Is the Health Care Cost Curve In Canada Finally Bending?

While public health care spending in Canada has been growing, what has not received a lot of attention is that after adjusting for inflation and population, growth rates of real per capita public health spending in Canada have actually been declining.

Using data from the Canadian Institute for Health Information, over the period 2000 to 2011, real per capita public health spending has grown at an average annual rate of 2.8 percent.   Since 2008, real per capita public health spending growth rates have steadily declined – from 3.6 percent in 2008, to 2.3 percent on 2009, and to estimates of 1.9 and – 0.7 percent in 2010 and 2011 respectively.

Does this mean that the cost curve is finally being bent and we have gotten health spending under control?  The answer is maybe but likely not.  Uwe Reinhardt in a piece on the recent slowdown in U.S. health care spending offered the lagged effect of the recession as one explanation.  Health spending is much like the proverbial oil tanker on the high seas and it takes a while to change speed and direction. Of course, Canada was supposed to have weathered the recession better than the United States but the recession still had an impact on government budgets and ultimately health spending. 

As the accompanying figure shows, real per capita spending growth rates slow down substantially in 1984 and 1985.  This is after the 1981-82 recession.    And in the wake of the 1991 recession, spending growth slows down in 1992 and moves into negative territory from 1993 to 1996.  Indeed, the estimate of negative growth for 2011 represents the first decline in real per capita spending since 1996.  Of course, the declines of the mid-1990s also coincide with the transfer reductions to the provinces by the federal government as a result of the federal deficit reduction program. But then, all of this can be tied to poor GDP performance if you want to.

 

Along with recession-induced effects on spending, the other bit of evidence that the health spending cost curve may not yet be bending is when the data is examined at the provincial level.  Figure 2 plots the annual growth rates in real per capita provincial government health spending by province.  For 2011-2012, six provinces are projected to decline declines in real per capita spending with the largest declines in Ontario and Alberta.  Newfoundland & Labrador, Manitoba, Saskatchewan and Quebec are still projected to see increases.  The provinces with declines in real per capita government health spending have not necessarily been impacted with the worst GDP performance.  Alberta (-5.7%) and Saskatchewan (+2.7%), for example, have been doing relatively well economically and yet one is seeing a healthy increase while the other a steep decline.  Alberta may be bending the cost curve or it may be having another resource revenue shock or it may be having a political reaction to the previous year's estimated massive spending increase of 11.5 percent.

In other words, it is still too early to tell whether the Canadian health spending cost curve is about to bend.  After the declines of the mid-1990s, spending grew at ferocious rates and made up for the declines.  But the economy also grew very rapidly during this period - meaning economic growth is the most important ingredient in driving health care spending.  If the economy starts to grow at a robust rate, expect health spending to eventually also pick up as the budget constraint relaxes.  On the other hand, if we enter a long-term period of slow economic growth, it will be accompanied by slower health spending growth.  This may only look like the cost-curve is being bent.  More convincing evidence that the health care cost curve is being bent would require that real per capita health spending rise more slowly than real per capita GDP growth.

Comments

[Shangwen]

Livio, I suspect the Alberta numbers may have to do with rapid population growth in the face of a relative shortage of health care professionals and hence expenditures in that province. And either they or Sask have the highest nurses wages in the country (see Nick's post...).

The problem I see in the data is that, while health spending eventually goes in the same direction as GDP, it doesn't track the intensity of those changes. For most of the boom years, HC spending rose above GDP, and during the recession it was cut less than declines in GDP. This certainly fits the US story: the economy is in the toilet, and the health care industry continues to party on. I have even heard health care costs put forward as one of the main wedges in slowing employment growth, because business can afford wages for new employees, but not their health care.

I was a student in the 90s when all the big cuts were going through. If you look at the population health and mortality from the period and just after, it's a lesson in how, up to a point, the health care system does suffer when there are cuts, but the health of the population does not.

[Chris J]

Liveo,
What happens if you normalize to GDP instead of inflation adjusted dollars per capita?

Chris

[Nick Rowe]

I think you are right, Livio, that recessions do seem to have an impact on healthcare spending (though lagged). But I'm a bit surprised that there isn't a clearer signal from the 1982 recession, which, IIRC, was bigger than the later ones.

[Livio Di Matteo]

Hi Chris:
Not sure I follow you. Do you mean the ratio of per capita health spending to per capita GDP?

[Shangwen]

Nick, if you follow the link to Reinhardt's piece and look at chart 4, there is a clear signal in the US in overall NHE for the 1982 recession. I suspect this is the case in the US because NHE is linked not only to personal income and out-of-pocket expenses, but employment generally because of the employment-based health insurance scheme there, and this was more the case in 1982 than it is now. It's also worth noting the Medicaid/care data show that government as a fraction of NHE in the US is nearly 60% and has been so for some time (including pre-Obama)--only about 5-10% less than government NHE fraction in Canada.

[Determinant]

The 1982 recession's figures may have been smothered by health-care reform. The Trudeau Government implemented the Canada Health Act in 1984 which outlawed extra billing, enforced by said billing being deducted dollar-for-dollar from a province's health transfers. This was the last time such large-scale payment structure changes were implemented in Canada.

AIUI 1894-1987 was when provinces were in the process of incorporating the expenditures formerly provided extra-billing into the public system.

[Nick Rowe]

Shangwen and Determinant: thanks.

Livio: my interpretation of Chris is that he did mean that ratio of health care spending to GDP.

[Livio Di Matteo]

Well, as a share of GDP, public health spending in Canada peaked in 2009 at 8.5% and is estimated to be 8.4% in 2010 and 8.1% in 2011.

[Chris J]

Liveo,
Nick is right: I am a non-economist getting the jargon wrong. Your plots were corrected for population and inflation. If instead health-care spending were plotted as a fraction of GDP we would know how we were doing. It seems many important economic variables (debt, deficit, spending, taxation,...) are normalized to GDP. It it were constant (with fluctuations at times of recession or high growth excepted) then it seems it is sustainable. If health care spending is growing faster than GDP then we have an issue.

Thanks.

[Chris J]

I should have just googled it: data from '70 to '05 here:
http://www.cmaj.ca/content/177/1/51.full

Thx

CJ