Canada’s health system is causing a crisis in provincial public finances. The growth in government health spending continues to outpace our public capacity to pay for it. The provinces must shift some costs onto medical consumers, or risk eventual provincial bankruptcy.

According to a recent Fraser Institute study using provincial government data, total government spending on health grew at an average annual rate of 7.5 percent across all provinces over the period from fiscal years 2000-2001 to 2009-2010. During the same period, total available provincial revenue from all sources, including federal transfers, grew at an average annual rate of only 5.7 percent. At the same time the economy, measured by gross domestic product (GDP) grew by only 5.2 percent.

The recent data mirror the long-term trend. Government spending on health has grown faster on average than GDP over the entire history of Medicare. The result is that total government health expenditures accounted for 8.4 percent of GDP in 2009 up from only 5.4 percent of GDP in 1975.

Health spending is also consuming larger shares of available government revenues over time. As of the end of 2009/2010, government health spending across all the provinces already consumed between 34.3 percent (Prince Edward Island) and 52.5 percent (Quebec) of total available provincial revenues from all sources. This is expected to get much worse.

Projections based on the most recent ten-year growth trends show that health costs in eight out of ten provinces are on pace to consume 50.0 percent of total revenues by 2028. As of the end of 2011, both Ontario and Quebec will already be spending half of their total available revenues on health; and four additional provinces (Saskatchewan, Alberta, British Columbia, and New Brunswick) are on pace for government health spending to consume 50.0 percent of revenues by 2017.

When federal transfers are excluded from provincial revenues, the provinces are staring impending bankruptcy in the face. Government health spending already consumes between 48.0 percent (Alberta) and 87.7 percent (Nova Scotia) of total available own-source revenues across the provinces.

Federal spending is not a solution. Previous Fraser Institute research using Statistics Canada data has shown that the feds provided the provinces with an estimated $115.7 billion in cash transfers for health care between 1997/98 and 2006/07. The average annual rate of growth in transfers to the provinces for health over this period was 12.9 percent. The rate required to keep health spending growing at the same pace as population and inflation was only 3.1 percent. Based on this data, it is estimated that Ottawa increased its cash transfers for health to the provinces by $36.0 billion more than needed to compensate for population growth and inflation over the period – and still the provinces are approaching bankruptcy from health spending costs. The analysis confirms that federal transfers allow the provinces to avoid necessary reforms.

The provinces have imposed tax increases to keep revenues growing at pace with health spending. In 2004 the province of Ontario introduced an income-based health surtax and last year the Quebec government followed suit with its own surtax. The government of British Columbia has recently announced that its health surtaxes will rise to keep pace with the province’s hikes in health spending. In each of these provinces, health taxes are progressively assessed against income and are not connected to the personal use of medical services, and therefore will not work to regulate consumer demands for health care, the driving force behind the unsustainable growth in government health spending.

The economic and political realities of this crisis are not pretty. Policymakers are under pressure to increase revenues, but raising taxes discourages economic growth, leading to fewer jobs, stagnant incomes and ironically, a smaller revenue base. As health spending consumes a greater percentage of available revenue, a smaller share of funds is left over for other important public priorities, encouraging ugly political battles between interest groups over shrinking resources. Governments respond by centrally restricting spending on health in order to contain costs, resulting in shortages which create long waits for access to necessary medical goods and services.

The ‘pay more, get less’ approach to health policy isn’t working. It is absurd to suggest that governments can sustain the health system indefinitely by raising taxes and rationing access.

Instead, the feds should simply suspend enforcement of the Canada Health Act’s prohibitions on private payment, for at least five years, so the provinces can experiment with alternative funding policies without risking the withdrawal of federal transfers.

The provinces should require patients to pay out-of-pocket for a fixed percentage (e.g. 25 percent) of any publicly-funded medical goods and services they use – maxing out at an accumulated fixed percentage of income (e.g. 3-5 percent), with full cost subsidies reserved for chronically ill patients. Canadians should also be allowed to buy additional private insurance coverage for all necessary medical goods and services. Health providers should be allowed to receive private and/or public payment for their services, and to charge private fees above public reimbursement rates. These simple reforms would introduce immediate economic incentives for efficiency that would organically regulate supply and demand, shift costs off the public system and offer a sustainable source of additional resources.

User-based funding is common in lots of other countries that guarantee universal access to medical care. If the ban on private payment is not lifted in Canada, health costs will eventually bankrupt the provinces.