Compensation for unionized workers is a moderating influence on hospital costs

As part of his discussion of cost pressures on Ontario hospital funding, the Auditor General sites a recent major union hospital settlement with (he says) "an average annual pay raise of about 1.5%".

He does not note that the 1.5% average is actually lower than the percentage the government intends to increase hospital funding -- less than one-half the increase in fact.

So this compensation change is actually creating room for other hospital budget line items to increase at an above average rate. If wages increase at a percentage rate less than the overall percentage funding increase, other line items can increase at an above average rate. If (as is likely) the hospitals increase labour productivity, the percentage increase in the total wage package will be even less, leaving even more space for above average increases for other line items.

That is going to be very helpful to the government. For example, if health care funding increases 3.6% as planned, and compensation goes up 1.5%, and (as the Auditor suggests) employee compensation is equal to 50% of health care costs, then the government will be able to increase all other areas of health care spending by 5.7%. That's a lot of help -- all thanks to health care employees taking a lower than average increase.

The moderating role of compensation increases is also borne out when the Audtior reviews the major cost pressures in health care. Using studies from the Ontario government, the TD bank, and the CD Howe Institute, he notes that long term annual increases in health care costs should range from 5.9% (according to the Ontario government) to 6.4% (CD Howe), or 6.5% (TD).

This is about double the funding increases the Liberals and PCs propose -- and that means there will be huge pressure to cut services.

Notably, most of those cost pressures come from areas completely unrelated to hospital employee compensation.

So, for example, TD estimates that utilization will drive up costs 2% annually, population aging 1% annually, and population growth 1% annually. Inflation (which would include in part the nominal employee wage increases) would account for the other 2.5%. And even the 2.5% inflationary pressures includes factors well beyond hospital union wage increases (which, in any case, are running below that rate, even excluding any productivity gains).

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