Arguing Health Care at Risk” Ca-
nadian Press Wire Service (19 September 2001), online: QL (CPN).
” Canadian Institute for Health Information, Health Care in Canada 2001 (Ottawa: Canadian In-
stitute for Health Information, 2001) at 27, online: Canadian Institute for Health Information
after CIHI, 2001 Annual Report).
IbiL at 75.
Tuohy, Flood, and Stabile note that the process of passive privatization is largely responsible for
the decrease in the public share of total health expenditure in Canada. C.H. Tuohy, C.M. Flood & M.
Stabile, “How Does Private Finance Affect Public Health-Care Systems? Marshalling the Evidence
from OECD Nations” (2000) 67:9 Ontario Medical Review 14.
” Canadian Life and Health Insurance Association, “Facts and Figures: Canada and Out of the
Country”, online: Canadian Life and Health Insurance Association
(date accessed: 1 November 2002). The proportion of Canadians with private insurance has doubled
since 1971, while the proportion of expenditures covered by private insurance has tripled. See Tuohy,
Flood & Stabile, ibicL at 39. A study undertaken by the CEII found that in 1998/1999 Canadians with
a high income and education level were far more likely to have some form of private insurance than
those with a low income and education level. For example, the percentage of Canadians with private
insurance for prescription drugs ranged from 58 percent for those Canadians in the lowest income
bracket to 87 percent for those in the highest income bracket. Similarly, 71 percent of Canadians with
less than high school education had some insurance for prescription drugs, while 80 percent of those
with university education had such insurance. See CII, 2000 Annual Report, supra note 26 at 21.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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private or private hospital rooms, prescription drugs (to the extent that they are not
publicly funded), special duty nursing, paramedical services, ambulance services,
crutches and other appliances, wheelchair rental, vision care, acupuncture, chiropody,
and home care (again, to the extent that it is not publicly funded). 9
Two increasingly important areas of health care that are not fully publicly funded
pursuant to the CHA are home care and drug therapy. Home care has been defined as
“an array of services which enables clients incapacitated in whole or in part to live at
home, often with the effect of preventing, delaying, or substituting for long term care
or acute care alternatives.”4 While home care is not covered as a “medically neces-
sary” hospital or “medically required” physician service under the CHA, each prov-
ince and territory has some kind of publicly funded home care program. The provi-
sion of home care varies significantly from province to province, however, resulting in
significant disparities in access and entitlements across the country.42
As home care is not covered by the CHA, there is nothing to prevent the devel-
opment of a two-tier system where those people with sufficient resources can buy
more services or services of a higher quality in the private sector. People look to pri-
vately financed home care for a variety of reasons: they may not be eligible for pub-
licly funded services; they may require additional services beyond those covered by
the public system; they may wish to purchase services perceived as being of a higher
quality than those provided in the public system; or they may not wish to submit to of-
ficial home care assessments. 3 Home care purchased in the private sector may be paid
39 Insurance plans that cover these services are described as “extended health coverage” or “supple-
mentary health coverage” plans. For example, Liberty Health’s extended health care plan includes
coverage for services provided by chiropractors, chiropodists, osteopaths, naturopaths, podiatrists,
massage therapists, acupuncturists, psychologists, and physiotherapists; prosthetic appliances; and du-
rable medical equipment. Where any of these services are financed by public plans, payment will
only be made once the government plan maximum has been reached. Online: Liberty Health
” It is projected that by 2026, home care expenditures will have grown by 80 percent. P Coyte & P
McKeever, “Home Care in Canada: Passing the Buck” (2001) 33:2 Canadian Journal of Nursing Re-
search 11 at 19.
1 Health Canada, Report on Home Care (Ottawa: Federal-Provincial-Territorial Working Group on
4′
Home Care, 1990) at 2. Home care services include medical services as well as community and social
services such as social work and homemaking.
42 Between 1997 and 1998, home care expenditure, as a percentage of total public health spending,
ranged from as low as 1.95 percent, 2.3 percent, and 3 percent in Prince Edward Island, Quebec, and
Alberta, respectively, to as high as 5.1 percent in Ontario and Newfoundland. See Coyte & McKeever,
supra note 40 at 18.
” See generally Health Canada, “Home Care in Canada 1999: An Overview”, online: Health Can-
ada
(date accessed: 1 November 2002)
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
759
for by either out-of-pocket payments or private insurance. Recent media reports have
highlighted the growing and unmet demand for home care services.” A 1999 Price-
waterhouseCoopers poll found that eleven percent of recently discharged people who
needed help at home did not receive it and that the average out-of-pocket expense was
$407 a week when home care services had to be purchased.*’ It is not surprising, then,
given the increasing demand for and the fragmentation of funding for home care
across the country, that a number of calls have been made for the implementation of a
national publicly funded home care program.
Drug therapy is a growing component of every stage of health care: primary,
emergency, acute, outpatient, home, long-term, and self-care.” While recognized as an
important aspect of health care, drug therapy is only treated as a “medically neces-
sary” service under the CHA when provided in hospitals. All provinces therefore
cover the drug costs of in-patient care,’7 but coverage for drugs used outside hospitals
varies across the provinces. Most provinces provide prescription drugs for seniors and
welfare recipients, albeit subject to a range of different user charges. A number of
provinces (British Columbia, Saskatchewan, Manitoba, and Quebec) provide some
coverage to all residents, but with substantial user charges in the form of copayments
or deductibles.!5
[hereinafter Health Canada, “An Overview”]. It seems that such a “two-tier” system is already devel-
oping. See e.g. Liberty Health’s “Home Care PLUS” insurance plan, supra note 39, which focuses
exclusively on home care and provides coverage for a number of services, including nursing care,
home health aid, physical therapy, occupational therapy, speech therapy, social workers and clinical
psychologists, ambulation and exercise, personal care, and home management services.
“The Toronto Star, for example, reported that community care access centres in Ontario were
struggling with inadequate budgets and were under intense pressure to meet the needs of an aging
population. It also reported some people having to pay thousands of dollars for private care. R. Daly,
“Home Sweet Profit’ The Toronto Star (22 March 1998) Fl, F7. See also G. Smith, “Cutbacks Kill
Diploma Dream” The Globe and Mail (11 July 2001) A17.
45 A. Picard, “Home Health Care: Only If You Can Afford It’ The Globe and Mail (6 December
1999) Al. In addition, one-third of caregivers reported that their charges were receiving inadequate
assistance because of government-imposed caps on hours of care and insufficient family resources to
purchase supplemental care privately.
‘ Institute for Research on Public Policy, Task Force on Health Policy, Recommendations to First
Ministers (Montreal: Institute for Research on Public Policy, 2000) at 35, online: Institute for Re-
search on Public Policy
1 November 2002).
“7 The federal government covers full costs for status Indians, military personnel, penitentiary in-
mates, and veterans.
‘ The National Forum on Health reported that deductible amounts in the above-mentioned prov-
inces are set at such a level that relatively few residents will actually receive any reimbursement. Na-
tional Forum on Health, “Directions for a Pharmaceutical Policy in Canada”, (Joint Report by the
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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The reduction of in-hospital care, where drugs are free to patients, has led to an
increase in out-of-pocket drug costs for many patients. Many Canadians must rely on
their own financial resources or private insurance to cover the cost of prescription
drugs. In 2001, sixty-one percent of retail drug sales were paid for by private
sources.’ A recent study found that ten percent of the Canadian population has no
drug insurance at all, and another ten percent is underinsured, meaning that they are
reimbursed less than thirty-five cents on the dollar.” As we will discuss, a number of
proposals have been put forward to ensure coverage for prescription drugs for all Ca-
nadians. Before examining these reform options, however, we will briefly address ex-
port initiatives on the part of the federal government and other bodies that have the
potential to alter the public/private mix of the health care sector fundamentally.
D. The Potential for Export of Health Care Services
Recently, the government has become aware of opportunities for Canadian health
care goods and services providers to expand into foreign markets. Any moves to
capitalize on such opportunities may have NAFTA implications. Although not strictly
a proposal for reform, the potential for export of health care goods and services, when
considered in relation to the NAFIA, raises concerns regarding the potential inadver-
tent reform of domestic health care policy.
To date, the health sector has contributed in a very minor way to the development
of world trade. The level of international trade in health services is gradually increas-
ing, however, largely as a result of two factors.’ First, regulatory regimes in a number
Striking a Balance and Evidence Based Decision-Making Working Groups) in Public Works and
Government Services Canada, Canada Health Action: Building on the Legacy, vol. 2 (Ottawa: Na-
tional Forum on Health, 1997) at 3, online: National Forum on Health
Forum on Health, “Directions”]. Further, a study in Quebec found that the introduction of cost-
sharing for essential and non-essential drugs among elderly persons and welfare recipients resulted in
reduced use of essential drugs. Higher rates of serious adverse events and emergency visits were asso-
ciated with these reductions. R. Tamblyn et al., “Adverse Events Associated with Prescription Drug
Cost-Sharing among Poor and Elderly Persons” (2001) 285 Journal of the American Medical Asso-
ciation 421.
” Canadian Institute for Health Information, Health Care in Canada 2002 (Ottawa: Canadian In-
stitute for Health Information, 2002) at 85, online: Canadian Institute for Health Information
‘0 A. Picard, “Six Million Lack Proper Drug Plan, Study Finds” The Globe and Mail (14 March
2001) Al. The study in question was commissioned by the federal government.
“, WTO, Health and Social Services-Background Note by the Secretariat (1998), WTO Doc.
S/C/W/50 at para. 3, online: WTO
1 November 2002).
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
761
of countries have moved towards a stronger market approach, with health sectors in
various countries being opened to increased private for-profit involvement, both do-
mestic and foreign. Second, technical changes such as more efficient transport and
communication technologies have enhanced the mobility of both health professionals
and patients and have enabled services to be delivered in new ways (e.g. telehealth).
These technologies are increasingly enabling a range of health care services to be
traded between countries and continents.”
Business interests are increasingly recognizing the possible opportunities and
profits to be made in exporting health care goods and services.’3 In particular, it has
been suggested that U.S. private for-profit health care corporations are looking to ex-
pand into foreign markets.’ While there is concern about infiltration by for-profit U.S.
and other foreign providers into Canada’s health care system, it has also been recog-
nized that Canadian health care providers stand to benefit from trade liberalization
through participation in other countries’ health sectors. The Standing Committee on
Foreign Affairs and International Trade reports, for example, that a number of people
believe major opportunities exist for Canada’s telehealth industry to expand into for-
eign markets.! Health Canada works with Industry Canada and the Department of
Foreign Affairs and International Trade in order to assist Canadian exporters of health
care products and services. ‘ In particular, the International Business and Development
5 For example, “U.S. suppliers provide commercial telemedicine services to customers in several
Arab Gulf countries; and Jordan has established telemedicine links with the Mayo Clinics in the
United States:’ bid at para. 19.
” A recent international conference on the private health care sector sought to understand the dy-
namics of the provision and financing of health care around the world and to promote the ability of
the private sector to improve health care outcomes. Severyn Group, “2000 Summit Proceedings Re-
port” in Academy for International Health Studies, 5th Annual International Summit on the Private
Health Sector (3-6 December 2000), CD-ROM: 5th Annual International Summit on the Private
Health Sector-Summit Proceedings 2000 (Davis, Cal.: Academy for International Health Studies,
2001).
See D.R. Luther, “Health Care Services: Strong Fundamentals and Innovations Foreshadow
Growth in U.S. Exports and Foreign Direct Investment,” Industry, Trade, and Technology Review
(June 1999: Publication 3206) 19, online: United States International Trade Commission
5 Public Works and Government Services Canada, Canada and the Future of the World Trade Or-
ganization: Report of the Standing Committee on Foreign Affairs and International Trade (Ottawa:
Standing Committee on Foreign Affairs and International Trade, 1999) at 6-1.
‘ See Health Canada International Business and Development Division, online: Health Canada
Trade Team Canada Health Industries, online: Industry Canada
762
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Division plays a supportive role in promoting trade for Canada’s health industry as a
member of the Trade Team Canada Sector Health Industries.
A sector that will benefit from increased access to foreign markets is the Cana-
dian health insurance industry. In addition to their dominant presence in the Canadian
market,”7 Canada’s life and health insurance companies have a significant presence in
foreign markets.” In 2001, the Canadian Life and Health Insurance Association re-
ported that Canadian-controlled life and health insurance companies operate branches
and subsidiaries in over twenty countries. 9 These companies collect significantly
more premiums abroad than foreign-owned companies collect in Canada.’ Ninety-
two percent of private health insurance in Canada was sold by life insurance compa-
nies, with the remainder sold by property and casualty companies.’
Benefits from trade do not flow only one way, however, and the quid pro quo for
gaining increased opportunities for Canada’s exports abroad is that Canada must be
prepared to grant reciprocal treatment to foreign interests under international trade
agreements. With respect to the NAFrA, this means that Canada will likely find it po-
litically difficult to argue for access to a particular area of the U.S. health sector, while
at the same time trying to protect that area of its own health sector from U.S. interests.
Thus, the benefits of liberalization in trade have to be set off against the impact of al-
lowing foreign entities (insurers and providers) entry into Canada’s health care mar-
ket. There is a potential tension between these different aims of government, namely,
increasing opportunities for health service exports while maintaining a comprehensive
publicly funded health care system.
“) Of 140 insurance companies active in the private health insurance field in Canada, 93 are Cana-
dian incorporated, 37 are from the U.S., and 10 are from the U.K., Europe, or elsewhere. Canadian
Life and Health Insurance Association, Canadian Life and Health Insurance Facts-2001 Edition
(Toronto: Canadian Life and Health Insurance Association, 2001) at 25, online: Canadian Life and
Health Insurance Association
(date accessed: 1
November 2002) [hereinafter CLHIA, Facts 2001]. Canadian-controlled firms have about 71 percent
of the Canadian life and health insurance market (ibid).
” Canada, Department of Finance, Canada’s Life and Health Insurers, online: Department of Fi-
nance
Department of Finance, Canada’s Insurers]. Canada’s life and health insurers derive a significant
portion of their premiums (55%) from foreign operations. CLHIA, Facts 2001, ibid. at 5. Income
from foreign premiums increased from $11.4 billion in 1990 to $49.1 billion in 2000. CLHIA, Facts
2001, ibid. at 26.
59 CLHIA, Facts 2001, ibid. at 26. The U.S. provides the largest market for Canadian life and health
insurers, followed by the U.K. and Europe, then Asia.
60Ibid
61 Ibid. at 25.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM 763
With respect to health insurance, there is sometimes a tendency to treat the entire
financial services sector as a unit during international trade negotiations. For example,
in a recent consultation paper regarding financial services negotiations in the World
Trade Organization, Finance Canada discussed the need for further liberalization of
financial services.’ While not specifically referring to the health insurance industry,
the paper notes that the health and life insurance industry forms part of the financial
sector. This highlights the importance of effective communication and co-ordination
between government departments. Policies that are appropriate for financial institu-
tions such as banks may be completely inappropriate in the health insurance market
given the distributive objectives underpinning medicare. Finance Canada and other
government departments need to be aware of the implications for the health sector of
seeking improved access for financial service suppliers to the U.S. and Mexican mar-
kets, even where such access will be beneficial to private Canadian exporters, and
must therefore seek appropriately worded exemptions.
E. Proposals for the Reform of Medicare
There are a number of reform proposals that seek to maintain the core value of
Canada’s health care system (ensuring access to care on the basis of need) but that
also look to improve the equity or efficiency of the system. Key reform proposals in-
clude: the introduction of national pharmacare and home care programs; efforts to ex-
pand access to privately financed services like prescription drugs through regulation
of private insurers (“managed competition” reform such as that implemented by Que-
bec with respect to prescription drugs); and moves to promote increased efficiency in
the publicly funded sector through contracting out to competing providers (whether
for-profit or non-profit) and through devolving budgets to groups of family physicians
and nurses to purchase a range of care on behalf of patients enrolled with them.
In February 1997 the National Forum on Health recommended that “home care …
be considered an integral part of publicly funded health services “‘6 It also made rec-
ommendations with respect to prescription drugs, suggesting that the way to improve
appropriate access to and utilization of drugs, as well as to control the growth of drug
expenditures, is to ensure that medically necessary prescription drugs be made avail-
Canada, Department of Finance, Consultation Paper for the World Trade Organization Negotia-
tions on Financial Services (Ottawa: Department of Finance, 2000), online: Department of Finance
that changing technologies will increase the ability of financial institutions to service foreign markets
from abroad without having to establish a commercial presence in a given market.
63 National Forum on Health, Canada Health Action: Building on the Legacy, vol. 1 (Ottawa: Na-
tional Forum on Health, 1997) at 21 [hereinafter National Forum on Health, Canada Health Action].
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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able to all Canadian residents, without deductibles or copayments.’ The forum con-
cluded that the best way to accomplish this goal would be by means of a publicly fi-
nanced and regulated system administered by the provinces.’ In its 2000 Recommen-
dations to First Ministers, the Institute for Research on Public Policy’s Task Force on
Health Policy also recommended increased federal financial support to ensure equit-
able access to pharmaceuticals.’ The Liberal government promised in its 1997 Red
Book to put in place national pharmacare and home care programs.’ In 1998, Health
Minister Allan Rock identified continuing care/home care as a priority area for fed-
eral, provincial, and territorial action.’ In 1999, the federal Speech from the Throne
promised reform in respect of home care and pharmacare.’
Despite these various calls for and promises of reform, Canadians have yet to see
medicare expand to include prescription drugs and home care. This impasse likely
speaks to the continued concern over ensuring the sustainability of the status quo, let
alone expanding public funding into new areas. It also speaks to the difficulties of
warming up the frigid relations between the federal and provincial governments, as
the latter are wary of federal promises of new programs when there remains the pos-
sibility of federal funding reductions in the future.
One possible means of funding a national pharmacare or home care program that
would not involve large expenditures of general taxation revenues is through the in-
64National Forum on Health, “Directions”, supra note 48.
65 Ibid.
66Supra note 46 at 38. The task force concluded, however, that moving to a solely federal drug plan
may prove too radical for the current state of federal-provincial relations. It put forward as a second
option the development of national standards to be accepted by each provincial drug plan with the
objective of ensuring that all Canadians are covered.
67 Liberal Party of Canada, Securing Our Future Together: Preparing Canada for the Twenty-First
Century, The Liberal Plan-1997 (Ottawa: Liberal Party of Canada, 1997) at 74-75, online: Liberal
Party of Canada
6 See “Speaking Notes for Allan Rock, Minister of Health” (Speech delivered at the National
Home Care Conference, Halifax, 9 March 1998), online: Health Canada
Alan Nymark, Associate Deputy Minister” (Speech delivered at A Federal Perspective on Health
Care Reform: Pulse
’98, Toronto, 11 May 1998), online: Health Canada
(date accessed: 1 November 2002); Report on the
National Roundtable on Home and Community Care (10 February 1998), online: Health Canada
‘ Governor General, “Building a Higher Quality of Life for All Canadians: Speech from the Throne
to Open the Second Session of the Thirty-Sixth Parliament of Canada” (12 October 1999), online:
Government of Canada Privy Council Office
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM 765
troduction of a social insurance scheme and managed competition reform. Such a
system would be financed by both employer and employee contributions fixed at a
certain percentage of salaries with government revenues having to cover only the un-
employed or elderly. Such a system would thus be progressively financed (albeit not
through taxation revenue) and would “ensure universal coverage of citizens for a core
range of health services on the basis of need as opposed to … willingness or ability to
pay.”
The managed competition model involves requiring private insurers to compete
within a government-regulated system for the business of customers who bring with
them a risk-adjusted share of funding. Competition occurs between insurers on the
basis of price and quality rather than risk avoidance. A managed competition system
involves a sponsor (e.g. a government-appointed body) pooling money received from
employer/employee contributions and from general taxation revenues. The sponsor
then pays, on behalf of individuals, a risk-adjusted share of the pooled funding to that
individual’s chosen insurer.” Managed competition reform is a relatively complicated
model, and an important feature of it from the perspective of the NAFrA is that it re-
quires sophisticated government regulation.
Let us shift here from reform initiatives geared towards expanding public coverage,
and turn to look at reforms aimed at the delivery of health care services. An initiative
that is currently being experimented with in Ontario and in a very limited way in Alberta
is that of the government contracting out the supply of publicly funded services to com-
peting public and private providers (non-profit or for-profit). This is sometimes de-
scribed as internal market reform. For example, Alberta’s Health Care Protection Act2
allows regional health authorities to contract with private for-profit facilities for the pro-
vision of some publicly insured health care services. In Ontario, home care is partly
publicly funded and provided through community care access centres that must contract
out service delivery to competing private for-profit and non-profit providers.’ Some
proposals for reform, following on from reform undertaken in countries like the United
7 C.M. Flood, “Accountability of Health Service Purchasers: Comparing Internal Markets and
Managed Competition Reform Models” (1998) 20 Dal. LJ. 470 at 478.
71 Ibid. at 478-79.
72R.S.A. 2000, c. H-1.
” See Canadian Home Care Association, “Ontario Fact Sheet Draft-Edited Version”, online: Ca-
nadian Home Care Association
(date accessed: 1 November 2002). Ontario is moving towards an open competitive model for home
care service delivery through a Request for Proposal process.
766
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Kingdom, New Zealand, and Sweden, have advocated expanding the use of contracting
out hospital and medical services to competing providers.74
All major reviews of medicare have concluded that primary care must be re-
formed and that the current system of solo, fee-for-service practice results in a variety
of systemic problems.” Some reform proposals have suggested devolving budgets to
groups of family doctors and nurses to purchase a range of care on behalf of the pa-
tients enrolled with them.76 This reform follows similar initiatives in the U.K. with
what is known as “GP Budget-holding”,” and the goal is to give doctors an incentive
to be somewhat sensitive to the cost of the various services and goods that they sup-
ply, prescribe, and recommend. Such reform would not constitute privatization, since
7′ See e.g. Canada, Standing Senate Committee on Social Affairs, Science and Technology, The
Health of Canadians-The Federal Role, vol. 4 (Ottawa: Standing Senate Committee on Social Affairs,
Science and Technology, 2001) at 64-68, online: Senate of Canada
(date accessed: 1 November
2002).
” See e.g. National Forum on Health, Canada Health Action, supra note 63 at 23; D. Mirkin, R.
Parke & R. Grignon, Proposed Inter-professional Primary Health Care Groups (PCGs) Costing
Models, Technical Costing Report prepared for the Health Services Restructuring Commission’s Pri-
mary Health Care Strategy (Toronto: Ontario Health Services Restructuring Commission, 1999), on-
line: Health Services Restructuring Commission
(date accessed: 1 November 2002); Saskatchewan Commission on Medicare, “Caring for Medicare:
Sustaining a Quality System” (April 2001) at 9-19, online: Saskatchewan Health Information Net-
work
vember 2002); Quebec, Ministry of Health and Social Services, Emerging Solutions: Report and
Recommendations (Quebec City: Commission of the Study of Health and Social Services, 2001), on-
line: Commission d’6tude sur les services de sant6 et les services sociaux
Health for Alberta, ‘A Framework for Reform: Report of the Premier’s Advisory Council on Health”,
online: Government of Alberta
76 See e.g. Institute for Research on Public Policy, Task Force on Health Policy, supra note 46 at 21:
“We would hope to see, for example, experimentation in primary care by way of further devolution of
budgetary responsibility to groups of family doctors and community nurses …” Jr6me-Forget and
Forget also make a proposal involving managed care principles. The basis of their recommendation is
a capitation formula, where physicians’ budgets are based on the number of patients who sign up.
Physicians, in turn, purchase services from hospitals on a fee-for-service basis. They argue that this
system would introduce greater accountability since physicians will have to meet individual patient
demand in the provision of information and in the delivery of health care. M. JMr6me-Forget & C.E.
Forget, Who is the Master?: A Blueprint for Canadian Health Care Reform (Montreal: Institute for
Research on Public Policy, 1998) at 93-109.
7For
discussion on reform in the U.K., see Flood, International Health Care Reform, supra note 10
at 95-103.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
767
provincial governments would continue to fund and govern the system for the benefit
of all citizens. The choices made (e.g. with respect to treatment, hospitalization, or
out-patient care), however, would be rooted in an accountable relationship between
doctors and patients and would rely on some degree of competition among provid-
ers. 9
These reform proposals, although obviously influenced by a desire to import
some private sector style of incentives, are nonetheless aimed at improving efficiency
within the publicly funded system. Such reform proposals (which may involve a
greater role for private delivery) can be sharply distinguished from proposals that ad-
vocate increased private financing as a means of reducing the burden on the publicly
funded system. Recently, at a national level, the possibility has been raised of allow-
ing more private financing of the system in the form of user charges or by allowing a
two-tier system where people can hold private insurance and buy higher quality serv-
ices or more timely treatment in the private sector.”
Whatever the outcome of current reform proposals, it is clear that ongoing
changes in the health care system and the possibility of reform make it impossible to
draw any hard and fast conclusions about how public/private boundaries will be
drawn in the future. As we discuss below, the significance of this in the context of the
NAFFA lies largely in the apparent failure on the part of the NAFTAs negotiators to
appreciate the dynamic and changing nature of the health care system. We begin in
Section II.A with a discussion of the relevant NAFTA provisions. Then, in Section
II.B we consider the NAFTA’s potential impact on reform proposals and whether the
NAFTA will have unintended or unwanted consequences as a result of reform.
II. The NAFTA and Canadian Health Care Reform
A. The Relevant Provisions
The NAFUA aims to establish a free trade area between the territories of the U.S.,
Canada, and Mexico. Its objectives, as listed in article 102, are: to eliminate barriers to
trade in, and facilitate the cross-border movement of, goods and services among the
U.S., Canada, and Mexico; to promote conditions of fair competition in the free trade
area; to increase investment opportunities in these countries; to provide adequate and
effective protection of intellectual property rights in each country; to create effective
7 MJr6me-Forget & Forget, supra note 76 at 145.
7′ See e.g. Canada, Standing Senate Committee on Social Affairs, Science and Technology, supra
note 74.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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procedures for the implementation and application of the NAFTA, its joint admini-
stration, and the resolution of disputes; and to establish a framework for further trilat-
eral, regional, and multilateral co-operation so as to expand and enhance the benefits
of the NAFTA.’ The NAFTA requires that these objectives be looked at whenever the
agreement’s other provisions are interpreted,8′ and it is therefore relevant to note that
their overriding theme is trade liberalization.
While the parties to the NAFrA are the federal governments of Canada, the U.S.,
and Mexico, these governments are obligated to “ensure that all necessary measures”
are taken in order to give effect to the agreement’s provisions, including their obser-
vance by state, provincial, and local governments.82
The NAFTA’s scope extends to all economic sectors, including the health sector,
unless there are exceptions or the parties have made reservations for particular sectors
(or parts thereof) that they wish to exempt from some of the NAFTA’s liberalizing
provisions. The agreement is divided into chapters that deal with various aspects of
trade. The chapters of the most relevance to the provision of services within Canada’s
health care system are chapters 11 (investment),3 12 (services), and 14 (financial
services).’ In accordance with the NAFTA’s objectives, the provisions contained in
these chapters impose a number of constraints on the regulatory measures a govern-
ment can take. We discuss below the key provisions that have relevance to the health
care sector, namely, national treatment, most-favoured-nation treatment, expropria-
tion, and dispute settlement. We then examine Canada’s reservations.85
Supra note 6, art. 102.
81Ibid., art. 102(2).
82 Ibid., art. 105.
83 The term “investment” is defined broadly to include assets owned or controlled, directly or indi-
rectly, actually or contingently, by an investor; it also includes enterprises, equity security, and certain
debt security (i.e. contractual rights, economic interests, intellectual property rights, and licenses).
Ibid., art. 1139. An investor is defined as “a Party or state enterprise thereof, or a national or an enter-
prise of such Party” (ibid.). The definition applies to U.S. and Mexican investors of Canadian incorpo-
rated private health care service providers and insurers. It also applies to U.S. and Mexican organiza-
tions that make loans to or have a stake in Canadian incorporated service providers and insurers.
” Chapter 14 (financial services) is applicable to the extent that it covers commercial health insurers.
There are other provisions that may have an impact on health care, but they are not discussed here
as being less central to this article’s focus: arts. 1104, 1204 (standard of treatment), art. I106(l)(c)
(performance requirements), art. 1205 (local presence and rights of establishment), and art. 1210 (li-
censing of providers). See NAFTA, supra note 6.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
769
1. National Treatment and Most-Favoured-Nation Treatment
The key trade liberalizing provision in the NAFTA is the national treatment rule,
which applies in respect of investors (article 1102), service providers (article 1202),
and financial service providers (article 1405). It requires that Canada treat relevant
entities from the U.S. and Mexico no less favourably than it treats its own entities in
like circumstances. In other words, U.S. and Mexican entities must be given the same
rights and opportunities as Canadian entities in like circumstances. With respect to
measures taken by a Canadian province, the national treatment rule requires that a
province accord entities from the U.S. or Mexico treatment no less favourable than the
most favourable treatment accorded by that province, in like circumstances, to Cana-
dian entities.’
The national treatment rule could be violated if a province established investment
rights only for Canadian individuals and companies. For example, if a provincial gov-
ernment required the contracting out of publicly funded surgical services but only to
Canadian-owned private facilities, this would put U.S. and Mexican service providers
and investors at a disadvantage relative to their Canadian counterparts. Similarly, pro-
vincial regulations prohibiting the cross-border delivery of services (e.g. diagnostic
services) could violate the national treatment principle, as the result would be that
U.S. and Mexican laboratories would be treated less favourably than Canadian labo-
ratories.’
Government measures that prima facie do not discriminate in their treatment of
domestic and imported products or services might nonetheless be found in violation
of the national treatment rule.’ This is because measures might make the same de-
mands of foreign and domestic entities, but effectively put the foreign entities at a
competitive disadvantage by placing a more onerous burden on them. For example, in
a trade dispute concerning the import, distribution, and sale of beer by Canadian pro-
-Ibid., arts. 1102(3) (investment), 1202(2) (services) and 1405(4)(a) (financial services).
” See B. Appleton, ‘International Agreements and National Health Plans: NAF7A” in D. Drache &
T. Sullivan, eds., Market Limits in Health Reform: Public Success Private Failure (New York: Rout-
ledge, 1999) 87 at 89.
‘s See e.g. United States-Section 337 of the Tariff Act of 1930 (Complaint by the European Eco-
nomic Community) (1989), GATT Doc. U/6439, 36th Supp. B.I.S.D. (1990) 345 at paras. 5.11, 5.13,
online: WTO
vember 2002); European Communities-Regime for the Importation, Sale and Distribution of Ba-
nanas (Complaint by Ecuador et aL) (1997), WTO Doc. WT/DS27/AB/R at para. 234 (Appellate
(date
Body Report), online: WTO
accessed: 1 November 2002).
770
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vincial marketing agencies,” the U.S. complained, among other things, that minimum
prices maintained for imported and domestic beer in British Columbia, New Bruns-
wick, Newfoundland, and Ontario were inconsistent with the national treatment prin-
ciple contained in article 111.4 of the General Agreement on Tariffs and Trade.’ Can-
ada argued that the minimum prices were consistent with the provision because they
applied equally to both imported and domestic beer. The panel found for the U.S.,
holding that applying minimum prices equally to imported and domestic beer did not
necessarily accord equal conditions of competition, as the U.S. suppliers were effec-
tively prevented from competing on the basis of price. There was discrimination to the
extent that U.S. beer was brewed more efficiently and was more competitively priced.
The maintenance of a minimum price for imported products at the level at which the
directly competing, higher-priced domestic product was supplied was inconsistent
with the national treatment principle because the minimum prices were fixed in rela-
tion to the prices at which the domestic beer was sold.
The NAFTA requires Canada to provide to NAFTA investors (article 1103),
service providers (article 1203), and financial service providers (article 1406) from
the U.S. and Mexico treatment no less favourable than it accords, in like circum-
stances, to investors, service providers, and financial service providers from any other
country (including, but not limited to, the U.S. or Mexico).’ This rule is not as far-
reaching as the national treatment rule, as it only comes into play once access has al-
ready been granted to foreign entities. It would have to be considered, for example, if
access were to be granted to Swiss-owned surgical facilities or diagnostic providers.
In that case, the same opportunities would have to be opened to surgical facilities and
diagnostic providers from both the U.S. and Mexico.
2. Expropriation
The most controversial aspect of the NAFTA, and arguably of the most concern
with respect to the health care system, is the article 1110 expropriation provision. It
has been argued that this provision will make it difficult for governments to retreat
89 Canada-Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing
Agencies (Complaint by the United States) (1992), B.I.S.D. 39S/27 at para. 6.1 (Panel Report), online:
WTO
(date accessed: 1 November
2002).
9 30 October 1947, 58 U.N.T.S. 187, Can. T.S. 1947 No. 27 (entered into force 1 January 1948)
[hereinafter GATT]. The GATT has an almost identically worded national treatment provision to that
of the NAFTA. Decisions concerning disputes under it are therefore relevant.
” Supra note 6.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
771
from policies of economic liberalization or privatization.’ Article 1110(1) of the
NAFTA reads:
No Party may 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 (“expropriation”), ex-
cept:
(a)
for a public purpose;
(b) on a non-discriminatory basis;
(c)
in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation …
Compensation is required to be equivalent to the fair market value of the expro-
priated investment immediately before the expropriation took place.’ The requirement
for payment of compensation is the condition that has provoked the most concern
among critics of the NAFTA. In particular, it has been argued that article 1110 has the
effect of rendering prohibitive the cost of re-establishing in the public domain those
elements of the health system opened to private foreign investors.” That is, if a gov-
ernment wanted to fund or provide health care services in an area that was currently pri-
vately financed or open to private providers, such action could be considered a measure
tantamount to expropriation by depriving investors present in the market of their current
or potential business, thus opening up the possibility of a claim for compensation.
The Canadian government has called for a clarifying statement regarding article
1110 on the grounds that “the NAFTA parties never intended the expropriation and
compensation provisions of NAFMA Chapter Eleven to limit the legitimate rights of
governments to regulate ” Canada has argued that the NAFTA should not “give in-
92 Appleton, supra note 87 at 100; S. Shrybman, A Legal Opinion Concerning NAFTA Investment
and Services Disciplines and Bill 11: Proposals by Alberta to Privatize the Delivery of Certain In-
sured Health Care Services (Ottawa: Library of Parliament, 2000). The following analysis of the ex-
propriation provision and of Canada’s Annex 11 reservation is based to some extent on the approach
offered by Shrybman.
9 Supra note 6, art. 1110(1).
Ibid., art. 1110(2). Examples of criteria used to determine fair market value are going concern
value and asset value (including declared tax value of tangible property).
Appleton, supra note 87; Shrybman, supra note 92.
“Issues Paper on Expropriation” attached to J. Gero, “Canadian Memo on Investor-State Provi-
sions”, Memorandum from the Director General of Trade Policy Bureau II at the Department of For-
eign Affairs and International Trade to Eduardo Solis Sanchez and Jon Huenemann, 13 November
1998, reprinted in N. Sherif, “Canadian Memo Identifies Options for Changing NAFTA Investment
Rules” (1999) 17:6 Inside U.S. Trade 1 at 20.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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vestors the right to seek compensation for wealth deprivation caused by acts or meas-
ures [that] are non-discriminatory and within the normal exercise of a State’s regula-
tory prerogative.”‘
No such statement has been issued to date. The meaning of the term “expropria-
tion”, however, was considered by the arbitral tribunal in a claim brought against the
Canadian government by S.D. Myers Inc.” In that case, the tribunal drew a distinction
between expropriation and regulation, in that expropriation tends to involve the depri-
vation of property rights, whereas regulation generally involves a lesser interference.”
On this basis the tribunal declared it unlikely that regulatory conduct would be the
subject of a successful complaint under article 1110, although they did not rule out the
possibility. Indeed, the tribunal accepted “that in legal theory, rights other than prop-
erty rights may be ‘expropriated’ and that international law makes it appropriate for
tribunals to examine the purpose and effect of governmental measures.”” One tribunal
member, Dr. Bryan Schwartz, opined that the phrase “tantamount to expropriation” in
article 1110 requires a tribunal to “take a hard look at whether government conduct
amounts in substance to an expropriation. … The real purpose and real impact of a
measure must be considered, not merely the official explanations offered by govern-
ment or the technical wrapping in which the measure is cloaked.””‘ In addition, it has
been argued by one of the NAFTA’s negotiators that while a measure that diminishes
the value of an investment but does not necessarily transfer ownership to a third party
may be scrutinized under the expropriation provision, a “generally applicable non-
discriminatory measure, which merely has the effect of lessening the economic for-
tunes of a particular enterprise such that the enterprise could not repay a debt, would
not be treated as an expropriation.’102
In sum, explicit legislation forcing established U.S. or Mexican entities out of Ca-
nadian health care markets would trigger a requirement for expropriation compensa-
tion. 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
9’ Ibid.
98 S.D. Myers Inc. v. Government of Canada (2000), NAFrA/UNCITRAL Arbitration, Partial Award,
at paras. 279-88, online: DFAIT
99Ibid. at paras. 281-82.
‘Ibid. at para. 281.
‘o0 S.D. Myers Inc. v. Government of Canada (2000), NAFrA/UNCITRAL Arbitration, Separate
Opinion (Dr. B. Schwartz), at para. 217, online: DFAIT
” D.M. Price, “NAFrA Chapter 11 Investor-State Dispute Settlement: Frankenstein or Safety
Valve?” (2000) 26 (Supp.) Can.-U.S. L.J. 1 at 4.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
773
expropriation claim. The only certainty is that it will depend on how the particular arbi-
tration panel views the scope and substance of the regulation or legislation in question.
3. Dispute Settlement
The rights and obligations in the NAFTA are only as effective as the mechanisms
by which they can be enforced. While governments can intercede on behalf of their
nationals in respect of chapters 12 (services) and 14 (financial services),” foreign in-
vestors have a right under chapter 11 (investment) to invoke international dispute
resolution processes themselves to enforce their rights under that chapter. The ability
of a private party to bring a claim directly against a foreign government is a recent in-
novation in international trade policy. Prior to implementation of the NAFTA and
other recent bilateral investment treaties,'” private parties did not have standing to take
up a cause of action against sovereign states. Rather, the government of the country of
which the private actor was a national had to agree to take the case on its behalf. The
dispute resolution mechanism in NAFTA chapter 11, however, eliminates the need for
a state to intercede on behalf of its national in respect of investments.
Investment disputes are decided by international arbitration panels pursuant to ar-
ticles 1115 to 1133. Panels consist of three arbitrators, one appointed by each of the
disputing parties, and the third (the presiding arbitrator) appointed by agreement of
the disputing parties.'” If a party fails to appoint an arbitrator, or the parties cannot
agree on a presiding arbitrator, selection is by the secretary-general of ICSID.'” The
secretary-general makes appointments from a roster of presiding arbitrators estab-
lished pursuant to article 1124(4). The panels operate under international law,'” ac-
cording to procedures established for resolving international commercial disputes.'”
” Disputes under chapters 12 and 14 are dealt with pursuant to chapter 20, which provides for an
initial consultation phase (art. 2006), followed, if necessary, by arbitration. Arbitration panels estab-
lished pursuant to chapter 20 are comprised of members selected by the disputing parties from a ros-
ter that is maintained pursuant to article 2009. The chair of the panel is chosen by agreement between
the parties. If agreement cannot be reached, a disputing party chosen by lot shall select as chair an in-
dividual who is not a citizen of that party. See NAFTA, supra note 6.
” The U.S. has signed a large number of bilateral investment treaties with other countries. These
treaties seek to protect U.S. investment interests abroad and often contain an investor-state dispute
mechanism similar to that found in chapter 11 of the NAFTA.
‘ NAFTA, supra note 6, art. 1123.
‘ Ibid, art. 1124.
“oIbid, art. 1131, which provides that disputes shall be decided in accordance with the NAFTA and
applicable principles of international law.
‘ Ibid, art. 1120, which stipulates that “a disputing investor may submit the claim to arbitration
under
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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Such international disputes tend to be closed and secretive, since, for example, rule
15(1) of the ICSID Arbitration Rules provides that “deliberations shall take place in
private and remain secret.”” This means that there is little opportunity for public
scrutiny or participation in the dispute settlement process. ‘ In July 2001 the NAFTA
Free Trade Commission issued an interpretive statement clarifying that “nothing in
the NAFTA imposes a general duty of confidentiality” and that, subject to limited ex-
ceptions including limitations on disclosure imposed by the specific arbitral rules be-
ing used, documents associated with NAFTA arbitrations must be made available to
the public.”‘ One commentator has noted, however, that this may provide an incentive
for parties to use the UNCITRAL Model Law rather than the ICSID Additional Fa-
cility Rules, because the former provide for confidentiality of party submissions.”2 It
is also worth noting that the chapter 11 dispute settlement process does not make any
allowance for direct intervention of other interested parties or any guarantee that ami-
cus submissions of such parties will be accepted.”‘
The NAFTA investment dispute resolution process allows the possibility of deci-
sions being made concerning Canada’s health care system behind closed doors. Deci-
sions under NAFTA chapter 11 may be made by arbitrators who have little familiarity
with Canadian law or health policy objectives and little understanding of the very dif-
ferent set of values that underlie the Canadian health care system relative to the U.S.
health care system. Panel decisions must be made by a majority. Ganguly notes that
(a) the ICSID Convention, provided that both the disputing Party and the Party of the
investor are parties to the Convention;
(b) the Additional Facility Rules of ICSID, provided that either the disputing Party or
the Party of the investor, but not both, is a party to the ICSID Convention; or
(c) the UNCITRAL Arbitration Rules.”
‘9 ICSID, Rules of Procedure for Arbitration Proceedings, online: ICSID Basic Documents
(date accessed: 1 November 2002). See also
ICSID, Rules Governing the Additional Facility for the Administration of Proceedings by the Secre-
tariat of the International Centre for Settlement of Investment Disputes (Additional Facility Rules),
Schedule C, art. 24(1), online: ICSID Additional Facility
,, See J.C. Beauvais, “Regulatory Expropriations under NAFTA: Emerging Principles and Linger-
ing Doubts” (2002) 10 N.YU. Envt’l L.J. 245 at 263.
Ibid. Beauvais refers to NAF’TA Free Trade Commission, “Notes of Interpretation of Certain
I..
Chapter 11 Provisions” (31 July 2001), online: DFAIT
” T. Weiler, “Trade Ministers Say the Darndest Things” (August 2001), online: NAFTALAW.ORG
“,3 This is unlike the general dispute settlement provisions in chapter 20, which do allow for third
party participation. See NAFTA, supra note 6, art. 2013.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
775
this opens up the possibility of the “neutral” member (the presiding arbitrator) being
pressured to agree with one or the other of the appointed members.”‘ The danger in
this process is that there may not be that many available arbitrators with a knowledge
of health issues, and it is possible that Canada would have to accede to the appoint-
ment of a presiding arbitrator who has little or no knowledge of its health care sector
and who would tend to sympathize with the arbitrator chosen by the investor.”‘
Ganguly argues that a number of aspects of the chapter 11 dispute mechanism
process are particularly advantageous to investors: the arbitral process is binding, and
decisions are enforceable with no right of judicial review or appeal; arbitral panels are
not required to follow the decisions of previous panels, resulting in uncertainty when-
ever a dispute is heard; there are strict standards of confidentiality; the costs of litiga-
tion in the courts of the host country or the investor are removed; and the ability to
bypass domestic courts of the foreign government enables the investor to avoid po-
tentially unfavourable domestic laws of the host country and judiciaries sympathetic
to their government.”‘ He also notes that there are no checks or balances as to the use
of the NAFTA investor-state dispute mechanisms and that the need to evaluate the
merits of investors’ claims makes it impossible to dismiss claims readily.” These are
all valid concerns should U.S. investors seek to challenge government regulations in
the health care sector, as public interests are so clearly at stake.
4. Reservations”‘
The parties to the NAFMA were permitted to make reservations in order to protect
specified sectors from the full force of the agreement’s provisions with respect to in-
vestment,”9 services, ‘ and financial services.2’ Reservations do not, however, extend
“14 S. Ganguly, “The Investor-State Dispute Mechanism (ISDM) and a Sovereign’s Power to Protect
Public Health” (1999) 38 Colum. J. Transnat’l L. 113 at 124.
“5Ibid.
I1 Ibid. at 122.
‘Ibid. at 115.
Besides reservations, the NAFTA contains a variety of exceptions that will not be discussed in
any detail in this article. As a brief example, we note that the national treatment and most-favoured-
nation treatment provisions do not apply to “procurement by a Party or state enterprise”. NAFTA, su-
pra note 6, arts. 1108(7), 1201(2)(c). This arguably means that where health care services are pur-
chased by the federal or provincial governments for their direct use, they will not be subject to the
stated provisions. The effect of this exemption is narrow as very few, if any, health care services are
provided directly for the use of either the federal or provincial governments. Also exempted are sub-
sidies and grants provided by Canada or a state enterprise (ibid, arts. 1108(7), 1201(2)(d)).
“I Ibid, art. 1108.
Ibid, art. 1206.
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to all of the NAFTA’s obligations. In terms of the most important provisions for a dis-
cussion of health care reform, reservations extend to the national treatment and most-
favoured-nation treatment provisions, but not to the article 1110 expropriation provi-
sion. The failure of reservations to extend to the expropriation provision is of crucial
importance to our analysis. Canada has entered two types of reservations, which are
set out in Annexes I, 1I, and VII of the NAFTA.
The Annex I (investment and services) and Annex VII (financial services) reser-
vations permit a government to maintain any specific non-conforming measures that it
chooses to list. These measures may be amended in the future but must not be
amended so as to “decrease the conformity” of the measure with the NAFTA’s provi-
sions. There were difficulties determining the full extent of provincial and state non-
conforming measures at the date of entry into force of the NAFTA, and as a solution
the parties agreed to grandfather all such measures.” Accordingly, Canada is not in
breach of the NAFTA by virtue of any non-conforming provincial measure that ex-
isted prior to 1 January 1994 and is still in place. While Annex I and Annex VII are
important, Annex II contains the more important reservation in terms of health care,
as it has relevance for future changes in the health care system.
Canada’s Annex II reservation allows the government to “adopt or maintain”
measures that would otherwise violate the NAFTA where those measures are for the
purpose set out in the reservation. The reservation reads:
Canada reserves the right to adopt or maintain any measure with respect to
the provision of public law enforcement and correction services, and the fol-
lowing services to the extent that they are social services established or main-
tainedfor a public purpose: income security or insurance, social security or in-
surance, social welfare, public education, public training, health and child
23
care.1
This reservation protects the health care sector from the full application of the
NAFTA only to the extent that the services in question are “social services established
or maintained for a public purpose.” Annex II is not specific as to what is meant by
either “social services” or “public purpose”, and there has been controversy over how
the reservation ought to be interpreted. Unfortunately, the NAFMA does not define ei-
“‘ Ibid., arts. 1409(2), 1409(4). Where a party sets out a reservation to arts. 1102, 1103, 1202, or
1203 in their schedule to Annex I, H, I, or IV, it is deemed also to be a reservation to arts. 1405 (na-
tional treatment) and 1406 (most-favoured-nation treatment).
2 Exchange of letters between Canada, the U.S., and Mexico (29 March 1996), cited in A. de
Mestral, “The North American Free Trade Agreement: A Comparative Analysis” (1998) 275 Rec. des
Cours 219. See also Canada, Department of Foreign Affairs and International Trade, supra note 9.
123 NAFTA, supra note 6, Annex II [emphasis added]. The U.S. and Mexico have entered identical
reservations.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM 777
ther of these phrases. Canada and the U.S. have suggested very different interpreta-
tions of the reservation, neither of which has been tested before a dispute settlement
tribunal.
The Canadian government has suggested a broad interpretation of the Annex II
reservation that emphasizes “government intent” as a crucial factor in determining
whether a service is provided for a “public purpose” ‘ This interpretation recognizes
that a government may explicitly indicate that it is acting in order to provide a service
“for a public purpose”, while in other cases it can be inferred from the circum-
stances.'” In the case of health care services, the act of providing public funding (e.g.
government funded health insurance plans) is an important factor in showing the gov-
ernment’s intent to provide services “for a public purpose”. If the government did not
intend to benefit the public, presumably it would not have chosen to fund the services
from general taxation revenues, thus ensuring access to care on the basis of need
rather than ability to pay.
The United States Trade Representative has expressed a contrary view. Indeed, he
issued a narrow interpretation of the “social services” reservation, which states that
[t]he reservation in Annex II (II-U-5) is intended to cover services which are
similar to those provided by a government, such as child care or drug treatment
programs. If those services are supplied by a privatefirm, on a profit or not-for-
profit basis, Chapter Eleven and Chapter Twelve apply.”f’
It would be extremely problematic for Canada if this interpretation were to pre-
vail, as virtually all health care services, whether publicly or privately funded, are
supplied by private firms or other private entities, either on a for-profit or non-profit
basis-even hospitals in Canada are private organizations, albeit heavily regulated.
The United States Trade Representative has also expressed the view that chapters 11
and 12 apply once “[a] state allows private providers to offer similar services on a
commercial basis.”‘” Following this line of reasoning, if any part of a sector is oper-
ated on a commercial basis, then the government-operated part of that sector is subject
to the full force of the NAFTA.
Clearly the Canadian and United States governments’ views on Annex II conflict.
Which interpretation should prevail? A starting point is the Vienna Convention on the
24 B. Schwartz, “NAFTA Reservations in the Areas of Health Care” (1997) 5 Health LJ. 99 at
107-09.
‘”Ibid.
‘ “Draft USTR Guidelines for U.S. States’ NAFTA Service Reservations: Guidelines for NAFTA
Non-Conforming State Measures” Inside NAFTA 2:24 (29 November 1995) 18.
12 Ibid
778
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Law of Treaties,2′ which provides that the primary method of interpreting a treaty
should be the “ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose.'” What is a “social service that is main-
tained or provided for a public purpose”?’ 30 Neither “social service” nor “public pur-
pose” are defined in the NAFTA. The Oxford English Dictionary defines “social
service” as “a service supplied for the benefit of the community, esp. any of those
provided by the central or local government, such as education, medical treatment,
social welfare, etc.”‘ 3′ The term “public purpose” in international law is discussed in
Amoco International Finance Corporation v. Government of the Islamic Republic of
Iran.’ The tribunal in that case dealt with expropriations by the state, which are only
justified when undertaken for a “public purpose”. According to the tribunal, the pre-
cise definition of “public purpose” has been neither agreed upon nor suggested in in-
ternational law. Further, “as a result of the modem acceptance of the right to nation-
alize, [the] term is broadly interpreted and … States, in practice, are granted extensive
discretion”‘ 3
It is arguable that most health care services are social services provided for a
public purpose, at least to the extent that they are publicly funded. In our view, the
suggested definition of “social service for a public purpose” is satisfied where the
government funds services for the benefit of all those who require them on the basis
that everyone ought to have access to such care. The meaning of “public purpose” is ar-
guably wide enough to include services that the government wishes to fund for the pub-
lic benefit. Thus, in our view, the Canadian interpretation of Annex II should prevail.
We discussed above the increased use of contracting out the delivery of fully
publicly funded services to competing private for-profit companies. Do services de-
livered in this manner qualify as social services established or maintained for a public
purpose? In our opinion they do. The Canadian government funds certain health
services because it believes it is in the public interest that everyone have access to
,’ 23 May 1969, 1155 U.N.T.S. 331 (entered into force 27 January 1980). Though this convention
has not been ratified by the United States, it has become part of customary international law. See
Fisheries Jurisdiction Case (United Kingdom v. Iceland), (Jurisdiction of the Court), [1973] I.CJ.
Rep. 3 at 18; Case Concerning the Gabcikovo-Nagymaros Project (Hungary v. Slovakia), [1997]
I.C.J. Rep. 7 at 38.
129Ibid., art. 31(1).
‘, Canadian officials have suggested that the phrase was left deliberately vague in order to allow the
term to be interpreted in a broad manner. See Schwartz, supra note 124 at 110.
Oxford English Dictionary, 2d ed., s.v. “social service”.
m (1987) 15 Iran-U.S. C.T.R. 189, 27 I.L.M. 1314 [hereinafter Amoco], quoted in Ganguly, supra
note 114 at 136.
‘ Amoco, ibid at 233.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
779
necessary services, regardless of their ability to pay. The act of contracting out deliv-
ery to private for-profit companies is a means by which the government hopes to de-
liver services more efficiently-it does not change the fundamental nature of such
services as social services for a public purpose, nor does it change the government’s
intent that such services be available to everyone. It is difficult to rationalize the
United States Trade Representative’s view that services lose their characterization as
social services for a public purpose simply by virtue of being provided by for-profit
providers and companies on a commercial basis. Rather, the question seems to us to
be whether or not the services are publicly funded, as public funding is an indication
of what services the government has decided ought to be made available for the bene-
fit of the general public.
A factor bolstering the U.S. interpretation is that the NAFrA’s objectives are to be
used to assist in interpreting its text.'” The overriding tenor of promoting trade liber-
alization supports a narrow interpretation of Annex II. Even if we accepted an argu-
ment that the exception in Annex II be construed strictly, we believe the Canadian in-
terpretation should prevail. In publicly funding services, particularly for all citizens, a
government clearly establishes a system for a “public purpose”, even if within that
system the services are actually delivered by private entities. In addition, that there
was such a high level of private delivery within Canada’s health care system at the
time the reservation was entered into should be taken into account in interpreting the
reservation. To argue that Canada intended all privately delivered health care services
to be excluded from the reservation’s protection would render the reservation virtually
meaningless from a Canadian perspective.
It is worthwhile to look at the method of interpretation of exceptions to other in-
ternational trade agreements used by dispute panels. The World Trade Organization’s
Appellate Body said the task of interpreting the chapeau of article XX of the GATT
was
essentially the delicate one of locating and marking out a line of equilibrium
between the right of a Member to invoke an exception under Article XX and
the rights of the other Members under varying substantive provisions … of the
GATT 1994, so that neither of the competing rights will cancel out the other
and thereby distort and nullify or impair the balance of rights and obligations
constructed by the Members themselves in that Agreement. The location of the
line of equilibrium … is not fixed and unchanging; the line moves as the kind
” NAFTA, supra note 6, art. 102(2).
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and the shape of the measures at stake vary and as the facts making up specific
cases differ.3
In the context of Annex II, this approach would involve balancing Canada’s right to
protect its health care sector with the U.S. and Mexico’s rights to seek entry into Can-
ada’s market under the NAFTA’s substantive provisions. In order to protect the health
care sector, a trade-off needs to be made between the benefits of trade and the values
of Canada’s health care system. The extent to which a particular tribunal is willing to
give primacy to the health care system or to be fully cognizant of the redistributive
values that underlie it remains to be seen.
Any conclusion on the meaning of Annex II must be tentative given that it has not
yet been the subject of interpretation pursuant to the NAFTA dispute settlement proc-
ess. In our opinion, the U.S. interpretation of the exemption should not prevail. Such
an approach would subject all publicly funded services delivered by the private sector,
whether by for-profit or non-profit entities, to the full extent of the NAFTA’s provi-
sions. The corollary of this of course is that where services are privately financed, and
access thereto is allocated according to the capacity and willingness to pay, there is no
public purpose element. We argue, however, that some services, even though not fi-
nanced by general taxation revenues, are provided for a public purpose if they are
provided by charitable non-profit organizations and made available to anyone ac-
cording to need without requiring payment. Charitable organizations operating in this
way provide services for a public purpose without the objective of commercial gain,
and on that basis should be excluded from the full extent of the NAFTA’s application.
One of the biggest difficulties in assessing the implications of the Annex II reser-
vation with any certainty is the dynamic nature of the health care system. Goods and
services are shifting across the boundaries as the public/private mix of funding
changes. For example, as home care has become a more important component of care,
so the degree of public funding has increased significantly. This makes it difficult to
assess the likely application of the reservation at any point in the future. We reiterate
that regardless of the interpretation of the reservation, it does not provide any protec-
tion from the article 1110 expropriation provision.
“‘ United States-Import Prohibition of Certain Shrimp and Shrimp Products (Complaint by India,
Malaysia, Pakistan, Thailand) (1998), WTO Doc. WT/DS58/AB/R at para. 159 (Appellate Body Re-
port), online: WTO
accessed: 1 November 2002).
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
781
B. The NAFTA’s Effect on Proposals for Reform
1. National Pharmacare and/or Home Care Programs
As we noted in Part I, two important areas of health care that are not covered by
the CHA are drugs used outside hospitals and home care. Many Canadians rely on
private insurance to cover the cost of these services. Does Canada’s Annex I reserva-
tion for “social services established or maintained for a public purpose” protect the
private health insurance market from the NAFTA’s provisions? To the extent that
provinces do provide public coverage for drugs and home care, in our opinion this
sector of the market falls within the reservation. To the extent that drugs and home
care are privately financed, however, their provision, or that of private insurance
services to cover them, cannot be viewed as “social services established or maintained
for a public purpose” As noted, the national treatment principle applies unless serv-
ices are covered by an exemption or are included within the scope of the reservation.
This means that on an objective interpretation, in respect of private insurance for
drugs and home care, the NAFTA requires Canadian governments to provide market
access to private U.S. and Mexican insurers on the same basis as domestic Canadian
insurers. The U.S. interpretation of Annex 11, on the other hand, would find that the
reservation does not even apply to publicly funded provincial insurance plans cover-
ing drugs and home care because the state is allowing private providers to offer simi-
lar services on a commercial basis.
The article 1110 expropriation provision applies regardless of the interpretation of
Annex II, and it has the potential to entrench the investment rights of foreign health
insurers by allowing them to claim compensation if a Canadian government national-
izes or expropriates their investment or takes a measure tantamount to nationalization
or expropriation. The possible impact of article 1110 in this regard can be explained
by considering a hypothetical case in which a U.S. insurance company, Peace of
Mind, Inc., enters the Canadian market to provide insurance for extended health care
services including prescription drugs and home care. Within five years, Peace of
Mind, Inc. has a significant share of this market. The Canadian government, as part of
a health care reform package, decides to expand the coverage of medicare to include
universal coverage of medically necessary prescription drugs and home care services.
The CHA is amended to provide protection for these services and prohibit extra bill-
ing and user charges in respect of them. The provinces, not wanting to lose federal
transfers pursuant to the CHA, take steps to introduce legislation prohibiting the pur-
chase of private insurance to cover the cost of drugs and home care. Peace of Mind,
Inc. finds it has lost access to a large market, and delivers a notice of intent to submit a
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claim to arbitration to seek compensation for the indirect expropriation of its invest-
ment. Canada now potentially faces a large bill for implementing health care reforms.
How realistic is this scenario? In 2000, the private health insurance industry in
Canada consisted of 140 active firms.” Of these, 93 were Canadian incorporated
firms, 37 were American, and 10 were European (including British).’3′ Despite the
implementation of the NAFA in 1994, the market share of total industry premiums
(life and health insurance) held by foreign insurance companies fell slightly over the
last decade, from 32 percent in 1990 to 29 percent in 2000.3′ Clearly, costly compen-
sation claims by US insurance companies are a real possibility.
It is relatively expensive and time-consuming to bring an expropriation claim, and
it is arguably unlikely that a foreign insurer will bring a claim unless it stands to sus-
tain losses that are substantial enough to exceed the cost of bringing a claim. Thus, the
theoretical risk that arises from article 1110 may not always translate into a realistic
threat. Yet the mere threat of article 1110 claims may discourage both the federal and
provincial governments from extending medicare’s coverage where they believe that
to do so might result in costly claims for compensation. Existing fiscal constraints al-
ready present an impediment to the extension of medicare, and the threat of article
1110 claims only serves as yet another disincentive to act. At worst, such claims may
render reform economically unfeasible.
2. Managed Competition Reform
An alternative to a single-payer publicly funded insurance program for prescrip-
tion drugs and home care is to implement managed competition reform. A form of
136 CLHIA, Facts 2001, supra note 57 at 25. Over ninety percent of these firms were for-profit life
and health insurance companies. Department of Finance, Canada’s Insurers, supra note 58. Non-
profit groups such as the Blue Cross are also active in the market. See online: Blue Cross
“‘ CLHIA, Facts 2001, ibid. at 25.
… Ibid. When the NAFFA was signed in 1994, it was predicted by some that as the health insurance
market in the U.S. was saturated, U.S. insurers would look to expand into the Canadian market. RV.
Rosenau et aL, “Anticipating the Impact of NAFTA on Health and Health Policy” (1995) 21 Cana-
dian-American Public Policy 1 at 26-27. The Health Insurance Association of America noted in 1994
that opportunities for U.S. companies in foreign markets were likely to grow, since public sector in-
surance is “pinched by rising costs” in many industrialized countries with the consequent effect of
benefits being curtailed and national systems privatized. B. Gradison, “US Health Insurers Can Ex-
port Their Skills” (1994) 95:3 Best’s Review 44, cited in Rosenau et al. (ibid. at 27). While Canada
has not seen an influx of U.S. private insurers, this does not rule out the possibility of a claim by a
U.S. insurance company should their business be adversely affected by Canadian health care reforms.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM 783
managed competition reform has been implemented in Quebec, where all residents
are covered by a basic insurance plan covering prescription drugs.’ A managed com-
petition model requires significant government regulation, for example, to prevent in-
surers from charging people different premiums depending on their risk factors, and
to control the level of copayments and deductibles. Regulations may also dictate what
goods or services the insurers must cover. The Quebec legislation, for example,
stipulates that for the purposes of the basic plan, membership of a group insurance or
an employee benefit plan may not be determined on the basis of the age, sex, or state
of health of plan members,'” while insurers transacting group insurance and all ad-
ministrators of employee benefit plans must pool the risks arising from the basic plan
coverage they provide.’
Would the provision of services by private insurers in a managed competition
system be exempt from the national treatment principle pursuant to the Annex II res-
ervation as being services maintained “for a public purpose”? If not, the national
treatment principle would require market access to be given to U.S. insurers. Gov-
ernments implementing managed competition reform would need to be wary of
regulations that might have a disparate effect on the ability of U.S. health insurers to
compete for customers. For example, one could envisage an argument by U.S. health
insurers that the fixing of maximum premiums has a disparate effect on them-it af-
fects their ability to compete on the quality of the plan offered because customers
cannot trade-off higher prices against higher quality. The U.S. would almost certainly
argue that insurance services under a managed competition model are not provided
for a public purpose due to the presence of competing private insurers. In our opinion,
however, despite the presence of private insurers, the objective of providing universal
coverage, the requirement of a sophisticated governance model, the requirement of
risk-pooling, and the requirement that the scheme be progressively funded makes it
clear that services in a managed competition model are provided for a public purpose.
Thus, the national treatment rule should not apply and there should be no impediment
to any regulation the government wanted to introduce.
Regardless of the interpretation given to the Annex II reservation, the article 1110
expropriation provision presents a potential problem on two fronts. First, if U.S. in-
… See An Act Respecting Prescription Drug Insurance, R.S.Q. c. A-29.01. The basic plan is ad-
ministered by the government. Private insurers also play a part by insuring those people who belong
to group plans or private sector employee benefit plans. Legislation requires that people who are
part of such plans be covered, at a minimum, for the same benefits as those offered by the basic plan
(ibid, s. 38).
id, s. 41.
.
“‘ Ibid., s. 43.
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surers are already present in the market at the outset of such reform (and it is likely
they would be given that a number of U.S. insurers currently operate in Canada), the
government would face a potential financial obstacle if it wished to exclude them
from the new model. Second, if any U.S. insurers only enter the market after managed
competition reform, the government might face compensation claims if later it wished
to retreat from managed competition reform to a single-payer insurance system.
3.
Internal Market Reform: Contracting Out to Competing Providers
An internal market model involves public funding of services that are provided by
private for-profit or non-profit organizations who tender for contracts on a competitive
basis with government-appointed bodies such as regional health authorities. The
NAFTA presents no obvious constraints to implementation of internal market reform.
The article 1110 expropriation provision, however, may result in consequences that
were not foreseen as part of the reform model.
As we argued above, it is correct to interpret Canada’s Annex II reservation as
covering all publicly funded services, and as a consequence these services should not
be subject to the NAFTA’s national treatment rule. On the other hand, the U.S. inter-
pretation of Annex II implies that even publicly funded services are not covered by
the reservation if they are privately delivered; thus, the NAFTA should apply. If the
U.S. interpretation were to prevail and the national treatment rule found to be applica-
ble, Canadian provincial governments would be required to ensure that U.S. and
Mexican providers have the right to be considered on an equal basis for contracts to
deliver publicly funded services.
Regardless of the application of the Annex II reservation, unintended conse-
quences also could flow from the article 1110 expropriation provision if provinces
allow foreign entities to enter their markets. For example, contracts might be awarded
to foreign entities if they are able to provide services more cost effectively. As dis-
cussed above, the potential effect of article 1110 is that where a government allows
foreign private entities to operate in a market, it may be forced to pay compensation if
it later wishes to remove or restrict their right to operate in that market. Thus, while on
our interpretation a government will not be hampered in implementing internal mar-
ket reform, it may find that doing so commits it to a course of action that would be
costly to reverse at a later date. In this regard, the fact that a number of similar reforms
in other jurisdictions like the U.K., New Zealand, and Sweden have been significantly
modified, if not reversed, speaks to the need to allow governments to experiment with
different reform initiatives without fear of having to pay compensation.
Consider the hypothetical case of a successful new form of gene therapy that is
developed to treat cancer. The Ontario government wishes to fund the therapy, yet
there are high capital expenses involved in setting up facilities to provide it. Therefore,
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
785
it is more feasible to contract out the delivery of such services so that they can be
made accessible to all people on the basis of need. There are a number of private en-
terprises in Canada capable of delivering the services, but U.S. corporations are able
to offer a more competitive cost structure. Notices to tender are published and con-
tracts are awarded to a U.S. corporation that will operate facilities in Toronto, Ottawa,
and Windsor. The U.S. corporation performs satisfactorily and the Ontario govern-
ment renews its contracts for a number of years. Eight years later, however, the gov-
ernment finds that the cost of contracting out has become prohibitive due to factors
including exchange rate fluctuations, contract negotiation costs, quality regulation,
and monitoring. Given that the cost of providing the therapy has now dropped, the
government decides to provide the services out of public hospitals. Accordingly, it
gives the U.S. corporation notice that it will not be re-tendering for contracts when the
current contract expires. When it learns that the Ontario government proposes to have
publicly funded hospitals provide the services, the U.S. company brings an article
1110 claim based on the expropriation of its profitable business interests in Ontario.
The Ontario government is faced with the possibility that the corporation will be suc-
cessful in its argument that it has suffered a deprivation of its ownership rights and
that it will be required to pay a large sum in compensation.
4. Primary Care Reform
Unless foreign providers have entered Canada’s primary care market, the NAFTA
is not likely to prevent governments from undertaking primary care reform to devolve
budgetary responsibility to groups of physicians and nurses. To date, primary care
services have been provided by physicians, nurses, and other domestic providers with
little foreign presence in the market. It is possible, however, that if primary care re-
form led to the presence of a competitive internal market with a focus on health net-
works with devolved budgets, Canada’s primary health care sector would appear more
attractive to foreign for-profit health organizations such as U.S. health management
organizations (“HMOs”) or physician practice management groups (“PPMs”). Within
the U.S. health care system, the number of for-profit HMOs increased dramatically
between 1980 and the late 1990s. “2 On the heels of this growth has been the emer-
gence of PPMs. PPMs are for-profit organizations that link physician groups in multi-
ple markets and provide physicians with capital and resources through investment
from private sources including venture capitalists, bond underwriters, private inves-
4. S. Srinivasan, L. Levitt & J. Lundy, “Wall Street’s Love Affair with Health Care” (1998) 17:4
Health Affairs 126 at 126.
786
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tors, and public equity markets.’ 3 Such commercial activity south of the border raises
the spectre of for-profit organizations seeking to expand into Canada’s market should
the opportunity arise. The opportunity is only required to be given to U.S. providers,
however, if primary care services are not covered by the Annex II reservation and are
therefore subject to the NAFFA’s national treatment rule.
In our opinion, Canada’s Annex II reservation covers primary care services, even
in the scenario of a competitive internal market. Once again, provided that services
are fully publicly funded, they are “social services” provided for a “public purpose”.
If the reservation is found not to apply, U.S. for-profit organizations would have to be
treated as favourably as Canadian physician groups and be given access to Canadian
primary care markets. The expropriation provisions could then make it potentially ex-
pensive for the government to turn back the clock and remove U.S. providers from the
market. As discussed earlier in this section, even though Canada’s Annex II reserva-
tion protects publicly funded services, the expropriation provisions will still apply,
meaning that if a U.S. or Mexican provider is allowed to enter the Canadian primary
care market (regardless of whether they are entitled to such entry under the NAFTA),
they will have the right to claim compensation if that right is later taken away by a
Canadian government.
Conclusion
In the introduction to this article we noted that there are two contrasting perspec-
tives on the implications of the NAFTA for medicare. Critics fear a slide into a U.S.-
style health care system, while the federal government has given assurances that the
NAFTA poses no threat to medicare. We conclude that neither of these perspectives is
completely correct, since each presents a black and white picture of the situation. In
fact, as this article has shown, things are much more complex than such a binary op-
position would suggest. Our view is that the NAFTA does present concerns for the
sustainability and enhancement of medicare. In particular, the operation of both the
national treatment and expropriation rules casts doubt on the ability of governments to
enact a number of advocated reforms. Even where reforms can be undertaken, the
NAFTA may have unintended or unwanted consequences where such reforms in-
’43 PPMs provide either the full spectrum of professional services, or focus on a single specialty, dis-
ease category, or type of facility. They subcontract on a fee-for-service, episode-of-illness, or capitated
basis with HMOs, health plans, hospitals, integrated delivery systems, multispeciality medical groups,
and self-insured employers. J.C. Robinson, “Financial Capital and Intellectual Capital in Physician
Practice Management” (1998) 17:4 Health Affairs 53 at 53-55.
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
787
crease the participation of the private sector within medicare. Such reforms may prove
both costly and difficult to reverse because of the article 1110 expropriation rule.
The NAFrA is unlikely, however, to cause a total slide into a U.S.-style health
care system. The Annex I reservation allows the continuation of NAFIA-inconsistent
provincial measures that were in place at the time of the agreement’s implementation.
Annex I, however, does not allow new or more NAFTA-inconsistent measures. Ac-
cordingly, from the perspective of future health care reforms, it is Annex II that is
more important, as it allows the parties to enact measures in specified sectors that are
inconsistent with some of the NAFrAs provisions, including the national treatment
rule. Unfortunately, the Annex II reservation fails to provide clear and certain protec-
tion for Canada’s health care system, although we believe that it should be interpreted
so as to cover all services that are publicly funded, whether delivered by private (for-
profit or non-profit) or public entities. It should also cover social insurance schemes
where contributions are collected on a progressive basis from employer and employee
contributions. It may also extend to privately funded services delivered by private,
non-profit entities, if it can be said that the services are being supplied for a public
purpose (this may be the case with some charitable organizations). It is important to
keep in mind, however, that the Annex 1- reservation provides no protection from the
operation of the expropriation rule.
Our interpretation of Annex II is much more generous than that of the U.S. Even
with our interpretation, however, there are still significant concerns, given that the res-
ervation will not apply to the privately financed sector, a sector that is growing sig-
nificantly and that covers a large component of important services, including pre-
scription drugs used outside hospitals and home care. As we discussed, these services
are increasingly important and are not covered by the CHA. The national treatment
principle will apply to these areas and will require Canada to provide access to U.S.
and Mexican providers, investors, and insurers in respect of these services, unless
provincial measures in place before 1994 expressly prohibit the entry of foreign in-
vestors or providers.
The NAFTA’s negotiators do not appear to have appreciated either the complex
range of public/private relationships within Canada’s health care system or the
changing dynamics of the system when they agreed to the wording of the Annex II
reservation. Changing technologies and changing health care needs not only make it
difficult to draw a line between public and private in the health care sector today, but
also make it impossible to draw any firm conclusions about how public/private
boundaries will be drawn in the future. For example, services that are only considered
experimental today, such as genetic testing, may be widely accepted as an important
medical service in five years, and the government will want people to have universal
access to them accordingly. By then, however, the market may be saturated with for-
eign private providers and insurers who will not give up their market share without
seeking compensation.
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The NAFTA’s investor dispute settlement process is of significant concern, as it
allows foreign private investors to bring claims against the Canadian government
and-at least from an investor’s point of view-provides for an effective and binding
enforcement process. The investor dispute settlement process gives private investors
the opportunity to have their claims heard in secret by arbitral tribunals that are not
bound by precedent, and whose members may have little or no knowledge of the val-
ues underlying Canada’s health care system and the complexities that surround it.'”
This process opens up the possibility that areas of Canada’s health policy will be de-
termined in the future by foreign commercial interests through the NAFTA investor
dispute settlement process.”‘ The government needs at least to ensure that if a claim is
brought that concerns the health sector, those arbitration rules with the least protection
for confidentiality of party submissions are chosen and where possible, the selected
arbitrators have some knowledge of the Canadian health care system.
In terms of reform options, an area of key concern is the potential obstacle posed
by the expropriation provision to the extension of medicare to prescription drugs and
home care. National pharmacare and home care programs, although long promised,
have yet to appear. In an era of ongoing fiscal constraints, there are already significant
financial impediments facing the government in this regard and the possibility of U.S.
insurers bringing an article 1110 claim will be yet another deterrent to the implemen-
tation of such reform.
Canadian governments are beginning to experiment with contracting out publicly
funded services to competing private organizations. There are salutary lessons from
other jurisdictions, however, as experiences with contracting out initiatives in coun-
tries like the U.K., New Zealand, and Sweden have been very mixed. Significant as-
pects of the reforms in these countries have been subsequently modified or even re-
voked. Canadian provinces will want the freedom to be able to experiment with new
public/private initiatives if first attempts are not successful. Article 1110 may mean,
however, that provinces find themselves compelled to pay compensation to U.S. or
Mexican investors if they later wish to remove or restrict the right of those investors to
operate in the Canadian market. Thus, while a government will not be hampered in
‘” Ganguly, supra note 114.
141 In this respect, NAFTA investment claims are in stark contrast, for example, to decisions made in
the European Court of Justice. That court operates under conditions of openness and transparency.
Protocol on the Statute of the Court of Justice of the European Conmnunity, 17 April 1957. See in
particular Article 28 (hearing shall be public) and Article 37 (right to intervene for member states, in-
stitutions, other persons with an
the case). Online: ECJ
result of
the
interest
in
2002] T EPPS & C.M. FLOOD- THE NAFTA AND HEALTH CARE REFORM
789
increasing the use of contracting out services, it may find that doing so commits it to a
course of action that would be costly to reverse at a later date.
Another possible reform is “managed competition”, where competing private in-
surers are heavily regulated to ensure universal coverage (as is the case with Quebec’s
prescription drug plan). If Canada’s Annex II reservation is not interpreted to cover a
managed competition model, then the NAFTA’s national treatment rule will apply and
may adversely restrict a government’s ability to regulate private insurers. Regulation
is critical to managed competition reform, and any restrictions would be potentially
problematic to the successful introduction of a managed competition model. Regard-
less of the interpretation given to the Annex II reservation, the NAFTA could result in
unintended consequences flowing from the article 1110 expropriation provision. As
with the increased use of contracting out, the government could face difficulties if at a
later date it wished to retreat from managed competition reform to a single-payer in-
surance system.
Primary care reform proposals-with the idea of creating a competitive internal
market that focuses on health networks with devolved budgets-may render Canada’s
primary health care sector more attractive to foreign for-profit health organizations
such as American HMOs or PPMs. Once again, the expropriation provision would
apply, making policy reversal difficult if U.S. or Mexican providers were allowed to
enter the Canadian market.
The challenge facing the Canadian government is to maximize the NAFTA’s po-
tential benefits while minimizing its potential negative impact on the health care sec-
tor. Canada may be able to benefit from the export of health care services and tech-
nology, but international trade benefits do not only flow one way. Thus, if Canada
wishes to argue for increased access to U.S. or Mexican markets, it will be unable to
claim the protection of the Annex II reservation for the same services in its own mar-
ket. Finance Canada, Industry Canada, and the Department of Foreign Affairs and
International Trade should be cautious and consider the possible implications for
medicare as they seek to support Canadian exporters of insurance services, health
services, and technology in gaining access to U.S. and Mexican markets.
An important first step in responding to the problems we have raised is for Can-
ada to negotiate with the U.S. towards an interpretation of the Annex I reservation
that gives the greatest protection to Canada’s health care system. In the interim, it is
crucial that all future measures concerning the health care sector, whether they be at
the legislative level (e.g. implementing new legislation to contract out services to pri-
vate providers) or at the operative level (e.g. a decision by a regional authority in Al-
berta to contract out the delivery of a particular service to a U.S. organization), be
made in light of the possible NAFTA consequences. This will require informed com-
munication between various government departments, including Industry Canada,
Health Canada, and the Department of Foreign Affairs and International Trade. It is
790
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also important that governments make explicit in any legislation or regulations their
intent that publicly funded health care services be considered social services estab-
lished or maintained for a public purpose. The clearer the government’s intention in
this regard, the more likely it is that a tribunal decision will find the sector concerned
to be covered by the Annex II reservation and therefore exempt at least from the na-
tional treatment rule.
