Healthcare in Canada is a shared responsibility between federal and provincial governments. The exact level of responsibility of each jurisdiction has, however, varied over the years. The former Harper government often stated that healthcare should be a provincial matter while the incumbent government wants to extract more efficiency and progress on specific objectives from the provinces. The federal government currently contributes about 23 per cent of the provincial healthcare budget through the Canada Health Transfer (CHT). In 2017 and beyond, however, the proportion of the federal contribution to healthcare funding could drop as a 10-year funding agreement focuses on curbing costs and targeting finances to certain priority areas.

Since 2004, a long-term funding formula originally enacted by the Paul Martin government has seen the CHT grow at an annual rate of 6 per cent. Beginning in April 2017, a formula set by the former Harper government would see annual CHT growth be linked to the 3-year moving average of nominal GDP (but not fall below 3 per cent). Anticipating the imminent expiry of this agreement, provincial and territorial governments have joined efforts to ask the federal government for a new funding agreement. In December 2016, the provinces submitted a tentative proposal calling for a 5.2 per cent annual escalator in CHT funds. They insisted that such an increase is necessary to maintain the current level of services considering the cost-drivers in the healthcare system. Some of these drivers referred to include an aging population, population growth, and inflation among other economic and socioeconomic indicators.

In response to the provinces’ submission, the federal government claims that little improvements in healthcare delivery were achieved over the last ten years despite the uninterrupted increase in funding. Their stance calls for improving efficiency and entails targeted funding to contain costs instead of pouring more money into a broken system. In their December offer to the provinces, the federal government offered a 3.5 percent annual increase in CHT over 10 years plus some additional targeted funding. The federal government stipulates that a certain part of the additional funding be conditionally dedicated to areas deemed to be a priority for improving national healthcare. Those include allocations dedicated to home-care, palliative care, and mental health, in addition to a small share for prescription drugs and health innovation initiatives.

Initially, the provinces unanimously rejected the federal offer, citing the 5.2 per cent included in their proposition as the bare minimum required to maintain the current level of healthcare services. However, after months of stagnation in negotiations, successive bilateral deals were signed separately between the federal government and each of nine provinces/territories (British Columbia, Saskatchewan, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland & Labrador, Nunavut, Northwest Territories, and Yukon). As of March 2017, Ontario, Alberta, Quebec and Manitoba are the only provinces left without a long-term funding agreement. Lacking any agreement by April 2017, CHT funding for these provinces would revert to the GDP-linked formula set by Harper and not contain any of the additional funds allotted for mental care, home care, palliative care or prescription drugs.

In these bilateral federal-provincial deals, the CHT escalator will be linked to the 3-year moving average of nominal GDP growth but not fall below 3 percent. Combined with the additional funding dedicated to priority areas (amounting to $11.5 billion), the total annual growth in federal health funding is estimated at approximately 3.7 per cent. The new escalator represents a significant drop from the 6 per cent escalator the provinces have been receiving since 2004 and from the 5.2 per cent escalator that was requested in their earlier proposal.

An analysis by a Canadian think-tank, Institute of Fiscal Studies and Democracy (IFSD), suggests that this escalator will be insufficient to meet the growing needs of the provincial and territorial healthcare systems. Consequently, provinces would need to introduce multiple cost-containment measures to ensure the sustainability of their healthcare system. Controlling the costs of health professionals and reducing drug expenditures are often the go-to cost-containment measures imposed in Canada. This is particularly relevant in Ontario, as physicians continue to fight the fee-cutting initiatives levied by the provincial government over the last two years.

Reduction of drug expenditures will also be backed the PMPRB’s (Patented Medicines Price Review Board) upcoming reform of pricing guidelines. The reform will consider ways to reduce patented medicine prices by offering lower price ceilings and/or adjusting the basket of reference countries used in the price setting process. Considering these developments, pharmaceutical companies could find more value in product-listing agreements (PLA, also known as risk-sharing agreements) when negotiating listing contracts with provincial drug plans. PLAs can provide a balanced compromise that achieves value for public payers while maintaining incentives for pharmaceutical companies. Any cuts to drug coverage, if they occur, could also be offset by an additional CA$500 million in funding over 5 years set out specifically for prescription drugs in the federal deal.

Reduced federal funding has the potential to undermine the foundational principles of the Canada Health Act. Provincial governments could be forced to cut public healthcare services as they feel more fiscal pressures in upcoming years. To finance health services, provinces may resort to practices that fundamentally violate the public administration aspect of Canada Health Act such as extra-billing, user fees, and privatization. Saskatchewan has already been feeling the effect of a lack of funds to address rising healthcare costs as they started allowing private for-profit MRI scans to operate in the province. This form of privatization of healthcare is disastrous for Canada because it is uncoordinated and largely unchecked. Without national standards on this practice, health system inequality could be on the rise across the country as each province implements ad-hoc measures to alleviate pressure on their underfunded provincial system. For the industry, a healthcare system that is fragmented in funding is also fragmented in operation. Pharmaceutical companies could encounter even more disparity in access for their drugs due to growing difference in each province’s own reimbursement resources and priorities.

The year 2017 will be a challenging year for everyone involved in healthcare in Canada - from patients to government to the industry. In the new funding environment, provincial and territorial governments will no doubt need to make adjustments to extract greater efficiency from their healthcare systems. The question is: will the chosen cost-containment measures be sustainable for all three parties or will they leave gaps in care and coordination that will be felt by patients and industry alike?

This blog is part of a series of posts from DRG’s global market access team examining challenges facing pharmaceutical firms in different countries in 2017. See our other blogs as they are added here (


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