Federal Health Care Funding in the Current Economic Context

Karin Phillips
Legal and Social Affairs Division

Provincial and territorial health care systems in Canada are facing common challenges. The population is aging; chronic non-communicable diseases are becoming increasingly prevalent; and demand is rising for new, and often costly, health technologies.

This situation has been exacerbated by the 2008 global recession. It has placed pressure on governments to reduce health care expenditures to levels more in line with economic growth while maintaining the quality and accessibility of health services.

Meanwhile, there is significant debate as to how federal health care funding arrangements can best be used to support provincial and territorial health care systems as they adapt to these new pressures and demands.

These issues are expected to come to the fore as the federal Minister of Health begins working with the provinces and territories to develop a new multi-year Health Accord, which will also include a long-term funding agreement.

Health care financing in Canada

Health care in Canada is financed by both the public and private sectors. About 29% is funded through private health insurance and out-of-pocket expenditures. This includes most dental and vision care, out-of-hospital prescription drugs and complementary and alternative therapies.

The remaining 71% is funded by municipal, provincial, territorial and federal governments from revenues raised through general taxation. The federal government provides funding to provincial and territorial governments for health care delivery through the Canada Health Transfer (CHT). On average, it accounts for 23% of total provincial and territorial government health expenditures (Figure 1). In 2015-2016, the provinces and territories received approximately $34 billion through the CHT.

Figure 1. Health Cash Transfer as a Percentage of Provincial/Territorial Government Health Expenditures

Figure 1 ENG

Source: Advisory Panel on Healthcare Innovation, Unleashing Innovation: Excellent Healthcare for Canada, 2015, p.26.

 

Trends in public sector health spending prior to 2008

From 1998 to 2008, increases in public sector health spending in Canada outpaced both economic growth and government revenues (Figure 2). According to the Canadian Institute for Health Information (CIHI), the average real annual growth rate in public sector health spending was 3.4% during this decade.

In contrast, real gross domestic product (GDP) per capita grew at an average annual rate of 1.9%, while real per capita public sector revenues increased by 1.4% a year on average.

Figure 2Figure 2 ENG.png

Source: Canadian Institute for Health Information (CIHI), Health Care Cost Drivers: The Facts, 2011, p.11

 

This growth in public health expenditures reflected reinvestments by governments in health care after a period of fiscal constraint during the 1990s. In particular, First Ministers signed the 10-Year Plan to Strengthen Health Care in 2004, which outlined common pan-Canadian health care funding priorities.

In support of the 10-Year Plan, the federal government provided increased funding to the provinces and territories for health care through the CHT, which included an annual 6% increase in the CHT until 2015-2016.

Economic slowdown and changes to the Canada Health Transfer

With the onset of the 2008 global recession, provincial and territorial governments began reducing growth in health care spending (Figure 3). In December 2011, the federal government also signalled that health care expenditures should remain in line with economic growth by introducing changes to the CHT.

As of 2017-2018, the annual increase in the CHT would be calculated based upon a three-year moving average of nominal GDP growth, with funding guaranteed to increase by at least 3% per year. This new formula has created additional pressures to reduce health care costs even further.

Figure 3. Average annual growth in public-sector health spending, 2000 to 2010 and 2010 to 2013, compared with annual growth in 2014 and 2015 by cost driver

Figure 3 ENG
Source: CIHI, National Health Expenditure Trends, 1975-2015, 2015, p. 22.

 

Towards a health care innovation agenda

Economic constraints coupled with current and future population health needs have prompted all levels of governments to look towards health care innovation for both improving health system performance and reducing health care costs.

In 2012, provincial and territorial governments, through the Council of the Federation, established the Health Care Innovation Working Group. It is currently looking at innovative approaches to lowering pharmaceutical costs, ensuring appropriateness of care and improving care for seniors.

In the federal Minister of Health Mandate Letter, the Prime Minister also outlined similar priorities for the development of a new multi-year Health Accord with the provinces and territories. They include:

  • support for the delivery of home care services;
  • pan-Canadian collaboration on health innovation to support adoption of new digital technology;
  • improved access to necessary prescription pharmaceuticals; and
  • more available high-quality mental health services.

Aging seen as a factor in negotiating a long-term funding agreement

In negotiating a long-term funding arrangement to support these potential priorities, some observers have suggested the federal government consider providing additional funding through the CHT. The aim would be to address the fiscal gap that provincial and territorial governments will face as health care costs rise and revenues decline as a result of the aging population.

This approach has been proposed by the Council of the Federation. It requested that the federal government increase the CHT’s base amount so that “the federal share of Canada’s health care costs is at least 25% of all health care spending by provinces and territories”.

In addressing this fiscal gap, the federal government may also have to consider regional variation in population aging. According to CIHI, the populations of both the Atlantic region and Quebec are aging at faster rates than those of Ontario and Western Canada, and have higher age-related health care costs as a result.

However, some commentators have argued that increasing federal health care funding removes incentives for provinces and territories to undertake necessary reforms to their health care systems.

In its statutory review of the 2004 Health Accord, the Standing Senate Committee on Social Affairs, Science and Technology found that increases in funding alone would not result in long-term health care system sustainability; transformation in health care delivery would also be necessary. The Committee recommended that governments use annual increases in the CHT to create incentives to promote change rather than maintain the status quo.

In light of these debates, the federal Advisory Panel on Healthcare Innovation, in its July 2015 report, proposed a new federal approach for promoting health care innovation through creation of an arm’s length Healthcare Innovation Agency of Canada.

The proposed agency would oversee a 10-year Healthcare Innovation Fund with an annual budget of $1 billion. The fund would support initiatives that break down structural barriers to change in health care delivery and accelerate the spread and scale-up of promising health care innovations.

It remains to be seen whether this proposal will influence inter-governmental discussions towards a new Health Accord and a new long-term health care funding agreement.

Related resources

Butler, Martha and Tiedemann, Marlisa. Federal Role in Health and Health Care, In Brief, Library of Parliament Publication No. 2011-91E, revised 20 September 2013.

Gauthier, James. The Canada Health Transfer: Changes to Provincial Allocations, Background Paper, Library of Parliament Publication No. 2011-02-E, 25 February 2011.

Picard, André. “A report that diagnoses health care’s illsThe Globe and Mail, 23 July.