The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap

Transcription

1 The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap CHSRF series of reports on financing models: Paper 5 January 2012 Livio Di Matteo and ROSANNA DI MATTEO Lakehead University

2 This expert paper is the fifth of a series of papers that the Canadian Health Services Research Foundation has committed to producing on the topic of financing models. This document is available at This research report is a publication of the Canadian Health Services Research Foundation. Funded through an agreement with the Government of Canada, CHSRF is an independent, not-for-profit corporation with a mandate to promote the use of evidence to strengthen the delivery of services that improve the health of Canadians. The views expressed herein are those of the authors and do not necessarily represent the views of CHSRF or the Government of Canada. ISBN: The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap 2011, Canadian Health Services Research Foundation. All rights reserved. This publication may be reproduced in whole or in part for non-commercial purposes only and on the condition that the original content of the publication or portion of the publication not be altered in any way without the express written permission of the CHSRF. To seek this permission, please contact info@chsrf.ca. To credit this publication please use the following credit line: Reproduced with the permission of the Canadian Health Services Research Foundation, all rights reserved, (modify year according to the publication date). CHSRF 1565 Carling Avenue, Suite 700 Ottawa, Ontario K1Z 8R1 info@chsrf.ca Telephone: Fax: Canadian Health Services Research Foundation

3 Table of contents Note to the reader...ii Key Messages... iii Executive Summary...iv 1 Introduction Defining sustainability Current sustainability of the Canadian publicly funded healthcare systems Measuring sustainability Results for Canada by provinces and territories Health spending projection and fiscal capacity/resource base forecasts Regressions scenarios Extrapolation scenarios Results Policy implications: Dealing with sustainability Conclusion...18 References...20 Appendix I: Public Healthcare Expenditure & Sustainability Indicators...23 Appendix II: Regression Approach to Forecast Healthcare Spending: Estimation and Results...28 Appendix III: Regression Results-Log of Real Per Capita Government Health...31 Appendix IV: Scenario Results...32 The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap

4 Note to the reader This report is one of a series of reports on healthcare financial sustainability, innovation and transformation commissioned by the Canadian Health Services Research Foundation (CHSRF). In this paper, the authors first shed light on the various definitions and measures of fiscal sustainability used in the literature, and then use two different methodological approaches to develop a series of five scenarios projecting healthcare spending up to Through these scenarios, they explore the amount of fiscal action in terms of increased revenue and/or reduced spending that would be required to achieve sustainability of healthcare spending in Canada and its provinces and territories over time. The lack of consensus on how to define healthcare sustainability, in addition to the assumptions used in forecast studies, leads to variability in estimates of the fiscal gap. This is evident in the wide range of estimates obtained from the five scenarios in this paper. These scenarios should not be interpreted as predictions of the future, but rather as a set of what if scenarios under varying assumptions. Moreover, the results should be interpreted cautiously in light of the approaches used. All of these scenarios are based on assumptions about the future an inherently difficult and imprecise exercise. The findings in this paper should be considered alongside the options for improving efficiency and generating additional revenue presented throughout the series of reports available on the CHSRF website ( Gillian Mulvale Director, Applied Research and Policy Analysis Directrice, Recherche appliqué et analyse des politiques Canadian Health Services Research Foundation/ Fondation canadienne de la recherche sur les services de santé 1565 avenue Carling Avenue, Suite/bureau 700 Ottawa, Ontario K1Z 8R1 (Canada) Tel./tél.: Ext. 249 Fax/téléc.: Gillian.Mulvale@chsrf.ca ii Canadian Health Services Research Foundation

5 Key messages Fiscal sustainability generally refers to the extent to which spending growth matches growth in measures of a society s resource base. Since 1975, real per capita government health spending in Canada has risen at an average annual rate of 2.3%, in excess of the growth in real per capita GDP, government revenues, federal transfers and total government expenditures. Five expenditure scenarios were constructed, using regression determinants and growth extrapolation approaches, for Canada as a whole, each of the ten provinces and the territories for the period For Canada as a whole, real per capita public healthcare spending from 2010 to 2035 can be expected to grow anywhere from 78% to 115% and reach a level in 2035 in 2010 dollars ranging from $6,552 to $8,798 per capita. For the provinces, the average increase across the ten provinces from 2010 to 2035 in real per capita provincial government health spending ranges from 81% to 160%. Average estimated spending in 2035 ranges from a low of $6,711 to a high of $10,819 per capita. For the Yukon, real per capita public healthcare spending between 2010 and 2035 can be expected to increase from a low of 142% to a high of 652% a range in 2035 of $14,316 to $41,089 per capita. For the Northwest Territories and Nunavut, low-end growth was 57% while the highest growth was 281%. Spending in 2035 would be estimated to range from a low of $12,423 to a high of $32,557 per capita. In terms of the fiscal gap, annual compound growth rates for forecast government health spending exceed those for government revenue growth for most scenarios and jurisdictions. For Canada as a whole, the public healthcare expenditure-to-gdp ratio could rise to as little as 9.5% or to as much as 13.4% by 2035 from the current 7.6%. The territories and most provinces generally also see increases in the public healthcare expenditure-to-gdp ratio by Under the extrapolation assumption that health expenditure trends for the 1996 to 2008 period continue but with lower economic growth, government health spending in Canada in 2035 would reach $8,798 per capita and the public healthcare expenditure-to-gdp ratio would reach 13.4%. This projected increase is equivalent to an increase in public spending today of about $2,797 per capita, possibly requiring up to a 15% increase in per capita revenues. Potential policy solutions to make public healthcare spending more sustainable include controlling and restructuring expenditure, raising additional tax revenues, creating a federal health tax to generate revenues for a national health endowment fund, and allowing for a greater private role in healthcare spending. The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap iii

6 Executive summary The fiscal sustainability of the publicly funded healthcare systems in Canada is a persistent policy issue. Recent estimates by the Canadian Institute for Health Information (CIHI) put total nominal healthcare spending in Canada in 2010 at $191.6 billion, reflecting an annual nominal growth rate of 5.2% in Since 1975, real per capita government health spending in Canada has risen at an average annual rate of 2.3%, in excess of the growth in real per capita GDP, government revenues, federal transfers and total government expenditures. With these persistent increases in health expenditures in mind, this study examines the fiscal sustainability of Canada s publicly funded healthcare systems for the period up to The definition and measurement of sustainability is important because it defines the scope of the policy problem and what the eventual solutions may be. A publicly funded health system with spending that grows at rates that are equal or less than economic growth and/or tax revenue growth may indeed be fiscally sustainable from a strict financial point of view, but not if it is delivering a standard of service that is unacceptable to the public and/or that negatively affects economic growth/competitiveness. Overall, this paper assumes fiscal sustainability refers to the extent to which spending growth matches growth in measures of a society s resource base. With a definition of fiscal sustainability, the next question is how do we measure the current sustainability of the Canadian publicly funded healthcare system? To measure sustainability, general macro indicators of health expenditure and expenditure-resource base indicators are defined and used in this study. The macro indicators seek to answer whether government health spending is taking up too large a share of government expenditure in general and whether government health expenditure is taking up too large a share of the economy s resources (GDP share). Meanwhile, the specific comparison expenditure-resource base indicators of sustainability seek to address on a per capita basis whether government health spending is rising faster than the resource base. The sustainability of government health spending in Canada as a whole as well as separately for the provinces and the territories is analyzed using the above mentioned indicators. The data to construct basic sustainability measures were obtained from the CIHI and Statistics Canada. The basic variables of the data set are for the period 1975 to 2008 and include gross domestic product, population, population aged 65 years and over, government health expenditures, total government expenditures, government program expenditures (total spending minus debt service costs), total government revenues, provincial revenue from federal cash transfers 1 and the government expenditure implicit price index, (1997 dollars). From 1975 to 2008, the share of total government spending accounted for by health rose from 17% to 21% and the share of GDP accounted for by public healthcare expenditure rose from 5% to 8%. Given the increase in both indicators, combined with the evidence on the annual growth rates for health spending and the resource base, suggests a potential growing national sustainability problem. The long-term sustainability of Canada s current universal publicly funded healthcare systems is a concern for Canadian governments. This paper constructs different expenditure scenarios using regression determinants and growth extrapolation approaches, for Canada as a whole, each of the ten provinces and the territories for the period These scenarios include; business as usual, low economic growth, rapid aging with low economic growth, and two situations based on extrapolations of historical growth rates. 1 Estimated federal cash transfers to the provinces and territories in were $50.9 billion, of which approximately 30% was general-purpose transfers (mainly equalization) and the remainder specific-purpose transfers under the rubric of the Canada Health Transfer and the Canada Social Transfer. iv Canadian Health Services Research Foundation

7 The results of these forecasts are based on assumptions about the future which is an inherently difficult task. However, they show that government health spending in real per capita spending terms will continue to grow, sometimes quite dramatically into the future. For Canada as a whole, real per capita public healthcare spending from 2010 to 2035 can be expected to grow anywhere from 78% (scenario 3) to 115% (scenario 5) and reach a level in 2035 (in 2010 dollars) ranging from $6,552 to $8,798 per capita (from the current fitted range in 2010 of $3,666 to $4,101 per capita). For the provinces, the average increase in real per capita provincial government health spending across the ten provinces from 2010 to 2035 ranges from a low of 81% in scenario 3 to a high of 160% in scenario 5. Average estimated spending for the provinces in 2035 ranges from a low of $6,711 per capita in scenario 3 to a high of $10,819 per capita in scenario 5. The largest totals by 2035 for the provinces are achieved in scenario 5, which uses growth rates in health spending from 1996 to 2008 to construct the estimate. The fiscal gap facing future government health shows real per capita government health expenditures and government revenues under the five scenarios for 1975, 2008 and then forecast to There are large gaps between government health spending and revenue growth for most scenarios and jurisdictions. For Canada as a whole, the growth rate gap is largest under scenario 5, with health spending rising at 3.1% annually while revenues only rise 0.8% which is similar to the recent performance of those variables over the period Under the most optimistic scenarios for Canada as a whole, health spending growth rates exceeds revenue growth rates by 0.6 to 0.9 percentage points (scenarios 4, 3, 2). The gap is substantially larger for the less optimistic scenarios. When the provinces and territories are examined, this gap is generally replicated. How to deal with sustainability issues requires sound public policy. Ultimately, increases in healthcare spending can be paid for publicly, via taxes, or privately, by individual Canadians from their own pockets. Assuming that a major proportion of healthcare expenditures will continue to be public and given forecasts of real per capita government health expenditure growth rates outstripping revenue growth and GDP, what policy instruments might be available to make public healthcare spending more sustainable? Public healthcare spending cannot continue to grow faster than the resource base forever, despite the scenarios that have been outlined in this paper. Ultimately, the government and its citizens make choices with respect to (i) what other public goods they want to give up in order to fund health services they deem to be of higher priority, (ii) how much higher they are willing to set tax rates to pay for current and future health services or (iii) reconsider what health services will be financed out of public revenues as opposed to private incomes. Potential policy solutions to make public healthcare spending more sustainable include controlling and restructuring expenditure, raising additional tax revenues, creating a federal health tax to generate revenues for a national health endowment fund, and allowing for a greater private role in healthcare spending. None of these solutions can be expected to resolve sustainability on their own given the diversity of health spending and health systems across the Canadian federation. Most likely a portfolio of approaches will be employed; implementation of any approaches, however, first requires a frank and open discussion on the future of the public healthcare system. The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap v

8 1 Introduction The fiscal sustainability of the publicly funded healthcare systems in Canada is a persistent policy issue despite the rise in federal transfers that occurred in the wake of the Romanow Report (2002). 2 Recent estimates by the Canadian Institute for Health Information (CIHI) put total nominal healthcare spending in Canada in 2010 at $191.6 billion, reflecting an annual nominal growth rate of 5.2% in Public sector healthcare spending in 2010 was $135.1 billion (an increase of 5.1 %). These high growth rates are part of a prolonged upward trend in health spending after the restraint of the 1990s, a trend that is in excess of government revenue growth rates. 4 Figure 1.1 illustrates the rise of real per capita Canadian public sector healthcare spending (1997 dollars) over the period 1975 to From $1,257 per capita in 1975, real spending reached $2,791 per capita by 2010 an increase of 122%. Moreover, during this same period, public sector healthcare spending by all levels of government grew as a share both of total government spending and of gross domestic product (GDP). As a share of GDP, public sector healthcare spending rose from 5.3% in 1975 to 8.2% in The pattern of real per capita public sector healthcare spending is divided into three phases a rising phase from , a period of restraint and declining spending from and then a resumption of increases from Given these persistent increases in health expenditure, this study examines the fiscal sustainability of Canada s publicly funded healthcare systems for the period up to First, the concept of fiscal sustainability is defined with basic measures established. Second, the growth of overall public sector healthcare spending in Canada, and then in each province and territory, is compared to these measures. Third, projections of healthcare spending are constructed by regression determinants and growth extrapolation forecasts and are used to estimate the potential future track of public healthcare spending. Fourth, these projections are then combined with extrapolations of resource base indicators to examine the sustainability of public healthcare spending. Finally, some policy prescriptions for dealing with the fiscal sustainability problem are briefly explored. Figure 1.1: Real per capita public sector healthcare expenditures (1997 dollars), Canada, Real per capita public health expenditures (1997 dollars), Canada, Source: National Health Expenditures Data Base, 2010, Canadian Institute for Health Information 2 Officially known as the Commission on the Future of Healthcare in Canada, the Romanow Report affirmed the desirability and value of public healthcare and recommended a number of policies, including a major infusion of federal transfers to promote change in the system. The 2003 First Ministers Accord on Health, which saw the creation of a separate health transfer and a substantial increase in transfer funding, was a follow-up to that report. 3 National Health Expenditures Data Base, 2010, Canadian Institute for Health Information. 4 For example, a report by the Fraser Institute estimated that between 1999 and 2010, total average provincial government health spending grew at an annual average of 7.7 percent while average provincial revenues grew at an annual average of 6.3 percent. Skinner and Rovere (2008). 1 Canadian Health Services Research Foundation

9 2 Defining sustainability In general, the question of fiscal sustainability is concerned with the future availability of public funds to provide, in this case, universal, high-quality healthcare. The definition and measurement of sustainability is important because it defines the scope of the policy problem and what the eventual solutions may be. Unlike pensions, in which money is accumulated in the present to pay out future obligations, healthcare spending is a yearly consumption or investment expenditure out of current income. 5 As a result, fiscal sustainability with regard to healthcare is ultimately a function of the willingness to pay now for current services received. There is no unique definition of fiscal sustainability for a publicly funded healthcare system. One definition of sustainability as it relates to healthcare is the ability to maintain quality public healthcare that is fairly allocated. This translates into a definition of sustainability as having mechanisms in place to ensure that Canadians, irrespective of their ability to pay, will have continued access to prompt, technologically current, competent and compassionate healthcare that addresses the full range of their health needs. 6 Sustainability in the public finance sense of the word can also mean having the money to pay for what you want to do both at present and into the future in essence, fiscal sustainability. As well, the concept of sustainability is also linked to the environmental movement, where it means a balanced approach, such that resource use and replacement are considered in tandem. Indeed, it is possible to address all these aspects of sustainability by combining them into a definition that states that public sector healthcare sustainability is the sufficiency of resources over the long term to provide timely access to quality services that address Canadians evolving health needs. 7 Ruggeri (2006) emphasizes the concept of fiscal sustainability as specifically related to public sector funding and provision. If healthcare were purely a private good, then the amount of healthcare people are willing and able to pay for would be provided and there would be a market equilibrium amount. If, after market allocation, some were without access to healthcare or consuming less healthcare, the issue would not be one of sustainability but of equity. With public provision and funding of healthcare, public choices have to be made collectively on how much healthcare to provide and how to pay for that care. Therefore, one solution to the sustainability problem could be to simply transfer all health spending to the private sector; the Romanow Report (2002), however, suggests this would not be in accord with Canadian values. 8 Moreover, transferring all health to the private sector only resolves fiscal sustainability for government, as resources for the health sector are still required. Fiscal sustainability also relates to the concept of fiscal burden in the public finance literature and uses the techniques of intergenerational accounting. The intergenerational accounting approach to healthcare sustainability asks what fiscal burden current health spending policy imposes on future generations; if this policy can be continued without major sacrifices on the part of current and future taxpayers; and what policies would ensure that future generations face the same fiscal burden as current generations. 9 5 It should be noted that healthcare funding could be treated in a manner more akin to pensions. One can increase tax rates or reduce expenditures now to set aside financial resources to pay for healthcare in the future by building a large health spending endowment fund a concept known as prefunding that will eventually generate income to cover rising health expenditures. However, future healthcare expenditures are less certain than pension commitments and there ultimately must still be a willingness to pay higher taxes now to fund the future stream of uncertain benefits. For a discussion of the pre-funding approach as applied to Alberta, see Di Matteo and Di Matteo (2009). 6 Guyatt et. al., Marchildon et. al.(2004), 3. 8 According to the Romanow Report (2002: xvi): Canadians consider equal and timely access to medically necessary healthcare services on the basis of need as a right of citizenship, not on a privilege of status or wealth. 9 Kotlikoff and Raffelhuschen (1999). For other generational discussions of healthcare see also Cutler and Sheiner (2000) and Auerback, Gokhale and Kotlikoff (1992). The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap 2

10 This translates into a situation whereby the present value of all future public sector budget surpluses is sufficient to pay off any public debt. 10 For the overall public sector, fiscal sustainability implies a stable debt-to-gdp ratio or one that is adjusting toward a desired long-term target. This is a more difficult definition to implement just for the public healthcare sector as its expenditure decisions are intertwined with other public spending decisions. Moreover, it can be argued that politicians may manipulate the concepts of debt, deficits and public sector surpluses to defer difficult choices. As well, given the time dimension, the entire concept of generational imbalance can be considered more of a simulation than an actual outcome though it does help to isolate key variables for a policy debate. 11 However, extending this, one definition of healthcare sustainability could be a stable health spending-to-gdp ratio over the long term; this begs the question, however, as to what the ratio should be set at. Rising health expenditure-to-gdp ratios can simply reflect the desire of a society with rising income and wealth to choose to consume more healthcare. 12 In the absence of a unique definition of fiscal sustainability for a publicly funded healthcare system, a number of proxy measures are available to ascertain its meaning. Chief of these is the share of GDP accounted for by public healthcare spending. When compared to taxes as a share of GDP, it can be a useful indicator of public healthcare s expenditure as a share of the total economy. Healthcare spending growth rates are, however, relatively stable while GDP growth rates fluctuate, making the health expenditure-to-gdp ratio an erratic measure of fiscal sustainability given business cycle fluctuations. 13 Glied (2008:21) finds that the public healthcare share of GDP increased by less than the tax share of GDP for most countries exceptions being Germany, the Netherlands, Switzerland, the UK, the USA and Canada. The implication is that for these latter countries, if all of their health spending were public spending, then other types of public spending would have to be reduced or tax revenues increased. Another measure is to look at the share of government spending allocated to healthcare and whether it is growing faster than the share of other government expenditures. 14 Assessing the fiscal sustainability of Canadian publicly funded healthcare systems ultimately requires that health expenditure growth be compared to growth in measures of the resource base. 15 One can examine the per capita value of government healthcare spending over time and compare its growth rate to growth rates in per capita income or per capita government revenues. 16 When such measures are used, growth rates of spending that are faster than those resource growth rates are indicators of a potential sustainability problem especially if there is no capacity to increase revenue. Although the share of provincial government spending accounted for by health is not a resource base measure, it is still useful to examine as evidence of the relative importance of the health sector in total government spending. 10 It should also be noted that when making intergenerational comparisons, the benefit to future generations of current expenditures and the possible debt they may generate also must be recognized. The health expenditures we make for our children today can enhance their future productivity and therefore make them more able to pay off any health debt they may face. 11 See Kotlikoff and Raffelhuschen (1999: 162), who write: The calculation of generational imbalance is an informative counterfactual, not a likely policy scenario, because it imposes all requisite fiscal adjustments on those born in the future. 12 Indeed, Chernew et al. (2003) argue that a larger amount of healthcare spending in the U.S. is sustainable if it is valued and people are willing to pay for it. They write: Our belief is that within a reasonable range of projected healthcare spending growth, we can afford to spend more for healthcare if we place sufficient value on those services relative to forgone non-healthcare consumption. 13 Another potential issue with using the health expenditure-to-gdp ratio is that a rising share of GDP going to health spending may also be partly due to the Baumol Productivity Lag effect. Labour-intensive sectors such as health services can absorb larger output shares as demand for their product grows. See Baumol & Bowen (1966) and Baumol (1996). 14 A recent Canadian study using this measure is Landon et al. (2006). 15 Skinner and Rovere (2008:3) argue that government spending on healthcare should be considered unsustainable when on average it grows faster than revenue. 16 This connection between healthcare costs growing faster than general government revenue was noted by the Fykes Commission report on healthcare in Saskatchewan. See Boothe and Carson (2003: 12). 3 Canadian Health Services Research Foundation

11 It should also be noted that ultimately, fiscal sustainability is not just a technical measure but also a set of policy choices that reflects a society s notions of equity and fairness, preferences about public goods and the willingness to bear taxes. A publicly funded health system with spending that grows at rates that are equal or less than economic growth and/or tax revenue growth may indeed be fiscally sustainable from a strict financial point of view, but not if it is delivering a standard of service that is unacceptable to the public and/or that negatively affects economic growth/competitiveness. 3 Current sustainability of the Canadian publicly funded healthcare systems 3.1 Measuring sustainability To measure sustainability, a number of specific proxy indicators are defined and used in this study. They are divided into (1) general macro indicators of health expenditure; and (2) specific comparison expenditure-resource base indicators of sustainability. The general macro indicators of health expenditure and sustainability expenditure-resource base indicators are presented in Table 3.1 and 3.2. Table 3.1: General macro indicators of healthcare expenditures Measure The government health expenditure-to-total government expenditure ratio The government health expenditure-to-gdp ratio Notation m1 m2 The question the macro indicators seek to answer is whether government health spending is taking up too large a share of government expenditure in general and whether government health expenditure is taking up too large a share of the economy s resources (GDP share). While an upward trend suggests a rising health expenditure burden, it cannot be considered evidence for sustainability without the context of the resource base. Specific comparison expenditure-resource base indicators of sustainability seek to address on a per capita basis whether government health spending is rising faster than the resource base. As well, for comparison purposes, the growth rates of government expenditure measures are also useful to examine. This approach compares provincial/territorial government health expenditure growth rates (h) to resource base growth measures (r) and government expenditure growth rates (g), which can be defined as follows (Table 3.2): Table 3.2: Specific comparison expenditure-resource base indicators of sustainability Health expenditure growth rates (h) Resource base indicators (r) Government expenditure indicators (g) h Percent growth of real per capita provincial territorial government health expenditures r1 Percent growth of real per capita GDP r2 Percent growth of real per capita total provincial/territorial government revenues r3 Percent growth of real per capita federal cash transfers to provincial territorial governments * Total provincial/territorial government expenditures minus provincial/territorial debt service costs g1 Percent growth of total real per capita provincial/territorial government expenditures g2 Percent growth of real per capita provincial/territorial government program expenditures* g3 Percent growth of real per capita provincial government/territorial program expenditures net of health The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap 4

12 Table 3.3 summarizes potential sustainability situations based on these indicators. If h>r, there is potentially a sustainability problem as spending growth is outstripping growth in resources (though not necessarily in the case of r3). If h>g, there may be a potential sustainability problem depending on whether or not g is rising faster than the resource base. For example, if h<=r2 and g3<=r2, then we are definitely fiscally sustainable. Indeed, we would be running large overall surpluses. If h>r2 and g3>r2, we would have a sustainability problem, with rising deficits and debt. If h>r2 and g3<r2, we have a situation that may be currently sustainable but over time the ratio h/g1 could grow and eventually healthcare could take up the entire government budget by crowding out other sectors. As well, as g1 grows (because it includes h) g1 could also outstrip r2 and generate rising public sector deficits and debts. Table 3.3 summarizes situations that are unsustainable based on government revenue as the resource measure. Table 3.3: Sustainability problem h>r: provincial/territorial government health expenditure growth rate above resource base indicator growth rate h>g: provincial/territorial government health expenditure growth rate above a government expenditures growth rate Unsustainable in the long-term in the absence of policy changes Potentially sustainable if h<=r2 and g3<=r2 Potentially unsustainable if h>r2 and g3>r2 short run sustainable e.g. if h>r2 and g3<r2 or h>r1 and g3<r1 although at risk in the long run 3.2 Results for Canada by provinces and territories The sustainability of government health spending in Canada as a whole as well as separately for the provinces and the territories is analyzed by comparing the above growth rates (indicators described in Section 3.1). The years will be examined, rather than a broader period, for a number of reasons. First, the years represent the start-up period for publicly funded healthcare in Canada and inclusion of this period biases the expenditure growth rates upward. In addition, the global fiscal crisis has directly affected data from 2009 and Given, as well, that revenue data in the fiscal reference tables only extend to 2009, 2008 makes a good cut-off point. The data to construct basic sustainability measures were obtained from the Canadian Institute for Health Information and Statistics Canada. The basic variables of the data set are for the period 1975 to 2008 and include gross domestic product, population, population aged 65 years and over, government health expenditures, total government expenditures, government program expenditures (total spending minus debt service costs), total government revenues, provincial revenue from federal cash transfers 17 and the government expenditure implicit price index, (1997 dollars) Data for these variables are generally available at the national, provincial and territorial levels. Tables 3.4 presents government health expenditure and sustainability indicators for Canada as a whole, and Appendix I reports the indicators for the provinces and territories. For Canada as a whole, the share of total government spending accounted for by health rose from 17 to 21% and the share of GDP accounted for by public healthcare expenditure rose from 5 to 8%. Given the increase in both indicators, combined with the evidence on the annual growth rates for health spending and the resource base, suggests a potential growing sustainability problem. 17 Estimated federal cash transfers to the provinces and territories in were $50.9 billion, of which approximately 30% was general-purpose transfers (mainly equalization) and the remainder specific-purpose transfers under the rubric of the Canada Health Transfer and the Canada Social Transfer. 5 Canadian Health Services Research Foundation

13 Indeed, the annual growth rates do suggest an unsustainable pattern of public healthcare spending. 18 Over the entire period , real per capita government health spending in Canada rose at an average annual rate of 2.3%, well in excess of the growth in real per capita GDP, government revenues and federal transfers as well as the growth in the measures of government expenditures (g1 to g3). When examined by time period, government healthcare spending was only sustainable during the period of deficit and debt induced restraint from when per capita spending on health actually declined while the resource indicators either were flat or grew. This provides some evidence for the argument that the sustainability of public healthcare spending can indeed be a policy choice. Table 3.4: Public healthcare expenditure and sustainability indicators: Canada, Government health expenditure ratio (%) m1 m Average Average Average Annual growth rate (%) h r1 r2 r3 g1 g2 g Source: Canadian Institute for Health Information (calculations made by the authors of this paper) Appendix I presents results for each of the provinces and territories. Healthcare spending as a share of total government spending has increased over time in all provinces except Quebec, though the extent varies from province to province. In Ontario, the share was greatest at 43% in 2010, while it was the least in Quebec at 30%. Similarly, most provinces had an increase in healthcare spending as a share of GDP of 1 3 percentage points from 1975 to 2010, except Newfoundland and Labrador, where the ratio decreased slightly, from 8.7% in 1975 to 8.0% in In terms of the resource base-expenditure annual growth rate indicators, Newfoundland and Labrador fares the best with its real per capita government health expenditures growing on average slower than both GDP and transfer revenues for the period , and growing on average slower than the total provincial revenues for the period Prince Edward Island, New Brunswick and Nova Scotia generally are in less sustainable positions with health spending rising faster than resources. However, the lack of sustainability is most evident in the and post-1996 periods. During the period, real per capita provincial government health expenditures grew more slowly than revenues for Prince Edward Island and Nova Scotia; for Nova Scotia, spending actually shrank. Since 1996, health spending in these three provinces has grown at a much faster rate than total government spending. 18 Because of the difficulty of obtaining consistent numbers all the way back to 1975 for some of the variables, measures for the territorial governments are only for the period 1981 to As well, the Northwest Territories and Nunavut have been combined for the purposes of this analysis, as they were one jurisdiction prior to The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap 6

14 Quebec presents a more mixed picture. For the overall period, its government health spending grew faster than GDP and federal transfers but slower than provincial government revenues in general. Moreover, its health spending grew at about the same rate as other government spending. Ontario exhibits less sustainability, with government health spending growing faster than all resource base measures as well as all other spending. Manitoba is similar to Ontario, as is Saskatchewan, with the exception that its health spending grew slower than its federal transfer revenue. The data show that Alberta and British Columbia also have challenges to sustainability. In all the territories, healthcare spending represents a larger share with large percentage-point increases in the share of total government spending and GDP. For the entire period , government health spending is also demonstrated to be very unsustainable as the growth rate is usually in excess of the growth rate for the revenue measures as well as other government spending. Across Canadian jurisdictions, the annual growth rates for the resource base measures when compared to the growth of public healthcare spending suggest a potentially unsustainable pattern of public healthcare spending. The only exceptions to this over the period appear to be Newfoundland and Labrador and Quebec. However, over the period , with the exception of Newfoundland and Labrador, all the provinces and territories have seen their real per capita public healthcare spending growth rates exceed their per capita GDP and real per capita government revenue growth rates. For most provinces, the only period when their health spending was sustainable according to these measures was the explicit period of restraint, Public sector health spending rising faster than provincial government revenue begs the question as to whether tax cuts brought in after the late 1990s have eroded provincial revenue bases, causing revenues to grow more slowly than the economy. 19 Over the period , however, the median of the average annual growth rates in real per capita provincial-territorial revenues was 1.8%, while the median of the average annual growth rates in real per capita GDP was 1.5%, while that for public sector health spending was 2.4%. 20 Even with tax reductions, provincial government revenues have grown, but have not kept up with provincial government health spending growth. The period is, in many ways, unique because the fall in interest rates reduced government debt service costs and allowed for resources to be diverted to both healthcare spending and tax reduction. 21 Whereas in 1998, the debt interest share of provincial government spending in Canada was 14%, by 2008 it had fallen to 8.5% 22 freeing up a fiscal dividend that allowed governments to address multiple targets. However, in the wake of the Great Recession and the return of large public sector deficits, combined with lower GDP growth, this fiscal dividend as a foundation for rising health spending is crumbling and will not be a basis for future expenditure growth. 19 See Evans (2003, 2007). Evans (2007) maintains that the share of national income devoted to public healthcare insurance has been remarkably stable but provinces have introduced fiscal measures reducing their rates of personal and corporate income taxation. This is part of a broader agenda as Evans (2003: 19) argues that: Claims that Canada s Medicare is economically or fiscally unsustainable represent part of a broader propaganda campaign to advance those priorities, softening up a generally skeptical and unsympathetic public to accept that the current form of public healthcare insurance is simply impossible to maintain. The agenda is being advanced by right-wing governments in the larger provinces with sympathetic coverage from the country s dominant newspaper chain. 20 Calculated from data obtained from CIHI National Health Expenditure Data base and the Federal Fiscal Reference Tables It should be noted that when average rather than median rates are used, provincial government revenues have also failed to keep pace with GDP growth. 21 Balanced budgets after the mid 1990s opened up a fiscal dividend that enabled provinces to spend more on health, even while lowering income and corporate taxes. See Landon et al.,(2006). 22 Department of Finance, Canada, Federal Fiscal Reference Tables 2010, Table Canadian Health Services Research Foundation

15 4 Health spending projection and fiscal capacity/resource base forecasts The long-term sustainability of Canada s current universal publicly funded healthcare systems is a concern for Canadian governments. This concern has gained momentum with the recent global economic downturn and the upcoming end of the Health Accord in Numerous recent reports, such as those by the TD Bank, the C.D Howe Institute, and the Office of Parliamentary Budget Officer, 23 have assessed the long-term sustainability of the Canadian healthcare systems and fiscal capacity by projecting healthcare spending and resources (GDP). These studies have shown that the funding requirements of the existing system will squeeze out other provincial government spending priorities over the long term. 24 The fiscal gap in these reports is usually defined as the amount of fiscal action in terms of increased revenue and/or reduced spending that is required to achieve sustainability. This type of analysis is the focus of this section. The lack of consensus on how to define healthcare sustainability, in addition to the assumptions used in forecast studies, can lead to some variability in any estimate of the fiscal gap. We thus apply two approaches (a regression-based approach and a simple growth-extrapolation approach) and consider five scenarios with varying assumptions to forecast real per capita public-sector health spending up to 2035 for each province, the territories and Canada as a whole. Estimates of the public-sector healthcare expenditures are compared across these economic and revenue forecast scenarios to provide insight on the projected fiscal gap. Subsequent discussion will focus on these scenarios. These scenarios should not be interpreted as predictions or forecasts of the future outcomes but rather as a set of what if scenarios under varying assumptions to illustrate the implications of those assumptions. Moreover, the results should be interpreted cautiously in light of the techniques used. The regression approach entails estimating the size and significance of determinants that influence real per capita public-sector healthcare expenditures such as population growth, population aging, income growth and real per capita federal cash transfers and uses these estimated co-efficients to forecast future real per capita public-sector healthcare spending (see Appendix II for technical details and Appendix III for the estimated equations). In the extrapolation approach, the average annual growth rate is applied to real per capita health spending itself starting in 2008 and then moving forward. This is an approach that relies entirely on historical growth rates as opposed to the regression approach, which applies a structure to the determinant variables generated by the historical growth rates. Three scenarios with varying assumptions are considered using the regression approach to forecast healthcare spending and two scenarios are considered using the extrapolation approach; all five scenarios are summarized below: 23 See TD Economics (May 2010), Dodge and Dion (2011) and Office of the Parliamentary Budget Officer (2010). 24 As well, there have also been studies arguing that the public healthcare system is indeed quite sustainable under reasonable growth assumptions and dedicating the same proportion of new economic output to healthcare even with population aging and healthcare inflation. For this perspective, see Lee (2007). The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap 8

16 4.1 Regressions scenarios Average annual growth rates are applied to the independent variables and they are extrapolated forwards and they are then used with the estimated regression co-efficients from the regression equations to determine the dependent variable real per capita health spending. 25 Forecast Scenario 1: Base Scenario (Business as Usual) Real per capita GDP, real per capita transfers, population, proportion of population aged and proportion of population aged 75 and over all continue to grow at their average annual rate for the period As well, it is assumed that real per capita government revenues and real per capita total government expenditures also grow at their average annual rates for the period. Scenario 1 broadly parallels the historical experience of the past and in a sense assumes that the future, on average, will be much like the past in terms of the regression determinants. Forecast scenario 1: Base scenario (Business as usual) Healthcare spending assumptions Real per capita GDP, real per capita transfers, population, proportion of population aged and proportion of population aged 75 and over all grow at their average annual rate for the period Economic/revenue assumptions Real per capita government revenues and real per capita total government expenditures also grow at their average annual rates for the period Forecast scenario 2: Low economic growth (Long-term economic slowdown) Real per capita GDP, real per capita transfers, real per capita government revenues and real per capita government expenditures all grow at half their average annual rate for the period Population, proportion of the population aged and proportion of population aged 75 and over grow at the same rate as in Forecast Scenario 1. Forecast scenario 2: Low economic growth (Long-term economic slowdown) Healthcare spending assumptions Real per capita GDP, real per capita transfers, real per capita government revenues and real per capita government expenditures all grow at half their average annual rate for the period Population, proportion of the population aged and proportion of population aged 75 and over grow at the same rate as in Scenario 1 (i.e. at their average annual rate for the period ) Economic/revenue assumptions Real per capita government revenues and real per capita total government expenditures also grow at half their average annual rates for the 1975 to 2008 period 25 The GLS regression was used for the provinces and territories with all the coefficients employed. 26 It should be noted that population and aging projections were also available from Statistics Canada but were not used so as to keep a consistent approach across all the scenario variables. However, an examination of the population aging variables generated with our scenarios compared to the high, low and medium scenarios from Statistics Canada found that they tracked well.. The average proportion of population over age 65 across Canada s provinces by 2036 in the Statistics Canada low growth was 26.2% while for the high growth scenario it was 24.6%. For the assumption in our Scenario 1, by 2035 the average proportion is 25.9 percent. See Statistics Canada X. 9 Canadian Health Services Research Foundation