Evidence on the determinants of Canadian provincial government health expenditures: 1965–1991

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Abstract

Real per capita provincial government expenditures on health care over the period 1965–1991 are examined using pooled time-series cross-section regression analysis. Key determinants of real per capita provincial government expenditures on health care over the period 1965–1991 are real provincial per capita income, the proportion of the provincial population over age 65 and real provincial per capita federal transfer revenues. Established program financing had a negative and significant impact on real per capita provincial government health expenditures in Newfoundland and Quebec. An income elasticity of 0.77 implies that health care is not a luxury good.

Introduction

Like other major industrialized countries, Canada has seen a steady increase in per capita health expenditures and the share of GDP accounted for by health spending in the postwar era. For example, over the period 1960–1987, the health care expenditure to GDP ratio for Canada rose from 5.5% to 8.8%. For France, it rose from 4.2 to 8.5%, Germany 4.7 to 8.1%, Italy 3.3 to 7.2%, the United Kingdom 3.9 to 6%, Japan 2.9 to 6.8% and the United States from 5.2 to 11.2% (Schieber, 1990: 159). Compared to these major OECD countries, Canada had one of the lowest rates of increase in the health care to GDP expenditure ratio over this time period2.

Nevertheless, rising public expenditures on health care are a major policy concern in Canada and the recent public sector fiscal problems have placed additional stress on the public funding of health care. In Canada, the federal and provincial governments jointly finance public expenditures on health but under the provisions of the British North America Act it is largely up to the provincial governments to actually deliver publicly funded health care to citizens. About 47% of health care spending in Canada is financed by provincial governments while another 22% comes from federal transfers to the provinces which means that provincial governments in Canada are responsible for nearly 70% of health care expenditures in Canada.

An important question for policy purposes is what factors have determined growth in provincial government health care spending3. There is now an international literature examining the determinants of health expenditures across countries which can be applied to Canada's provinces. Moreover, the publication of public finance historical statistics for the period 1965/66–1991/92 now provides a consistent definition of government expenditures on health care across provinces which facilitates the analysis of provincial government health expenditures. This paper uses a pooled time-series cross-section approach to estimate and examine the determinants of provincial government health spending over the period 1965–1991.

The results of the paper show that the key determinants of real per capita provincial government expenditures on health care over the period 1965–1991 are real provincial per capita income, the proportion of the provincial population over age 65 and real provincial per capita federal transfer revenues. The estimated income elasticity of real per capita provincial government health care expenditures is 0.77 suggesting that over this time period, provincial government health expenditures were not a luxury good. In addition, the introduction of Established Program Financing (EPF) had a negative and significant impact on real per capita provincial government health expenditures in Newfoundland and Quebec.

Overall, the results suggest that federal transfers are a very important determinant of provincial health spending and the decline in federal cash transfer payments that will come about as a result of the new Canada Health and Social Transfer will lead to a decline in real per capita provincial health spending. When the transfer decline is combined with a growing proportion of population over age 65, it suggests that provincial health care expenditures will continue to be a demanding policy issue.

In the remainder of the paper the determinants of health care literature is surveyed in order to place the results of this paper into proper context. An overview of the provincial data is then provided which examines the trends in health care expenditures across Canada's provinces. This is followed by a discussion of model results using a pooled time-series cross-section regression analysis approach and concluding remarks.

Section snippets

The health expenditure determinants literature

Over the last quarter century, a body of literature examining the determinants of health care expenditures has arisen in an effort to explain why health expenditures have risen so much in the postwar era and to offer suggestions as to what variables can be influenced to reduce costs. Most of these studies have used a determinants approach in which per capita health care expenditures are regressed on variables thought to affect health expenditures. Among the determinants of per capita health

Overview of the data

The dimensions of provincial government health expenditures are outlined in Fig. 1Fig. 2Fig. 37. The rise in real per capita provincial government health expenditures was quite steady over the period 1965–1991 as Fig. 1 illustrates, with growth rates the highest over the period 1965–1975. In 1965, real per capita spending (1986 dollars) averaged

Model and estimates

The basic model estimated in this paper is drawn from the determinants of health expenditure literature. Real per capita provincial government expenditures on health care are assumed to be a function of real provincial per capita income, the proportion of the provincial population over age 65 and real provincial per capita federal transfer revenues. The model is specified in log–log form so that the coefficient estimates are elasticities and therefore enable us to interpret the responsiveness

Conclusion

This paper has utilized a pooled time-series cross-section data set for Canada's provinces over the period 1965–1991 to examine the determinants of real per capita provincial government health expenditures. The regression results explain 92% of the variation in real per capita provincial government health expenditures and show that real per capita provincial government health expenditures are positively and significantly related to real provincial per capita income, the proportion of the

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    The authors wish to thank two anonymous referees, A.J. Culyer and J.P. Newhouse for their comments on this paper.

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