The historic decision to create a universal Canadian public health care system in the late 1960s and early 1970s was driven by the federal government’s exercise of its constitutional “spending power” – it offered 50-50 cost-sharing transfers to those provinces that created public health insurance programs covering nearly all medically necessary physician and hospital-based services. Long-term care (LTC) services were left out of this initial arrangement. Today, Canadians are facing a moment as consequential as the creation of public health care now that the nation has been exposed to the LTC system’s major shortcomings during the COVID-19 pandemic.

The various means adopted over the decades for transferring federal money annually to the provinces for Canadian medicare have proven to be inadequate and have held back needed reforms. However, a new, redesigned federal-provincial cost-sharing transfer for LTC – down-payment federalism – could galvanize much-needed reforms while avoiding past mistakes.

Since their introduction, conditional federal-provincial health transfers have become unproductive. For far too long, federal and provincial governments have been engaged in an endless game of shifting blame and responsibility for our health-care system’s inadequacies, with the provinces pointing to the feds’ declining share of funding support as the reason for inaction. As a result, necessary health-care reforms languish.

A good idea gone wrong

The creation of our health-care system is regarded by many as Canada’s most important policy success. Not long after medicare began, however, concerns about its fundamental cost-sharing arrangement started to emerge. In the late 1970s, the federal government grew concerned about its ability to finance these ongoing commitments, so it replaced its open-ended cost-sharing commitment in 1977 with an unconditional block funding arrangement (under Established Programs Financing provisions). This included converting half of the cash transfer into federal tax points and transferring them to the provinces to enable them to collect more of their own tax revenues to pay for health care. The provinces, however, refused to publicly acknowledge the transfer of tax points and instead complained that the federal government was violating the agreement.

In the early 1980s, in response to public concerns about the growing role of private medicine in the health-care system – and what the feds saw as provincial politicians’ unwillingness to appropriately manage it – the federal government reasserted the conditions on health transfers in the principles of the Canada Health Act of 1984. In theory, the feds would enforce the act by withholding some of the annual transfer payments if the CHA conditions were not met. But in practice, such penalties were circumscribed to the application of user fees or extra-billing by physicians.

In the mid-1990s, when the federal government faced a debt and deficit crisis, it unilaterally cut health and other social transfers to the provinces by more than one-third. Any remaining trust between Ottawa and the provinces was irredeemably lost as a result of this decision. As governments’ public finances improved in the late 1990s, health transfers slowly started to rise again and culminated with the 2004 Health Accord, whereby Ottawa committed to six per cent annual increases for a period of 10 years in exchange for health-care improvements on a number of fronts (most of which never materialized). This commitment was extended to 2017, after which they have increased in line with average economic growth in Canada, subject to a minimum increase of three per cent each year.

Federal involvement in funding health care, while central in efforts to establish our universal publicly funded system, has become more of a hinderance to progress than a catalyst. Conditions on health transfers to the provinces have two basic flaws: they are less effective in changing provincial governments’ behaviour because the money goes into general provincial revenues and are used as provinces see fit, and because they focus more on how the provinces administer and deliver these services rather than on general health and patient outcomes.

What has resulted is blurred accountability and mutual distrust, leaving most Canadians confused as to what level of government is to blame when issues arise. Cost-sharing agreements should therefore be used cautiously, so that voters see health policy issues as purely provincial responsibilities.

With this in mind, a new way of designing conditional transfers is warranted. Long-term care was not part of the original list of health services to be covered by public health insurance. Rather than include it in the Canada Health Act, the federal government should embark on a new way of funding long-term care that would spur and facilitate the extensive, medium-term reforms required.

Breaking the stalemate

What to do when two sides in a negotiation are concerned about the other party fulfilling its side of the bargain? Simple. Pay half up front, and the other half when the job is done. The feds should negotiate a cost-sharing arrangement with the provinces based on anticipated increases in LTC costs, which will determine the size of the transfer. Governments should jointly set outcome-oriented, not process-oriented, objectives for improved quality of LTC and should develop ways to measure progress toward these goals. Then the federal government should get out of the way.

How would down-payment federalism work for LTC?

Because there is no precise calculation of total LTC costs in Canada, an estimate is required. Canada has comparable provincial/territorial data for public funds spent in LTC institutions, but only has estimates of how much each province/territory spends on LTC services delivered in individual homes. In 2019, the provinces spent approximately $20.7 billion to finance long-term care institutions (according to the Canadian Institute for Health Information’s national health and expenditure database). Recent research concludes that roughly 82 per cent of LTC spending in Canada goes to institutions, which means that roughly $4.6 billion in 2019 was spent on public LTC services provided at home.

By adding public spending on LTC institutions to estimates of public home-care spending, total provincial and territorial LTC costs are estimated to be slightly more than the $25 billion in 2019. Assuming these figures will increase in line with the annual growth of the age groups that have the highest need for LTC (those aged 80 and up) as well as government-sector inflation, we can project the trajectory of provincial and territorial LTC institutional costs in the next 20 years. According to this simple calculation,  we can expect the costs of LTC to more than triple over the coming 20 years, from $25 billion in 2019 to slightly more than $86 billion in 2039. (See figure 1.)

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But, of course, embedded in this projection is the assumption that the provinces just keep doing what they have been doing in the past, which we know is insufficient in terms of quality of care. All provinces have to invest in improving the quality of LTC services. So, when we add a premium of 15 per cent for the provinces to make necessary improvements to LTC, we get a total expected increase in LTC costs of $70 billion by 2039 relative to 2019. (We get $70 billion by subtracting $25 billion from $86 billion, then adding 15 per cent of the difference.)

If the federal government were to pick up half of this anticipated increase in costs, that means it would need to cover about $35 billion of the public bill for LTC in the coming decades. That would mean transferring to the provinces an additional $17.5 billion this year, then another $17.5 billion in 20 years’ time.

How would down-payment federalism advance LTC reform?

Such a transfer has the potential to create clear lines of accountability and give provinces needed funds to bring long-overdue improvements in the quality of care. By focusing related federal conditions on the data collection of specific LTC outcomes rather than on constraints on how to use funds, the feds would free up the provinces to innovate in the sector.

The feds should demand that the provinces collect and provide LTC data on patient-centred outcomes, such as resident-satisfaction scores, quality of life, and caregiver burnout, for example. The data could be paid for by the feds and should be comparable across provinces and territories. Much like pan-Canadian standardized test data helps educators across the country to identify and discuss good and bad policies, or models of delivering services, these data would perform a similar function for LTC.

An advantage of this new transfer is that it would remove short-term political cycles from the policy realm. With elections roughly every four years, a concern for the provinces is that a new federal government could be elected with a different set of priorities. This would no longer be a major issue with a down-payment transfer.

The only time that the federal government would start to seriously look over the provinces’ shoulders would be near the end of the 20-year period, when the second installment comes due. Given the size of the lump-sum transfer, and taking into account any provincial progress toward improved outcomes, it would be difficult for a future federal government to walk away from the deal. At the same time, a province that has not made improvements to LTC would be rolling the dice and would have to face the scrutiny of its electorate if it has not improved its LTC system relative to its peers.

Should the provinces find more cost-effective ways to deliver services – say by providing a greater share of LTC services in people’s homes rather than in institutions – and the increase in LTC costs is lower than originally anticipated, the provinces should get to keep the savings.

A new approach to health transfers to help spark LTC reform

Any new transfer must seek to end the blame game between governments and remove the excuse that a lack of financial resources is holding back reforms. Conditions would focus on LTC outcomes and the collection of data to observe progress toward these outcomes rather than have the federal government play an ongoing enforcement role.

The federal government and the provinces should agree on projections of long-term-care cost increases in the next 20 years and what health outcomes should be measured. Then Ottawa should make a down payment and get out of the way. In another 20 years, when the provinces have done their job, then the federal government can settle the remaining tab.

This article is part of the Kick-starting Reform in Long-Term Care special feature.