On health-care funding, 2 + 2 probably does equal 4

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Provincial governments are trying to divine the Harper government's plans for future health-care funding, in advance of Monday's meeting of finance ministers. They might want to pencil in 4 per cent.

Why 4 per cent? It has a lot to do with Europe and Pierre Trudeau.

Ottawa and the provinces fought over health funding in the Seventies, too – they fought over everything, back then – but Trudeau and the premiers ultimately came up with a deal that lasted for years. In 1977 both sides agreed to an incredibly complex formula, the essence of which was that federal funding for health care would increase annually at the rate of the nominal increase in the gross domestic product averaged over the previous three years.

In other words, take the rate of inflation, add the rate real of economic growth – which, combined, equals nominal GDP – average that number over three years, and Bob's your uncle.

Within the Conservative government, according to sources, nominal GDP growth is generally favoured as a reasonable basis for future increases in health-care transfers once the current commitment of annual increases of 6 per cent expires in 2016.

John Wright is CEO of the Canadian Institute for Health Information, a non-profit corporation funded by all levels of government that compiles data on health care nationally. He believes the 1977 formula is "the most logical" basis for a new agreement.

"It was funded that way in the past, and it would seem to be reasonable going forward," he said in an interview.

Federal government revenues generally increase at same rate as nominal GDP. As Ottawa struggles to eliminate the deficit, Mr. Wright believes, increasing transfers at the same rate that revenues increase, and no more, just makes sense.

Conversations with government officials suggest that it makes sense to the Conservatives, too.

If this is the formula that is finally adopted, then we can already calculate the likely increase for 2017, the first year of the new agreement. The Bank of Canada is determined to limit inflation to 2 per cent annually. The spreading debt crisis that is imperiling the euro is suppressing growth projections for Canada going forward. Over the next three years, growth of 2 per cent annually is a reasonable guess. Two plus two equals four, goes the saying.

Of course, the Canadian economy could prove the cynics wrong, but an average of 3 per cent is as enthusiastic as anyone not waving pom-poms would predict. In that case, health-care funding would increase by 5 per cent – still well below the provincial demand of 6 per cent, at least.

Worrywarts warn that the United States and Canada could be dragged into a recession along with Europe. If so, inflation could turn into deflation, the Armageddon of financial forecasts. But the Conservatives promise that the final agreement will contain a funding floor – a guaranteed minimum increase – regardless of the vagaries of inflation and growth.

Still, provincial governments will have no choice but to rein in health-care spending in light of reduced federal transfers.

There is another factor that provinces will need to bear in mind. Previous health-care funding agreements have contained an equalization component, because smaller, poorer provinces have a harder time funding their health-care systems than richer provinces.

But the Harper government is adamant that any future deal be negotiated on a strictly per capita basis. This will benefit wealthier provinces such as Alberta, but will be bad news for places like New Brunswick, which are not only poorer but have older and sicker populations to deal with.

Atlantic Canada and Quebec will have to live with this, however. The Harper government is firm in the belief that regional equalization subsidies should be restricted to the equalization program itself. In everything else, they maintain, everyone should be treated equally.

This is the federal position today; that doesn't mean things won't change before the final agreement is signed. But if you're a provincial finance minister, you probably don't need to wait for that deal to know roughly what you'll be getting from Ottawa for health care after 2016. Think 4 per cent, and carry on.

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