Warning to Ottawa: Old Spending Habits Die Hard for Provinces when it comes to Healthcare

There is no clear evidence that a lasting period of health spending restraint is underway.

August 9, 2016 – There is no clear evidence that a lasting period of health spending restraint is underway, according to a new report from the C.D. Howe Institute. In “Hold the Applause: Why Provincial Restraint on Healthcare Spending Might Not Last,” authors Livio Di Matteo and Colin Busby examine whether the recent downward bending of the provincial healthcare cost curve can be sustained.

During the mid-1990s, there were four years of declining per person health spending that were followed by a lengthy period of rapid growth,” state the authors. “Is the current period of health spending restraint likely to repeat the past and give way to rapid growth? What can policymakers do to prevent history from repeating itself?”

“During the mid-1990s, there were four years of declining per person health spending that were followed by a lengthy period of rapid growth,”

The authors note that the ratio of provincial/territorial health spending to GDP fell from 7.6 percent in 2010 to 7.4 percent in 2013 and to 7.2 percent in 2015. Over the same period, real per capita total health expenditure has declined by an annual average rate of 0.6 percent.

But the report finds a number of reasons why the current period of cost restraint may be temporary: the inability of provinces to maintain relatively large decreases in capital spending, rising cost pressures from “nichebusting” drugs, and the large number of medical school graduates being assimilated into the health system each year. However, Di Mattero and Busby suggest that there are policies that could strengthen provincial government efforts to achieve effective cost restraint in healthcare and put publicly financed healthcare on a more sustainable footing.

“For starters, the federal government should, in discussions with the provinces over a new health accord, not yield to provincial demands for more money,” says Di Matteo. Since 2004, the Canada Health Transfer has been growing at 6 percent per year – nearly doubling in overall size over the last decade – and is currently scheduled to grow at a slower pace starting in 2017. Busby adds that, “given evidence that federal transfers can be a key driver of provincial health spending, a return to something near a 6 percent escalator – the same size as in the 2004 health accord – would likely spark an increase in provincial health spending and forestall efforts to bend the cost curve.”

The report recommends that the federal government should instead stick to the formula set by the previous government, and that would see provincial health transfers grow with the Canadian economy and never fall below 3 percent annually.

Efforts to control health costs will always be subject to criticism. In particular, the sharpest concerns will come from groups whose incomes may be squeezed by government efforts. Without data on patient outcomes, however, governments cannot demonstrate that patients are unaffected by cost-control efforts and that quality of care is maintained – this makes governments particularly vulnerable to claims that patient care is being eroded by budget cuts. Better data keeping should help create an environment that would allow governments to achieve lasting improvements in financing healthcare while maintaining, or improving, care quality.

“Given the importance of federal transfers as an expenditure driver, any return to the transfer formula adopted in 2004 – such as an escalator growing in the range of 5 percent to 6 percent annually – should be avoided,” conclude the authors. If this were to happen, health spending would likely once again begin to outstrip economic growth, forestalling efforts to push through difficult reforms that would help to bend the cost curve.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

For more information contact: Livio Di Matteo, Professor of Economics at Lakehead University; or Colin Busby, Associate Director of Research, C.D. Howe Institute: 416-865-1904 or email, amcbrien@cdhowe.org.


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