Livio Di Matteo is a professor of economics at Lakehead University and an expert advisor to EvidenceNetwork.ca, a comprehensive and non-partisan online resource designed to help journalists covering health policy issues in Canada. He holds a PhD from McMaster University, an MA from the University of Western Ontario and an Honours BA from Lakehead University.

The Canada Health Transfer to the provinces has grown steadily from $20.3 billion in 2005 and is expected to reach 28.6 billion in 2012-13 – an annual growth rate of nearly six percent. Under the federal government’s new unilateral funding formula this growth will continue until 2017-18 and then proceed in line with nominal GDP growth with a growth floor of at least 3 percent a year.

Sounds pretty good, and simply an extension of what the provinces have become accustomed to receive from the federal government. However, there is a significant difference in how transfers will be calculated.

Starting in 2014-15, the Canada Health Transfer will be allocated on an equal per capita cash basis only. Previous payments were made on a per capita basis that included both cash and tax point transfers, meaning that the actual size of the per capita cash transfer differed across provinces. Alberta in particular was receiving substantially less cash per capita under this approach.

The move to an equal per capita cash allocation provides a particularly large windfall to Alberta.

Equity can be complex. On the one hand, equal per capita cash payments are the simplest way to distribute money and directly address the need for visible demonstration of fair treatment. However, there is a difference between equity and equality and treating everyone exactly the same may not always be fair.

The provinces are certainly not equal in their fiscal capacity. Indeed, if one looks at per capita own-source revenues, Newfoundland and Labrador, Saskatchewan and Alberta are well above the provincial average as a result of their natural resource revenues. Meanwhile, Prince Edward Island, Nova Scotia, New Brunswick and Ontario are below the average while Manitoba and British Columbia are at about the average.

The provinces are also not equal in their rates of population growth, the rates at which their population is aging, the proportion of aboriginal or immigrant population, or the incidence of various diseases. As a result, these differences can and, many would argue should, be a factor in provincial variations in per capita health spending. Indeed, per capita provincial government health spending in Canada in 2011 varied from a high of 5,064 dollars in Newfoundland and Labrador to a low of 3,434 dollars in Quebec.

Recognizing regional health variations

In 2011-12, Ottawa transferred about $58 billion in cash to the provincial and territorial governments. The three main provincial cash transfer programs are the Canada Health Transfer at $27 billion, the Canada Social Transfer (for child, post-secondary education and social programs) at about $12 billion and Equalization (funds for those provinces with a weaker fiscal capacity) at almost $15 billion.

Federal health cash transfers in particular are contentious given that they have declined over time as a share of provincial health funding. Moreover, providing them on an equal per capita cash basis does not really account for provincial diversity.

The question is: Should health transfers be paid out on a per capita cash basis or in a manner that addresses regional differences in health?

The general purpose of federal transfer payments is to assist the provinces in providing reasonably comparable levels of public services at reasonably comparable levels of taxation.

The previous health transfer formula could be considered unfair in that Alberta received substantially less cash per capita. However, both the old and new formulas can be considered unfair in that they ignore that some provincial differences in health spending are rooted in population health differences.

This is not saying that health transfers should necessarily be a venue for fiscal equalization – there is already a program for that. Rather, it makes some sense for federal health transfers to incorporate the recognition of differences in health status and population characteristics.

A blended formula

Just as we acknowledge the impact of differences in fiscal capacity on the ability of provincial governments to offer reasonably comparable levels of services at reasonably comparable levels of taxation via the federal equalization program, so do we need to recognize the impact on health spending of provincial differences in health status and population characteristics such as aging.

The solution?

There should be a blended formula that combines the need for base core funding with the simple concept of fairness rooted in historic precedent – equal per capita funding – with recognition that differences in population characteristics and demographics create different regional spending pressures.

The Canada Health Transfer payment should be broken into two components. The first component should be an equal per capita cash payment recognizing the fixed costs of operating a health system with a reasonably comprehensive range of services no matter the size of the province.

The second component needs to base the payment on a formula that takes into account population growth, differences in the aged proportion of population, and perhaps even differences in the incidence of illnesses.

Only then can the federal health transfers really be fair.

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