Hold the Applause: Why Provincial Restraint on Healthcare Spending Might Not Last

32 Pages Posted: 19 Aug 2016

Date Written: August 9, 2016

Abstract

Provincial government health spending has entered a new era of restraint – the second such era in Canada’s history. However, it is not clear that publicly funded health systems have achieved lasting efficiency gains by “bending the healthcare cost curve.” After all, we have seen a similar narrative before: in the mid-1990s, there were four years of declining per person health spending that were followed by a lengthy period of rapid growth. Are we likely to see a repeat of the past – in other words, are we witnessing a temporary pause on the upward trajectory of health spending – or have permanent, lasting changes to health spending growth taken root? This Commentary compares the two major periods of restraint in Canadian healthcare spending and finds that, after controlling for broader economic and fiscal variables – such as provincial GDP and federal transfers – as well as physician supply growth and population aging, there is no clear evidence that a lasting period of health spending restraint is underway. There are a number of reasons to speculate that the current period of cost restraint may be temporary, such as the inability of provinces to maintain relatively large decreases in capital spending, rising cost pressures from “nichebusting” drugs, and the large number of medical school graduates being assimilated into the health system each year. However, there are policies that could strengthen provincial government efforts to achieve effective cost restraint in healthcare and put publicly financed healthcare on a more sustainable footing. For starters, the federal government should, in discussions with the provinces over a new health accord, not yield to provincial demands for more money. Since 2004, the Canada Health Transfer has been growing at 6 percent per year – nearly doubling in overall size over the last decade – and is currently scheduled to grow at a slower pace starting in 2017. Given evidence that federal transfers can be a key driver of provincial health spending, a return to something near a 6 percent escalator – the same size as in the 2004 health accord – would likely spark an increase in provincial health spending and forestall efforts to bend the cost curve. The federal government should instead stick to the formula set by the previous government that would see provincial health transfers grow with the Canadian economy and never fall below 3 percent annually. When originally announced in 2011, the prospects for economic growth were robust and a 3 percent floor seemed unlikely to come into effect. With much more subdued prospects for economic growth in 2016 and going forward, guaranteeing that the health transfer grow by no less than 3 percent annually should be considered generous. Efforts to control health costs will always be subject to criticism. In particular, the sharpest concerns will come from groups whose incomes may be squeezed by government efforts. Without data on patient outcomes, however, governments cannot demonstrate that patients are unaffected by cost-control efforts and that quality of care is maintained – this makes governments particularly vulnerable to claims that patient care is being eroded by budget cuts. Better data keeping should help create an environment that would allow governments to achieve lasting improvements in financing healthcare while maintaining, or improving, care quality.

Keywords: Health Policy

JEL Classification: I18, H50, H51

Suggested Citation

Di Matteo, Livio and Busby, Colin, Hold the Applause: Why Provincial Restraint on Healthcare Spending Might Not Last (August 9, 2016). C.D. Howe Institute Commentary 455. Available at SSRN: https://ssrn.com/abstract=2820651 or http://dx.doi.org/10.2139/ssrn.2820651

Livio Di Matteo (Contact Author)

Lakehead University ( email )

955 Oliver Road
Thunder Bay, Ontario P7B 5E1
Canada

Colin Busby

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada

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