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From: Don Drummond 

To: Provincial Premiers and Ministers of Health

Date: May 14, 2021

Re:  Provincial Demands for Higher Canada Health Transfers

Conspicuously absent from the big-spending federal budget last month is any increase in the Canada Health Transfer (CHT), a seeming rejection of provincial calls for an immediate increase of $27.7 billion and growing amounts thereafter.

A day later, however, the Prime Minister promised to increase the CHT once the pandemic is over. The case for higher CHT rests on the calculation that the federal share of healthcare costs has shrunk to 21.7 percent and will fall to 17.6 percent under the Premiers’ assumption of 5-percent annual increases in healthcare costs. With such an expansion in health budgets, the argument is made that the provinces will be under greater fiscal stress than the federal government.

Several issues undermine this argument.

With healthcare as high as 50 percent of provincial program spending, strong spending growth in this domain would greatly stress provincial finances even as the federal government would be relatively insulated under the present CHT formula. The current system limits growth to a moving average of GDP which will almost certainly average well less than 5 percent per annum.

Yet federal finances are already precarious, even without an extra share of healthcare, and pose substantial risks to Canada’s future. The 2021 budget projects that the pre-pandemic net debt-to-GDP ratio will not be restored until 2055, 34 years from now. And that is only under very optimistic economic and interest rate assumptions. Slight tweaks to either assumption show the federal debt burden could rise further from the current peaks.

The expectation of 5-percent future healthcare spending increases is not fanciful at all. All that’s required is continuation of 2-percent inflation and one percentage point increases from each of these three factors: aging of the population, the “intensity” of healthcare utilization with increasing technological sophistication, and peoples’ new priorities. Yet from a base in 2010, healthcare spending growth through 2019 averaged only 3.6 percent. This was roughly in line with growth in nominal GDP.  Moderate restraint applied to all major components of spending over the 2010s; hospitals 2.5 percent average annual increases; physicians 4.1 percent; other professions 4.9 percent; drugs 2.4 percent; capital -.6 per cent.

Arguing the future will be different requires pointing out that some of the restraint measures proved counterproductive; capital spending, for example, down in 2019 by one-quarter from its 2010 base in constant dollars, has increased capacity pressures; Ontario’s unilateral cut of 3 percent in physician pay was reversed by arbitration. It also requires explaining some of the downward pressure on costs has likely lapsed; a benign decade of drug cost inflation may be replaced by pressures as new biologics come on stream. The modest growth assumed for “intensity” could well be exceeded if technological advances accelerate. Technological progress in most fields leads to lower costs; in healthcare the reverse tends to apply.

At the same time, recent provincial budgets undermine the case for much higher CHT payments. Ontario, for example, projects healthcare spending to increase at an annual average pace of only 2.6 percent from 2019-20 to 2029-30; from the post-pandemic base of 2024-25 growth is but 2.2 percent. The Financial Accountability Office (FAO) of Ontario is skeptical such restraint can be applied without major reform, so far unidentified, or serious damage to quality of services. Yet the FAO calculates that fulfilling Ontario’s existing healthcare plans would require average growth over the 10 years of 4 percent. Under even this higher pace of growth, the CHT would likely keep the federal share of healthcare spending reasonably stable under the existing formula. 

Finally, the 10-year period beginning in 2006-07 when the CHT did grow 6 per cent per annum does not offer encouragement that new money will drive innovation in delivery and accessibility. That plan to “strengthen healthcare” has little to show for the high spending beyond higher compensation in the sector. The so-called system ended up no more effective or efficient and just as unprepared to handle the coming tsunami of older seniors. A credible argument has yet to be made that this time would be different.

Many policy elements must be employed by all governments in Canada to address the high public debt and prospect of rising healthcare costs: long-deferred reform to the healthcare sector, restraint across all components of spending to accommodate the shift in resources as the population ages, likely tax increases at both levels of government, and debate over how to split the tax must be put in that broader context and arguments sharpened.

Don Drummond is the Stauffer-Dunning Fellow in Global Public Policy and Adjunct Professor at the School of Policy Studies at Queen’s University.

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.