A Hidden Feature of the New Health Transfers Will Help Smaller Provinces

Federal support to provincial and territorial healthcare systems increased earlier this year. Under significant political pressure from Premiers, the federal government offered $46.2 billion in new funding to provinces and territories over ten years.

This is modest but meaningful. It represents a roughly 31 percent increase in funding relative to what existing policy would have delivered to provincial and territorial governments.

Despite health systems being a provincial responsibility, there is a case for federal support.

First, the federal government can more efficiently raise public funds than provincial governments typically can. Having higher-than-necessary tax rates federally, and transferring cash to provincial governments, can therefore be better for the economy than shifting all the tax room to provincial governments.

But, more importantly, there are also differential burdens on provincial health systems primarily due to aging populations. For some provinces, this could either grow beyond their individual capacity to manage or raise increasingly serious equity concerns even if they could.

A little-recognized feature of the new federal funding may help address these very pressures. It represents an interesting shift in the government’s approach to health funding allocations that, while imperfect, may be simple and meaningful. I’ll explain.

Since 2014, federal health transfers to provinces have been allocated on an equal per-capita basis. A province with double the population as another would receive precisely double the dollars.

But the new funding announced in 2023 is, in part, allocated differently.

Of the $46 billion in new funding, just over $19 billion is a boost to the Canada Health Transfer, which is allocated based only on population.

But just over half of the new funding is embedded within new “Tailored Bilateral Agreements”. These agreements will feature some variation across provinces in what the funds will be used for. The most interesting thing about them, though, is not mentioned explicitly by the government: they’re worth different amounts for different provinces.

I display the projected per capita value of the CHT Boost and the Bilateral Agreements below. On average, the bilateral agreements are roughly $60 per capita nationally. Newfoundland and Labrador and Prince Edward Island are set to receive 2.5 times more than that, while Ontario, Quebec, British Columbia, and Alberta will receive less.

While differences in demographics are a significant source of differential pressure on provincial health systems, the uneven allocation of new dollars does not explicitly address this.

Unfortunately, it isn’t easy to see what’s driving these differences.

The government’s own policy backgrounder and the individual agreements with provinces are silent about how dollars are allocated. Perhaps it would be politically difficult to communicate this. But the funding formula can be backed out from the announced commitments, combined with Statistics Canada’s population projections.

It turns out that funding is provided through (1) a fixed amount and (2) a common per-capita allocation.

Of the $25 billion, I estimate $4.85 billion is allocated through fixed amounts of $500 million over ten years for provinces (except PEI, which receives $200 million) and $50 million for territories. In addition, provinces will receive $48.39 per person on average over the coming decade. For comparison, the CHT will provide roughly $1,470 per person over this period. (These are averages. Values grow over time within the decade, and are not adjusted for inflation here.)

To understand this formula better, consider Newfoundland and Labrador. That province is set to receive a projected $749 million over the next ten years through its bilateral agreement with the federal government. This is $500 million in the fixed component and $249 million in the population-based component from $48.39 per person times ten times the 514,000 average annual population that Statistics Canada projects the province will have from 2023 through to 2032.

In Alberta’s agreement, an expected $2.92 billion will be transferred over the coming decade. This includes the same $500 million fixed amount as Newfoundland and Labrador, plus $2.42 billion in population-based amounts from $48.39 per person times ten times its projected 5.01 million average annual population.

For small provinces, these fixed amounts are a very important share of the total new funding, while nationally they account for only one-fifth of the total.

Will this new approach to allocating new health funding help offset pressures from aging populations? It may, at least in smaller provinces.

Since smaller provinces are also somewhat older than large provinces, incorporating a fixed payment within new health transfers yields an allocation that tilts towards older provinces. The share of additional health dollars, for example, received by Atlantic provinces was just over 9 per cent. Their share of the national elderly population is roughly 7.5 per cent. Their share of the national total population — which determined CHT allocations — is 6 per cent. The new dollars, therefore, pull overall health funding allocations for this region closer to its elderly population share.

Some have proposed allocating the Canada Health Transfer in a way that reflects each province’s share of the national elderly (65+) population rather than the total population as is currently done. While an interesting option, it has gained little traction.

This new approach of having a fixed and variable component to health transfers isn’t perfect, since Quebec is both old and large, and therefore receives little benefit from the fixed payment. But it may be a simple alternative that moves the funding needle in the right direction.

Trevor Tombe is a professor of economics at the University of Calgary and a research fellow at the School of Public Policy.