Backgrounder: Federal Transfer Payments and how they affect healthcare funding in Canada

Prepared for EvidenceNetwork.ca by Livio Di Matteo

 Backgrounder Federal Transfer Payments and how they affect healthcare funding in Canada

The Canadian fiscal transfer system is relatively simple and designed to address fiscal imbalances arising from economic differences across provinces and territories that are related to per capita income and natural resource endowments.  In 2014-15, the federal government transferred $65 billion to the provinces and territories, up 4.4 percent from the previous fiscal year.  These transfers account for almost 20 percent of provincial/territorial revenues.

Since 2005-06, total federal grant support has grown from $41.909 to $65.030 billion – an increase of 55 percent.

Three main federal transfers

There are three main sets of federal transfers.

1.  Equalization is an unconditional per capita grant to provincial governments with below average fiscal capacity as calculated via a formula. The purpose of equalization is to assist provinces in providing reasonably comparable public services at reasonably comparable levels of taxation.

Equalization is determined by measuring a province’s ability to generate revenues or “fiscal capacity” compared to the average revenue of all ten provinces.  Provincial government revenue sources used to calculate equalization come from personal income taxes, business income taxes, consumption taxes, property taxes and natural resource revenue.

In 2014-15, total equalization to the provinces (Manitoba, Quebec, Ontario, New Brunswick, Nova Scotia and PEI) was $16.7 billion.  In 2014-15, the provinces that did not receive equalization were Newfoundland & Labrador, Saskatchewan, Alberta and British Columbia.

2. There are a set of per capita health and social transfers designed to help finance provincial and territorial health, social and child welfare and post-secondary education spending.

The Canada Health Transfer (CHT) consists of a cash transfer as well as revenue from tax points.  The current cash allocation procedure is now entirely on an equal per capita cash basis whereas, until recently, there was an equalizing adjustment for tax point transfers.  (A tax point transfer is when the federal government reduces its basic tax rate by a specific percentage and the provinces then take up the tax room).

CHT cash levels have been growing at six percent per annum, but starting in 2017-18, will have their growth tied to nominal GDP growth subject to a minimum growth rate of three percent.

The Canada Social Transfer (CST) is cash transferred on an equal per capita basis.  CST cash levels will grow at three percent annually.

In 2014-15, the value of the Canada Health Transfer was $32.114 billion while the value of the Canada Social Transfer was $12.582 billion.

3. The Territorial Funding Transfer formula provides federal funding to the three territorial governments to fund their activities in a manner comparable to those offered by the provinces. Essentially, each territory’s grant is based on the difference between an estimate of its expenditure needs and its ability to generate revenues with the calculation done on an annual basis.

Territories do not have provincial powers and capacities for revenue generation and rely heavily on federal grants for service delivery.  Since 2006-07, the TTF allocation has grown at an average annual rate of six percent.

In 2014-15 the value of the Territorial Funding Transfer to the three territorial governments was $3.469 billion

For more detailed annual numbers nationally and by province, see the Federal Department of Finance site at http://www.fin.gc.ca/fedprov/mtp-eng.asp

The Changing Canada Health Transfer Formula and What it Means for Healthcare

Federal funding for healthcare to the provinces and territories can come from Equalization, the Canada Health Transfer and Territorial Funding, but the bulk is from the Canada Health Transfer.

The Canada Health Transfer (CHT) is the largest single transfer that is made to the provinces and territories and is designed to provide stable and predictable support for provincial and territorial health systems in accord with the basic principles of the Canada Health Act.

In 2014-15, the CHT provided about 23 percent of provincial and territorial government health spending.  Starting in 2014-15, provincial and territorial CHT transfers changed their allocation to an entirely equal per capita basis with no province to receive less than its 2013-14 CHT cash allocation as a result of the change.

Pros and Cons to the Changing Formula: Who Wins, Who Loses? 

The change to an entirely equal per capita health transfer has advantages and disadvantages.  On the one hand, it provides recognition of the upfront costs of having and funding a healthcare system and does so equally and consistently across all the provinces and territories; it also limits federal fiscal exposure by making the grant size more predictable.

On the other hand, such a formula does not take regional variations in health, socio-economic and demographic factors into account.  For example, some provinces are aging more rapidly than others while others have larger aboriginal populations with often complex health needs — all of which can have implications for differences in health spending per person.

Larger provinces are also potentially better able to take advantage of economies of scale, which can lead to lower per capita healthcare costs.  With the end of the equalizing adjustment regarding tax points, provinces with a richer tax base will also see a greater benefit from the move to equal per capita cash.

So does the change in funding formula amount to a funding cut, an increase — or neither — for each of the provinces?

Federal funding for healthcare will continue to grow but at a lower rate – though in the short-term the new formula will benefit some provinces over others.

Starting in 2017-18, the growth rate of total CHT cash transfers will grow at a three year moving average of the rate of growth of nominal GDP — but with a minimum rate of three percent.  This differs from the previous annual growth rate of six percent for the cash component implemented as a result of the 2004 Health Accord.

However, this minimum three percent rate is below the funding increases of the last 10 years.  What this means is that the growth of transfer payments will not likely keep up with the possible continued growth in healthcare costs.

In other words, provinces and territories will see funding from the federal government grow at a slower rate than previously.  Increases above three percent will also be less predictable and less stable, as they will be tied to increases in GDP above three percent.

The bottom line: Given population growth and inflation, federal health cash transfer growth of only three percent after 2017 essentially means a freeze in real per capita health transfers.

For provinces with growing economies and relatively young populations, a freeze in real per capita federal health transfers, while unwelcome, nevertheless may generate some innovation and experimentation in healthcare systems. For provinces with more rapidly aging populations and slow economic growth, the result may be more fiscal stress.

Experts available for interview

Livio Di Matteo, PhD
Lakehead University
Health Economics, Sustainability, Costs, Expenditures
807-343-8545 | Livio.DiMatteo@lakeheadu.ca

Herb Emery, PhD
University of Calgary
Health Care Finance, Sustainability, Innovation, Chronic Disease Prevention
403-220-5489 | hemery@ucalgary.ca

Jeremiah Hurley, PhD
McMaster University Health Care Financing, Funding Models
905-525-9140, ext. 24593 | hurley@mcmaster.ca

Gregory Marchildon, PhD 
University of Toronto Health Systems, Health Policy & Economic History
416-978-4326 | greg.marchildon@utoronto.ca

Steve Morgan, PhD
University of British Columbia Access to, Financing of Prescription Drugs
604-822-7012 | Morgan@chspr.ubc.ca | @SteveUBC

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