The fiscal imperative of health care reform


Federal Health Minister Philpott displayed unusual candour when she said recently that Canada spends more per capita on healthcare than many other countries but gets middle-of-the-road results. Her “mediocre” label on Canadian healthcare could also have included “inefficient”. That should have ignited a discussion among federal-provincial politicians and health authorities on how to increase efficiency and raise the quality of healthcare while restraining spending growth. Instead, Canadians have witnessed the tired old fight over how much should be spent on what and who should spend it.

If not for the sake of quality and efficiency, we will see reform! The fiscal imperative will see to that. The federal government is insulating itself from the worst of healthcare’s fiscal squeeze; that will be borne by the provinces, especially those with older populations where health spending will grow faster and revenues slower. The federal government can and should play a supporting role, but much of the action will have to come from provinces and territories.

With healthcare spending rising at an annual pace of only 2.8 per cent over the past 6 years, it might seem that the fiscal challenge has been licked. That conclusion is premature and likely incorrect.

First, remember the 1990s where spending was restrained for a while only to explode subsequently? Second, a disproportionate share of the current restraint has resulted from deferral of capital spending, a future liability. Third, in the period 2011 through 2014 drug costs were stable, in part because of government efforts to reduce costs, especially on generics. That permanently lowered prices but the effect has waned. This was also a period when a number of expensive drugs came off patent and few new ones came to market. Drug costs can turn quickly. In 2015 the cost of public drug programs soared 9.2 per cent, driven by the cost of new drugs, almost half of which are used to treat one disease, hepatitis C.

A fourth reason why restraint is unlikely to endure is that for the most part it was a result of squeezing budgets; that can only continue for so long. Therein lies the fifth reason why the current restraint will not likely endure. Without proper measures of outcomes and the quality of healthcare, with on-going spending restraint governments are entering dangerous territory. Budget squeezing may compromise quality but with few canaries in the mine, this and the decline of beneficial outcomes might only become apparent as a crisis. That too could be reminiscent of the late 1990s when perceptions of increased wait times, at a time when wait times were hardly measured, was one factor that brought spending restraint to an end and ushered in an extended period of rapid growth in spending.

Implicit in the arguments Premiers have been making for more federal money is an expectation that healthcare spending will grow at an average annual pace of 5.2 per cent over the longer-term. This would far exceed the pace of provincial nominal GDP and revenue growth, which on average are expected to increase around 3 ½ per cent annum over the next 10 and 20 years according to a project done for the Council of the Federation in 2015 by the Centre for the Study of Living Standards. The result would be some combination of extreme crowding out of other government spending, persistent tax increases and rising provincial deficits and debt.

Keeping health care spending growth to 5.2 per cent per annum would require some ongoing element of reform or restraint. Most projections of cost increases under the “status quo” start with the core of 1 per cent growth in population and a 2 per cent increase in inflation. Add to that 1 percentage point for population ageing, a similar amount for the fact inflation tends to be higher in the health sector than the general economy, and at least another 1 percentage point from the trend rise in the intensity of healthcare use which, given the development of precision medicine may be a serious under-estimate, and you have at least 6 per cent growth per year. If provincial revenues grow at 3 ½ per cent and budgets are to be balanced, the other half of provincial spending, everything other than health, including education, could not grow more than 1 per cent per annum, a decline of 2 per cent each year on a real, per capita basis. That is neither desirable nor likely feasible.

Something will have to give, hopefully not health outcomes and the quality of care. The result will have to be an improvement in the efficiency with which money is spent. The fiscal imperative for reform will be particularly intense in the provinces with older populations, like New Brunswick with its largest share of seniors. They will face both greater pressure on cost growth and slower government revenues. The C.D. Howe Institute projects that health care spending could rise from the current 10 per cent of New Brunswick’s GDP to more than 20 per cent over the next 50 years. New Brunswick’s revenues will likely only rise 2 ½ per cent per annum compared to a provincial average of 3 ½ per cent. These desperate fiscal realities may explain why New Brunswick, Nova Scotia and Newfoundland and Labrador have made health care funding agreements with the federal government to lock down one element of the reforms they will have to introduce.

The coming healthcare reform will be driven by bean counting. To ensure the exercise goes beyond that, one of the first elements of reform will have to be good measures of outcomes, quality of care, and of efficiency. Then progress in Canadian health care can be measured in more than dollars.

Authored by members of the Queen’s Health Policy Council:

Don Drummond
Chris Simpson
Duncan G. Sinclair
David Walker
Ruth Wilson

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