Canadian Health

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

Tim Bevand
360692

Dr. Gary Munro

Political Science - 2213
Canadian Health Care System: Sustainable?March 30, 2010

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 Alternative Suggestions 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 doesn’t 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’ [ CITATION Rob07 \l 4105 ]. However, a more

recent and broader version of ‘sustainability’ has been adopted; one that explores the idea of
‘supply of ingenuity’ [ CITATION TFH00 \l 4105 ]. This neo-Malthusian perspective on sustainability
discusses the idea that resources don’t ‘run out’ and that human society will adapt given
development of a hostile environment whether human created or naturally occurring [ CITATION
Rob07 \l 4105 ].

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 given
level of spending [ CITATION Rob07 \l 4105 ]. 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 [ CITATION Jan04 \l 4105 ]. 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

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and changing spending patterns [ CITATION Jan04 \l 4105 ]. As we have noted the main problem is
the cost of the health care system is outpacing the revenue of governments.

E.g. Ontario

 From 1997/98  2002/03 the Ontario government increased spending

on Health Care by 42% while revenue only increased by 31% [ CITATION
Jan04 \l 4105 ].

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 [ CITATION Joe06 \l 4105 ]. 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’ [ CITATION Joe06 \l 4105 ]. It is

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effective to provide a broad concept of the health care funding debate, but detailed analysis
lack in requisite detail.

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’ [ CITATION Joe06 \l 4105 ].
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 [ CITATION Hea01 \l 4105 ]. 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 Investment Table 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 [ CITATION Hea01 \l 4105 ].
After accounting for inflation the overall annual growth rate is considered to be 5.6% [ CITATION
Joe06 \l 4105 ]. 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 [ CITATION Joe06 \l 4105 ]

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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 Finance’s Jackson
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 have
been affordable’;
2. ‘the spending increases projected under the 1990s enrichment ratios thus appear to be
within the limits of sustainability from both fiscal and political perspectives’; and
3. ‘discussions of sustainability ultimately become a question of public choice. Even very
large 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.’

[ CITATION Joe06 \l 4105 ]

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 [ CITATION Joe06 \l 4105 ]. 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 [ CITATION Joe06 \l 4105 ].

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% over
the next twenty-two years [ CITATION Joe06 \l 4105 ].

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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 [ CITATION Gov05 \l 4105 ].

‘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)’ [ CITATION Gov05 \l 4105 ]. 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 administered
on 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 ‘insured
health 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 care
insurance and insured health services on uniform terms and conditions;
4. Portability: provinces and territories must cover insured health services provided to
their 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 insured
health 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.
[ CITATION Gov05 \l 4105 ]

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 [ CITATION Rob03 \l 4105 ]. 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 [ CITATION Rob03 \l 4105 ]. This
was part of the restructuring program of the Chrétien 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’ [ CITATION Rob07 \l 4105 ] 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 and
documented 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 major
problem. We noted earlier that ‘from a fiscal point of view, Canada’s 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

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peak’ [ CITATION Jan04 \l 4105 ]. 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 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’ [ CITATION Mar07 \l 4105 ]. There is a correlation
between aging and increasing cost in health care expenditures, however, it must be noted that
‘one-third to one-half of a typical person’s 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’)’ [ CITATION Mar07 \l 4105 ].
Subsequently, ‘research is not conclusive on this point’ [ CITATION Mar07 \l 4105 ] 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 same
level 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 a
bigger population. If the population doubles, we should expect health care expenditures
to roughly double in order to maintain the same level of service; and
3. 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.

[ CITATION Mar07 \l 4105 ]

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-1970’s to mid 1980’s’ to ‘2.5% per year increase from 1996-2006’ [ CITATION
Mar07 \l 4105 ]. 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

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study period, and is projected to increase expenditures to maintain status quo of under 1% per
year [ CITATION Mar07 \l 4105 ].

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 [ CITATION Lil \l 4105 ] is a narrow focus point
of view that has been discredited throughout this report.

Health Canada conducted a roundtable discussion about the sustainability of Canada’s health
care system; the following is what they determined:

- Government decisions to cut taxes and spending in other, non-health sectors have had
in 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 challenge
will 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 imperative
should 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 not
systematically 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 be
used differently to maximize its value (for example, to reduce waste and to better
integrate services). This requires a willingness and commitment to make fundamental

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changes in the way health care is organized and delivered. Innovation and ideas from
other sectors should be welcomed;
- The health care workforce needs to be better employed and deployed. The drive to
increase 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
- Canada’s health care system does not have adequate means of separating wants and
needs. 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.

[ CITATION Lil \l 4105 ]

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 government’s fiscal
capacity to balance revenue and expenditure ratios’ [ CITATION Sea08 \l 4105 ]

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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 Delivery Under 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: The
Saskatchewan Institute of Public Policy.

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