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Becoming Sustainable: The Six Stages of Provincial-Territorial Government Health Spending

Summary:
The Canadian Institute for Health Information (CIHI) has released its 22nd annual edition of  National Health Expenditure Trends covering the period 1975 to 2018 and the basic highlights are as follows: Total health expenditure is expected to reach 3.5 billion or ,839 per Canadian in 2018. In 2018, total health expenditure is expected to rise by 4.2%, a slight increase in the rate of growth compared with earlier in the decade Provincial per capita health expenditures vary with total health expenditure per capita expected to range from ,552 in Alberta and ,443 in Newfoundland and Labrador to ,597 in British Columbia and ,584 in Ontario. Drugs expenditure growth is the fastest among 3 largest health spending categories with Hospitals (at 28.3% of spending), Drugs (at

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The Canadian Institute for Health Information (CIHI) has released its 22nd annual edition of  National Health Expenditure Trends covering the period 1975 to 2018 and the basic highlights are as follows:

  • Total health expenditure is expected to reach $253.5 billion or $6,839 per Canadian in 2018.
  • In 2018, total health expenditure is expected to rise by 4.2%, a slight increase in the rate of growth compared with earlier in the decade
  • Provincial per capita health expenditures vary with total health expenditure per capita expected to range from $7,552 in Alberta and $7,443 in Newfoundland and Labrador to $6,597 in British Columbia and $6,584 in Ontario.
  • Drugs expenditure growth is the fastest among 3 largest health spending categories with Hospitals (at 28.3% of spending), Drugs (at 15.7% of spending) and Physicians (a 15.1% of spending) together expected to continue to account for close to 60% of total health spending in 2018.

The bulk of health spending in Canada is done at the provincial-territorial level of government which in 2018 is forecast at $162.7 billion out of $253.5 billion or about 64 percent of total health spending – with remainder being private ($78.7 billion) or remaining public sector spending ($12.1 billion).  While much of the focus by the public on this annual release of health information is the current rate of increase and state of spending, a longer-term perspective is useful given the constant preoccupation with health care system fiscal sustainability. A historical retrospective of the evolution of provincial-territorial government spending since the dawn of Medicare is in order using Statistics Canada data for the 1965 to 1974 period and CIHI data since 1975.

 

Figure 1 plots real per capita provincial-territorial government health spending from 1965 to 2018 in 1997 constant dollars.  From $447 per capita in 1965, provincial-territorial health spending has grown to reach a forecasted amount of $2,622 per capita.  As a share of Canadian GDP, provincial territorial health spending was 2.6 percent in 1965 and currently sits at about 7.3 percent.  Spending climbs upwards from 1965 to the early 1990s followed by a decline to the mid 1990s and then a resumption of spending growth until 2010.  The period since 2010 is marked by an arrest in spending growth.

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Figure 2 plots the annual growth rate of real per capita provincial-territorial government health spending and the growth rates were highest at the dawn of Medicare as the system was being put into place.  Indeed, I like to think of the evolution of provincial-territorial government spending as having gone through six stages as summarized in Figure 3.  The first stage is the Golden Age of health spending covering the birth of Canadian Medicare from 1966 to 1974 which sees real per capita spending (in 1997 dollars) rise from $447 to $1073 with an average annual growth rate of 10.4 percent.  This was also the era of cost-sharing when it came to federal health transfers to the provinces with the federal government picking up 50 percent of the tab for hospital and physician spending. The high rate of provincial-territorial government spending growth during this period can be attributed to putting in place a public system.

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The Golden Age ended in the wake of the oil crisis and productivity slowdown of the 1970s and the period from 1975 to 1991 was a period of much slower health spending growth – at least relative to what went before.   It was marked by the first health sector crisis during the early 1980s (the extra billing crisis and bed closures) which was followed by the 1984 Canada Health Act tying federal transfers to conditions of public funding and provision of health services.  This era saw federal cost sharing replaced by the Established Program Financing (EPF) block grant which reduced the growth of federal heath transfers.  Still, this Era of Post Golden Age Restraint saw real per capita spending rise annually from $1177 in 1975 to reach $1838 in 1991 for an average annual growth rate of 3.2 percent.

The third stage of spending coincides with federal fiscal crisis of the 1990s which saw the federal government deal with its debt and deficit situation with a program of expenditure restraint that included ending EPF and creating the Canada Health and Social Transfer which cut cash transfers to the provinces for Health and Social Services by about one-third.  During this Era of Health Spending Decline real per capita provincial-territorial government health spending falls from $1837 in 1992 to $1694 in 1996 for an average annual rate of growth of -1.6 percent. 

Growth in real per capita health spending resumes in 1997 and with the Report of the Romanow Royal Commission calling for increased transfer funding for transformative health sector change, the subsequent 2004 Health Accord put in place a 6 percent federal health transfer escalator.  There is an era of Renewed Health Spending Growth that comes to an end with the start of the Great Recession even though the enriched transfer payments of the health escalator stay in place until 2017. Real per capita spending grows from $1710 in 1997 to reach $2580 in 2010 with an average annual growth rate of 3.1 percent.

The period from 2011 to 2014 sees a Second Era of Health Spending Decline but the decline in real per capita health spending is not as pronounced as the 1992 to 1996 one.  Real per capita spending falls to $2563 in 2011 from $2580 in 2010 and reaches $2501 in 2014 for an annual average rate of growth of -0.8 percent.  Given this period was not accompanied by federal transfer cuts, it generated some debate as to whether the provinces were finally engaging in transformative change of their health care sectors and putting in policies that were bending the health care cost curve.  However, spending begins to grow again in 2015 – even with reduced rates of federal health transfers coming into effect in 2017 - and real per capita spending grows from $2501 in 2014 and is forecast to reach $2622 in 2018.  This Era of Resumed Growth however to date has only seen an average annual growth rate of 1.2 percent.

Average annual real per capita health spending growth rates have gradually come down over time from the double-digit highs of the late 1960s to rates of about 1 percent.  With real GDP in Canada currently growing at about 2 percent and population at about 1 percent, one can venture that for the time being, provincial-territorial government health spending is close to being sustainable – if one defines sustainability as real per capita health spending keeping pace with real per capita income growth. 

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Believe it or not, real per capita provincial government health spending is now growing at about the rate of real per capita GDP.  Indeed, if one looks at the difference between the growth rate of real per capita provincial government health spending and real per capita GDP (See Figure 4), the gap between the two over the last 50 years has trended down.  If the current rates of real per capita provincial government health spending are maintained, we may very well have finally arrived at a sustainable equilibrium of sorts in terms of the growth of public health care spending.  True, there are challenges ahead in terms of aging populations and rising drug costs but after fifty years, provincial governments may finally have gotten a handle on dealing with rising health care costs.

Information Note: I am currently a member of the CIHI National Health Expenditure Advisory Panel.

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