The Health of Canadians – The Federal Role

Interim Report

Volume One – The Story So Far

The Standing Senate Committee on Social Affairs, Science and Technology

Chair: The Honourable Michael J.L. Kirby

Deputy Chair: The Honourable Marjory LeBreton

March 2001


TABLE OF CONTENTS

ORDER OF REFERENCE

MEMBERSHIP

FOREWORD

INTRODUCTION

CHAPTER ONE:

Historical Background on Public Health Care Insurance and the Role of the Federal Government in Financing Health Care

1.1 Federal Role in Health and Health Care
1.2 Cost-Sharing Arrangements
1.3 Functioning of the EPF Block Funding
1.4 The CHST
1.5 Tax Points versus Cash Transfers
1.6 The Federal Contribution to Health Care
1.7 The Need for Stability in Federal Funding
1.8 Accountability in the Use of Federal Health Care Dollars

CHAPTER TWO:

National Principles for Health Care and the Advent of the Canada Health Act

2.1 The Origins of the Canada Health Act
2.2 Definition/Interpretation of the National Principles and their Application
2.3 Enforcement Penalties under the
Canada Health Act
2.4 Is the Canada Health Act Still Relevant?
2.5 Committee Commentary

CHAPTER THREE:

Public Expectations about Health Care

3.1 Health Care is an Important Public Policy Concern
3.2 Canadians Are Concerned About Quality, Access and Universality
3.3 Health Care is a Priority
3.4 Health Care is a Federal/Provincial Partnership
3.5 Support for the Principles of the
Canada Health Act is High
3.6 Decreasing Support for User Charges and Private Initiatives
3.7 Committee Commentary

CHAPTER FOUR:

Trends in Health Care Expenditures

4.1 Global Trends – From 1975 to 2000
4.2 Public versus Private Spending
4.3 Categories of Expenditures
4.4 International Comparisons
4.5 Health Care is a Priority in the Provinces
4.6 Committee Commentary

 

CHAPTER FIVE:

Health Status and the Concept of Population Health

5.1 Health Status of Canadians
5.2 How Does Canada Compare to Other Countries?
5.3 Health Care Expenditures and Health Status
5.4 The Concept of Population Health
5.5 What Makes Canadians Healthy or Unhealthy?
5.6 Committee Commentary

CHAPTER SIX:

Myths and Realities

6.1 Myths About Rising Health Care Costs
6.2 Myths About Public Financing
6.3 Myths About the
Canada Health Act
6.4 Myths About Privatization
6.5 Myths About Health Care Utilization
6.6 Myths About the Health Status of the Population
6.7 Myths About the Need for Change
6.8 Myths About Health Care Providers

CONCLUSION

The Next Steps

APPENDIX A - LIST OF WITNESSES


ORDER OF REFERENCE

Extract from the Journals of the Senate of March 1, 2001:

Resuming debate on the motion of the Honourable Senator LeBreton, seconded by the Honourable Senator Kinsella:

That the Standing Senate Committee on Social Affairs, Science and Technology be authorized to examine and report upon the state of the health care system in Canada. In particular, the Committee shall be authorized to examine:

  1. The fundamental principles on which Canada's publicly funded health care system is based;
  2. The historical development of Canada's health care system;
  3. Health care systems in foreign jurisdictions;
  4. The pressures on and constraints of Canada's health care system; and
  5. The role of the federal government in Canada's health care system;

That the papers and evidence received and taken on the subject and the work accomplished during the Second Session of the Thirty-sixth Parliament be referred to the Committee;

That the Committee submit its final report no later than June 30, 2002; and

That the Committee be permitted, notwithstanding usual practices, to deposit any report with the Clerk of the Senate, if the Senate is not then sitting; and that the report be deemed to have been tabled in the Chamber.

After debate,

The question being put on the motion, it was adopted.

ATTEST :

Paul C. Bélisle
Clerk of the Senate


MEMBERSHIP

Standing Senate Committee on Social Affairs, Science and Technology

The Honourable Michael J. L. Kirby, Chair
The Honourable Marjory LeBreton, Deputy Chair

The Honourable Senators :

Catherine S. Callbeck
Erminie J. Cohen
Joan Cook
Jane Marie Cordy
Joyce Fairbairn
Alasdair B. Graham
Janis G. Johnson
Lucie Pépin
Douglas Roche
Brenda Robertson
* Sharon Carstairs (or Fernand Robichaud)
* John Lynch-Staunton (or Noel A. Kinsella)

Original Members agreed to by Motion of the Senate :

The Honourable Senators :

Callbeck, *Carstairs (or Robichaud), Cohen, Cook, Cordy, Graham, Fairbairn, Kirby, Johnson, LeBreton, *Lynch-Staunton (or Kinsella), Pépin, Roche, Robertson

Other Senators who participated in the work of the Committee during the First Session of the Thirty-Seventh Parliament and the Second Session of the Thirty-Sixth Parliament:

The Honourable Senators :

Atkins, Banks, Keon, Losier-Cool, Mahovlich, Meighen, Morin, Murray, Robichaud F. and Wilson

* Ex Officio members


FOREWORD

anada’s publicly-funded health care system has always sparked emotional discussion. Providing a forum that allows for the rational debate of issues affecting the federal government’s role in Canada’s heath care system is therefore a significant challenge. It is with this goal in mind that the Standing Senate Committee on Social Affairs, Science and Technology undertook this study.

This Phase 1 report is the product of our work so far and is the first of five reports. In order to plan for the future, we need to understand how we got to where we are today. This report presents the history of Canada’s publicly funded health care system, what we have learned about what factors affect the health status of Canadians, and presents some of the myths and realities surrounding the health care debate. It is the story so far.

Phase 2 will examine the pressures that will be exerted on Canada’s health care system over the coming years. Phase 3 will describe how other countries have structured their health care systems, including several countries that have universal health care systems that are significantly different from Canada’s. Phase 4 will take the lessons from the first three phases (the past, future pressures, and other countries systems) and will present options for renewal and reform of the federal role in the Canadian health care system. This fourth report will form the basis for a broad discussion and debate with Canadians from all backgrounds and regions of the country. Phase 5 will present the results of this discussion along with the Committee’s recommendations for change.

This first report would not have been possible without the assistance of many people from across Canada. We would like to thank the many witnesses who appeared or sent submissions to enlighten us on the history of publicly-funded health care in Canada, the changing health status of Canadians, the challenges we face now, and what can be done to improve our health care system in the future. Although this report is being tabled in the 37th Parliament, it could not have been written without the dedicated interest and contribution of the members of the Standing Senate Committee on Social Affairs, Science and Technology from the 2nd session of the 36th Parliament, as well as the many Senators who came to listen to witnesses or to replace one of us temporarily. We look forward to continuing our work in a completely non-partisan, consensus-driven atmosphere.

We hope that you will follow and join in the debate. The sustainability of our most prized social program is at stake. We owe it to ourselves to ensure that its future is debated in a rational, objective way.

The Honourable Michael J.L. Kirby The Honourable Marjory LeBreton
Chair Deputy Chair

INTRODUCTION

n December 1999, during the Second Session of the Thirty-Sixth Parliament, the Standing Senate Committee on Social Affairs, Science and Technology received a mandate from the Senate to study the state of the Canadian health care system and to examine the evolving role of the federal government in this area. The Senate renewed the mandate of the Committee in the First Session of the Thirty-Seventh Parliament. The terms of reference adopted by the Senate for the purpose of this study read as follows:

That the Standing Senate Committee on Social Affairs, Science and Technology be authorized to examine and report upon the state of the health care system in Canada. In particular, the Committee shall be authorized to examine:

  1. The fundamental principles on which Canada's publicly funded health care system is based;
  2. The historical development of Canada's health care system;
  3. Publicly funded health care systems in foreign jurisdictions;
  4. The pressures on and constraints of Canada's health care system; and
  5. The role of the federal government in Canada's health care system.(1)

In response to this broad and complex mandate, in March 2001, the Committee re-launched its multi-year and multi-faceted study comprising five major phases. Table 1 provides information on each individual phase and their respective timeframes.

 

TABLE 1

health care study: Individual phases and proposed timeframes

Phases

Content

Timing

Release
Of Report

Phase 1

Historical Background and Overview

Winter/Fall 2000

March 2001

Phase 2

Future Trends, Their Causes and Impact on Health Care Costs

Winter/Spring 2001

June 2001

Phase 3

Models and Practices in Other Countries

Winter/Spring 2001

June 2001

Phase 4

Development of Options Paper

Summer 2001

September 2001

Phase 5

Hearings on Options Paper and Development of Final Report and Recommendations

Fall 2001

March 2002

 

The purpose of this report is to present the evidence obtained in the first phase of the Committee’s study on health care. The objectives of Phase One were to:

In order to meet the objectives of Phase One, the Committee heard from a wide range of witnesses, including former federal and provincial ministers and deputy ministers, health economists, experts in Canadian history, public health administration, public policy and health ethics, officials from Health Canada and the Department of Finance, selected health care organizations, Canadian pollsters and representatives from the Canadian Institute for Health Information. We are most grateful for their invaluable contribution.

For the purposes of our study, we defined health care as any activity the primary objective of which is to improve or maintain the health of individuals or to prevent the deterioration of their health. This definition is very broad and encompasses health promotion, disease prevention, health protection, public health and health research, as well as diagnostic services and treatment of disease. It also includes a wide variety of health care delivery sites (hospital, home, community, clinic, etc.) and a broad range of health care providers (physicians, nurses, nurse practitioners, pharmacists, physiotherapists, caregivers, etc.).

Our definition of health care contrasts with the narrow range of health services covered under the Canada Health Act, which is limited to hospitals and physician services. Moreover, the shift away from institutional care towards more home care and community care has meant that, increasingly, many important health services are not covered by the Act.

We feel that these two concepts – the broad concept of health care and the narrow application of the Canada Health Act – must be put into perspective as solutions for reforming Canada’s publicly funded health care system, which is currently centred around the Canada Health Act, may lie in adopting a broader vision of health and health care.

This report consists of six chapters. Chapter One provides historical information about public health care insurance in Canada and about the federal government’s involvement in health care funding. Chapter Two traces the evolution of nation-wide principles in the Canadian health care system and their implementation and administration by the federal government. Chapter Three discusses past and present public attitudes towards, and public expectations of, the health care system. Chapter Four briefly reviews previous and current trends in health care spending, with comparative data from Canada and other OECD countries. Chapter Five provides information on the health status of Canadians and explains the concepts of "health determinants" and "population health". Chapter Six discusses myths and realities in an attempt to clarify many of the misconceptions in order to ensure an informed, fact-based debate on health care.


CHAPTER ONE:

Historical Background on Public Health Care Insurance and the Role of the Federal Government in Financing Health Care

The history of public health care insurance in Canada is a vast, complex and long-standing subject of study. The federal government’s role in the context of health care, particularly in terms of financing mechanisms, has changed substantially over the years.(2)

The delivery and means of financing health services on a universal basis has been a long-standing subject of study. It was the subject of several commissions in the 1930s and 1940s.

Abby Hoffman, Senior Policy Advisor, Health Canada (13:1).

 

1.1 Federal Role in Health and Health Care

During the Committee’s hearings, a few witnesses gave an overview of the basis for the federal role in health and health care. The following is a summary of their observations.

Under the Constitution, the provinces are responsible for delivering health care to the majority of Canadians, but the federal government also has a number of roles and responsibilities in areas that affect health and health care. The first, and most direct, is ensuring access to health care to specific groups of people, including primary care to First Nations and Inuit communities, and other services to the RCMP, Correctional Services, the Armed Forces and veterans.

While provincial governments have primary responsibility for health care delivery, the field of health is not assigned exclusively to either order of government. There are very well-established and well-developed mechanisms for intergovernmental collaboration in health.

Abby Hoffman,
Senior Policy Advisor, Health Canada (13:5).

The second area of responsibility falls under the broad category of health protection. For example, Health Canada regulates the safety and efficacy of pharmaceuticals and medical devices; the Department of Fisheries and Oceans monitors the safety of the fish and seafood we buy; and Environment Canada watches over our land, air and water quality.

The third federal role in health encompasses health promotion, disease prevention and education strategies. These strategies focus on educating, informing and encouraging individuals to take an active part in enhancing their own health and well-being.

We currently describe the federal mission in health as being that of helping the people of Canada to maintain and improve their health. We do that through work in three broad areas. One pertains to national health policy and systems, including in particular our publicly funded health care system. The second area pertains to our work in the fields of health promotion and protection, including disease, illness, and injury prevention. The third area pertains to our particular roles with respect to the health and health care services of First Nations and Inuit.

Abby Hoffman,
Senior Policy Advisor,Health Canada (13:5).

 

The fourth area of federal involvement is in health research. For 40 years, the federal government provided significant funds to health research through the Medical Research Council (MRC). In 1999, this role was expanded through the creation of the Canadian Institutes of Health Research (CIHR) as MRC’s replacement. CIHR is the major federal agency responsible for funding health research in Canada.

The fifth, and perhaps most important, area of federal responsibility is financial support of provincial health care systems. Professor Keith Banting, Director of the School of Policy Studies at Queen’s University (Kingston, Ontario), told the Committee that federal involvement in health care delivered by the provinces stems mainly from its constitutional "spending power":

The spending power in our Constitution is assumed to lie with the federal government – to make payments to individuals, to institutions, or to provincial governments, and to make payments even in areas of policy that it does not have the constitutional authority to legislate on or regulate. (…) This authority is not written formally into the Constitution but has been inferred constitutionally from a number of other jurisdictions. This power was core to the development of the welfare state in this country and core to the development of health policy. (3)

Under its spending power, the federal government can spend money that it has raised through taxation or otherwise and set conditions on the disposition of funds. The Committee was told that the federal spending power is the basis for transferring funds to the provinces to be used for health care, and for administering and enforcing the Canada Health Act. As we will see below, the federal government’s role in financially supporting provincial health care delivery is important and has a long history.

 

1.2 Cost-Sharing Arrangements

Canada’s publicly funded health care system – or "Medicare" as it is usually called – has evolved into its present form over five decades. Prior to the late 1940s, private medicine and private insurance dominated health care in Canada, and access to care depended on one’s ability to pay.

Tom Kent, a former federal deputy minister and senior policy advisor to Lester B. Pearson, explained that the underlying objective of federal health care policy was essentially to ensure timely access to necessary health services without undue financial impediment:

The number of Canadians who knew life before Medicare will very soon be, if it is not already, a minority. Of course, how life was before was the essential reason Medicare developed. As you all know, before that, treatment could be a financial disaster even for well-to-do people, and many poorer people just did not get care when it was needed. The aim of public policy was quite clearly and simply to change that situation to make sure that people could get care when it was needed without regard to other considerations.(4)

The trend toward universal, publicly financed health care insurance began in 1947 when the province of Saskatchewan introduced a public and universal insurance plan for hospital services. Then, in 1957, the federal government introduced the Hospital Insurance and Diagnostic Services Act in order to encourage the development of hospital insurance plans in all provinces. Through the provisions of the Act, the federal government offered to share the costs of eligible hospital and diagnostic services with the provinces on a roughly 50-50 basis(5). As a condition for receiving federal money, the provinces agreed to make insured services available to all their residents, under uniform terms and conditions. By 1961, all provinces had signed agreements establishing public insurance plans that provided universal coverage for in-patient hospital care.

In 1962, Saskatchewan once again led the way by extending public health care insurance to physician services provided outside of hospitals. In 1964, the Royal Commission on Health Services, chaired by the Hon. Justice Emmett Hall, recommended that the federal government establish a public medical care insurance plan similar to that available to residents of Saskatchewan. In response to the report of the Hall Commission, the federal government introduced in 1966 the Medical Care Act, under which it paid approximately half the costs of eligible physician services(6). To qualify for federal funding, provincial medical insurance plans were required to satisfy four conditions relating to: public administration, portability, universality and comprehensiveness. By 1972, all provinces had extended their health care insurance plans to include physician services.

In 1964, the Royal Commission on Health Services reviewed the health system and recommended that the federal government also enter into agreements with the provinces to share the costs of comprehensive, universal medical care for their residents, sustaining the view that pre-paid access to medically necessary physician care for all Canadians was equitable, cost-effective and socially responsible.

Abby Hoffman,
Senior Policy Advisor, Health Canada, (13:10).

 

Also in 1966, the federal government introduced the Canada Assistance Plan (CAP). While the main purpose of this federal-provincial program was to cost-share comprehensive welfare services, it also covered the costs of certain health services required by welfare recipients but not funded through Medicare or supplementary provincial health care insurance plans including mainly prescription drugs, as well as dental and vision care.

During our hearings, witnesses identified a number of disadvantages associated with the cost-sharing arrangements under both the Hospital Insurance and Diagnostic Services Act and the Medical Care Act:

The Hon. Marc Lalonde, a former federal Minister of Health and Minister of Finance, stated that since federal transfers to provinces were tied to provincial health care spending initiatives, shared-cost programs were proving to be expensive for the federal government, and these costs were unpredictable:

As for the federal government (…), [w]e were stuck with paying 50 per cent of what the provinces wanted to spend in the areas covered, without having any say at all on the allocation of funding by the provincial governments. There was at the time a great desire for predictability of the federal government’s obligations.(7)

Tom Kent, who is regarded by some as the father of Canadian Medicare, explained that these cost-sharing arrangements were both cumbersome to administer and perceived as an intrusion into an area of provincial jurisdiction:

Until then, provinces had come forward to present detailed reports on their programming, and federal officials had to make decisions about whether this particular program – for example, a particular home for the elderly – fell inside or outside the terms of the shared-cost program. Many detailed decisions were being made in Ottawa, which, in effect, was a deeper intervention and deeper administrative control over provincial jurisdiction.

Keith Banting
Queen’s University ( 9:64).

(…) how were 50 per cent of the costs reckoned? Hospital insurance had been based on provinces signing agreements that required them to give quite detailed undertakings and be involved in a good deal of federal vetting of what they did. There were objections of principle to that as an intrusion of jurisdiction and a distortion of provincial priorities. Certainly, also very important to both provincial and federal governments, it was very tiresome to administer.(8)

Mr. Lalonde also indicated that the provinces were concerned that funding under the federal legislation was inflexible because it was limited to hospital and physician services. In his view, this generated distortion in the allocation of health care resources and discouraged innovation:

(…) the system in place discouraged innovation and concentrated resources in the most costly areas, namely health, hospital insurance and medical insurance. (...) Over time, we realized that this concept of health care was rather narrow and that there was a less costly alternative to hospitalization for a good many types of treatment. Unfortunately, this alternative was not eligible for cost sharing with the federal government. (…) [For example] the Government of Quebec wanted to set up local community service centres to take the overflow from the hospitals, promote less specialized services and improve accessibility. It however found itself in a situation where it was forced to absorb 100 per cent of the costs.(9)

In 1977-78, the 50-50 federal provincial cost-sharing arrangements were replaced by the Established Programs Financing (EPF), a block funding transfer mechanism that combined federal transfers for hospital services and medical care with transfers for post-secondary education. The same year, the federal government also implemented the Extended Health Care Services Program (EHCSP) to provide financial assistance to provinces for ambulatory care, nursing home intermediate care, adult residential care and home care. Transfers under the EHCSP were tied to the EPF block fund.

The new system, called block funding, said that the federal government would make a general contribution to the provinces to cover health and post-secondary education. There would no longer be an exact fit between expenditures and transfers – that is, the federal government would make a general transfer that would not be based on what the provinces were spending but would grow over time with the rate of growth in the economy. The amount transferred would be unrelated to how much the province had actually spent.

Keith Banting
Queen’s University (9:64).

 

1.3 Functioning of the EPF Block Funding

Under the EPF, each province received an equal per capita transfer for health care and post-secondary education. About 70% of all EPF transfers were notionally earmarked for the "health care" component, while the remaining 30% were notionally tied to the "education" component. This breakdown was arbitrary, because EPF was a "block" funding mechanism. Unlike shared-cost programs, EPF transfers were not linked to the provinces’ own expenditures on health care and post-secondary education. Furthermore, these percentages did not necessarily reflect equal apportionment at the provincial level, since provinces were able to use EPF transfers according to their own priorities.

EPF entitlements comprised two components, a tax transfer and a cash transfer. Under the tax transfer, the federal government ceded a certain tax room to the provinces through the transfer of tax points. To do this, it reduced its tax rates while the provinces increased their rates by an equivalent amount. This procedure resulted in a reallocation of revenue between the two levels of government: federal revenue was reduced by an amount equivalent to the increase in the provincial governments’ revenues. The fiscal burden on taxpayers remained the same because, although they paid more provincial tax, they paid less federal tax(10). The cash transfer, which was a payment made periodically by cheque, matched the difference between the total EPF entitlement of each province and the value of the tax transfer.

Originally, the basic payment under EPF was calculated on an initial per capita amount, determined in 1975-76, which was then adjusted each year, according to an escalator that reflected the rate of growth in the gross domestic product (GDP)(11) per capita(12). To determine the total value of a province’s EPF entitlement, the initial per capita amount was multiplied by the escalator and then by the population of that province.

In an effort to reduce the federal deficit, the escalator was modified on several occasions. In 1983-84 and 1984-85, the escalator associated with the education portion of EPF was capped at 6% and 5% respectively (if the formula based on the growth in the GDP per capita had been used, the education component of EPF would have increased by 9% in 1983-84 and by 8% in 1984-85). For all other years, the escalator for post-secondary education was the same as for health care.

From 1986-87 to 1989-90, the escalator used to calculate total EPF entitlements was reduced by 2%. After this period, and until 1994-95, per capita transfers were frozen at their 1989-90 levels, so that increases in transfer payments hinged on population growth in each province (about 1%). For 1995-96, the escalator was decreased by 3% and the result was a negative escalator (almost -1.0%, according to the Federal-Provincial Relations Division of the Department of Finance); this meant a decrease in per capita transfers, given the fact that GDP growth was less than 3%.

Graph 1.1 depicts total EPF entitlements for health care in both current and constant dollars. Expressed in current (nominal) dollars, total EPF transfer payments for health care increased continually, although the growth rate slowed down considerably in the late 1980s. When adjusted for inflation and converted into constant (1992) dollars, however, EPF entitlements for health care began to decline in 1989-90. Because of its deficit and its desire to reduce expenditures, in the late 1980s and early 1990s the federal government gradually levelled off its real contribution to health care to the provinces.

In order to obtain an idea of the magnitude in the reduction of federal funding, we asked the Library of Parliament to estimate the shortfall in provincial revenues due to the constraints on the growth of EPF transfers for health care. Two different ways of computing these losses were used. The first computation results in an estimate of the difference between actual EPF entitlements and the theoretically possible value of federal transfers to provinces if no changes had ever been made in EPF. The second computation is of a different nature as it compares the legislated changes to the EPF formula from one period to the next one. It yields the difference between actual EPF entitlements for health care and the level of transfers the provinces would have otherwise received if we assume that the formula used in the preceding period had been maintained. The results of these calculations are provided in Table 1.1. While these numbers should be used with caution, it is clear that the provinces incurred continual losses in federal transfers for health care between 1986-87 and 1995-96.

GRAPH 1.1

Some witnesses suggested that, while this might not have been the initial intent of EPF, block funding allowed the federal government to cut its financial commitment to health care. For instance, the Hon. Marc Lalonde commented:

I wish to emphasize that the intent at the time was not to reduce the federal contribution to the services already covered, but it is obvious that subsequent events proved that it was perhaps easier for the federal government to do this under the 1977 program than previously. (13)

TABLE 1.1

ESTIMATED SHORTFALLS IN PROVINCIAL REVENUES DUE TO CONSTRAINTS ON THE GROWTH OF EPF TRANSFERS FOR HEALTH CARE

 

Results of First Computation
(in dollars)

Results of Second Computation
(in dollars)

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

226,309,946

486,176,584

779,908,361

1,119,885,311

2,235,404,086

3,091,649,580

3,516,854,362

3,688,879,572

3,935,164,742

4,533,434,766

226,309,946

486,176,584

779,908,361

1,119,885,311

1,923,289,637

2,428,407,569

2,485,271,924

2,287,699,962

2,152,824,719

2,270,889,679

TOTAL

23,613,667,310

16,160,663,692

Source: Department of Finance and Library of Parliament.

 This, however, was detrimental to the federal government’s visibility in the field of health care:

It was obviously more difficult to evaluate the specific federal contribution to each program since you had payments covering a group of programs and since there was no specific allocation, contrary to what had previously been the case (…). Without a doubt this brought a certain reduction of the political visibility of the federal government’s contribution.(14)

Graph 1.2 shows the diverging paths of transfers in the form of cash and tax points resulting from the limits to the overall rate of growth in EPF entitlements. While the cash transfers for health care declined continually between 1986-87 and 1995-96, the value of the tax transfers increased in real terms in the first half of the 1990s. It became clear that, over the medium term, constraints on the growth rate of EPF entitlements for health care would have caused the cash transfers to some provinces to come to an end. The distinction between cash and tax transfers is discussed in more detail in section 1.5 below.

 GRAPH 1.2

 

1.4 The CHST

In the Budget Speech of February 1995, the federal government announced its intention to merge the EPF with the CAP into a new block funding mechanism called the Canada Health and Social Transfer (CHST) that would cover transfers for health care, post-secondary education and social assistance. The CHST legislation was implemented for the 1996-97 fiscal year with the coming into force of Bill C-76. Since then, the Federal-Provincial Fiscal Arrangements Act, which now governs the CHST, has been modified on five different occasions by the following pieces of legislation: Bill C-31 (1996), Bill C-28 (1998), Bill C-71 (1999), Bill C-32 (2000) and Bill C-45 (2000). Table 1.2 provides the details of the various legislative steps for the CHST.

 

TABLE 1.2

A Brief History of the CHST

1995

Budget announced that, starting in 1996-97, EPF and CAP programs would be replaced by CHST block fund. Meanwhile, for 1995-96 (Bill C-76):

  • EPF growth set at GDP growth minus 3 percent.
  • CAP frozen at 1994-95 levels for all provinces.
  • CHST entitlements set at $26.9 billion for 1996-97 and $25.1 billion for 1997-98.
  • CHST entitlements for 1996-97 to be allocated among provinces in the same proportion as combined EPF and CAP entitlements for 1995-96.
  • CHST cash transfer to be obtained residually by subtracting the value of the tax transfer from the total CHST entitlement.
1996

Budget announced a five-year CHST funding arrangement covering the years 1998-99 to 2002-03 (Bill C-31):

  • For 1996-97 and 1997-98, CHST entitlements maintained at $26.9 and $25.1 billion respectively. Then, for 1998-99 and 1999-00, CHST entitlements fixed at $25.1 billion. For each subsequent fiscal year, through 2002-03, total CHST entitlements set to increase according to an escalator equal to the average GDP growth for the three preceding years, less a predetermined coefficient (2% in 2000-01, 1.5% in 2001-02 and 1% in 2002-03).
  • Guaranteed cash floor of at least $11 billion per year.
  • A new allocation formula introduced to reflect differences in provincial population growth and to narrow existing funding disparities, moving half-way to equal per capita entitlements by 2002-03.
1998 Legislation passed putting in place a $12.5 billion cash floor under the CHST for the years from 1997-98 to 2002-03 (Bill C-28). As a result, total CHST entitlements varied directly with the value of tax points, and CHST cash transfer no longer determined residually.

1999

 

 

 

 

 

Budget announced increased CHST funding of $11.5 billion over 5 years, and this amount was earmarked specifically for health care (Bill C-71):

  • $8 billion provided through increases to the CHST and $3.5 billion provided through a CHST supplement to give provinces and territories the flexibility to draw down funds over three years as they see fit. One-time cash supplement to be allocated to the provinces on an equal per capita basis.
  • The cash floor provision was abolished as the amended legislation provided a level of cash transfer over and above the $12.5 billion limit. Similarly, the escalator used to calculate growth in total CHST entitlements was eliminated since the total entitlement was no more fixed in legislation but varied directly with the cash transfer.
  • Changes to the provincial allocation formula accelerated the move to equal per capita CHST by 2001-02.
  • CHST legislation extended program to 2003-04.
2000 Budget announced a $2.5 billion increase for the CHST to help provinces and territories fund both post-secondary education and health care (Bill C-32). These funds were paid into a CHST Supplement Fund and allocated on an equal per capita basis. Provinces can draw down their respective share at any time over the course of four years (2000-01 to 2003-04).
2000 The CHST legislation was extended by one year to 2005-06 and the total CHST entitlement was increased by $21.1 billion over a five year period (Bill C-45). The enriched cash transfer is to cover all the three fields supported by the CHST, including early child development, and be allocated to the provinces on an equal per capita basis.

Source: Department of Finance (http://www.fin.gc.ca/fedprove/hise.html) and Library of Parliament.

 

The structure of the CHST is similar to that of the EPF, as the federal transfer of funds involves both cash and tax transfers. Unlike EPF, however, the CHST included a cash floor provision. The cash floor, which was initially set at $11 billion and then increased to $12.5 billion in 1997-98, was established to make sure that the growth in the value of tax points would not erode the cash transfer(15). Many witnesses pointed out that, by bringing in the CHST, the federal government has prevented the erosion of its power to ensure that the provinces comply with the Canada Health Act.

The CHST legislation sets out the manner in which the total entitlement is to be allocated among the provinces. Initially, provincial entitlements were not calculated on a per capita basis. Under Bill C-76 (1995), the allocation for fiscal year 1996-97 was based solely on each province's share of the transfers received under the CAP in 1994-95 and under EPF in 1995-96. Then, under Bill C-31 (1996), each province's CHST entitlement for 1997-98 was based on the transfers received under the earlier programs and on the ratio between each province's cumulative population growth and Canada's. From 1998-99 to 2002-03, the allocation formula was to be similar to the one used in 1997-98, but took into account each province's proportion of the country’s population, and a weighting coefficient was used in the calculation. This change to the formula was aimed at reducing discrepancies among provinces in the value of per capita transfers but without making equal per capita allocations.(16)

With the enactment of Bill C-71 in 1999, the method of allocating the CHST transfer to the provinces was modified once again. Under the new method, the provincial distribution focuses less on the initial provincial share (based on the former EPF and CAP) and more on the province’s demographic weight. As a result, the CHST transfer is moving gradually towards an identical per capita distribution among the provinces. In fact, it is expected that all provinces will receive an equal CHST per capita entitlement by 2001-02.

Equal per capita entitlements are to be achieved on a cash and tax basis, not cash alone. The federal cash contribution, per capita, will still vary from province to province. All equalization-receiving provinces obtain, as in the past, a per capita CHST cash contribution that is higher than the all-province average. This is due to the fact that they need more federal cash, per capita, to bring their entitlements to the national average(17). By contrast, richer provinces will receive more of their federal support from the tax points and less from cash transfers.

Consequently, if the CHST cash component were to be allocated on an equal per capita basis, the total per capita entitlements would be higher for provinces with higher income than for those with lower income because tax points have a higher value in higher income provinces. In the federal government’s opinion, equal per capita entitlements ensure that all provinces receive equitable federal support regardless of differences in provincial governments’ revenues and economic growth rates.(18)

As Graph 1.3 shows, important reductions in federal transfers to provinces were implemented when Bill C-76 (1995) created the CHST. From 1995-96 to 1996-97, the total CHST entitlement (expressed in current dollars) decreased by $3.0 billion or 10%. During the same period, the cash transfer declined even more steeply, by some $3.7 billion or 20%. In the following year, the overall CHST entitlement was reduced again by $1.1 billion (or 5%), while the cash transfer decreased by $2.2 billion (or 15%). The changes legislated by Bill C-28 (1998) and Bill C-71 (1999) reversed the downward trends in both the total CHST entitlement and its cash component.

Clearly, as we all know, the CHST represented a cut in cash transfers at a time of broad cutbacks in federal spending to address the deficit situation. However, the value to the provinces of the tax point portion of the CHST continued to grow as the economy grew.

Abby Hoffman,
Senior Policy Advisor, Health Canada (13:9).

 

GRAPH 1.3

Bill C-32 (2000) and Bill C-45 (2000) together led to substantial growth in both the total CHST entitlement and the CHST cash transfer. Bill C-32 established a CHST supplement fund of $2.5 billion to be allocated to provinces on an equal per capita basis. Bill C-45 was enacted in response to the federal-provincial health accord reached on September 11, 2000, following a First Ministers’ Meeting; it provides additional federal investment of $21.1 billion in CHST cash transfers. The health accord also resulted in a further $2.3 billion in federal targeted funding to help the provinces meet health care challenges in three specific areas: acquisition of medical equipment ($1 billion), health information technology ($0.5 billion) and primary care reform ($0.8 billion).

Total CHST entitlement, expressed in current dollars, is expected to reach a new high of close to $31 billion in 2000-01, slightly above its position prior to the 1996-97 reduction. The CHST cash transfer will match its peak level in 2002-03. However, when converted into constant (1993-94) dollars, the total CHST entitlement will surpass the 1995-96 level only in 2002-03, while the CHST cash transfer will never achieve its peak level of 1993-94. Meanwhile, the value of the CHST tax transfer is constantly growing: from 1997-98 to 2000-01, a higher proportion of the CHST was provided in the form of tax transfers.

Although the federal government introduced measures to halt cuts in CHST transfer payments and to ensure growth in transfers (namely through bills C-28, C-71, C-32 and C-45), it failed, according to the provinces, to restore the cash portion to previous levels. On a number of occasions, provincial governments called on the federal government to restore the CHST cash transfer to the 1994-95 levels and to include an escalator to ensure appropriate growth in the CHST. In their view, this would be a major step toward stabilizing and sustaining Canada’s health care system.(19)

 

1.5 Tax Points versus Cash Transfers

The federal government and the provinces do not agree on what constitutes the federal contribution to health care because they hold different views on the tax transfer. The federal government believes that cash and tax transfers should be regarded as the same in that both represent a cost to the federal treasury and both contribute to provincial revenues. Therefore, the federal government includes the tax component in the calculation of the overall CHST entitlement.

The provinces, however, do not consider it legitimate to count the value of tax points as part of the CHST transfer. They maintain that the tax points constitute a one-time permanent transfer that occurred 23 years ago and that they are now firmly embedded in the provincial tax room. Moreover, they contend that over the past two decades the federal government has more than recaptured the tax room it ceded to the provinces in 1977. In the view of the provinces:

(…) the federal practice of including the tax component has – particularly in recent years – had the effect of making the CHST transfer appear larger than it actually is, and making the CHST cuts appear smaller. (20)

During our hearings, witnesses expressed different views on the tax transfer. In her statement to the Committee, the Hon. Monique Bégin suggested that tax points should be entirely removed from CHST calculations and that only cash should be transferred to the provinces. In her view, this approach would both preserve the federal government’s role in establishing and maintaining national principles and enable the provincial governments to rely on a steady contribution. This suggestion could be implemented only if the federal government agreed to forego the cost it incurred when it initially transferred tax points to the provinces.

I would just take the tax points out of the way. I think it poisons the whole thing and does not help at all. If it was bad politics, so be it. It was bad politics, but I still believe firmly that it was the only thing they could do at the time. Perhaps they should have given fewer tax points and more cash.

Hon. Monique Bégin (16:8).

 

By contrast, the Hon. Marc Lalonde held the view that the tax transfer was and still is a valid federal contribution:

I also believe that contribution in tax points should not just be written off on the basis of, "It is gone, so it is gone." It is something that the federal government, at a certain stage, has said we will withdraw. That contribution, in my view, is still there. There is a way of evaluating it, certainly in terms of the contribution of the federal Parliament to provincial programs in the field of health or in the general field of the services covered now with the new system, which includes post-secondary education and health and welfare. (21)

Mr. Lalonde also told the Committee that the tax transfer was, and remains, a reasonable compromise in terms of the federal involvement in an area of primarily provincial jurisdiction. Also, in 1977, it appeared to be the only way to reach an agreement with all provinces:

Fundamentally, it was a political settlement with the provinces. We bought our peace at a certain cost, no doubt. (…) provinces generally felt that the federal government was spending money in what were recognized as provincial matters or provincial jurisdictions. We argued that, indeed, we were using the constitutional spending power that we had. It was clear that these programs would be in operation, we assumed, for a long time. Some provinces had tax points that brought in more money than others, and the provincial governments were insisting that they would feel much more reassured that they were not at the whim of the federal government if at least part of the transfer was in the form of tax points.(22)

Overall, there is no one answer to the whole question of how to account for tax points. Keith Banting suggested that both the perspective of the federal government and the views of the provinces are right:

There is no single answer to the question as to what is the federal contribution to health care. The provinces have taken the view that the transferred tax points are simply part of the tax base of the provinces and that the federal contribution is therefore the cash contribution. The federal government says that, no, its contribution is both the cash transfer and the value of the tax points transferred in 1977, as escalated by growth in the economy. As a consequence, there are two answers to the question regarding the federal contribution to health care. Both the provinces and the federal government are right. They both define the system differently and, in their terms, they are both correct.(23)

 

1.6 The Federal Contribution to Health Care

What is, then, the federal contribution to health care? Under the 1957 and 1966 cost-sharing arrangements, the federal share corresponded to approximately 50% of the eligible hospital and physician services covered under provincial health care insurance plans. It did not correspond to 50% of all public health care costs incurred in the provinces.

When EPF was implemented, a notional portion of the transfer payments was attributed to health care. Under the CHST, however, there is no specific allocation for health care, not even a notional one. Therefore, it is not possible to determine exactly how much the federal government spends on health care.

Health Canada provided an estimate of the federal contribution to health care, calculated on the basis of the same notional apportioning among health care, post-secondary education and social assistance as existed in the pre-CHST days under the combined effects of EPF and CAP. This estimate was used to calculate the federal share of provincial government spending on health care.

I wish to say that it is difficult (…) to determine exactly how much the federal government spends on health because of the flexibility under the CHST. When one calculates federal contributions to health using the same notional apportioning among health, post-secondary education and social security as existed in the pre-CHST days under the combined effects of EPF and CAP, the federal government is contributing $1 out of every $3 spent on health by public authorities in Canada. That is a subject of debate at the moment, but it is undeniable that it is a one-in-three share of public spending.

 

Abby Hoffman,
Senior Policy Advisor, Health Canada (13:10).

 

This information was used to construct Graph 1.4, which depicts the evolution of public health care spending by source of financing from 1977-78 to 2003-04. These data, as reported by Health Canada, show that spending on health care from provincial funds in 1999-00 is expected to amount to 65% of total health care expenditures by the public sector. Thus, the federal share for that year is approximately 35%. If tax points are not included as part of the federal contribution, then the proportion of health care spending by provincial governments totals some 82%, while the federal share is 18%.

Health Canada’s data also indicate that the provincial governments’ share of public health care expenditures has been increasing steadily since the late 1970s, irrespective of the method of calculation used. Concurrently, the estimated federal share has been declining since then. The value of tax transfers and federal direct funds(24) are increasing slightly, but the cash transfer share is largely decreasing. This downward trend could be reversed, however, with the additional federal investment in health care provided in Bill C-45 (2000).

GRAPH 1.4

 

1.7 The Need for Stability in Federal Funding

According to Tom Kent, subsequent federal governments have, over the years, played a major role in diminishing the federal commitment to health care by restraining the growth or reducing transfer payments to provinces. He stated that federal funding for the purpose of health care should be committed in relation to provincial costs and that stable federal financing would insure uniformity and consistency of provincial health care insurance plans:

As yet, the main attack on Medicare has not come from "two-tierdom," from Mr. Klein or from anyone else. It has come over a good many years from federal governments. Medicare was not built on principles for the provinces alone. It was also built on federal principles, and the crucial federal principle was its commitment to share in the costs of the provinces. That commitment has been increasingly dishonoured ever since 1977, and in 1995 it was completely tossed aside. In 1977, as you know, the form of financing was switched in part to a transfer of taxes instead of a cash transfer. That had its merits, but at the same time the opportunity was taken to de-couple the total from provincial health costs and relate it instead to the GNP. Subsequently, by unilateral federal decisions, that relation was increasingly diminished, and finally, with the CHST, the Canada Health and Social Transfer, all vestige of a formula was removed. The transfer became an arbitrary sum determined entirely according to federal financial and political convention. Political pressure has since led to some restoration of the original cuts, but there has been no restoration of the principle of federal commitment. (…)

For better or worse, delivering health care is provincial business. There will be collaboration and there can be national consistency if there is federal financial help. However, what is significant is not so much the amount of that help but that, if there is to be the planning of efficient, comprehensive health care, it must be based on an assurance of financing. Part of that financing must be federal if we are to have consistent national programs, and it is important that that federal share be committed in relation to provincial costs. (25)

In my province, I have seen radical and arbitrary cost cutting, and decisions have been taken that were purely looking at the short term. The Minister of Finance wanted to have a smaller deficit next year, and that was it. We ended up with the early retirement of nurses in Quebec. We made them an offer that they could not refuse. Next thing we knew, we were short of nurses. We are rehiring those willing to come back and paying them hefty remuneration. We are in a situation now where we are even sending people to the United States to be treated at public expense. Surely, this could have been foreseen. Surely, we know what the needs of the population will be over the next few years. It is mind boggling to see situations like this, and it is totally unacceptable. I can understand why there is such an outcry amongst the people in Canada about the current situation and the tendency to say, "A plague on both your governments' houses. It is your job to fix it; get going."

I hope that there will arise out of your deliberations a recommendation that the federal government at least look at providing a stable base of financing over the next decade.

Hon. Marc Lalonde (15 :23-24).

 

Most witnesses agreed on the necessity for stable and predictable federal transfers. However, Guillaume Bissonnette, General Director of the Federal-Provincial Relations and Social Policy Branch, Finance Canada, told the Committee that the concept of stability of funding should be balanced with the notions of adequacy, affordability and sustainability:

(..) we are trying to balance a number of competing notions. We obviously want to take into account the notion of affordability, which is important. We also want to take into account the notion of adequacy – which, in a sense, is the flip side. How much is adequate? As well, we want to take into account a notion that is talked about frequently on the environmental side, but which I think applies here, too, and that is the concept of sustainability over time and the notion of stability.

Of course, there are conflicts between all those pairs of concepts. You cannot make commitments about a stability. They are so strong that when the world changes – and nobody can control what happens in the world - you find that your commitments are no longer sustainable. You do not want to make commitments, for example, about adequacy and then find that those commitments are not affordable – not just by one order of government but by both orders of government.

Thus, in a sense, we are trying to balance all of these notions. Presumably, we are also trying to balance the fact that there are other spending priorities that are also meritorious. Health is important for the future of the country, but so are post-secondary education, research and innovation. They are viewed as key to the development of our country. (26)

During the Committee’s hearings, there was no agreement on the mechanism through which more federal transfers for health care and social programs should be provided. Ms. Bégin, for example, suggested that there should be a specific program for home care and primary care. In her view, this should be done under a new piece of legislation which would parallel the Canada Health Act. (27)

By contrast, Tom Kent indicated that separate financial support would not be conducive to an integrated, efficient and coordinated system of health care delivery:

I groan, frankly, when I hear talk, in federal circles in particular, of separate financial support for home care or Pharmacare or whatever is the hot button. That would make a political splash, but that sort of division of the total health care service would be disastrous. Health care of high quality can be efficiently delivered according to need, but only if there is coordinated management in the community of the comprehensive services – the components of the whole health care system. Separate bags of money are certainly not the way to reform health care.(28)

The Hon. Claude Castonguay, a former Quebec health minister in the 1960s, also known as the father of Medicare in that province, believes that the federal government should not designate more funds to specific programs of primary care and home care, but should provide flexible funding that would let provinces allocate money according to their own needs and priorities:

The federal government has proposed to increase the level of its financing through the establishment of a national program of primary care and home care. The provinces find this proposal inappropriate while they are struggling with their existing plans. They know what has to be done and that what they need most is additional funds. Instead of its proposed plan, the federal government could play a much more useful role by bringing to the provinces transitional financial help. The objective would be to give the provinces some room or margin to allow them to develop new approaches and to introduce changes in their plans capable of improving the situation in a durable way. In the middle of the sixties, the federal government created a health resources fund to enable all the provinces to have the human resources and the equipment necessary for the introduction of Medicare. Using that successful initiative as a model, the federal government could create a health transition fund to help the provinces make the necessary changes to their respective plans. The setting up of such a fund, to which it could allocate at least the funds intended for the national primary and home care programs, would give the federal government an essential role fully compatible with its responsibility with respect to health services and the visibility it is seeking in this field. Contrary to a primary and home care national program, this approach had the advantage of not pressuring the provinces into increasing in a permanent way the level of their health expenditures when they are not in a position to finance adequately their existing plans.(29)

 

1.8 Accountability in the Use of Federal Health Care Dollars

The issue of accountability surfaced on a number of occasions during the hearings. The Committee was told that the notion of accountability for federal dollars has evolved enormously over the years:

(…) there has been an evolution in the notion of accountability. There has been a long, steady evolution away from tracing dollars and tracing inputs to broader, more modern definitions of accountability that have to do with measuring results.

One could look back at the history of these transfers, since the Second World War. In fact, there has been a constant search for an accountability link with the dollars being spent. If one looks at that evolution, one sees that, in the 1940s, we started with accountability, meaning that the federal government would actually inspect provincial hospitals to find out whether they met certain standards.

In the 1950s, we moved to a slightly more flexible form of accountability, that is, cost-sharing, where we agreed that we would cost-share a certain well-defined basket of doctor services and hospital services.

With the advent of EPF, we moved, yet again, to another notion of accountability, which was less concerned with the use of inputs and the matching of inputs. It was a form of accountability that basically gave a block fund, had some general principles, and then counted upon the provinces to use the money in a way that respected those general principles.

If we carry the evolution of this practice of accountability right up to the social union framework agreement, we are now seeing accountability being defined much more in terms of results achieved and in terms of outcomes.

In a sense, there has been a shift away from inputs to outputs to broader results. There has been a shift, as well, in the doctrine of accountability and what we mean by accountability. (30)

It is clear that the concept of accountability has changed dramatically over the last forty years or so. The recent shift from evaluating inputs to estimating outcomes is of particular importance. For most of the last century, Medicare was evaluated on the basis of inputs. While we know how public health care funding has been allocated among physicians, institutions, hospital beds and so on, it is astonishing how little we know about how effectively the money has been used. We need to start measuring the quality of the health care system by its outputs, not its inputs. This is essential if we are to know how to spend government funds more wisely.

To do this, we need better information. With better information, governments will be able to make more informed decisions about the management, delivery and financing of health care.

Better information will also ensure that governments are accountable to Canadians for the way in which they spend health care dollars. In Phase Two of its study, the Committee will examine the issues related to health information, including evidence-based and outcome-based decision-making and the potential role of the federal government in this area.


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