This Selected Issues paper assesses the long-term fiscal position of Canada. Simulations based on current tax and spending policies suggest that the fiscal position will remain favorable until well into the middle of the century, and relatively modest adjustments would be required to make these policies sustainable in the long term. The analysis also illustrates that these conclusions could be easily overturned if pressures to spend the planning surpluses that are expected to emerge in coming years are not resisted, and if measures are not put in place to contain the cost of health care.

Abstract

This Selected Issues paper assesses the long-term fiscal position of Canada. Simulations based on current tax and spending policies suggest that the fiscal position will remain favorable until well into the middle of the century, and relatively modest adjustments would be required to make these policies sustainable in the long term. The analysis also illustrates that these conclusions could be easily overturned if pressures to spend the planning surpluses that are expected to emerge in coming years are not resisted, and if measures are not put in place to contain the cost of health care.

II. The Canadian Health Care System: Cross-Country Comparisons and Options for Reform1

1. Although fiscal restraint during the 1990s in Canada substantially improved the overall fiscal position, it also severely strained the public health system as federal transfers and provincial health care budgets were cut. Cutbacks led to growing dissatisfaction with the quality of health care, while still leaving the Canadian system one of the most expensive among industrial countries. As a result, and given that cost and utilization pressures are likely to intensify with the aging of the baby boom generation, growing attention has been given—at both federal and provincial levels—to reforming the system of health care delivery and its financing.

2. This chapter first briefly describes the Canadian health care system and some of the weaknesses that have emerged in recent years. Section B then provides a comparison of the system to those abroad, and Section C reviews the longer-term cost pressures that are expected to emerge. The chapter concludes with a short overview of the principal reform options.

A. The Canadian Health Care System

3. The Canadian health care system provides universal, comprehensive coverage for medically-necessary hospital and physician services. The system is predominately publicly-funded, but services are largely delivered by nongovernment providers that are generally paid on a fee-for-service basis. The key elements of the system include:

  • Shared federal/provincial roles: Provinces are responsible for health care policies under Canada’s constitution and each province maintains separate insurance systems. However, the federal government funds a large proportion of provincial health care spending and has established national health care policies and standards. Federal legislation—the Canada Health Act of 1984—defines minimum standards of health care and provides a basis for withholding funding from provinces that deviate from national standards.2

  • Universality: All insured persons have universal access to the public health care system. Provinces are required to provide comparable levels of service and coverage is portable across provinces.

  • Comprehensiveness: Under the Canada Health Act, all health care that is deemed “medically necessary” is covered under by the public system. This typically includes hospital treatment, as well as treatment by general practitioners and specialists, and related medical procedures and tests.

  • Tax financing: Provincial health care programs are funded by tax revenues. Users do not pay premiums based on age or other factors that are related to the probability of usage.3

  • Absence of co-payments and deductibles: Typically health-related services are 100 percent covered and no deductibles or co-payments are required.

  • Public administration: Health insurance plans are administered and operated on a nonprofit basis by a public authority, and hospitals are generally also run on a not-for-profit basis. Physicians are generally self-employed or employed by hospitals.

  • Public-price setting/single-payer system: The fees charged by medical practitioners and hospitals are set by the provincial authorities. Payment for services are made by provincial insurance plans, and practitioners and hospitals are prohibited from charging patients additional or separate fees.

4. The framework for federal funding of provincial health plans has evolved considerably. Prior to 1977, the federal government compensated provinces for 50 percent of their health care outlays, but this system was viewed as providing inadequate incentives to contain costs. In an effort to improve control over provincial spending on health care and post secondary education, the Established Programs Financing (EPF) transfer system was established in 1977, which provided a per capita block grant to provinces linked to per capita GNP. Beginning in 1996, the EPF and transfers under the Canada Assistance Plan (which funded social welfare programs) were combined into the Canada Health and Social Transfer (CHST), a block transfer to fund health care, post-secondary education, and social assistance.

5. Despite the large role played by the public sector in the health sector, only about 70 percent of health-related spending in Canada is publicly financed. Dental care and most prescription drugs are not included in provincial plans, and private insurance plans are available to cover these services.

6. Fiscal restraint caused health care spending, as a share of GDP, to fall from around 10 percent in the early 1990s to around 9 percent by the latter half of the decade. The decline mainly reflected a drop in spending by the public sector in real terms, with the compression mainly in the area of hospitals, which was partly offset by continued rapid growth of spending on pharmaceuticals (Figure 1).

Figure 1.
Figure 1.

Canada: Health Indicators 1/

Citation: IMF Staff Country Reports 2003, 034; 10.5089/9781451806953.002.A002

Sources: Canada Tnsitute of Health and Statistics Canada.1/ Data for 2000-01 are preliminary.2/ Deflated by CPI inflation, base year 1992.

7. Per capita health expenditures vary widely across the provinces and territories. Average per capita spending was estimated to be $2,226 in FY 2001/02, with the Northwest Territories spending the most at $4,268 and Quebec the least at $2,001.4 The variation partly reflects differences across provinces with regard to the definition of whether some services—such as home care and long-term care—are deemed “medically necessary” and, therefore, fall under provincial health plans. Demographic and geographic factors are also relevant—areas with sparse and highly dispersed populations, such as the territories, are unable to benefit from economies of scale, and, thus, face higher costs.

8. The quality of service under the Canadian system has come under growing criticism in recent years. Concerns have centered on access to both services and medical technologies.

  • Overcrowding in hospitals is increasingly reported, and patients also are often required to wait a considerable length of time before obtaining elective surgical and other procedures, or before seeing specialists.5

  • A recent report by the Canadian Institute for Health Information highlights the decline in the ratio of physicians per population during the 1990s—from around 195 to around 185. This is ascribed to the increase in physicians attending post-graduate studies, fewer foreign doctors entering Canada, and increased retirements, all possibly in response to cuts in rates of remuneration. Data on the number of hospital days and waiting periods for organ transplants also deteriorated during the latter half of the 1990s.

  • In addition, underinvestment in key medical technologies—including in diagnostic devices such as MRI and CT scanners—has resulted in delays in accessing these devices, and existing equipment is often described as outdated or at the end of its useful life.6

B. How Does the Canadian System Compare with Other Countries?

9. The Canadian health care system has a number of unusual features compared with other OECD countries.7 First, unlike Canada, most industrial countries maintain user fees for at least one of the major elements of the system—hospital services, general practitioners, and specialists. Only four other OECD countries do not—Denmark, the Netherlands, Spain, and the United Kingdom.8 Although, ten other OECD countries also rely solely on public or heavily regulated hospitals, Canada is the only country that effectively prohibits the private provision of “core” medical services—such as hospital services.

10. A number of indicators suggest that Canada’s health care system is relatively expensive compared to other countries. Among OECD countries, health care spending in Canada is the fifth highest at 9¼ percent of GDP, compared with an OECD average of just over 8 percent (Figure 2). Esmail and Walker (2002) argue, however, that this understates the cost of health spending in Canada, given the relatively small proportion of the population that is over 65 years in age—an age category with relatively expensive health care needs.9 Taking this into account, they estimate that Canada ranks as the highest spending country, excluding the United States.

Figure 2.
Figure 2.

Selected Cross-Country Comparisons of Health Outlays and Outcomes

Citation: IMF Staff Country Reports 2003, 034; 10.5089/9781451806953.002.A002

Source: OECD.

11. Comparing Canada’s health care outcomes to those in other countries also suggests a mixed picture. According to World Health Organization (WHO) data, life expectancy, the distribution of life expectancy, and the fairness of financial contributions for health care in Canada are roughly comparable to other industrial countries, and the Canadian system also compares well in terms of responsiveness and goal attainment (Table 1). However, once per capita expenditure on health and other factors are taken into account in the WHO’s index of overall performance, the Canadian system ranks only 30th in the world, below the industrial country average. More recent OECD data suggest that the Canadian system compares well in terms of life expectancy. However, in-patient beds, physicians per capita, and access to medical technology rank relatively low, and out of pocket expenses and infant mortality arc relatively high (Figure 2 and Table 2).

Table 1.

Relative Ranking of Health Care Systems, 19971

article image
Source: World Heath Organization, World Health Report: Statistics, Table 1.

Relative rankings are against full WHO membership, and only a selected set of countries are shown above. The health ranking is based on a measure of the disability adjusted life expectancy, and inequality measures the distribution across countries’ population of life expectancy at birth. The responsiveness ranking is based on surveys measuring respondents’ assessment of the overall quality of the countries’ health care system. Fairness in financial contribution is ranked according to the degree of inequality of outlays on health relative to income and includes tax and other payments to public programs. Overall goal attainment represents the countries’ rank against a weighted average of life expectancy and the other measures of performance. Performance is the countries’ rank of health outcomes and the weighted average of overall outcomes relative to outcomes that would be otherwise expected assuming a fully functioning health care system and taking into account per capita spending on health and countries’ educational attainment.

Table 2.

Medical Technology Availability in Canada and OECD Countries, 2000

(Number per million population)

article image
Source: Esmail and Walker (2002).

12. The high cost of the Canadian health care system can be illustrated with a simple cross-country regression that quantifies the relationship between health expenditure as a share of GDP and its key determinants. The factors assumed to determine spending include: the old-age dependency ratio; a country’s income level (GDP per capita); life expectancy, which is defined as the WHO’S health adjusted life expectancy (HALE) index; and private sector health care spending as a share of the total. The regressions were based on data for 163 countries in 1998. The principal results are (Table 3):

  • Health expenditures tend to rise with income for middle income and higher-income countries, although the elasticity is the greatest at the middle-income range.

  • The share of the elderly total population also tends to increase total outlays, but only at the upper income level.

  • Health outcomes—defined in terms of life expectancy—seem to have significant effects only at low-income levels, and there appear to be economies at the middle income level, insofar as higher life expectancy is associated with lower health spending.

  • Increases in the private share of health expenditure appear to increase total spending at the higher income levels.

Table 3.

Cross-Country Determinants of Health Expenditure1

article image
Data sources: World Health Organization and the World Bank.

Least squares regression. LOW is a dummy variable set at 1 for incomes below $800 per capita. MID is a dummy set at 1 for incomes between $800 and $3,000 per capita.

The results also suggest that spending levels in Canada exceeded by roughly 20 percent that which would be expected on the basis of these basic determinants. Of course, given the explanatory power of the regression equation, (as indicated by the R-squared statistic and high standard error) only limited confidence can be placed on this conclusion.

C. Long-term Outlook for Canadian Health Care Spending

13. Cost pressures on the Canadian health system are expected to intensify in the future owing to a variety of factors—including, the aging of the baby boom generation and innovations in technology. Most estimates suggest that the cost of health care will absorb a rising share of resources in Canada, as in other OECD countries.10

14. The key factor driving such estimates is the aging of the baby boom generation. The ratio of persons over age 65 to the working-age population—the old-age dependency ratio—in Canada is currently about 20 percent, but is projected to reach 32 percent by 2020 and over 40 percent by 2040. However, demographic trends are considerably different across Canada—dependency ratios in the Atlantic provinces and Alberta are projected to increase much more sharply than elsewhere.11 The impact of demographics is compounded by the fact that health expenditures on people aged 65 and older are typically around 5½ times larger than on people under age 65. Again, this ratio varies considerably across provinces, ranging from 4½ in Saskatchewan to 6 in Newfoundland and Nova Scotia.

15. Robson (2001) estimates that demographic pressures will cause provincial health care spending, as a share of GDP, to rise from about 6 percent in 2000 to 7½ percent in 2020 and to 10 percent by 2040.12 However, in several provinces—including Newfoundland, New Brunswick, and the Yukon Territories—provincial health care spending, as a share of GDP, would rise in percentage point terms by roughly twice the national average by 2040. The uneven distribution of these costs across provinces raises concerns that there will be continued pressures for increases in provincial transfers, and for changes in funding formulas that take into account the diversity of provincial needs.

D. Options and Issues for Reform

16. The discussion above suggests that the Canadian health care system has underperformed, with outcomes falling short of what would be expected given relatively high outlays, and cost pressures on the system likely to intensify in the future. As a result, the provincial and federal governments and private analysts have devoted considerable attention to alternative approaches to health care reform (Box 1). Much of the emphasis has been on identifying areas where expanded coverage is needed, ways to enhance incentives for efficiencies on the part of both suppliers and consumers of health care, and how best to finance health care spending.

Expanding coverage

17. With advances in technology and medical practices, many reform proposals have highlighted the need to modernize the Canada Health Act by expanding coverage beyond hospital and physician care. In particular, while new medical procedures have reduced the length of hospital stays, post-hospitalization care has grown increasingly important, both as a means of ensuring satisfactory health outcomes and for reducing pressures to extend costly hospital stays. As a result, recent reform proposals have called for home-based and palliative care to be covered on a consistent basis across the provinces. Moreover, with prescription drugs playing a greater role in health care system, there have also been strong calls for coverage of (at least) catastrophic prescription drug costs.

Demand-side incentives

18. Concerns that the current system provides inadequate incentives to users to economize on their access to the system have led to proposals for improving demand-side incentives. For example, some analysts have argued for the introduction of co-payments as a means of encouraging consumers to economize on their demand for services and contribute to the funding of health care. Research has suggested that co-payments can have a significant effect on demand for health care services without adversely affecting health care outcomes. Suggestions for ameliorating the impact of catastrophic illness on family incomes include introducing an income-based maximum payment. For example, Aba, et al. (2002) illustrate that a system of a 40 percent co-payment up to an annual maximum of 3 percent of family income would reduce usage by 17 percent and yield roughly $6 billion in revenue.

19. An alternative approach to introducing demand-side incentives could involve a system of medical savings accounts (Migué, 2002). These would involve annual vouchers provided to insured persons that would vary in amount according to their potential need for health services (i.e., age and health). The vouchers would be used to pay for services, with costs in excess to be covered by patients’ own resources up to an income-based maximum. Unused balances could be saved for future years.13

Supply-side incentives

20. Other analysts have argued instead for a focus on supply-side incentives for increased efficiencies, given that incentives that operate on the demand-side are costly to administer and may have a relatively weak impact on the demand for health care, given its unresponsiveness to price signals. A large part of this emphasis has been on primary care reforms that would improve the role of preventative care and ensure that specialists and high-costs procedures arc directed to where they are most needed. In Canada, for example, this type of mechanism is already partly in place, since patients typically are required to obtain a referral from a primary care physician to see a specialist. However, increasing consideration is being given—especially by provincial health plans—to expanding the role of nurse practitioners as a less expensive provider of basic health care and as a gatekeeper to the rest of the system.

21. Some commentators have suggested, however, that more radical reforms may be needed, including moving away from a fee-for-service basis for remunerating physicians. Under a capitation system, for example, doctors would be provided a fixed dollar budget based on the number of patients on their “roster.” Physicians’ annual compensation would then depend, at least in part, on ensuring that their patients’ health care was provided in a cost-effective manner.

22. Some analysts have suggested that the efficiency of the Canadian health care system could also be improved by greater private provision of medical services. As noted above, the Canadian system is unusual, insofar as hospitals are generally run on a not-for-profit basis and practitioners are unable to charge fees in excess of prescribed amounts. Although even partial privatization of the system has been resisted in order to preserve its universality, some observers have suggested that opening the hospital sector could improve efficiency and investment in key technologies. Deber (2002) cautions, however, that “for-profit” providers of hospital and similar care are typically most successful in achieving these objectives if they are regulated and subject to competition.

Proposals to Reform Canada’s Health Care System

Two federal commissions recently released reports summarizing the stale of the Canadian health care system, and recommending reforms that would involve significant increases in public outlays on health care. Key proposals from each are summarized below.

The Commission on the Future of Health Care in Canada—the Romanow Commission—released its final report in late November. The Report includes 47 recommendations, whose costs would rise to $15 billion through 2006. A role for enhanced private sector participation was largely ruled out. Key recommendations included:

  • Set a federal cash funding floor of 25 percent of the cost of insured health services under the Canada Health Act by 2005/2006 and increase federal health care funding by $6.5 billion from currently forecasted levels to provide more stable and predictable long-term funding for health care.

  • Provide a new dedicated cash-only, five-year Canada Health Transfer that includes a built-in escalator provision.

  • Introduce five new targeted funds to address immediate priorities for two years—at a cost of S3.5 billion in 2003/04 and $5 billion 04/05—until the minimum federal funding floor is achieved in 2005/2006:

    • Primary Health Care Transfer to remove obstacles to renewing primary health care delivery;

    • Home Care Transfer to create the foundation for an eventual national home care strategy;

    • Catastrophic Drug Transfer to expand and improve provincial drug programs;

    • Rural and Remote Access Fund to improve timely access to care in rural and remote areas;

    • Diagnostic Services Fund to improve wait times and purchase new equipment.

  • In addition, introduce the following: a national immunization strategy; a National Drug Agency to evaluate new drugs, and re-evaluate existing drugs; an Aboriginal Health Partnerships to organize health services for aboriginal peoples; a Canadian Health Covenant that would act as a tangible statement of Canadians’ values and confirm the vision of the future of health care; a Health Council of Canada to collect information on waiting times, measure and track performance of the health system, and report regularly to Canadians.

The Senate Social Affairs Committee released its recommendations in late October 2002. Its proposals were estimated to cost $5 billion annually, financed through either a 1.5 percent national health care sales tax or a national health care insurance premium tied to income. Key proposals include:

  • Increase the federal contribution to spending on health care infrastructure, including medical technology, training doctors and nurses, and evaluating health care outcomes.

  • Expand public insurance to include coverage for catastrophic prescription drug costs, as well as post-hospital and palliative home care.

  • Establish maximum waiting times, which, if exceeded, would allow the patient to seek treatment in another jurisdiction, including the United States.

Restructure the current hospital and doctor system to enhance efficiency and effectiveness, including for hospitals, with a shift toward service-based funding and greater competition.

23. Proposals to expand the coverage of the public system could also have significant supply side implications. For example, broadening the scope of public system to include prescription drugs, post-hospital home care, and palliative care, would provide opportunities for a more effective integration of these services in the existing system. At the same time, however, the challenge will be to ensure that efforts to contain costs in these new areas—including through the use of price controls—enhance, rather than detract from efficient delivery of these services.

Fiscal issues

24. Significant fiscal issues are raised by many of these proposals, especially those that involve broadening the scope of the public insurance system. An important concern is that they would require large increases in federal and provincial health care spending, without concomitant improvements in efficiency or the definition of alternative sources of funding. While the recent Senate report has suggested that spending increases should be funded by an income-based health care premium or a dedicated sales tax, the Royal Commission report appeared to suggest that spending increases would be largely met out of prospective fiscal surpluses.

25. Moreover, health care reform has important implications for fiscal federalism. A significant proportion of provincial health care outlays are funded by transfers from the federal government, and a critical issue—especially given pressures to increase the amount flowing to the provinces—is the manner in which these resources are provided. Some authors have suggested that for the federal government to continue to enforce national standards and promote appropriate spending levels, a return to cost sharing may be required.14 In addition, providing transfers in the form of cash payments, rather than as “tax points,” would also improve the predictability of funding. However, Rode and Rushton (2002) caution that a return to open-ended cost sharing arrangements could undermine incentives at the provincial level to contain costs, and others have expressed concern that cash payments have provided too much scope for conditions to be attached to transfers.

E. Concluding Remarks

26. The Canadian health care system has come under considerable stress in recent years. This stress reflects a number of factors, including the effect of fiscal constraints and the high cost of new technology. Looking ahead, these budgetary pressures seem likely to intensify, given the impending aging of the baby-boom generation. Thus, Canada, like most other countries, faces the challenge of ensuring that the system delivers health care services in a manner that is as cost effective as possible.

27. The discussion above, and the results of numerous studies, suggest that the efficiency of the Canadian health care system could be improved by measures to enhance the incentives that operate on both the demand- and supply-sides. The difficult challenge will be to introduce these reforms in a manner that is consistent with both the commitment to universality and the need to preserve longer-term fiscal sustainability.

References

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1

Prepared by Paula De Masi and Christopher Towe.

2

The Canada Health Act requires that the health services of provinces and territories meet the following criteria in order to receive federal funding: public administration; comprehensiveness; universality; portability; and accessibility. In cases where providers impose user fees (i.e., “extra bill”) on patients in excess of the rates set by provincial authorities, the legislation requires dollar-for-dollar deductions from federal transfer payments to the provinces.

3

Alberta and British Columbia do levy income-tested premiums, but these cover only a small proportion of provincial outlays.

4

Provincial health care spending as a share of provincial revenue (including federal transfers) in 2000 averaged about 30 percent in Canada, ranging from 34 percent in Ontario and Manitoba to 20 percent or less in the territories. See Robson (2001).

5

Esmail and Walker (2002) review a number of international comparative studies which suggest that Canadian health consumers perceive considerably poorer access and quality compared to Australia, New Zealand, the U.K., and the United States. Moreover, access to care in Canada appears to differ across socioeconomic groups, with low income earners reporting less access. The Canadian Institute for Health Information (2002) cautions, however, that empirical studies find only mixed support for the perception of longer wait times, and that waiting periods seem long only in comparison to the United States.

6

For a discussion, see the Standing Senate Committee on Social Affairs (2001a).

7

For a more detailed discussion of how Canada’s system compares to other OECD countries, see Esmail and Walker (2002).

8

Although France and Australia do not have explicit cost sharing, features of their systems allow for private payments.

9

The proportion of the population over age 65 in Canada is around 12½ percent compared to 15¾ percent in the United Kingdom and France, and 17 ¾ percent in Italy.

10

On a cross-country basis, Dang, Antolin, and Oxley (2001) find that over the period 2000-2050 the average increase is 3½ percentage points of GDP; however, for Canada, the United States, and several other countries increases of 4 percentage points or more arc projected.

11

See Robson (2001).

12

These same projections imply that the share of provincial revenues (excluding federal transfers) devoted to health care spending would rise from 35 percent presently to around 40 percent in 2020 and to over 55 percent in 2040. Using different methodologies, the Conference Board (2001) comes to similar conclusions.

13

This type of system has been used in Singapore, China, South Africa, and (to some extent) the United States.

14

See for example Rocher and Smith (2002).

Canada: Selected Issues
Author: International Monetary Fund