1. Official projections of a more slowly growing and more rapidly aging population in Canada through the first half of the next century suggest that some demographically sensitive expenditure programs, most notably health care, will absorb a growing proportion of available resources (Chart 1).2 In Canada, 70 percent of health care costs are publicly financed. Provincial governments, partially supported by transfer payments from the federal government, are primarily responsible for the funding of hospitals, physicians, and community care programs, as well as related research and education programs. Health care expenditure at present accounts for about 35 percent of total provincial government spending.

Abstract

1. Official projections of a more slowly growing and more rapidly aging population in Canada through the first half of the next century suggest that some demographically sensitive expenditure programs, most notably health care, will absorb a growing proportion of available resources (Chart 1).2 In Canada, 70 percent of health care costs are publicly financed. Provincial governments, partially supported by transfer payments from the federal government, are primarily responsible for the funding of hospitals, physicians, and community care programs, as well as related research and education programs. Health care expenditure at present accounts for about 35 percent of total provincial government spending.

VI. Health care, demographics, and fiscal sustainability1

1. Official projections of a more slowly growing and more rapidly aging population in Canada through the first half of the next century suggest that some demographically sensitive expenditure programs, most notably health care, will absorb a growing proportion of available resources (Chart 1).2 In Canada, 70 percent of health care costs are publicly financed. Provincial governments, partially supported by transfer payments from the federal government, are primarily responsible for the funding of hospitals, physicians, and community care programs, as well as related research and education programs. Health care expenditure at present accounts for about 35 percent of total provincial government spending.

CHART 1
CHART 1

CANADA: DEMOGRAPHIC PROJECTIONS

Citation: IMF Staff Country Reports 1998, 055; 10.5089/9781451806915.002.A006

Source: Office of the Superintendent of Financial Institutions.

2. The provinces have initiated measures in recent years to control health care costs more strictly and to restructure the health care industry to achieve greater efficiency in the delivery of services. As a result, total real health expenditures have actually declined since 1992. Nevertheless, the prospective demographic changes present a major challenge to the system’s long-term viability. In addition, the effects of these demographic changes on potential economic growth, and therefore on the revenue of the public sector, complicate the long-term financing of health expenditures.

3. To illustrate the long-term demographic pressures on health care expenditures and the resulting implications for provincial government finances, several scenarios are developed here. These scenarios reflect different assumptions regarding relative inflation in health care and trend changes in real health expenditures per capita. The results of these long-term simulations are highly conditional on the underlying assumptions, but they nevertheless illustrate the broad parameters of the problems and issues that policy makers may face.

4. The results of the various simulations for total health expenditures are presented in Table 1. The impact of the projected demographic changes on total health expenditures is illustrated in the first scenario where long-term GDP growth is held constant at 2½ percent annually, real per capita health expenditures are constant, and the rate of increase in the health care price index (at 2 percent annually) is held to 1 percentage point above the overall inflation rate.3 In this scenario, the ratio of health expenditures to GDP declines over the long term from its current level of around 9 percent of GDP to about 5½ percent of GDP by 2070; however, the ratio is higher than it otherwise would be owing to the projected change in the age composition of the population. The relative size of the oldest population cohort (age 65 and over) grows rapidly over the medium term. Specifically, the “baby-boom” generation—those born between 1945 and 1965—begins to retire around 2010, with peak retirements for this generation occurring around 2030, By 2050, the “baby-boom echo”—the children of the baby boomers, those born between 1975 and the present—begins to retire, which maintains the relative size of the senior cohort in the population at a fairly constant rate between 2030 and 2070, Since real expenditures per capita for those aged 65 and over are about three times the average for all age cohorts, the demographic changes alone raise the ratio of health expenditures to GDP by 1¾ percentage points in 2030.

Table 1.

Canada: Total Health Expenditures

(In percent of GDP) 1/

article image
Source: Fund staff estimates.

Although the output gap is closed by the year 2000, it is re-opened to I percent by 2005 and held constant at this percentage level for the rest of the projection period.

Real expenditure per capita for each age cohort continues to decrease in the 1995-97 period, increases slowly to the 1994 level by 2005, and maintains this level over the rest of the projection period.

The age composition of the population is held constant at its estimated 1997 level while the growth of the population changes over the long-term as projected.

Real expenditure per capita for each age cohort continues to decrease in the 1995-97 period and then grows over the projection period at the average growth rate of the 1984-91 period.

Real GDP growth is held constant at 2.5 percent between 2005 and 2080.

Real GDP growth is assumed to be 2.5 percent for 2005-14, 2.25 percent for 2015-24, and 2 percent for 2025-80.

5. If the differential in the inflation rate for health care costs relative to the GDP deflator were to return to its historic average of 2 percentage points (as illustrated in the second scenario), the ratio of health expenditures to GDP would rise to nearly 11½ percent by 2030, about 3 percentage points higher than in the first scenario. The ratio would decline slightly thereafter, but by 2070 it would be 5½ percentage points higher than in the first scenario.

6. Health care costs may also be affected over time by innovations in medical technology, although the net effect of such innovations is not clear. While the cost of treating some medical conditions may come down over time as a result of such innovations, new treatment regimes introduced to deal with medical conditions that previously were not effectively treatable could possibly boost, health care costs, In addition, the needs of the aging population may require some costly re-tooling of existing health care facilities and systems. The effects of changes in medical technology and of restructuring the health care system should be reflected in changes in real per capita medical expenditures. To capture the potential effects of medical care innovations on health care spending, real per capita expenditures by age group were allowed to increase in the third scenario at the same rate as between 1984 and 1990.4 The impact on health expenditures of this assumption is similar to that of changing the assumption regarding relative inflation in medical costs.

7. Projected demographic changes will also contribute to a slowdown in labor force growth. Slower labor force growth in turn may lead to slower growth in the economy’s productive potential over time, especially if trend growth in total factor productivity is assumed to be largely unchanged over the long term. As illustrated in the third scenario, such a slowdown in economic growth would significantly raise the portion of GDP required to meet health expenditures. The fourth scenario shows the effects on health expenditures of higher relative medical care inflation and rising real per capita expenditures assuming first a constant and then a declining rate of growth in real GDP. The scenario with declining real GDP growth illustrates how rapidly health expenditures as a ratio to GDP could grow.

8. It is useful to note that the provincial governments moved decisively to restructure their health care systems in the early 1990s when the ratio of health expenditures to GDP rose to around 10 percent.5 Looking ahead, only under the relatively favorable assumptions in the first scenario is this ratio consistently below 10 percent. In all of the others, it is exceeded by a growing margin as the key assumptions underlying the scenarios become less favorable (Chart 2). Thus, with less favorable conditions, questions may be raised about the long-term sustainability of the health care system.

CHART 2
CHART 2

CANADA: TOTAL HEALTH EXPENDITURES 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1998, 055; 10.5089/9781451806915.002.A006

Sources: Department of Finance Canada; and Fund staff estimates and projections.1/ Plotted at 5-year intervals.

9. Adding to the questions about the sustainability of the health care system are the implications for the finances of the provincial governments of the alternative long-term scenarios for health expenditures (Table 2). In the estimates in Table 2, it is assumed that the private sector continues to finance an increasing share of total health expenditures as it has in the past. It is also assumed that the federal government continues to finance some of the provincial expenditures on health care through transfer payments, but with the share of health expenditures financed by federal transfers declining in most scenarios except the first one.

Table 2.

Canada: Provincial Health Expenditures and Net Debt 1/

(In percent of GDP)

article image
Source: Fund staff estimates.

Scenarios refer to those defined in Table 1.

10. In the first scenario assessing provincial government finances, it is assumed that the provinces balance their budgets by the end of the current century. Subsequently, they use their budget surpluses (which would occur on a current policy basis and with the favorable conditions assumed in the first health expenditure scenario) to reduce their aggregate debt-to-GDP ratio to around 10 percent by 2015 (a level roughly similar to where this ratio stood in the 1980s before provincial debt rose sharply). Thereafter, taxes are assumed to be cut as required to keep the debt-to-GDP ratio from falling below 10 percent, while no fiscal policy action is assumed to be taken as the provincial governments’ finances slip back into deficit in the later part of the projection period, since the debt-to-GDP ratio remains below 16 percent, which was its average level in the late 1980s. All of the other scenarios assume the same tax polices as in the first scenario. However, with substantially higher health care expenditures in these scenarios, provincial budget deficits rise sharply over time, and the debt-to-GDP ratio reaches unprecedented levels in the absence of policy actions.

11. The results of the various scenarios suggest that, instead of using their expected fiscal dividend to reduce taxes, the provinces will need to consider using their prospective budget surpluses over the medium term to achieve more ambitious debt reduction (and maybe even to accumulate net financial assets on their own budgetary accounts) to meet the potentially large future health care obligations over the longer term illustrated in the other scenarios (Chart 3).6 Such a policy approach would more equitably spread the cost of financing future health expenditures across generations. Otherwise, the pattern of tax changes implied by the more costly health care simulations would involve an intergenerational transfer that could benefit the baby boomers (and, to a lesser extent, the baby-boom echo). The boomers would enjoy the benefits of the enhanced health care programs for the aged and of decreases in provincial taxes in the latter part of their working life, while avoiding much of the burden of the tax increases in the longer term (when they have retired) that would be needed to finance health expenditures.

CHART 3
CHART 3

CANADA: PROVINCIAL GOVERNMENT FINANCES

(In percent of GDP)

Citation: IMF Staff Country Reports 1998, 055; 10.5089/9781451806915.002.A006

Sources: Department of Finance Canada; and Fund staff estimates and projections.1/ In the provincial government finance simulations, Scenario 1B is supplemented by anchoring net debt between 10% and 16% of GDP.

12. The scenarios illustrating the potential demands for provincial financing of health expenditures assume that the medium-term schedule of transfer payments announced by the federal government will be followed. However, over the longer term, pressure would likely grow on the federal government to provide an increasing share of health care costs to the provinces, especially if the case were made that such resources would be required to help the provinces to maintain the health care standards mandated under the Canada National Health Act. Consequently, the federal government will also need to give consideration to the long-term financing requirements for health care in framing its medium-term decisions regarding its fiscal position.

13. To meet the health care system’s rising cost, substantial changes in the coverage of the publicly funded portion of the system might also need to be considered. Moreover, it is important that public policies or federal and provincial health care legislation not inadvertently restrain the development of private health care initiatives. Such private initiatives may be needed to help meet the demands of the aging population for health care services.

CHART 4
CHART 4

CANADA: TOTAL AND PROVINCIAL HEALTH EXPENDITURES 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1998, 055; 10.5089/9781451806915.002.A006

Sources: Department of Finance Canada; and Fund staff estimates and projections.1/ Plotted at 5-year intervals.

List of References

  • Auer, L., D. E. Angus, J. E. Cloutier, and T. Albert, 1995, Sustainable Health Care for Canada, Queen’s University of Ottawa Health Care Projects (Ottawa).

    • Search Google Scholar
    • Export Citation
  • Auer, L., D. E. Angus, J. E. Cloutier, and J. Comis, 1995, Cost-Effectiveness of Canadian Health Care, Research Report, Queen’s University of Ottawa Health Care Projects (Ottawa).

    • Search Google Scholar
    • Export Citation
  • Canadian College of Health Service Executives, 1994, External Environmental Analysis and Health Reform Update: Special Report (Ottawa), July.

    • Search Google Scholar
    • Export Citation
  • Clemens, J. and C. Ramsay, 1996, “Health Care Isn’t Free—Even in Canada,” Fraser Forum, The Fraser Institute (October).

  • Culyer, A. J., 1998, Health Expenditures in Canada: Myth and Reality; Past and Future, Canadian Tax Paper No. 82, Canadian Tax Foundation (Toronto).

    • Search Google Scholar
    • Export Citation
  • Denton, F. T. and B. G. Spencer, 1997, “Demographic Trends, Labour Force Participation, and Long-Term Growth” paper presented at the Conference on Fiscal Targets and Economic Growth, John Deutsch Institute, Queen’s University, Kingston (September).

    • Search Google Scholar
    • Export Citation
  • Denton, F. T. and B. G. Spencer, 1995, “Demographic Change and the Cost of Publicly Funded Health Care,” Canadian Journal on Aging, Vol. 14, No. 2.

    • Search Google Scholar
    • Export Citation
  • Denton, F. T., S. N. Li, and B. G. Spencer, 1988, “Health Care in the Economic-Demographic System: Macro-Effects of Market Control, Government Intervention, and Population Change,” Southern Economic Journal, Vol. 55 (July).

    • Search Google Scholar
    • Export Citation
  • Foot, D. K. and D. Stoffman, 1996, “The Health Care Crunch” in Boom, Bust & Echo, Macfarlane, Walter & Ross (Toronto).

  • Health Canada, 1996, National Health Expenditures in Canada: 1975-1994, Full Report, Minister of Public Works and Government Services (Ottawa), January.

    • Search Google Scholar
    • Export Citation
  • National Forum on Health, 1997, Canada Health Action: Building on the Legacy, Vol. I—The Final Report and Vol. II - Synthesis Report and Issues Papers, Minister of Public Works and Government Services (Ottawa).

    • Search Google Scholar
    • Export Citation
1

Prepared by Sean O’Connor, Brenda González-Hermosillo, Yutong Li, and Jeffrey Cole.

2

There is a range of official projections for population growth and its composition because of uncertainty over fertility and mortality rates. The projections used in the simulations presented here are from the Chief Actuary in the Office of the Superintendent of Financial Institutions. They correspond closely to medium-growth projections from Statistics Canada The projections generally reflect the continuation of current trends in birth rates, mortality, and immigration.

3

This differential is about one-half the average difference between the annual rates of change in the CPI health care index and the overall GDP price deflator over the 1981–94 period.

4

The period 1984–90 was chosen because no major changes in the coverage of health care programs were introduced during this period. Of the four population age groups considered, the upward trend in real per capita expenditures was most pronounced for the senior group (aged 65 and over).

5

The 10 percent figure is used here as a simple benchmark for flagging potential problems. In the early 1990s, provincial governments faced general problems with persistent deficits, mounting debt loads, and high debt service costs all of which combined led them to embark on budget reduction programs. Given its relative size and rate of increase, health care expenditures received considerable attention in the formulation of plans to reduce spending.

6

The provincial governments borrow to fund their own budgetary operations and in some cases to help finance the operations of provincially owned agencies and enterprises.

  • Collapse
  • Expand
Canada: Selected Issues
Author:
International Monetary Fund