Health Canada Quarterly Financial Report - For the quarter ended June 30, 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 and Supplementary Estimates A, 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 must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29, 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 will be established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In future years, the changes to departmental authorities will be implemented through the Annual Reference Level Update, as approved by Treasury Board, and reflected in the subsequent Main Estimates tabled in Parliament.

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.  However, the spending authorities voted by Parliament remain 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 relation to the Main Estimates and Supplementary Estimates A for fiscal year 2012-13, as well as budget adjustments approved by Treasury Board up to June 30, 2012.

The following graph provides a comparison of net budgetary authorities available for spending and year to date expenditures for the quarter ended June 30, 2011 and June 30, 2012.

The following table provides a comparison of authorities by vote for the first quarter of the current and previous fiscal years.

Authorities available for spending in fiscal year 2012-13 are $3,462 million at the end of the first quarter as compared with $3,407 million at the end of the first quarter of 2011-12, representing an increase of $55 million, or 1.6 %. This increase is primarily attributable to the following:

• $67.4 million increase for renewal of the Chemical Management Plan;
• $46.6 million increase due to the 3% growth in the Indian Envelope;
• $27.5 million increase for renewal of the Clear Air Regulatory Agenda;
• $27.0 million increase in statutory authorities for disbursements to Canada Health Infoway Inc.; and
• $10.0 million increase for the Brain Canada Foundation to support neuroscience research to advance knowledge for the treatment of brain disorders.

These increases are partially offset by the following:

• $52.3 million decrease due to the transfer to Shared Services Canada to provide ongoing support of the government-wide initiative for consolidation and transformation of IT infrastructure;
• $32.9 million decrease relating to the sunsetting of the two-year funding identified in Budget 2010 for the continued implementation of the Indian Residential Schools Settlement Agreement^{Footnote 1};
• $26.7 million decrease relating to the sunsetting of the two-year Extension of the First Nations Water and Wastewater Action Plan^{Footnote 1}; and
• $11.3 million decrease relating to the sunsetting of time-limited funding for review of drug and medical device submissions.

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

During the first quarter of the 2012-13 fiscal year, total budgetary expenditures were $936 million compared with $874 million reported in the same period of 2011-12, representing an increase of $62 million or 7.1%.

Year to date operating expenditures have decreased by approximately $2 million or 0.5% when compared to the first quarter of 2011-12. Although not material in total, there are noteworthy underlying fluctuations in certain areas of expenditures as follows:

• Personnel expenditures decreased by $4.1 million due primarily to the approximate 255 employees transferred to Shared Services Canada;
• Professional and special services increased by $3.5 million and the cost of utilities, materials and supplies increased by $4.9 million. This reflects curtailed spending in the first two quarters of the prior year awaiting the renewal of sunsetted programs in Supplementary Estimates B; and
• Vote-netted revenues increased by $2.7 million relating to full implementation of the new fee regulations that became effective on April 1, 2011 under the Cost Recovery Initiative.

There was an increase in Vote 10 - Grants and contributions year to date expenditures of $35 million primarily due to the timing of disbursements made to various transfer payment recipients, since overall planned expenditures have not changed significantly from the prior year. Those transfer payments where the timing of disbursements was advanced as compared to the prior year included:

• $10.0 million to Brain Canada Foundation;
• $5.1 million related to the Drug Treatment Funding Program;
• $4.4 million to Canadian Partnership Against Cancer;
• $4.2 million related to the Official Languages Health Contribution Program; and
• much of the remaining increase relating to several of the First Nations and Inuit Health Programs.

Statutory year to date expenditures have increased from $96 million in 2011-12 to $124 million in 2012-13. The most significant element of this variance was a $27.0 million increase in year to date expenditures made to Canada Health Infoway Inc. The payments for this statutory grant are expended according to the cash flow requirements of that organization.

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. One of the principles that guides effective financial management is risk management. The Department is responsible for ensuring that effective and efficient systems of internal controls are in place, and that these controls are proportionate to the risks they aim to manage while at the same time supporting the achievement of departmental program objectives.

The Department is operating in a dynamic and complex environment characterized by internal and external drivers of change including: user fee and cost recovery models, new funding approved through Supplementary Estimates, organizational restructuring aimed at expenditure reduction, etc. Proactive, ongoing risk management in decision making is required to minimize any adverse impacts on services, program delivery, and the Department's overall capacity to deliver services to Canadians. Management is applying sound risk-based management to the financial stewardship of its departmental resources through the annual development of a Corporate Risk Profile to recognize, understand, accommodate and capitalize on new challenges and opportunities.

Included in Vote 1 net operating authorities are anticipated re-spendable revenues relating to the revised user fee regulations which came into effect for 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.

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, 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 s. 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 to Shared Services Canada, including telecommunications for voice and data. 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 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 the last 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 saving of $197.6 million by 2014-15.

Internal transformation

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

Shared services

Health Canada and the Public Health Agency of Canada (PHAC) will consolidate several common internal services. A wide range of services, including communications, audit, evaluation, and some financial functions have already been merged into new units to serve both Health Canada and PHAC. This has also taken place for corporate services such as human resources and information technology.

First Nations and Inuit Health

While identifying savings in the First Nations and Inuit Health Branch (FNIHB), the priority was to protect frontline health services. To protect these essential services, the headquarters office of the FNIHB will be restructured to better support regional offices and their focus on frontline service delivery.  Grants and contributions funding will be focused on direct service delivery with funding for areas such as research, building capacity, developing partnerships and networking reduced.

Regulatory Operations

Core regulatory responsibilities for a variety of products, including drugs, food, consumer products and pesticides, will be maintained.  However, each of Health Canada's three regulatory branches will refocus research on priority areas as well as restructure some regulatory and policy operations in keeping with red tape reduction efforts.

Legislative and regulatory changes now underway will change the approach to classifying new drugs or to change their status from prescription to over-the-counter.

The Medical Marihuana Access Program is being and re-aligned to better reflect the federal role. As well, the regulatory process for pesticides will be streamlined by enhancing international collaboration.

Grants and Contributions (Gs&Cs)

The administration and management of Gs&Cs will be simplified to strengthen and focus overall delivery to stakeholders, maintain accountability and achieve savings. Gs&Cs 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.

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 will continue to support anti-smoking programming to preserve and build on the gains made over the past ten years.  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.

In addition to the savings measures outlined above, 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.
• Support for 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.
• 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: August 29, 2012

Jamie Tibbetts
Chief Financial Officer
Ottawa, Canada
Date: August 28, 2012

Statement of Authorities (unaudited)

Departmental Budgetary Expenditures by Standard Object (unaudited)