TABLE OF CONTENTS

ORDER OF REFERENCE

TABLE 1

health care study: Individual phases and proposed timeframes

CHAPTER ONE:

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)

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

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.

A Brief History of the CHST

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.

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.

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.

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).

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)

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.