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The sustainability of public health expenditures: evidence from the Canadian federation

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Abstract

The fiscal sustainability of government health expenditures is defined as the gap between growth rates of spending and measures of the resource base. The results show that over the period 1965–2008, real per capita Canadian provincial government health spending has grown at rates that exceed growth in basic measures of the resource base such as per capita gross domestic product (GDP), per capita federal transfers and per capita provincial government revenues. Forecasts of future spending to 2035 using determinant regression and growth rate extrapolation techniques show that Canadian provincial government health spending is projected to continue rising in the future and its share of provincial GDP will rise. While the amount spent on health is ultimately a public policy choice, provincial government health spending also cannot continue growing faster than the resource base indefinitely.

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Notes

  1. See Barros and Bac and Le Pen [3–5] for overviews. See also [39].

  2. Officially known as the Commission on the Future of Health Care in Canada, the Romanow Report affirmed the desire and value of public health care and recommended a number of policies including a major infusion of federal transfers to promote change in the system. The follow up in 2003 was the First Ministers Accord in Health, which saw the creation of a separate health transfer and a substantial increase in transfer funding.

  3. It should be noted that health care 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 health care in the future by building a large health spending endowment fund—prefunding—that will eventually generate income to cover rising health expenditures. However, future health care 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 [18].

  4. For a recent example, see [19]. Evans [19, p 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 health 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.”

  5. It should be noted that Landon et al. [34] used a panel of Canadian province level data for the period 1988/1989–2003/2004 to test the hypothesis that health spending has crowded out other types of spending. They find no evidence that increased provincial government health spending resulted in lower spending on other government expenditure categories. Rising health spending and other government expenditures was funded out of increasing revenues and the fiscal dividend from debt reduction.

  6. According to the Romanow Report [47, p. xvi]: “Canadians consider equal and timely access to medically necessary health care services on the basis of need as a right of citizenship, not on a privilege of status or wealth.”

  7. For other generational discussions of health care see also Cutler and Sheiner [14] and Auerback et al. [2].

  8. See Kotlikoff and Raffelhuschen [33, p. 62] 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.”

  9. Indeed, Chernew et al. [11] argue that larger amounts of health care spending in the United States 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 health care spending growth, we can afford to spend more for health care if we place sufficient value on those services relative to forgone non–health care consumption.”

  10. A recent Canadian study using this measure is Landon et al. [34].

  11. Skinner and Rovere [50, p. 3] argue that government spending on health care should be considered unsustainable when on average it grows faster than revenue.

  12. This connection between health care costs growing faster than general government revenue was noted by the Fykes Commission report on health care in Saskatchewan. See Boothe and Carson [6, p. 12].

  13. Estimated federal cash transfers to the provinces and territories in 2008–2009 are expected to total 53.9 billion Canadian dollars, of which 30% is general purpose transfers (mainly equalization) and the remainder specific purpose mainly under the rubric of the Canada Health Transfer and the Canada Social Transfer.

  14. The implied annual growth calculates the rate of growth between the values in 1965 and 2008. The formula used is y = Aert where y is the end value, A is the start value, r is the growth rate and t is time in years. The implied growth rate r = [LN(y/A))/t].

  15. Landon et al. [34] do not break down the revenue increase from own source revenue as originating from higher tax rates or an expanding tax base. However, given the income tax cuts of the 1990s and the economic boom that occurred, it is likely the tax revenue increases came largely from an expanding base that was the product of a booming economy.

  16. The pooled regression is preferable to single province estimates because pooling allows for a larger sample and more degrees of freedom.

  17. A time trend (YEAR) is sometimes used to account for technological change’s impact though modelling the impact of technological extension on health care spending can be a complicated issue. If new techniques generate cheaper health procedures, there could be expenditure reductions associated with technological change. Cutler et al. [15] report that, between 1983 and 1994, the real quality-adjusted price of heart attack treatments declined at an annual rate of 1.1%. At the same time, with expensive new treatments, technological change can be associated with rising health expenditures. Given that technological change occurs over time, a time index is a way to control for the effect of technological change on health expenditures but it is an imperfect one.

  18. An aging population is a source of some debate as to its importance as a health care expenditure driver. For a sample of papers for Canada, see [8, 16, 29, 49]. While aging is seen as a factor in rising health expenditures, its contribution has been determined recently to be relatively small compared to factors such as rising care expectations, time to death, rising input prices and technological extension. There is also a vast international literature on the importance of an aging population on health expenditure impact that has reached similar conclusions; see [9, 23, 37, 40, 42, 51, 54].

  19. Federal cash transfers are important operating revenue sources for Canada’s provincial governments but vary across provinces and time. Estimated federal cash transfers to the provinces and territories in 2008–2009 totalled approximately 53.9 billion Canadian dollars, of which 44% was specifically marked for health. However, general-purpose transfers like equalization can be applied to health. It is difficult to separate out the extent of health transfers given the large amount of change in transfer arrangements over time both in dollar amounts as well as institutional arrangements.

  20. For an excellent survey of the international health expenditure determinants literature, see [21]. The first generation of such determinants studies often used international data; see [1, 4, 7, 17, 20, 22, 27, 28, 35, 43].

  21. Over the years a number of regime changes have occurred with respect to transfers. In 1977, there was the onset of Established Program Financing (EPF) which replaced federal-provincial cost-sharing on health with a block grant. In 1984 there was the onset of the Canada Health Act (CHA) which tied the receipt of federal transfers to running a health care system that met basic conditions. In 1996, EPF and the Canada Assistance Plan, which funded income support, were collapsed into one transfer (and the cash portion reduced by one-third). This new transfer was called the Canada Health and Social Transfer (CHST). Finally, in 2005 the CHST was broken up into two transfer payments—the Canada Health Transfer and the Canada Social Transfer.

  22. The value of lambda was 0.74.

  23. A stationary time series is one whose mean and variance do not change with time. If variables in a regression are non-stationary, then the implication is that the regression may be spurious. If the error term is stationary, then the two variables are co-integrated with the error term representing short-term deviations from that relationship. Tests for stationarity are available but their power is limited by both the quality and the time span of the data (see [38, pp. 92–103, 273–279]). In addition, another time-series study concludes that "researchers and policy makers modeling health expenditures and GDP in a panel regression framework can get meaningful results that are not spurious, if structural changes are allowed" [31].

  24. The unrestricted regressions allow for variable slope coefficients across the provinces whereas the restricted model assumes that all the provinces have the same slope coefficients across the key explanatory variables.

  25. The White Heteroscedasticity test using the OLS regression residuals found that population was a significant source of heteroscedasticity.

  26. The assumption is that, due to integration of Canadian provincial economies, there may be correlation in the error terms across the panels.

  27. In 2008–2009, federal transfers to the provinces for the Canada Health Transfer totaled 22.6 billion CAD out of total transfers of 53.9 billion CAD. See: http://www.fin.gc.ca/fedprov/mtp-eng.asp.

  28. The flypaper effect results when a dollar of exogenous grants-in-aid leads to significantly greater public spending than an equivalent dollar of citizen income. See [26, 30].

  29. The “cost-of-dying” approach implies that proximity to death rather than aging is the more important cost-driver. Seshamani and Gray [49] find a ten-fold increase in health costs in the final year of life.

  30. Running the same regressions with the omission of the time trend generates positive and significant coefficients for most provinces for the population proportion aged 65 and over.

  31. Nova Scotia is also positive at a value of 20.434 but it is not significant at either the 5 or 10% level.

  32. For example, if the real per capita GDP growth rate was 4%, then this scenario reduces it to 2% while if the proportion of population aged 65 and over was growing at 1%, this scenario then uses 1.5%.

  33. The implied growth rates for the entire period are used as they incorporate the entire range of the historical experience. Growth rates of real per capita health spending across the provinces are somewhat higher if the 1965–1990 period is used while the period 1990–2008 results in lower growth rates because of the deficit cutting agenda Canadian provincial governments followed from 1990 to 1996.

  34. Indeed, Alberta is particularly sensitive to its natural resource revenues and the recent drop in the price of oil has played havoc with its public finances. See Di Matteo and Di Matteo [18] for a specific discussion of health care sustainability in Alberta over the period 1975–2007.

  35. The average forecasted implied annual growth rate for real per capita provincial government health spending is 2.3% for the Scenario I regression forecast, 1.5% for Scenario II and 4.2% for the extrapolation forecast. The regression forecast provincial growth average which is below the average growth rates for real per capita GDP, transfers and provincial revenue of 2.4, 3.1 and 3.5% as laid out in Table 1.

  36. In the ten OECD countries mentioned by Kotlikoff, the ratio of the average annual growth rate of health spending to the growth rate of GDP was lowest for Canada. By way of further international comparison, total per capita health spending in the United States in 2006 stood at US $6,714 while public sector per capita health spending was US $3,075 (The US numbers are Purchasing Power Parity US dollars. Source: OECD Health Data 2008.) From 1975 to 2006, per capita public sector health spending in the United States grew from US $241 to $3,075—an increase of 1,176%. Between 1975 and 2006, Medicare and Medicaid account for a large and growing share of federal spending and the Congressional Budget Office projects that total spending on health care will rise from 16% of GDP in 2007 to 25% by 2025 making sustainability a key issue see [41].

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  1. Department of Economics, Lakehead University, Thunder Bay, ON, P7B 5E1, Canada

    Livio Di Matteo

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Appendices

Appendix 1

Data set variables definition and construction

The basic variables of the data set are for the period 1965–2008 and are constructed from Canadian Institute for Health Information (CIHI) and Statistics Canada data sources.

Provincial gross domestic product (GDP)

1981–2008: GDP2-Source-Canadian Institute for Health Information.

1965–1991: GDP1-Statistics Canada: D31720, D31742, D31764, D31786, D31808, D31830, D31852, D31874, D31896, D44014.

For the period 1981–1991, the ratio of GDP1 to GDP2 taken for each province and the average applied to GDP1 for the period 1965–1980 to adjust the data series.

Provincial population (POP)

1965–2008: Statistics Canada: v2, v8, v9, v10, v11, v12, v13, v14, v15, v3.

Provincial government health expenditures (PROVGOVHEX)

1965–1991: PGHX1: Statistics Canada 68–512 (Historical Public Finance Statistics).

1975–2008: PGHX2: Canadian Institute for Health Information.

For period 1975–1991, the ratio of PGHX2 to PGHX1 taken for each province and the average used to adjust PGHX1 for the period 1965–1974.

Provincial government expenditures (PROVGOVEX)

1965–1988: Statistics Canada: D12844, D12856, D12884, D12904, D12924, D12994, D12964, D12984, D13004, D12824.

1989–2008: Statistics Canada: V206514, V206579, V206644, V206709, V206774, V206839, V206904, V206969, V207034, V207099.

Provincial government revenues (PROVGOVREV)

1965–1988: Statistics Canada: D12836, D12856, D12876, D12896, D12916, D12936, D12956, D12976, D12996, D12816.

1989–2008: Statistics Canada: V206514, V206547, V296612, V206677, V206742, V206807, V206872, V206937, V207002, V207067.

Population aged 65 years and over (POP65)

1965–2008: Statistics Canada: V467001, V467316, V467631, V467946, V468271, V468576, V468891, V469206, V469921, V469836.

Provincial federal cash transfer revenue (FEDTRANS)

1965–1988: Statistics Canada: D12842, D12862, D12882, D12902, D12922, D12942, D12962, D12982, D13002, D12822.

1989–2008: Statistics Canada: V206512/V206513, V206577/V206578, V206642/V206643, V206707/V206708, V206772/V206773, V206837/V206838, V206902/V206903, V206967/V206968, V207032/V207033, V207097/V207098.

Government expenditure implicit price index with 1997 = 100 (GIMPI)

1975–2008: Source: Canadian Institute for Health Information.

1965–1974: Interpolated by using Statistics Canada CPI for each province.

Appendix II

figure a

Provinces: Nfld=1, PEI=2, NS=3, NB=4, QUE=5, ONT=6, MAN=7, SASK=8, ALTA=9, BC=1

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Di Matteo, L. The sustainability of public health expenditures: evidence from the Canadian federation. Eur J Health Econ 11, 569–584 (2010). https://doi.org/10.1007/s10198-009-0214-x

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