An Era of Restraint in Health Care Spending in Canada

The question is whether the current decline represents a permanent bending of the health care cost curve or a temporary pause

In the wake of new health expenditure data from the Canadian Institute for Health Information (CIHI), the evidence continues to mount that Canadian public health expenditure growth is moderating. Moreover, adjusting for inflation and population growth, per capita provincial and territorial government health expenditures have actually declined since their peak in 2010. From a high of $3915 (2012 dollars), real provincial and territorial government health spending per capita has declined by 3.9 per cent to reach an estimated $3762.

This decline, however, is not evenly distributed across health expenditure categories or jurisdictions. When health expenditure categories are examined, the largest drop in real per capita provincial/territorial government health spending is for capital spending with a drop of 28 per cent since 2010. Capital spending represents an easy target for government restraint given that postponing capital projects, such as new buildings or diagnostic equipment, often does not have an immediate impact on service delivery.

Next largest is real per capita drug spending, dropping 11.3 per cent, which is remarkable given drug spending was once one of the fastest growing components of provincial government health spending. According to CIHI, drug expenditure has been affected by jurisdictions introducing generic pricing controls combined with patent expirations and fewer new drug introductions.

Smaller declines are in the areas of hospital and other institutional spending and administration. However, physicians, other professionals and public health appear to have escaped the decline. Real per capita physician spending is up three per cent since 2010 while spending on other professionals is up 12.5 per cent and public health spending rose one third of one per cent.

Situations also vary across the provinces and territories when it comes to health spending change reflecting the diversity of the federation. Eight out of 10 provinces and two of the three territories saw declines in real per capita government health spending. The percentage change in real per capita government health spending since 2010 ranges from declines of nearly seven per cent each in Alberta and Ontario and five per cent in New Brunswick, to increases of 0.5, three and seven per cent in British Columbia, Nova Scotia and the Northwest Territories respectively. This diversity may be a function of differential rates of population aging and population growth as well as underlying economic performance and its effects on own source government revenues.

The health care cost curve is being bent in a manner not seen since 1992 to 1996 when real per capita provincial and territorial government spending dropped nearly eight per cent. This decline followed a severe recession and fiscal restraint in the face of mounting deficits that was augmented by reductions in federal cash transfers for health with the introduction of the Canada Health and Social Transfer. A key difference today is that federal health transfers continue to rise though their rate of growth will decline after 2017.

The key question is whether the current decline represents a permanent bending of the health care cost curve or a temporary pause. In the wake of the spending decline from 1992 to 1996, real per capita government health spending grew as the economy recovered and federal transfers enriched after the 2004 Health Accord. Indeed, real per capita provincial and territorial government spending grew 50 per cent between 1996 and 2010.

A similar rebound is unlikely this time. Starting in 2017, the growth of federal health transfers will be linked to the national rate of economic growth and inflation with a floor of three percent. Governments are likely implementing cost-control measures in advance of the day when federal transfer growth slows from the annual six per cent increases of the Health Accord.

However, the effort to restrain health expenditure costs given slower growth in both the economy and federal transfers will be counter balanced by the aging of the population and continued medical product innovation. While there has been a slowdown in drug innovation that has affected the growth of drug spending, this may change. As well, though aging has been a modest contributor to health spending growth to date, this may not continue.

The Canadian population is aging but the front end of the baby boom bulge is just entering the age 65 to 69 category.  Per capita provincial/territorial health spending in 2012 was $4620 for those aged 60 to 64 and $16231 for those aged 80 to 84. The effects of aging are not fully upon us yet. As a result, real per capita provincial government health spending will eventually resume growth but probably at a lower rate than that which characterized the period 1996 to 2010.

By Livio Di Matteo

Livio Di Matteo is an expert advisor with EvidenceNetwork.ca and a Professor of Economics at Lakehead University.