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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

Canada’s fiscal transfer system is relatively simple and designed to address fiscal disparities arising from economic differences across provinces and territories that are related to per capita income and natural resource endowments.  In 2016-17 the federal government transferred $70.9 billion to the provinces and territories, up 4.3 percent from the previous fiscal year.

In 2017-18, total federal cash transfers are expected to be $72.8 billion, up 2.7 percent.  These transfers account for approximately 20 percent of provincial/territorial revenues.

Since 2005-06, total federal grant support has grown from $41.909 to $70.943 billion – an increase of 69 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 2016-17, total equalization to the recipient provinces (Manitoba, Quebec, Ontario, New Brunswick, Nova Scotia and PEI) was $17.880 billion.  In 2015-16, 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 cash allocation procedure since 2014-15 is on an equal per capita cash basis whereas previously 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 under the previous Conservative government they were to have their growth tied to nominal GDP growth subject to a minimum growth rate of three percent starting in 2017-18.

The incoming Liberal government under its mandate appears to have largely adhered to this approach growth rate as for 2017-18 the CHT will grow 3.5 percent once additional funds for mental health and home care are taken into consideration.

The Canada Social Transfer (CST) is cash transferred on an equal per capita basis.  In 2017-18, CST cash levels will grow three percent and are expected to continue to grow at that rate.

In 2016-17, the value of the Canada Health Transfer was $36.068 billion while the value of the Canada Social Transfer was $13.348 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 annually.

Territories do not have provincial powers and capacities for revenue generation and rely heavily on federal grants for service delivery.  Since 2008-09, the TTF allocation has grown at an average annual rate of approximately five percent.  Growth has slowed since 2014-15.

In 2016-17 the value of the Territorial Funding Transfer to the three territorial governments was $3.603 billion and is expected to reach $3.682 billion in 2017-18.

For more detailed 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 2015-16, the CHT provided nearly a quarter of provincial and territorial government health spending.  Starting in 2014-15, provincial and territorial CHT transfers changed their allocation to an equal per capita basis.  As well, starting in 2017-18, new 10-year health funding agreements take effect between Ottawa and each province with the exception of Manitoba, which has yet to agree.

The Federal government went forward with a CHT increase tied to the three-year moving average of nominal GDP growth subject to a 3 percent minimum. An additional $11.5 billion over ten years was promised for federal priorities in mental health and home care, although much of this additional health funding will arrive towards the end of the current 5-year budget planning period. Building this in, total federal health funding to the provinces and territories should eventually grow at approximately 3.5 percent annually.

Pros and Cons of a Changing CHT: Who Wins, Who Loses? 

The last few years have seen several major changes to the CHT.  There was the move to a per capita funding formula, the expiry of the 6 percent escalator of the 2004 Health Accord starting in 2017, and the move by Ottawa to negotiate separate transfer agreements with each province rather than a blanket agreement for all.

The change to an equal per capita health transfer has advantages and disadvantages.  On the one hand, it recognizes the upfront costs of having and funding a public 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 given regularly available population numbers.

On the other hand, a per capita formula does not take regional variations in health, socio-economic and demographic factors into account.  For example, some provinces –particularly the Atlantic region – 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.  Without 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 do these changes 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 with the change to a per capita formula benefitting some provinces more than others though those benefits will be internalized and disappear over time.

Starting in 2017-18, the growth rate of CHT cash transfers will be at the rate of growth of nominal GDP — but with a minimum rate of three percent.   An additional half a percent is expected from the flow of federal funds for mental health and home care.  However, this is still below the funding increases of the last 10 years.

The good news for the provinces is that there is no funding cut.  Total federal funding for healthcare will continue to grow — but at a lower rate than the previous six percent escalator and the 5.2 per cent originally desired by the provinces.

However, there are differences across the provinces when it comes to their CHT growth next year given it is a per capita allocation and provincial populations are growing at different rates.  Keep in mind that the three per cent minimum growth applies to the total size of the federal transfer pot and not the increase that each province will get.

Growth in CHT totals by province in 2017-18 will range from a high of 3.5 per cent for Alberta to a low of two per cent for New Brunswick. Saskatchewan will see 3.4 per cent growth, Ontario 3.1 per cent and BC three percent. Even the lone holdout – Manitoba, will still see its CHT money grow 3.4 per cent this year.  The rest of eastern Canada, including Quebec, will see their federal CHT money grow at less than 3 percent.

The final consideration is what the long-term implications of moving to separate negotiations for each province will mean for public health care in Canada. A precedent has now been established for province-by-province negotiations and in future this could lead to wider variations in spending and health care services across the provinces.  This may indeed be a possibility in future negotiations if either provinces or the federal government decide to become more mercenary in their approach to federal-provincial negotiations.

How this will be ultimately reconciled with Section 36 of the 1982 Constitution Act regarding “providing essential public services of reasonable quality to all Canadians” and “promoting equal opportunities for the well-being of Canadians” will be interesting to observe.

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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