Health Canada Quarterly Financial Report - For the quarter ended September 30, 2013

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 and using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities. 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 2013-2014 fiscal year.

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 2012-2013 Main Estimates.

In fiscal year 2012-2013, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. Additional funding was sought by Health Canada through the 2012-2013 Supplementary Estimates B. The Department received this additional authority net of the planned savings or other amounts transferred by Treasury Board authority to a frozen allotment. In 2013-2014, the changes to departmental authorities were reflected in the 2013-2014 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. 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 comparison to the authorities provided in the combination of the Main Estimates and Supplementary Estimates A for fiscal year 2013-2014, as well as budget adjustments approved by Treasury Board up to September 30, 2013.

A. Significant Changes to Authorities

The following graph provides a comparison of net budgetary authorities available for spending for the year as at the end of each quarter of the current and previous fiscal years.

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

Authorities available for spending in fiscal year 2013-2014 are $3,385 million at the end of the second quarter as compared with $3,599 million at the end of the second quarter of 2012-2013, representing a decrease of $214 million, or 5.9%. This decrease is primarily attributable to the following:

• $133.3 million savings identified as part of the Budget 2012 Economic Action Plan;
• $94.4 million decrease relating to operating and capital budget carry forwards received in 2012-2013;
• $35.5 million decrease to transfer internal services resources contained in Health Canada's Main Estimates to the Public Health Agency of Canada (PHAC) under the co-management agreement for Portfolio Shared Services;
• $32.2 million decrease relating to the sunsetting of funding in 2012-2013 for support of tripartite negotiations in British Columbia which will lead to First Nations being responsible for health service delivery in their communities;
• $16.6 million decrease relating to the sunsetting of the Official Languages Health Contribution Program;
• $15.2 million decrease for the transfer to the PHAC of the International Health Grants Program;
• $14.4 million decrease for reprofiling of the Drug Treatment Funding Program;
• $8.6 million decrease relating to the sunsetting of funding to support the defence of Canada against third-party claims in tobacco litigation;
• $7.4 million decrease due to the reprofiling of the Investment in Health Innovation and Core Health Service for First Nations; and,
• $6.5 million decrease in the transfer from Agriculture and Agri-Food Canada in 2012-2013 for the implementation of the Agricultural Regulatory Action Plan.

These decreases are partially offset by the following increases:

• $64.9 million for the renewal of funding to implement the Indian Residential Schools Settlement Agreement including the provision of mental health and emotional support services;
• $48.0 million due to the annual 3% growth in the First Nations and Inuit Health Envelope;
• $26.7 million to continue to support the implementation of the First Nations Water and Wastewater Action Plan; and,
• $10.0 million for the Brain Canada Foundation to support neuroscience research to advance knowledge for the treatment of brain disorders.

Authorities for revenues netted against expenditures have increased $137.9 million primarily as a result of expenditure recoveries to be received under the tripartite agreement with the First Nations Health Authority in British Columbia. This increase in authority for revenues netted against expenditures is fully offset by increases in authority for operating expenditures.

The fluctuations in authorities available for spending are most notable in the following standard objects and in revenues netted against expenditures for services of a non-regulatory nature: personnel; transportation and communications; utilities, materials and supplies; acquisition of machinery and equipment; 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 second quarter of the current and previous fiscal years.

During the second quarter of 2013-2014, total budgetary expenditures were $1,928 million compared with $1,761 million reported for the same period of 2012-2013, representing an increase of $167 million or 9.4%, primarily in expenditures relating to grants and contributions.

Year to date net operating expenditures have decreased by approximately $18 million or 2.1% when compared to the second quarter of 2012-2013. This decrease is comprised of the following changes in operating expenditures reported by standard object:

• $10.0 million increase in professional and special services due primarily to increased activity in software application development, and more timely billing of legal services from the Department of Justice; and
• $28.6 million offsetting increase in vote-netted revenues, primarily due to cost recovery arrangements as a result of the tripartite agreement with the First Nations Health Authority in British Columbia.

There was an increase in Vote 10 - Grants and contributions year to date expenditures of $190 million or 25.4% when compared to the second quarter of the prior year. This increase in spending is primarily due to:

• $120.1 million increase related to timing of disbursements to several of the First Nations and Inuit Health Programs as compared with the prior year;
• $90.3 million increase as a result of disbursements made under the tripartite agreement with the First Nations Health Authority in British Columbia; and,
• $13.2 million decrease for the transfer to the PHAC of the International Health Grants Program.

Statutory year to date expenditures have decreased modestly from $157 million in 2012-2013 to $153 million in 2013-2014.

C. Quarterly Variances

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

Expenditures in the second quarter of fiscal 2013-14 were $889 million compared with $826 million for the second quarter of 2012-2013, representing an increase of $63 million or 7.7% in quarterly spending.

Increases in quarterly spending are due primarily to the timing of transfer payment disbursements which were advanced as compared to the prior year and offset by increased vote-netted revenues due to cost recovery arrangements as a result of the tripartite agreement with the First Nations Health Authority in British Columbia.

Risks and Uncertainties

Health Canada, as part of its commitment to effective management and accountability, employs integrated risk management tools to recognize, understand, accommodate and capitalize on new challenges and opportunities. The Department, as a public sector organization, is dedicated to enhancing the health and well-being of Canadians and recognizes that its success in fulfilling its mandate is directly related to the effective management of risk. To ensure effectual risk management, the Department makes sure that effective and efficient systems of internal controls are in place, and that these controls are proportionate to the risks being managed.

In a dynamic and complex environment characterized by internal and external drivers of change in Canada and abroad (e.g. population growth in First Nations and Inuit and changes in drug prices for the non-insured health program), effective management of risk at Health Canada contributes to improved decision-making, better allocation of resources and, ultimately, better results for Canadians. Additionally it can lead to effective service delivery, better project management, and an increase in value for money. Management proactively, systematically and continuously manages and responds to risks, both positive and negative, to minimize adverse impacts and capitalize on challenges and opportunities.

As of Budget 2013, growth in the First Nations and Inuit health, Non-Insured Health Benefits Program will be based on 5% growth on actual (annual) expenditures from the prior fiscal year. Program expenditures endure natural fluctuations from year to year depending on a variety of factors beyond program control (e.g. drug pricing, location of provincial and territorial health services) thus creating risk. Enhanced monitoring of expenditures is undertaken, including assessment of expenditures against projected spending as well as previous years’ trends and available resources to manage these risks. Trend monitoring, cost management and planning are also in place and are reported regularly to senior management for decision making.

Significant Changes in Relation to Operations, Personnel and Programs

The following changes in senior management were made during the second quarter of 2013-2014:

• Ms. Rona Ambrose was appointed Minister of Health in July 2013;
• Mr. George Da Pont was appointed Deputy Minister in August 2013;
• Mr. Paul Glover was appointed Associate Deputy Minister in July 2013; and,
• Ms. Kathryn McDade was appointed Assistant Deputy Minister of the Health Products and Food Branch in August 2013.

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 are being 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 is improving and transforming ways of conducting business that is resulting in efficiency gains, savings, and better value for money, while maintaining or enhancing accountability and services to Canadians.

In 2012-2013, the first year of implementation, Health Canada achieved savings of approximately $74.2 million. Savings will increase to $138.5 million in 2013-2014 and will result in ongoing savings of $197.6 million by 2014-2015. Authorities in the second quarter of fiscal year 2013-2014 are lower than the same period of last year ($3,385 million vs. $3,599 million) while expenditures in the second quarter of fiscal year 2013-2014 are higher than the same period of last year ($889 million vs. $826 million). The decrease in authorities is primarily due to the savings announced as part of the Economic Action Plan 2012. The increase in expenditures is primarily due to program payments in contributions as explained above.

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 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 2014-2015 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 has been eliminated as part of the Economic Action Plan 2012.

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 manage risk and ensure adequate resources for key health priorities, new funding for Health Canada was referenced in Budget 2013. This includes:

• Funding to support investments aimed at improving health care for the First Nations and Inuit people and continued funding for the Non-Insured Health Benefits Program;
• Funding to continue to support Aboriginal Affairs and Northern Development Canada’s Family Violence Prevention Program;
• Funding for the Pallium Foundation of Canada to support the delivery of training in palliative care to front-line health care providers with the aim to help develop new community-integrated palliative care models across Canada; and,
• Funding to enhance support for advanced research, including, Canadian Institutes of Health Research (CIHR) for patient-oriented research.

Approved by:

George Da Pont
Deputy Minister
Ottawa, Canada
Date: November 18, 2013

Jamie Tibbetts
Assistant Deputy Minister and
Chief Financial Officer
Ottawa, Canada
Date: November 18, 2013

Statement of Authorities (Unaudited)

Departmental Budgetary Expenditures by Standard Object (Unaudited)