Health Canada Quarterly Financial Report - For the quarter ended December 31, 2012

Table of Contents

• Introduction
• Basis of Presentation
• Highlights of Fiscal Quarter and Fiscal Year to Date Results
• Risks and Uncertainties
• Significant Changes in Relation to Operations, Personnel and Programs
• Budget 2012 Implementation
• Statement of Authorities (Unaudited)
• Departmental Budgetary Expenditures by Standard Object (Unaudited)

Introduction

Health Canada is the federal department responsible for helping Canadians maintain and improve their health. In keeping with the Department's commitment to making this country's population among the healthiest in the world as measured by longevity, lifestyle and effective use of the public health care system, its main responsibilities are as a regulator, a service provider, a catalyst for innovation, a funder, and an information provider. A summary of Health Canada's program activities may be found in Part II of the Main Estimates. Health Canada administers the Canada Health Act which embodies national principles to ensure a universal and equitable publicly-funded health care system.

This quarterly financial report has been prepared by management as required by section 65.1 of the Financial Administration Act in the form and manner prescribed by the Treasury Board, and should be read in conjunction with the Main Estimates, Supplementary Estimates A, Supplementary Estimates B, as well as Canada's Economic Action Plan 2012 (Budget 2012).

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities presents the spending authorities granted to Health Canada by Parliament and those used by the Department consistent with the Main Estimates and Supplementary Estimates for the 2012-13 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before any money can be spent by the Government. Such authorities are given in the form of annually-approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

As part of the Parliamentary business of supply, the Main Estimates are normally tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29, 2012, after the tabling of the Main Estimates on February 28, 2012. As a result, the measures announced in the Budget 2012 could not be reflected in the 2012-13 Main Estimates.

In fiscal year 2012-13, frozen allotments have been established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. Future year changes to departmental authorities have been implemented through the Annual Reference Level Update and will be reflected in subsequent Main Estimates.

As part of the departmental performance reporting process, Health Canada prepares its annual departmental financial statements on a full accrual basis in accordance with Treasury Board accounting policies, which are based on Canadian public sector accounting standards; whereas the spending authorities voted by Parliament are on an expenditure basis.

The quarterly report has not been subject to an external audit or review.

Highlights of Fiscal Quarter and Fiscal Year to Date Results

This quarterly financial report reflects the results of the current fiscal period in comparison to the authorities provided in the combination of the Main Estimates, Supplementary Estimates A and Supplementary Estimates B for fiscal year 2012-13, as well as budget adjustments approved by Treasury Board up to December 31, 2012.

A. Significant Changes to Authorities

The following graph provides a comparison of net budgetary authorities available for 2012-13 as at the end of each quarter.

The following table provides a comparison of authorities by vote at the end of the third quarter of the current and previous fiscal years.

Authorities available for spending in fiscal year 2012-13 are $3,819 million as at the end of the third quarter, compared with $3,858 million as at the end of the third quarter of fiscal year 2011-12, representing a decrease of $39 million, or 1.0%. This decrease is primarily attributable to:

• a $71.8 million decrease resulting from savings identified as part of the Budget 2012 Spending Review;
• a $29.8 million decrease relating to the transfer to Shared Services Canada in support of the government-wide initiative for consolidation and transformation of IT Infrastructure;
• a $24.4 million decrease for paylist requirements resulting from changes to entitlements under collective agreements, primarily the liquidation of severance and termination benefits;
• an $11.3 million decrease relating to the sunsetting of time-limited funding for review and reduction of backlogs in the processing of drug and medical device submissions;
• an $11.3 million decrease relating to the sunsetting of two components of the Prevention and Treatment Action Plans of the National Anti-Drug Strategy; and
• a $3.8 million decrease relating to the sunsetting of 5-year funding to enhance the ability to prevent, detect and respond to outbreaks of food-borne illness.

These decreases are partially offset by:

• a $46.6 million increase due to a 3% growth in the First Nations and Inuit Health Envelope;
• a $27.0 million increase in statutory authorities for disbursements to Canada Health Infoway Inc.;
• a $23.0 million increase in the Indian Residential Schools Resolution Health Support Program;
• a $10.0 million increase for the Brain Canada Foundation to support neuroscience research to advance knowledge for the treatment of brain disorders; and
• an $8.2 million increase for Non-Insured Health Benefits Program Integrity to address the funding gap for both current and new clients.

The fluctuations in authorities available for spending are most notable in the following standard objects:  personnel; transportation and communications; repair and maintenance; utilities, materials and supplies; and transfer payments.

B. Significant Changes in Year to Date Expenditures

The following graph provides a comparison of net budgetary authorities and cumulative spending by quarter for the current and previous fiscal years.

The following table provides a comparison of cumulative spending by vote for the current and previous fiscal years.

During the third quarter of 2012-13, total budgetary expenditures were $2,628 million compared with $2,599 million reported at the end of the same period of 2011-12, representing an increase of $29 million or 1.1%.

Year to date operating expenditures have decreased by approximately $10.4 million or 0.8% when compared to the third quarter of 2011-12.  This is comprised of the following noteworthy changes:

• a $17.5 million decrease in year to date personnel expenditures, due primarily to:
  • a $27.0 million decrease resulting from payments of severance and termination benefits as per collective bargaining agreement settlements;
  • a $12.0 million decrease in salary costs related to the transfer of operations and employees to Shared Services Canada;
  • an $8.6 million increase in salaries resulting from the transfer and consolidation of certain Internal Services functions between Health Canada and the Public Health Agency of Canada; and
  • a $15.9 million increase in severance and termination benefits paid as a result of Workforce Adjustment measures.
• a $7.0 million increase in professional and special services, due primarily to a rise in the cost of services provided under the Non-insured Health Benefits Program. This increase is offset by decreases in costs related to the transfer of certain information technology services to Shared Services Canada.
• a $16.4 million decrease in repair and maintenance expenditures resulting primarily from the transfer of certain information technology services to Shared Services Canada, and an overall reduction in the cost of maintaining laboratories.
• a $5.9 million increase in utilities, materials and supplies due primarily to a rise in pharmaceutical and medical supply costs resulting from increases under the Non-insured Health Benefits Program; as well as the costs associated with growth in the Marihuana Medical Access Program. 
• Other subsidies and payments have increased $6.5 million resulting, for the most part, from the delay in recoveries from the Public Health Agency of Canada for the provision of internal services.

Grants and contributions year to date expenditures have increased by $14.5 million, primarily due to a new program payment to the Brain Canada Foundation of $10.0 million in 2012-13.

The increase of $27.4 million in statutory year to date expenditures is primarily the result of a $27.0 million increase in year to date payments made to Canada Health Infoway Inc. The expenditures for this statutory grant are made in response to the cash flow requirements of that organization.

C. Quarterly Variances

The following graph presents a comparison of quarterly spending by quarter and by fiscal year.

Expenditures in the third quarter of fiscal 2012-13 were $867 million compared with $858 million for the third quarter of 2011-12, representing an increase of $9 million or 1.1% in quarterly spending.

This increase is primarily due to changes in timing of disbursements for professional and special services.

Risks and Uncertainties

At Health Canada, risk management is a fundamental underpinning of good management and decision making.  Canadians expect the Department to be well managed and for its leaders to be accountable for the prudent stewardship of public funds, the safeguarding of public assets and the effective, efficient and economical use of its public resources. The Department ensures that effective and efficient systems of internal controls are in place, and that these controls are proportionate to the risks being managed.

The Department is operating in a dynamic and complex environment characterized by internal and external drivers of change including developments in Canada and abroad that require departmental resources to ensure the health of Canadians. Proactive, ongoing risk management in decision making is in place at Health Canada to minimize adverse impacts on the Department's capacity to deliver services to Canadians. Management recognizes, understands, accommodates and capitalizes on new challenges and opportunities.

Vote 1 - Operating includes re-spendable revenues relating to the user fee regulations which came into effect starting in fiscal year 2011-12.  This revenue model adds an element of risk to the Department's financial management environment should these user fees not be realized by year end.  Governance and financial management practices including monitoring and audit are in place to mitigate risks.

As well, Budget 2010 announced that the operating budgets of departments would be frozen at their 2010-11 levels for the fiscal years 2011-12 and 2012-13.  The impact on departmental activities continues to be managed through a variety of mitigation strategies, such as:

• Managing attrition strategically - replacement for vacancies resulting from normal attrition is being managed at the departmental level against corporate-wide priorities.  This helps ensure that Health Canada has the appropriate capacity to deliver on its core mandate while lessening the impact on the workforce.
• Corporate investment planning - identification of resources from across the Department in support of implementing key business re-engineering, lab renewal, facility maintenance, and IT infrastructure projects.  This leverages investments projects across the department and increases the return on investment.
• Ongoing restraints and streamlining - continued scrutiny on travel, events, conference attendance and hospitality expenditures, and streamlining of administrative functions.

Significant Changes in Relation to Operations, Personnel and Programs

Shared Services Canada was created effective August 4, 2011, pursuant to section 31.1 of the Financial Administration Act and Order in Council P.C. 2011-0877. Shared Services Canada's mandate is to streamline and reduce duplication of information technology services in the federal government in order to reduce costs, improve services, and leverage capacity in the public and private sectors through pooled resources and greater buying power. As a result, Health Canada transferred the control and supervision of operational domains related to email and network services, including telecommunications for voice and data, to Shared Services Canada. Approximately 255 Health Canada employees associated with the delivery of these services were transferred to the new department. While the current year figures do not include expenditures related to Shared Services Canada, costs incurred for the transferred operations up to November 15, 2011 are embedded in the comparative figures for the prior year.

There have been no other significant changes in relation to operations, personnel and programs over last fiscal year.

Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that will be implemented in order to refocus government and programs; make it easier for Canadians and business to deal with their government; and, modernize and reduce the back office.

Health Canada conducted a comprehensive review of its operating and program spending. It placed priority on preserving activities central to its core mandate as a regulator, a service provider for First Nations and Inuit, and a leader in health care policy.

As a result, Health Canada will improve and transform ways of conducting business that will result in efficiency gains, savings, and better value for money, while maintaining or enhancing accountability and services to Canadians.

In the first year of implementation, Health Canada will achieve savings of approximately $74.2 million. Savings will increase to $138.5 million in 2013-14 and will result in ongoing savings of $197.6 million by 2014-15.  Authorities in the third quarter of FY 2012-13 are slightly lower than the same period of last year ($3.819 million vs. $3.858 million) while expenditures in the third quarter of FY 2012-13 are slightly higher than the same period of last year ($2.628 million vs. $2.599 million).  As previously stated, the increase in expenditures is primarily due to a new program payment in grants and contributions as well as an increase in statutory payments.

Administrative Efficiencies and Rationalization of Structures and Functions (Internal Transformation)

Many changes are internal to Health Canada, and savings will be generated by simplifying and streamlining operations across all Health Canada branches. These include: consolidating operations; reducing and consolidating strategic policy work; consolidating and focusing on research and laboratory work and space; simplifying grants and contributions administration; and, achieving administrative and operational efficiencies throughout the department.

These initiatives will achieve ongoing savings of $108.4 million.

Shared services

Health Canada and the Public Health Agency of Canada (PHAC) have consolidated several common internal services. A wide range of services, including human resources, information technology, communications, audit, evaluation, and certain financial functions have been merged into new units to serve both Health Canada and PHAC.  Governance is in place and processes are being reengineered to enhance services and reduce costs.

This initiative will achieve ongoing savings of $17.9 million.

Grants and Contributions (Gs&Cs)

Grants and contributions funding will be concentrated in areas that have continued relevance to Canadians, align with the priorities of the Department and the Government, and have the most potential for success.

For pan-Canadian health organizations, Health Canada is reducing funding for most by 5% by 2014-15 and has encouraged them to achieve savings through administrative efficiencies and reduced overhead.

Funding for the Health Care Policy Contribution Program will be reduced and targeted on key and emerging issues.  Funding for the Women's Health Contribution Program, a non-service delivery program which was established at a time when there were not many programs aimed towards women's health, will be eliminated. Recognizing that smoking is at an all-time low in Canada and that provincial, territorial and municipal governments have taken on a greater role in reducing tobacco use, funding for the Federal Tobacco Control Strategy has been reduced. Health Canada's efforts will be refocused to concentrate on more vulnerable populations such as First Nations and Inuit, whose communities have the highest smoking rates in Canada.

Recognizing that smoking is at an all-time low in Canada and that provincial, territorial and municipal governments have taken on a greater role in reducing tobacco use, funding for the Federal Tobacco Control Strategy has been reduced. Health Canada's efforts will be refocused to concentrate on more vulnerable populations such as First Nations and Inuit, whose communities have the highest smoking rates in Canada.

Grants and contributions funding in First Nations and Inuit Health will be focused on direct service delivery.  Funding reductions are limited to areas such as research, building capacity, developing partnerships and networking in order to preserve front-line delivery services.

These initiatives will achieve ongoing savings of $58.5 million.

Streamlining Regulatory Operations and Administration

Core regulatory responsibilities for a variety of products, including drugs, food, consumer products and pesticides are maintained.  Each of Health Canada's three regulatory branches is refocusing research on priority areas as well as restructuring some regulatory and policy operations in keeping with red tape reduction efforts.

These initiatives will achieve ongoing savings of $12.8 million.

Risk Management

Through planning and regular reporting on progress, Health Canada is managing the financial risks associated with achieving the reductions required as a result of Budget 2012.  Sound management and focus on service delivery provides assurance that reduction plans are being achieved.

To mitigate risk and ensure adequate resources for key health priorities, new funding for Health Canada was referenced in Budget 2012.  This includes:

• Funding to build and renovate water infrastructure on reserves and to support the development of a long-term strategy to improve water quality in First Nations communities;
• Funding to continue measures to enhance surveillance and early detection of food safety risks, and improve response capabilities to food-borne illness emergencies;
• Funding to support a research project at McMaster University to evaluate team-based approaches to health care delivery. The project will evaluate ways to achieve better health outcomes for patients while also making the health care system more cost-effective, through greater implementation of medical teams; and
• Funding to establish and integrate a network of mental health-related professionals. Research will be centered on treating depression, with a focus on suicide prevention and post-traumatic stress disorder.

Approved by:

Glenda Yeates
Deputy Minister
Ottawa, Canada
Date: February 22, 2013

Jamie Tibbetts
Assistant Deputy Minister and
Chief Financial Officer
Ottawa, Canada
Date: February 15, 2013

Statement of Authorities (Unaudited)

Departmental Budgetary Expenditures by Standard Object (Unaudited)