Canadian Health Care System: Sustainable? An Analytical Exploration of Current and Future Trends in Health Care Funding

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Canadian Health Care

System: Sustainable?An analytical exploration of current and future trends in health care funding.

Tim Bevand

360692

3/30/2010

Dr. Gary Munro

Political Science - 2213


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Canadian Health Care System: Sustainable? March 30, 2010

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Table of Contents

Introduction .......................................................................................................................................... 1

Sustainability ....................................................................................................................................... 1

Funding Formulas .................................................................................................................................. 1

Public Spending on Health in

Relation to Fiscal Capacity ..................................................................................................................... 2

Fiscal Sustainability ............................................................................................................................... 3

Public Policy Debate.............................................................................................................................. 5

Delivery of Funding ............................................................................................................................... 6

CHT & CST:

Canada Health Transfer & Canada Social Transfer ................................................................................ 7

Funding Demographics: Aging and Crisis ............................................................................................... 7

Summary and AlternativeSuggestions .................................................................................................. 8

Work Cited ........................................................................................................................................... 9


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Introduction

Health care funding has been a topic of major debate for decades; since 1966 to be exact.

Major changes have been enacted around this issue over the decades as well. Most evaluation

of the health care financial straits has been done regarding expenditures versus gross domestic

product (GDP). However; as will be discussed within this report, GDP to capital expenditure

ratio examinations are inadequate, ultimately ineffectual, and provide a distorted incomplete

picture of the situation facing financing the health care system. In addition this report will

examine the idea of sustainability and how it applies or doesnt to the issue. Further analysis

will be conducted on programs such as the Canada Health Act, Canadian Social Transfer, and

Canadian Health Transfer. Funding ideologies like GDP:Capital Investment, Total Health Care

Funding: Nominal GDP, Public Spending on Health: Fiscal Capacity (of all combined

governments, total revenue), and the vertical fiscal imbalances each of these programs create

will be discussed as well.

Sustainability

It is defined as a comparison of rates of change (Evans, 2007). However, a more recent and

broader version of sustainability has been adopted; one that explores the idea of supply of

ingenuity (Homer-Dixon, 2000). This neo-Malthusian perspective on sustainability discusses the

idea that resources dont run out and that human society will adapt given development of a

hostile environment whether human created or naturally occurring (Evans, 2007).

When discussing the health care system however, we assume that it is in relation to the

economy. To this extent sustainability relates to the economy in its ability to handle a givenlevel of spending (Evans, 2007). Various methods of displaying the sustainability of the health

care system have been adopted and used; the most prevalent one shows future trends

indicating an unsustainable funding trend in the health care system; HCF:GDP health care

funding to gross domestic product.

Funding Formulas

As mentioned the HCF:GDP formula is the most prevalent depiction of funding trends. This

equation takes into account total health care spending across all levels of government. Using

this formula expenses in funding are shown to have increases from 7% of GDP in 1975 to 9.8%by 2002 with an estimated 0.2% increase to 10% by 2003 (MacKinnon, 2004). This is an

alarming trend as the population continues to age. Studies have shown that over the next 20

years the share of government revenue relative to GDP will decline; due to the aging population

and changing spending patterns (MacKinnon, 2004). As we have noted the main problem is the

cost of the health care system is outpacing the revenue of governments.


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E.g. Ontario

From 1997/98 2002/03 the Ontario government increased spending onHealth Care by 42% while revenue only increased by 31% (MacKinnon,

2004).

The Organization for Economic Co-operation and Development (OECD) conducted a study

finding that Canada is from a fiscal standpoint in the most favourable position that it will be in

far at least another fifty years regarding revenue to expenditures. The number of people; they

found, that contribute to the revenue source of governments are roughly equivalent to those

that extract from the system as well. This situation is trending downwards as the population

continues to age at an alarmingly rapid rate.

As noted, spending is increasing in the health care system. However, if this were true it begs the

question, what priorities are being squeezed out because of the transfer in funding? This is a

reasonable question given that we know that revenues are decreasing and spending is

increasing in health care faster than revenue is increasing; the difference must be accounted

for. Indeed while the differences in funding must be accounted for we also know that

governments have begun to run deficits because of the imbalance.

This imbalance is due to the transfer payments schemes set up by the federal and provincial

governments; moreso the lack of transfers coming from the federal government for health

care, this topic will be explored in detail in a subsequent section as will the relative effects of

these funding formulas.

Public Spending on Health in Relation to Fiscal Capacity (total revenue of combined

governments)

The Saskatchewan Institute for Public Policy released a report in 2006 that pointed out some

glaring flaws in conventional health care funding thinking. First the study pointed out that not

only was the funding sustainable but also that the capacity of the economy to handle that

level of spending both public and private was possible (Ruggeri, 2006). The sustainability

quotient equation (HCF:GDP) noted earlier as being the most prevalent measure of

sustainability of health care funding does not reflect exclusively the health needs of the

population or the populations demand for health services (Ruggeri, 2006). It is effective to

provide a broad concept of the health care funding debate, but detailed analysis lack in

requisite detail.


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Fiscal Sustainability

As we are aware, the majority of funding for the health care system is publicly provided,

through various taxes and user fees. A real concern for the majority of the population is an

increase in taxes to continue to fund and provide the free access health care that we have come

to expect. Again as we discussed previously the funding formula for health care is the fiscal

capacity of combined governments, measured by their total revenues (Ruggeri, 2006). In

relation to this, Health Canada conducted a study resulting in a report entitled Health

Expenditures in Canada by Age and Sex, 1980-81 to 2000-2001 (Health Canada, 2001). The

study was separated as we can see by Age and Sex. Age groups being the following: 0-14, 15-24,

25-34, 35-44, 45-54, 55-64, 65-74, 75-84, 85+. Further separation were in groups of study

regarding the sustaining of quality in the health care system based on the base study period of

2003-04 in Ruggeri Health Care Spending, Fiscal Sustainability, and Public InvestmentTable 3

page 10. The groups were defined as; hospitals, other institutions, physicians, drugs, home

care, other services, and administration. The conclusion gained from this report indicated a

presumed increase in the average spending of only 3.4% annually. The breakdown as noted

above is as follows: 0.5% hospitals; 0.6% for physicians to capture labour supply constraints; as

in the case of hospitals; 3.0% for drugs because of the introduction of new drugs; and 0.5% for

other expenditures to capture the introduction of new equipment (Health Canada, 2001). After

accounting for inflation the overall annual growth rate is considered to be 5.6% (Ruggeri, 2006).

Clearly, far less of an increase in expenditures than other models are indicating.

Fiscal Year Public Health care Spending as Percent of Total

Government Revenues

1988-89 14.8

1992-93 16.3

1996-97 14.0

2003-04 19.3

2010-11 21.1

2015-16 22.8

2020-21 24.7

2025-26 27.0

Table 3: Page 10 (Ruggeri, 2006)

Further evidence that our health care system will remain sustainable despite continuing belief

that it will outgrow out fiscal capacity to sustain it comes from the Ministry of Finances Jackson


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and McDermott. Given the current increase trend and projected trending of 3.5% they

concluded the following:

1. the structure of public spending has always evolved over time, and these changes havebeen affordable;

2. the spending increases projected under the 1990s enrichment ratios thus appear to bewithin the limits of sustainability from both fiscal and political perspectives; and

3. discussions of sustainability ultimately become a question of public choice. Even verylarge increases in health spending as a share of GDP are technically feasible, provided

citizens choose to devote an ever increasing portion of GDP to the health care system

and are willing to pay for its cost.

(Ruggeri, 2006)

Public Policy Debate

Continuing, there is a public policy debate regarding health care funding; rather funding as a

whole. Economists and social scientists in general are now recognizing five categories of capital;

physical capital (the only item included in the national accounts), natural capital, human capital,

social capital, and civic capital (Ruggeri, 2006). All these forms of capital combine to form the

full picture of our health care spending environment. Each one of these forms of capital are

affected by the government spending decisions, however to admit as much would require the

government to re-evaluate their claim that physical capital is the only effectual form of

spending (Ruggeri, 2006).

When considering the increase in funding required to sustain our health care system through

the future, we must look at the funding formulas in detail. As we noted above the various forms

of capital investment to be gained by the government we must include them in the analysis.

The analysis shows that from 1981-82 through 2025-26 the total health care spending to GDP

ratio will fluctuate substantially increasing and decreasing; what must be noted of particular

interest is that there is no sustained dramatic upward trend in health care spending as has been

suggested in previous more narrow focussed models. An additional note is that while there is

no sustained dramatic upward trend there is a forecasted increase of approximately 3-4% overthe next twenty-two years (Ruggeri, 2006).


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Delivery of Funding

A great deal of discussion has been had regarding the funding of and formulation of funding

scenarios, we will move now to a detailed analysis of the actual funding mechanisms currently

in place via the Canada Health Act.

As we know there are two types of funding private sector and public sector. For reference

public sector funding refers to governments and government agencies; provincial, municipal,

and federal. Private sector refers to corporate for-profit, small business and entrepreneurial

entities, voluntary not-for-profit sector, as well as individuals and families. Funding is self

explanatory insofar as it refers to how the programs are paid for, and delivery; how services are

organized, managed and provided (Government of Canada, 2005).

The Canada Health Act set out five criteria that provincial and territorial health care insurance

plans must meet in order to qualify for the full federal contribution under the Canada Health

Transfer (CHT) (Government of Canada, 2005). These are neither legally binding nor do they

apply to the privately run and funded health insurance programs.

1. Public Administration: each provincial health care insurance plan must be administeredon a non-profit basis by a public authority, which is accountable to the provincial

government for its financial transactions;

2. Comprehensiveness: provincial health care insurance plans must cover all insuredhealth services (hospital care, physician services and medically required surgical dental

procedures which can be properly carried out only in a hospital);

3. Universality: all residents in the province must have access to public health careinsurance and insured health services on uniform terms and conditions;

4. Portability: provinces and territories must cover insured health services provided totheir citizens while they are temporarily absent from their province of residence or from

Canada; and

5. Accessibility: insured persons must have reasonable and uniform access to insuredhealth services, free of financial or other barriers. This condition is emphasized by two

provisions of the Act which specifically discourage financial contributions by patients,

either through user charges or extra-billing, for services covered under provincial health

care insurance plans.(Government of Canada, 2005)

These conditions are voluntary and are not legally binding as noted above, however, the

recourse the federal government can employ is withholding of funds to governments that do

not comply with this Act.


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CHT & CST: Canada Health Transfer & Canada Social Transfer

Initially within the CHA the government set out a funding transfer protocol that would see

federal monies transfer back to the provinces. This was the solution created to bridge the gap

regarding jurisdictional challenges. The federal government sought to incur more control over

universal health care, but was constitutionally bound by jurisdictional boundaries. The Canadian

Health and Social Transfer (CHST) was the first incarnation of this transfer formula. Previous

programs provided funding for both social and health systems in a similar manner, between a

tax room policy, and block grants of cash (Evans R. G., 2003). Tax-room being the term used to

reduce taxes at the federal level to allow for provincial increases accordingly. This federal-

provincial relationship provided a suitable transfer of funds to the provinces; however, the

federal government steadily decreased the amount of the transfers on a yearly basis allowing

for the accumulation of a surplus. In 1996-97 the federal government introduced the CHST

officially as an amalgamation of the funding formulas in place, however, in doing so they

decreased the overall funding transfers by nearly 20% by 1997-98 (Evans R. G., 2003). This was

part of the restructuring program of the Chrtien and Martin Liberals. Of course we know the

result of this program change, the deficit was brought down and budgets were balanced.

Unfortunately the program funding was not increased accordingly. Recent changes to the CHST

have seen it split again into two distinct programs the CHT and CST. Each program now sees a

block transfer (Evans R. G., 2007) of funds transferred to the provinces specifically for both

social programs and the health care system separately. In this way the federal government can

control both the funding for social systems and health care systems of the provinces.

The changes in the policy programs by the federal government have created a well known anddocumented vertical imbalance between the provinces. Indeed this is the exact topic in which

this report is debating. The funding formulas created have established horizontal stability

within the federal government, but has created not only the vertical imbalance, but an

incorporated imbalance at the provincial level. These imbalances however, do not preclude an

issue of sustainability. In fact, while the transfer programs established may require changing,

the ability to sustain the funding required by the health care system is not in question.

Funding Demographics: Aging and Crisis

A common consensus is that the aging population of Canada is going to be and is a majorproblem. We noted earlier that from a fiscal point of view, Canadas demographic profile is

currently as favourable as it has been for a generation and more favourable than it will be for at

least another fifty years and that this was because the number of people paying taxes relative

to the number drawing pensions or drawing heavily on the health care system is close to its

peak (MacKinnon, 2004). This of course is part of the narrow focussed analysis of the health

care funding schemes in place based on the fact that the baby boomers are aging rapidly and


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will all reach the age of retirement; 65, within the next 14 years. Furthermore the consequent

aging of the population as pointed out will result in a funding crisis as the tax base declines and

the expense base increases. This would seem to be substantiated by the fact that in 2004,

seniors over age 65 accounted for 13% of the population, but were responsible for 44% of the

total public health care budget (Lee, 2007). There is a correlation between aging and increasingcost in health care expenditures, however, it must be noted that one-third to one-half of a

typical persons health care expenditures happen in the final year of life. The pattern is not

entirely due to population aging (the cost of living), but due to higher rates of mortality as the

age group gets older (the cost of dying) (Lee, 2007). Subsequently, research is not conclusive

on this point (Lee, 2007) to garner a specified conclusion. However, we can gain a manner of

understanding that based on the evidence that baby boomers are leading healthier lives and

not subject to the same health ailments as the previous generation than they will lead longer

lives subsequently decreasing the overall cost on the health care system.

Marc Lee indicates in his report How Sustainable is Medicare? A Closer Look at Aging,

Technology and Other Cost Drivers in Canada, three additional cost drivers beyond that of

population aging.

1. Inflation in health care costs, the only ongoing rise in the price of purchasing the samelevel of health care service. This includes the rising salaries of professionals and other

workers, higher costs for supplies and equipment, and so on;

2. Increases in population size, since the health care budget will rise in accordance with abigger population. If the population doubles, we should expect health care expenditures

to roughly double in order to maintain the same level of service; and3. The enrichment or expansion of health care services, such as the addition of new

surgical procedures or new pharmaceuticals, or the expansion of public coverage to

additional health care sectors.

(Lee, 2007)

Discussing in further detail the three other factors, we must do so to further understand the

broader picture of the health care funding system. Inflation between the years 1975 and 2006

was the single biggest cost driver of increases in the health care system at 9.6% per year

increase from mid-1970s to mid 1980s to 2.5% per year increase from 1996-2006 (Lee,2007). Population growth is responsible for increases of 1.3% per year over the entire study

period. Remarkably, the most significant argument that population aging will cause a great

burden on health care system expenditures, only accounted for 0.8% per year over the study

period, and is projected to increase expenditures to maintain status quo of under 1% per year

(Lee, 2007).


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Summary and Alternative Suggestions

There is little argument that the health care system will require some attention to restructuring

the funding formulas in the relatively near future. There is however, substantial debate relative

to the argument that the health care system will become wholly unsustainable if current

spending patterns continue. The purpose of this report was to set out all arguments for and

against the sustainability of the current health care system. Through the course of the report

we reviewed current funding schemes, various funding analyses, legislation, various

percentages relating to numerical data compiled in defence of the sustainability or

unsustainable nature respectively of the health care system funding. The argument that the

health care system currently presents a squeeze out phenomenon where expenditures will

eventually consume the entire government budget (Bayne, 2008) is a narrow focus point of

view that has been discredited throughout this report.

Health Canada conducted a roundtable discussion about the sustainability of Canadas healthcare system; the following is what they determined:

- Government decisions to cut taxes and spending in other, non-health sectors have hadin impact on the size of budgets. With spending on health care remaining consistent or

increasing over time, health care will comprise a growing proportion of government

budgets;

- Canadians appear willing and able to use tax dollars to fund health care. The challengewill be to instil greater confidence in the system and to ensure Canadians perceive they

are receiving food value for the money spent;

- Regardless of how real or perceived the funding crunch is, the financial imperativeshould be an impetus for change. However, while it may be a necessary stimulus, the

spectre of cuts does not appear sufficient to create positive system change;

- While many solutions for improving quality and efficiency exist, they are notsystematically applied. Much of health care delivery has been built up around the

hospital, although care needs to be based on preventative and primary care

interventions. Shifting the focus of care in this way must involve health care providers,

so it is critical that they view themselves as part of the solution. Thrust among partners

is fundamental in making progress;

- New investments may be needed but the money currently in the system needs to beused differently to maximize its value (for example, to reduce waste and to better

integrate services). This requires a willingness and commitment to make fundamental

changes in the way health care is organized and delivered. Innovation and ideas from

other sectors should be welcomed;


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- The health care workforce needs to be better employed and deployed. The drive toincrease the number of doctors in Canada was fuelled by arguments that the population

is growing and people are getting sicker. But these arguments did not fully account for

the possibility of making better use of all providers who deliver care. To do this, we

need to allow professionals to practice to the full scope of their skills and qualifications,and increase the amount of time health care providers spend in actual clinical service

deliver. Currently only 40-60% of providers time is value-added patient time. In

addition, providers can be organized into teams to manage care more effectively. This

concept is popular in with the public and abundant evidence from numerous

demonstration projects shows that it works, particularly in the delivery of primary

health care for patients with chronic health conditions. The next step may be to

convince medical professionals of its soundness. Given medical schools more

comprehensive and integrated leaning curriculum, interested champions came make

this happen; and finally

- Canadas health care system does not have adequate means of separating wants andneeds. Decisions must be made about choices and limits. While limits are implicitly set

in some areas already (some services are not publicly funded), an explicit ethical

framework may be helpful in resolving some debates. When tough choices need to be

made, both decision-makers and the public must be confident that they are made fairly.

(Bayne, 2008)

Ultimately, the point of these suggestions are to point out the fact that there are certain

internal issues that can be focussed upon to reduce the cost of the current health care system

as well as make it more efficient and trustworthy to the public which uses and pays for it.

However, the overall sustainability of the health care system whether in its current form or in a

revised form in the future is a matter of choice and political will, not the governments fiscal

capacity to balance revenue and expenditure ratios (Burnett, 2008)


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Works Cited

Anonymous. (2010, March 10). Lessons for Canada. The Ottawa Citizen , p. A14.

Bayne, L. (2008). Sustainability in Public Health Care: What Does It Mean?Toronto: Health Council of

Canada.

Burnett, S. (2008). Financing the Health Care System: Is Long-term Sustainability Possible?Regina:

Canadian Centre for Policy Alternatives.

Evans, R. G. (2007). Economic Myths and Political Realities: The Inequality Agenda and the Sustainability

of Medicare. Vancouver: University of British Columbia.

Evans, R. G. (2003). Political Wolves and Economic Sheep: The Sustainability of Public Health Insurance in

Canada. Vancouver: Centre for Health Services and Policy Research.

Government of Canada. (2005). Private Health Care Funding and DeliveryUnder the Canada Health Act.

Ottawa: Library of Parlaiment.

Health Canada. (2001). Health Expenditures in Canada by Age and Sex. Ottawa: Health Canada.

Health Council of Canada. (2008). Rekindling Reform: Health Care Renewal in Canada 2003-2008.

Toronto: Health Council of Canada.

Homer-Dixon, T. (2000). The Ingenuity Gap. Toronto: Alfred A. Knopf.

Lee, M. (2007). How Sustainable is Medicare? A Closer Look at Aging, Technology and Other Cost Drivers

in Canada's Health Care System. Ottawa: Canadian Centre for Policy Alternatives.

Mackenzie, H. (2004). Financing Canada's Hospitals: Public Alternatives to P3's. Toronto: Ontario Health

Coalition.

MacKinnon, J. (2004). The Arithmatic of Health Care. Montreal: Institute for Research on Public Policy.

Priest, L. (2010, March 25). Cancer treatment becomes a perfect fiscal storm. The Globe and Mail, pp. A-

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Rovere, B. J. (2009). Paying More, Getting Less: Measuring the Sustainability of Government Health

Spending in Canada. Vancouver: Fraser Institute.

Ruggeri, J. (2006). Health Care Spending, Fiscal Sustainability, and Public Investment. Regina: TheSaskatchewan Institute of Public Policy.

Documents

Canadian Health Care System: Sustainable? An Analytical Exploration of Current and Future Trends in Health Care Funding