FOR HEALTH CARE
GOVERNMENT'S ROLE IN HEALTH CARE
NATURE AND MECHANISMS OF EPF ARRANGEMENTS
IN PROVINCIAL ENTITLEMENTS
OF LIMITING THE RATE OF GROWTH
FOR HEALTH CARE
The federal government helps
the provinces to discharge their responsibilities for health care primarily
through transfer payments made under Established Programs Financing (EPF).
EPF payments to the provinces form the foundations of intergovernmental
fiscal relations and represent substantial amounts of money, which are
transferred in the form of cash and tax points.
EPF constitutes in fact
the main form of federal assistance to the provinces. In the 1991-92 financial
year, all federal transfers to the provinces are expected(1)
to amount to over $36.9 billion, including all monetary and fiscal transfers;
the EPF program alone will account for some $20 billion, or about 55%
of all transfers to the provinces. Of this amount, $14 billion will be
allocated to health care.
Although the structure of
EPF has remained essentially unchanged since its inception in 1977, its
rate of growth has moderated. In fact, the constraints on the growth rate
of EPF transfers imposed by the federal government over the last few years
raise some doubt about the ability of some provinces to maintain a satisfactory
level of health services. The slowing growth rate of the transfers has
also prompted concern about the preservation of national standards of
health care. Finally, together with the prevailing constitutional uncertainty,
the reduction in transfers to the provinces once again raises the thorny
question of the separation of powers between the federal and provincial
This paper addresses these
various questions. The first part examines the reasons for government
intervention in health care. The second part describes the nature and
mechanisms of EPF arrangements between the federal and provincial governments.
The third part discusses the transfer payments to the provincial governments
for health care and analyses changes in them over the last 15 years. The
last part of the paper addresses the problems raised by the fiscal and
financial arrangements on which EPF is based.
GOVERNMENT'S ROLE IN HEALTH CARE
more than $60 billion, or 9.2% of the Gross Domestic Product, was devoted
to health care. About 73% of all health-related expenditure was assumed
by some level of government, whether federal, provincial, or municipal.
The omnipresence of government
in health care is generally explained by reference to certain imperfections
in the market system.(3) In
the private sector, resources are allocated according to the law of supply
and demand. The resulting price levels ensure optimal allocation of resources
when certain conditions relating to supply and demand are met. However,
these conditions do not always prevail in the area of health care.
First, it is difficult for
the market system to ensure an adequate supply of health services because
of the very nature of these services, which include types of costs and
social advantages which the market system does not take into account.
Furthermore, consumers cannot be fully informed, because uncertainty always
exists about illnesses and future states of health. Consumers are often
unable to determine for themselves the type of health services they need
and must therefore delegate their free will in the decision-making process
to those who provide health services.
in health care is also justified by reasons of social fairness. The most
frequently mentioned social inequality is basically economic. In a fee
market system, low-income people with health problems pay the same as
high-income people. As a result, the economically disadvantaged pay a
relatively larger share of their income for health costs.
For these reasons, federal
and provincial governments in Canada have preferred public insurance to
private insurance. Government intervention in health care cannot, however,
be explained entirely by economic and social weaknesses in the market
system. This is amply demonstrated by the example of the United States,
where health care relies heavily on the private sector. The contrasting
levels of government intervention in Canada and the United States are
largely explained by the two countries differing ideal of the proper
role of government. In the eyes of some,(4)
the omnipresence of government seems to explain why the Canadian system
is superior to the American system.
NATURE AND MECHANISMS OF EPF ARRANGEMENTS
Health services are financed
through powers shared among various levels of government. The public health
insurance system established over the last few decades is based on the
distribution of powers in the Constitution, according to which the delivery
of health services falls essentially under provincial jurisdiction. The
main lever through which the federal government exercises its influence
in this area is the "spending power" accorded to it under the
Constitution. This power enables the federal parliament to transfer funds
to people, organizations or other levels of government in areas over which
it does not necessarily have any legislative power.
The federal spending power
has therefore prompted the emergence of transfer programs to the provinces.
Federal government involvement in the financing of provincial health programs
ballooned during the 1960s with the establishment of a national public
insurance system covering hospital, diagnostic and medical services. At
the time, this expanding federal involvement was seen as responding to
both the increased needs of the provinces and the desire to establish
an equitable, uniform system across the country.
The mechanisms of federal
government financing have, however, changed over the years. Before the
adoption of EPF, federal transfers were based on more or less equal cost-sharing
formulas for both hospital insurance and medical insurance, but the formulas
for calculating provincial entitlements differed for each program.
Payments due to the provinces
under the Hospital Insurance and Diagnostic Services Act were
calculated as follows: a provinces entitlement in a given year was
equal to 25% of the average national per capita cost of the insured services,
plus 25% of the cost of the insured services per resident of that province
multiplied by the population of that province in that year. Overall, the
federal governments contribution was equal to about 50% of the cost
of the insured services in Canada, although it was more in the provinces
where the per capita cost was lower than the national average and less
in the other provinces.
Under the Medical Care
Act, a provinces entitlement in a given year was equal to 50%
of the average national per capita cost of insured services multiplied
by the population of that province in that year. As a result, all provinces
received equal per capita transfers, although the federal contribution
as a proportion of total provincial expenditures varied from one province
Since the establishment
of EPF in 1977, the total entitlements paid to the provinces for hospital
insurance, medical insurance and extended health care have been based
on the average federal per capita contribution paid out in the 1975-76
financial year, cumulatively increased year by year according to an escalator.
This escalator corresponds to a moving average of the gross per capita
national product over three years. The use of a moving average makes it
possible to moderate any overly sharp fluctuations in the GNP so that
the escalator reflects the average trend.
The EPF arrangements between
the federal and provincial governments have both a financial aspect and
a fiscal aspect. Cash transfers to the provinces are made periodically
by cheque, while the federal government also accords a certain tax room
to the provinces through the transfer of tax points. For this to happen,
the federal government reduces its tax rates while the provinces raise
theirs by an equivalent amount. The fiscal burden falling on taxpayers
remains the same, although they pay more provincial tax and less federal
tax. The amount of revenue thus foregone by the federal government is
deducted from the cash transfers to which the provinces would otherwise
be entitled. The fiscal transfer is 13.5 tax points on individual income
tax and one tax point on corporate tax. As part of its opting-out agreements,
Quebec receives a special reduction of 8.5 points on individual income
taxes. In comparison with the other provinces, Quebec therefore receives
a larger share of its federal contribution in the form of cash transfers.
In total, however, Quebecs per capita entitlements under EPF are
exactly the same as those of the other provinces.
There are various other
interesting aspects of the financing mechanisms established under EPF:
a) The formula used to calculate provincial
entitlements is based on the expansion of Canadas collective wealth.
When an economy has a large capacity to produce goods and services,
governments can easily raise revenues on the commercialization of those
goods and services in order to finance health services.
b) The performance of the Canadian economy affects the size of the transfers
which the federal government makes to the provinces in tow ways: first,
economic growth affects the calculation of the escalator and second,
it has a direct influence on federal individual and corporate tax revenues.
When the economy turns down, the escalator used to adjust the total
amount of transfers also decreases. Poor economic growth also reduces
federal government tax revenues, resulting in lower total point transfers.
c) The federal contribution depends not only on economic growth but
also on any changes that might be made to federal tax law and to the
legislation governing fiscal arrangements. For example, changes to the
income tax system which allowed the federal government to increase its
general revenues would result in decreased transfers to the provinces
because this tax increase would increase the value of a tax point. Any
expansion of the federal income tax base or increase in tax rates would
have a similar effect.
d) There is a redistributive aspect to the provincial entitlements under
EPF. Entitlements are equalized on the level of a representative five-province
standard under the general equalization formula. The provinces whose
fiscal strength (i.e. capacity to raise revenues) is lower than this
standard benefit from equalization. The provinces which make up the
standard are Quebec, Ontario, Manitoba, Saskatchewan and British Columbia.
As stated by the National Council of Welfare,(5)
the EPF entitlements paid by the federal government "play a vital
role in offsetting regional disparities and the difficulties poorer
provinces have in providing a full range of programs and services to
e) In contrast to the cost-sharing formula before 1977, EPF provides
for block funding. The provinces can use EPF funds according to their
Because it reflects economic
growth and can be changed by a unilateral decision of the federal government,
the formula used to calculate federal contributions contains an element
of uncertainty regarding both the total amount of transfers and their
rate of growth. EPF provides an equitable financing mechanism: provinces
receive equal per capita transfers, so that the amount of help they receive
depends on the size and growth rate of their populations.
In order to receive all
their health entitlements, the provinces must, however, comply with certain
criteria, which are as follows:(6)
all insured persons must be entitled to the services
all necessary insured services must be covered
services must be offered on uniform terms and conditions; no measure
may be taken which would impede reasonable access to these services
individuals must remain insured
when they are temporarily absent from their home province or from Canada
health plan must be administered by a public authority on a non-profit
These criteria are considered
to be "national standards" and are stipulated in the Canada
Health Act, which also sets out the financial penalties to be imposed
on provinces that allow extra-billing or user charges. The penalties for
provinces that contravene the provisions of the Act are limited to cash
transfers. The adoption of Bill C-20 could increase the penalties on non-complying
IN PROVINCIAL ENTITLEMENTS
It is often said that the
size of EPF transfers to the provinces for health care gives only a very
general impression of federal financial support. Since EPF is a block-funding
program, the distribution of funds between health and post-secondary education
(67.9% and 32.1% respectively) is very arbitrary. These percentages do
not necessarily reflect equal apportionment at the provincial level, since
the provinces may use the transfers they receive under EPF according to
their own priorities. Furthermore, the federal governments financial
contribution to health care is not limited to the resources made available
under EPF. For example, some expenses incurred under the Canada Assistance
Plan are directed toward health care.
In addition to the points
addressed above, developments in EPF entitlements for health care merit
close examination because of their political aspects. The federal contributions
that were used to calculate entitlements in the first year that EPF was
introduced are shown in Table 1.
Federal Contributions to Hospital Insurance
and Medical Insurance in the 1975-76 Base Year
$ Per Capita
% of Costs
Prince Edward Island
Source: Allan J. MacEachen, Federal-Provincial
Fiscal Arrangements in the Eighties, April 1981, p. 76-77.
It is evident that federal
contributions to health care during the last year in which the old agreements
were in effect varied considerably from one province to another. The per
capita contribution of the federal government varied between $126 in Prince
Edward Island and $148 in Quebec. Table 1 also shows that some of the
wealthiest provinces received greater per capita transfers than other
provinces under the old agreements. In the first year in which EPF was
in effect, the average federal per capita contribution of $144 was increased
by the escalator calculated at 14.85%. As a result, all provinces received
a per capita transfer of about $166. With the introduction of EPF, therefore,
all provinces received the same per capita amount for health care. The
provinces which had received relatively lower per capita transfers under
the old shared-cost arrangements - in fact the poorer provinces - received
much larger payments under EPF. This is because the EPF provisions contain
a certain amount of equalization. In addition, a $20 per capita supplement
was offered, beginning in 1977-78, to help finance extended health services.
Since then, the federal contributions to the provinces in the base year
were supposed to have risen cumulatively from year to year, reflecting
the rate of increase in the GNP and population, i.e., according to adjustments
in the escalator.
However, federal EPF transfers have in fact
been reduced since 1986 in an attempt to reduce the federal deficit. First,
in 1986, the Canadian parliament adopted Bill C-96, reducing the growth
of EPF transfers. The payments were still tied to economic and demographic
growth, but their annual per capita growth rate was 2% lower than it would
have been under the old formula. Then Bill C-69, adopted in 1991, froze
per capita EPF transfers at their 1989-90 levels for two year. Finally,
Bill C-20, which received first reading on 31 May 1991, extends the
freeze on per capita transfers to the provinces for three years. The provincial
entitlements will therefore continue to increase at the same rate as the
population. Bill C-20 also states that beginning in 1995-96, the rate
of increase in EPF entitlements will be limited to the per capita rate
of increase in the GNP minus 3%.
Figure 1 shows the changes in total
federal EPF contribution for health care in budget-year and constant dollars.
If transfers to the provinces are studied over a period of about 20 years,
the rate of growth in real terms seems to go through three different phases.
Over the decade from 1977 to 1987, transfer payments increased steadily,
and then flattened out between 1987 and 1990. Finally, federal transfers
for health care are expected to begin to decline in real terms in 1990-91.
Because of its deficit and
desire to reduce expenses, the federal government wished gradually to
level off or even reduce its contribution to health care. In the long
run, the federal cutbacks will result in sharply reduced revenues for
leading some people to say that the federal government is "vacating"
the health sector.
Figure 2 shows clearly
the diverging paths of transfers in the form of cash and tax points. The
monetary part of the total transfer is declining because the overall rate
of EPF growth has slowed as a result of the federal governments
budgetary restraint and because there has been relatively rapid growth
of fiscal transfers.
In the medium term, the
constraints on the growth rate of EPF transfers will cause the conditional
cash payments to disappear. As a result, the federal government may no
longer have the necessary means at its disposal to ensure maintenance
of the standards of health care set forth in the Canada Health Act.
OF LIMITING THE RATE OF GROWTH
The numerous modifications
to the system made by the federal government since 1986 have considerably
affected the growth rate of transfer payments to the provinces and aggravated
the financial imbalance in some provinces. What is more, these changes
threaten to compromise the very nature of the arrangements made under
The aim of the limits placed
on the growth rate of EPF transfers is to reduce the federal deficit,
which is now causing numerous distortions in the Canadian economy. A substantial
cut in the size of the budget deficit would make it possible to stabilize
the debt:GDP ratio. If the growth rate of the debt were brought down to
that of the economy as a whole, it would be possible to maintain at a
constant level the share of our collective wealth devoted to servicing
the debt, which in turn would diminish the vulnerability of public finances
to an economic downturn.
Federal EPF Transfers for Health
(Billions of Current and Constant Dollars)
EPF Transfers for Health
(Year over Year Percentage Change)
The provinces look askance
at the federal governments attempts to stabilize public finances
by reducing transfer payments. Provincial governments maintain that the
federal reductions are inappropriate because transfer payments to the
provinces are not the cause of the deficit. Furthermore, attempts to stabilize
the federal budget through cuts in transfer payments to the provinces
simply shift costs from one level of government to another, thereby forcing
the provinces to reassess their priorities in order to offset the loss
of revenues from Ottawa. If the provinces wish to maintain their current
levels of health care spending, they must choose between increasing their
deficits, increasing revenues through greater taxation, or charging a
user fee for health services. The alternative would be to reduce the quality
of health care. Ultimately it is the taxpayer or consumers of health care
services who will have to bear the brunt of readjustment.
Two points in the debate
on cuts to EPF transfers deserve particular attention:
- EPF transfers include an equalization
aspect intended to enable all the provinces to provide their residents
with reasonably comparable levels of public health services without
having to resort to heavy taxation. In order to be fair to all the provinces,
the federal government sought with the introduction of EPF to moderate
the sharp differences in per capita contributions from one province
to another. As federal transfers are cut back, the poorer provinces
are experiencing mounting difficulties in providing a broad array of
health services to their residents. At the same time, the governments
of these provinces are not in a position to pay an increasing proportion
of health care costs from their own budgets.
- The restrictions on EPF transfers have
fuelled the debate about underfunding of the health care system. Most
experts maintain, however, that public funding of the health care system
is adequate at the present time. The problem, they say, is that the
money devoted to health care is not spent in an optimal fashion.(8)
From this point of view,
the debate on funding should not focus on staying within the allotted
budget but on effects as far as health is concerned. Since a considerable
share of public finances is devoted to the health care system, we should
at least inquire into the possibilities of using the resources more efficiently
and improving the effectiveness of the delivery system.
The provincial entitlements
for health care under EPF are covered by the Canada Health Act,
which provides financial penalties for provinces that fail to maintain
national standards or that authorize extra-billing or user fees. At present,
the Governor in Council can hold back or reduce the amounts due under
EPF to a province that does not comply with the provisions of the Act.
The penalties have been limited, at least so far, to the total amount
of cash transfers.
One important result of
the constraints on the growth rate of transfer payments is the disappearance
in the medium term of cash payments under EPF. Without cash payments,
however, the federal government has no means to ensure that the criteria
and conditions set forth in the Canada Health Act are upheld.
In order to preserve this
power, the federal government, on 31 May 1991, gave first reading
in Parliament to Bill C-20, which would allow other federal payments to
the provinces to be withheld if the provinces contravened the provisions
of the Canada Health Act.
This measure is welcomed
by those who fear that limitations on cash payments might exacerbate discrepancies
between the provinces in the level, quality and accessibility of health
care services.(9) Facing those
who fear a "dismantling" of the national health insurance system,
however, are others who wonder if national standards are still justified.(10)
When the public health insurance
plans were established in the early 1960s, national standards were unquestionably
very important. These standards justified the federal presence in health
care because they made it possible to offer all Canadians comparable and
acceptable levels of care.
Some argue that these national
standards have now been largely achieved.(11)
They maintain that although these standards ensure a certain amount of
uniformity in the provincial health care programs, they exacerbate the
rigidity of the framework within which provincial governments are attempting
to improve their health care systems. As a result, national standards
allegedly detract from the efficiency of health care and the effective
use of resources. In this view, the provinces are perhaps better placed
than the federal government to determine the type of health care program
that best suit the needs of their residents.
Some analysts emphasize
the contradiction in the existence, side by side, of the EPF agreements
and the Canada Health Act. While the basic objective of EPF was
to provide the provinces with greater latitude in their areas of jurisdiction,
the Canada Health Act limits to some extent the full exercise
of provincial authority over health care. Ultimately, shared responsibility
between the two levels of government continues to be a problem.
Perhaps a new method of
distributing financial and fiscal resources, one that would be more instep
with the Canadian political and economic system, should be considered.
For example, a disentanglement of federal and provincial funding could
be achieved by a partial or complete replacement of EPF cash payments
with transfers of tax points and some associated adjustments in the equalization
program. The Economic Council of Canada has already studied this type
of option, and indicated that a separation of this kind would better reflect
the division of powers between the two levels of government. According
to the Economic council, this option would provide a clearer division
of responsibilities and would probably reduce the likelihood of friction
between the federal and provincial governments.(12)
The Group of 22 has made
a similar proposal.(13)
It also suggested that the provinces agree to entrench in the Constitution
certain guarantees regarding services so that Canadians will continue
to benefit from easy access to health care.
In the present context of
constraint on EPF transfers, these options deserve perhaps greater attention
than they have received so far. They would satisfy those provinces that
want a reassessment of the constitutional division of powers, while at
the same time the proposed adjustments in equalization would serve to
maintain an adequate level of health services in the poorer provinces.
The complete withdrawal
of the federal government from transfer payments for health through a
grant to the provinces of tax room equivalent to its contributions (at
least what remains of them) would also make the provinces less dependent
in regard to one aspect of their health insurance program financing. The
federal governments withdrawal would also eliminate the uncertainty
about the final determination of the total level of transfers and their
rate of growth.
In order for these concessions
to be made, the federal government and the provinces would have to come
to an agreement on the value of the fiscal transfers.(14)
The provinces have always considered the tax points granted by the federal
government to be an integral part of their tax structure. The federal
government, on the other hand, sees the tax point transfers as representing
sums of money that would otherwise be paid in cash, and which therefore
reduce its revenues.
Difficult negotiations lie
ahead when the two levels of government attempt to establish their priorities
in health care funding.
Over the years, governments
have become ubiquitous in the health care field. Government intervention
was intended primarily to correct certain imperfections in the market
system and to rectify social inequalities. The various levels of government
shared responsibilities in this area. Even though health falls under provincial
jurisdiction, the federal government has participated financially in establishing
a national system of health insurance and remains a relatively important
source of funding for the provincial health systems.
Federal contributions have,
however, declined over the recent years. While some provinces wish to
acquire greater latitude in health care, others fear a decline in their
ability to deliver care.
Since the responsibility
for health care is divided between two levels of government, the way in
which fiscal and financial resources are divided is a key element in the
Canadian economic and political system. Any change to the manner in which
health care is financed should therefore be the result of negotiations
that take into account the principle of financial and fiscal responsibility
and are based on criteria for establishing equity between the provinces.
Difficult negotiations are to be expected when two levels of government
attempt to set out their EPF priorities for health care.
Bowsher, Charles A., Comptroller General
of the United States. Canadian Health Insurance: Lessons for the United
States. Statement before the Committee of the House of Representatives
on Government Operations, 4 June 1991, p. 9.
Conklin, David W., "Why Canadas
System is Better and Cheaper." Policy Options, Vol. 11, No.
4, May 1990, p. 15-18.
Courchene, Thomas J., Refinancing the
Canadian Federation: A Survey of the 1977 Fiscal Arrangements Act.
C.D. Howe Institute, 1979, p. 48.
Couvelier, Mel, Resolving Canadas
Dangerous Fiscal Situation Through Renewed Federalism and Fiscal Discipline,
10 September 1990.
Economic Council of Canada, Financing
Confederation Today and Tomorrow, 1982, p. 182.
Evan, Robert G. Strained Mercy The
Economics of Canadian Health Care. Butterworths, Toronto, 1984, p.
Evans, Robert G. "Health Care: Is the
System Sick?" Canada at Risk? Canadian Public Policy in the 1990s.
Edited by Doern and Purchase. C.D. Howe Institute, 1991, p. 225-244.
Group of 22. Some Practical Suggestions
for Canada. Report, June 1991, p. 28.
Health and Welfare Canada, Canada Health
Act: Annual Report 1989-1990. Government of Canada, 1990, p. 92.
Health Action Lobby (HEAL), Federal Support
for Health CareA Background Paper. Alistair K. Thompson Policy
Inc., 15 May 1991, p. 28.
MacEachen, Allan J, Federal-Provincial
Fiscal Arrangements in the Eighties. Submission to the Parliamentary
Task Force on the Federal-Provincial Fiscal Arrangements. Department of
Finance, 23 April 1981, p. 93.
National Council of Welfare. Funding
Health and Higher Education: Danger Looming. Report, Spring 1991,
Parliamentary Task Force on Federal-Provincial
Fiscal Arrangements, Fiscal Federalism in Canada. House of Common,
August 1981, p. 214.
Rheault, Sylvie. Financement des services
de santé: Défis pour les années 90. Gaëtan Morin (ed.), Conseil
des affaires sociales, Gouvernement du Québec, 1990, p. 180.
Standing Committee on Health and Welfare,
Social Affairs, Seniors and the Status of Women. The Health Care System
in Canada and its Funding: No Easy Solutions. Report tabled in the
House of Commons in June 1991, p. 122.
Wilson, Michael H., Minister of Finance,
The Budget. Tabled on 26 February 1991, p. 164.
Michael H. Wilson, Minister of Finance, The Budget, 26 February 1991,
p. 18, 63, and 70.
Standing Committee on Health and Welfare, Social Affairs, Seniors and
the Status of Women, The Health Care System in Canada and its Funding:
No Easy Solutions, Ottawa, June 1991, p. 17.
For a detailed analysis of the governments role in health care,
see Evans (1984) and Rheault (1990) in the select bibliography.
David W. Conklin, "Why Canadas System is Better and Cheaper,"
Policy Options, Vol. 11, No. 4, May 1990, p. 15-18 and Charles
A. Bowsher, Canadian Health Insurance: Lessons for the United States,
Statement Before the Committee of the House of Representatives on Government
Operations, 4 June 1991.
National Council of Welfare, Funding Health and Higher Education: Danger
Looming, Spring 1991, p. 5.
Health and Welfare Canada, Canada Health Act: Annual Report 1989-1990,
For a quantitative assessment of the effects of limitations on the growth
of transfer payments, see the information published by the National Council
of Welfare, Spring 1991, or the Health Action Lobby, June 1991, which
appears in the select bibliography.
See for example Robert Evans, "Health Care: Is the System Sick?"
in Doern and Purchase (eds.), Canada at Risk? Canadian Public Policy
in the 1990s, C.D. Howe Institute, 1991, p. 225-244.
This is the position adopted notably by the National Council of Welfare,
See for instance Mel Couvelier, Resolving Canadas Dangerous Fiscal
Situation Through Renewed Federation and Fiscal Discipline, 10 September
1990, p. 3 and 4.
Some authors expressed this opinion even before the adoption of the Canada
Health Act. See for example Thomas J. Courchene, Refinancing the
Canadian Federation: A Survey of the 1977 Fiscal Arrangements Act,
C.D. Howe Institute, 1979, p. 20-23.
Economic Council of Canada, Financing Confederation Today and Tomorrow,
1982, p. 139.
Group of 22, Some Practical Suggestions for Canada, June 1991,
For a full analysis of the various interpretations of fiscal transfers,
see the paper published by the Parliamentary Task Force on Federal-Provincial
Fiscal Arrangements, Fiscal Federalism in Canada, House of Commons,