This week’s Ontario health news featured a report by the province’s Financial Accountability Office that the challenges facing Ontario’s health system were “expected to persist” as a result of under funding and accompanying shortages of health workers. The FAO projected total health sector spending for Ontario and compared it to the Ontario government's projections and found that between 2022-23 and 2027-28, a significant gap opens up between what the government is projecting and what the FAO expects spending to be. The cumulative shortfall over this period will be about $21 billion which over a seven year period averages out to about $3 billion a year.
The FAO projections were for total government health spending but one suspects that if one takes Ontario’s robust population growth into account, the future shortfalls are probably more serious. Indeed, per person provincial government health spending going into the pandemic was essentially flat as Figure 1 shows.
It turns out that spending shortfalls have been a feature of Ontario health spending for some time when one compares what is actually being spent to what simple models of health spending determinants predict should be spent.
Generally speaking, models of health spending determinants consider the main drivers of health spending to be income (usually measured by GDP) and aging (usually measured by the proportion of population over 65 years). Fun fact: In Ontario, the proportion of population aged over 65 was 8 percent in 1965 and in 2022 stands at just over 18 percent. Table 1 uses data from the Canadian Institute for Health Information National Health Expenditure database as well as data from Statistics Canada to present a simple regression of the determinants of real per capita Ontario provincial government health spending. Real per capita provincial government health spending (in 2021 dollars) from 1971 to 2022 is regressed on real per capita GDP as well as real per capita federal cash transfers (health, social, equalization) – which is really a source of provincial government income. As well, there is included the percent of the population aged 65 to 79, the percentage of the population aged 80 years and over, and a dummy variable to capture the impact of the COVID spending surge. The results are estimated with STATA using OLS .
Both per capita GDP and per capita transfers are both positive drivers of provincial government spending. A one dollar increase in real per capita federal cash transfers supports about 50 cents in real per capita provincial health spending while a 1 dollar increase in real per capita GDP is associated in a 3-cent increase. The results also suggest that relative to the population aged below 65 years, the real aging driver of spending is the proportion aged over 80 years. The percentage aged 65 to 79 seems to be negatively associated with real per capita provincial government spending. Put another way, there may be a healthy survivor effect in that if you make it to 65, you are likely to be in relatively good shape until you approach 80 when the costs of aging quickly escalate. And, these results implicitly suggest that the proportion under age 65 is a bigger driver of spending that popular belief thinks it is.
The coefficients in this regression can be used to generate
predicted Ontario government health spending based on the determinants and then compared
to actual spending. These results are
plotted in Figure 2. In the immediate
wake of the Great recession – between 2010 and 2012, actual real per capita
government health spending in Ontario exceeded what the economic determinants
predicted it should be. However, from
2012 to the onset of the pandemic, not only was inflation adjusted Ontario
government health spending per person flat, but it was below what the model
predicts it should have been. For example, in 2016, Ontario
spent $150 per person less on provincial government health spending -
about 3 percent less per capita. When the per capita numbers are aggregated to population totals, the numbers are in the billions. On average
over the period 2012 to 2019, Ontario spent an average of 1.1 billion dollars
less than what the model predicts. Some years, this shortfall was as high as
2.5 billion dollars. And, with the pandemic winding down in 2022, it appears
the shortfall has reemerged with spending $2.1 billion below what it should be.
While it has long been known that per capita government health spending in Ontario is below that of the other provinces, it is also lower than what Ontario's own economic and social health spending drivers predict it should be.