FSR 2017 – Provincial-Territorial Health Care Cost Drivers - Office of the Parliamentary Budget Officer

Demographics are a key driver of provincial-territorial government health care spending.

Over 1976 to 2015, population growth and ageing, combined, contributed 1.8 percentage points (26 per cent) to average annual growth in provincial-territorial health care spending.

PBO projects that demographics will contribute 1.8 percentage points annually, on average, to growth in provincial-territorial health care spending over the next 25 years, accounting for 43 per cent of projected spending growth.

We project that population ageing—on its own—will contribute 1.0 percentage points to average annual growth over 2016 to 2040, accounting for 23 per cent of projected growth in provincial-territorial health care spending.

Across provinces and territories, we project the contribution of demographics to average annual growth in health care spending over 2016 to 2040 to range from a low of 1.4 percentage points (39 per cent of growth) in Newfoundland and Labrador to a high of 2.7 percentage points (53 per cent of growth) in Alberta.

In PBO’s annual Fiscal Sustainability Reports (FSRs), we have highlighted the fiscal challenge of population ageing on subnational[1] government health care spending. In this year’s report[2] we produced health spending projections for individual provinces and the (combined) territories. To provide additional context for our projections, the following presents a decomposition of cost drivers for growth in provincial-territorial health care spending. The decomposition follows the framework used by the Canadian Institute for Health Information (CIHI) and is augmented to show how PBO’s components map into it.[3]

Health care cost drivers: average annual contributions to growth in provincial-territorial health spending

Percentage points

Period average	General inflation (1)	Population growth (2)	Ageing (3)	Other (4)			Total (1+2+3+4)
				(i)+(ii)	Real GDP per capita growth (i)	Excess cost growth (ii)
History: 1976-2015
1976-2015	3.5	1.1	0.7	1.8	1.4	0.3	7.1
2001-2010	2.3	1.0	0.8	2.7	0.8	1.8	6.8
2011-2015	1.4	1.1	1.0	-0.3	1.1	-1.4	3.1
Projection: 2016-2040
2016-2040	2.0	0.8	1.0	0.5	0.8	-0.3	4.2
2016-2020	1.8	1.1	0.9	-0.8	0.8	-1.7	2.9
2021-2040	2.0	0.8	1.0	0.8	0.8	0.0	4.5

Sources: Canadian Institute for Health Information; Statistics Canada and Parliamentary Budget Officer.

Note: To ensure an exact decomposition, all growth rates are calculated using natural logarithms. However, contributions may not add to total growth in health spending due to rounding. Similar to CIHI, PBO uses GDP inflation as its measure of inflation for health care spending. Projected growth rates and contributions are taken from PBO’s 2017 FSR.

Over 1976 to 2015, inflation contributed 3.5 percentage points annually, on average, to growth in provincial-territorial health spending, accounting for 49 per cent of spending growth over this period. Next, demographics (that is, population growth plus ageing) contributed 1.8 percentage points annually, on average, followed by other factors (that is, growth in real GDP per capita and excess cost), accounting for 26 per cent and 25 per cent, respectively, of spending growth over this period.

Looking ahead, we expect demographics to continue to be a significant driver of provincial-territorial health care spending.[4] Over the next 25 years (2016 to 2040), we project that population growth and ageing will contribute 1.8 percentage points annually, on average, to growth in health spending.[5] This represents 43 per cent of projected growth in provincial-territorial health care spending, which is only slightly lower than the contribution from the largest cost driver, inflation, at 46 per cent.

We project that population ageing—on its own—will contribute 1.0 percentage points to average annual growth, accounting for 23 per cent of projected growth in provincial-territorial health care spending over 2016 to 2040.

Over 2016 to 2040, across provinces and territories, we project the contribution of demographics to growth in health care spending to range from a low of 1.4 percentage points annually, on average, in Newfoundland and Labrador (accounting for 39 per cent of growth in health spending) to a high of 2.7 percentage points in Alberta (accounting for 53 per cent of growth in health spending).[6] The contributions from demographics beyond 2040 are projected to decrease significantly as the contribution from ageing dissipates with the expiration of the baby-boom generation.

Projected contributions from demographics to average annual growth in provincial-territorial health care spending, 2016 to 2040

Percentage points

Canada	N.L.	P.E.I.	N.S.	N.B.	Que.	Ont.	Man.	Sask.	Alta.	B.C.	Terr.*
1.8 (4.2)	1.4 (3.5)	2.2 (4.6)	1.5 (3.6)	1.5 (3.6)	1.6 (3.8)	1.8 (4.3)	1.8 (4.5)	1.4 (3.9)	2.7 (5.1)	1.8 (4.0)	1.7 (4.1)

Source: Parliamentary Budget Officer.

Note: * Terr. denotes the Territories combined. The contribution from demographics includes population growth and ageing. The value in parentheses represents average annual growth in health spending. All contributions and growth rates are calculated using natural logarithms.

[1] The subnational government sector combines provincial, territorial, local and aboriginal governments. In this note, we use “subnational” and “provincial-territorial” interchangeably.

[2] Available at: http://www.pbo-dpb.gc.ca/en/blog/news/FSR_October_2017. PBO’s health care spending projections are based, in part, on data from the Canadian Institute for Health Information (CIHI). FSR 2017 incorporated CIHI data from their 2016 National Health Expenditure Trends. CIHI’s 2017 report was published on 7 November 2017 (available at: https://www.cihi.ca/sites/default/files/document/nhex2017-trends-report-en.pdf).

[3] In PBO’s framework, growth in health spending is decomposed into: nominal GDP growth, growth due to population ageing and excess cost growth (that is, growth in excess of contributions from nominal GDP and ageing), which is assumed to equal zero over the long term. To map these components into CIHI’s framework, first nominal GDP growth is further decomposed into real GDP per capita growth, GDP inflation and population growth and then real GDP per capita growth is combined with excess cost growth to form CIHI’s “other” category.

[4] The projected decrease in excess cost growth over 2016 to 2020 reflects growth in planned spending in provincial and territorial budgets.

[5] Although the average contributions of demographics to spending growth over 1976 to 2015 and over 2016 to 2040 are quite similar, this reflects offsetting changes in the underlying contributions from population growth and ageing over these two periods.

[6] Newfoundland and Labrador’s projected annual contribution is 1.39 percentage points, which is marginally lower than Saskatchewan’s contribution of 1.44 percentage points.