Health Canada Quarterly Financial Report - For the quarter ended September 30, 2018

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
• 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 programs 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.

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

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the Department's spending authorities granted by Parliament, and those used by the Department consistent with the Main Estimates for the 2018-2019 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 money can be spent by the Government. Approvals 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.

The Department uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental results reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

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 Main Estimates for fiscal year 2018-2019, as well as budget adjustments approved by Treasury Board up to September 30, 2018.

A. Significant Changes to Authorities

The following table provides a comparison of year-to-date authorities by vote at the end of the second quarter of the current and previous fiscal years.

Year-to-date authorities available for spending in fiscal year 2018-2019 were $2,387 million at the end of the second quarter as compared with $4,420 million at the end of the second quarter of 2017-2018, representing a net decrease of $2,033 million, or 46%. This decrease is primarily attributable to the following:

• $3,125.8 million decrease for the transfer of the First Nations and Inuit Health Branch (FNIHB) and related internal services to the Department of Indigenous Services Canada (ISC), per Orders in Council P.C. 2017-1465 and P.C. 2018-0381;
• $19.9 million decrease in statutory spending authority for disbursements to Canada Health Infoway Inc.;
• $19.3 million decrease in funding for maintaining and upgrading federal infrastructure assets;
• $18.3 million decrease in the Department's operating and capital budget carry-forwards; and,
• $13.1 million decrease in funding for promoting clean growth and addressing climate change due to the sunsetting of funding for the indoor air quality component of the Addressing Air Pollution Horizontal Initiative. Note: this has since been renewed.

The decreases noted above are partially offset by the following increases:

• $850.0 million in funding to strengthen Canada's Home and Community Care and Mental Health and Addiction Services Initiative;
• $144.8 million in funding for helping address the Opioid crisis;
• $65.1 million in funding for implementing and administering a federal framework to legalize and strictly regulate cannabis;
• $40.9 million in funding for compensation related to collective agreements;
• $32.7 million in funding for maintaining core regulatory operations for therapeutic products;
• $20.0 million in statutory spending authority for disbursements pursuant to section 103 of the Patent Act; and,
• $17.9 million in funding for improving accessibility, affordability and appropriate use of prescription drugs and medical devices.

The fluctuations in authorities available for spending are most notable in the following standard objects: personnel; transportation and communications; professional and special services; utilities, materials and supplies; transfer payments; and revenues netted against expenditures for services of a non-regulatory nature.

B. Significant Changes in Year-to-Date Expenditures

The following table provides a comparison of year-to-date spending by vote at the end of the second quarter of the current and previous fiscal years.

At the end of the second quarter of 2018-2019, total budgetary expenditures were $653 million compared with $2,248 million reported for the same period of 2017-2018, representing a decrease of $1,595 million or 71%.

Year-to-date net operating expenditures have decreased by $596 million or 65% when compared to the second quarter of 2017-2018. The significant variances in operating expenditures reported by standard object are as follows:

• $268.5 million decrease in utilities, materials and supplies is mainly a result of the transfer of FNIHB to ISC and consequent decreased expenditures for pharmaceuticals and medical supplies;
• $158.5 million decrease in professional and special services is primarily due to the transfer of FNIHB to ISC and resulting decrease in such services for the Non-Insured Health Benefits program;
• $108.4 million decrease in transportation and communications is mainly due to the transfer of FNIHB to ISC and ensuing decrease in Non-Insured patient travel expenditures;
• $104.8 million decrease in personnel costs is primarily due to the transfer of FNIHB to ISC and partially offset by signing bonuses and retroactive salary payments resulting from the signing of collective agreements; and,
• $13.6 million decrease in acquisition of machinery and equipment is mainly due to the transfer of FNIHB to ISC and resulting decrease in medical equipment expenditures related to the Non-Insured Health Benefits program.

The decreases noted above are partially offset by the following:

• $63.0 million decrease in revenues netted against expenditures, causing an increase in net operating expenditures, related mainly to services of a non-regulatory nature associated with the Non-Insured Health Benefits program that has been transferred from FNIHB to ISC.

There was a decrease in Vote 10 - Grants and contributions year-to-date expenditures of $990 million or 80%, primarily due to:

• $1,068.2 million decrease in contributions resulting from the transfer of FNIHB to ISC.

The decrease noted above is partially offset by the following:

• $30.7 million increase in expenditures related to the new initiative for strengthening Canada's Home and Community Care and Mental Health and Addiction Services;
• $27.0 million increase in expenditures due to the timing of payments for the Territorial Health Investment Fund; and,
• $20.6 million increase in expenditures due to the timing of payments to Canada Health Infoway Inc.

Statutory year-to-date expenditures have decreased by $9 million or 11% from $87 million in 2017-2018 to $78 million in 2018-2019 which is comprised of the following offsetting components:

• $19.9 million decrease in statutory payments made to Canada Health Infoway Inc. which are disbursed in accordance with the organization's cash flow needs;
• $9.0 million decrease in the government's contribution to employee benefit plans for those employees transferred to ISC and a reduction in the rate used for the calculation of employee benefit plans for 2018-2019. These are partially offset by the impact of increased personnel costs related to collective agreements, Canada's response to the opioid crisis, and cannabis legalization; and,
• $20.0 million increase in spending for a statutory payment made pursuant to section 103 of the Patent Act.

C. Quarterly Variances

Expenditures in the second quarter of fiscal year 2018-2019 were $312 million compared with $974 million for the second quarter of 2017-2018, representing a decrease of $662 million or 68% in quarterly spending.

The decrease in quarterly spending is due primarily to:

• $351.9 million decrease in transfer payments due to the transfer of FNIHB to ISC, partially offset by:
  • new transfer payments for strengthening Canada’s Home and Community Care and Mental Health and Addiction Services Initiative;
  • statutory spending authority for disbursements pursuant to section 103 of the Patent Act, and;
  • timing differences for disbursements related to a number of contribution programs including those to support the Canada Health Infoway Inc., Canadian Institute for Health Information, Brain Canada, and Canadian Foundation for Healthcare Improvement;
• $142.5 million decrease in utilities, materials and supplies primarily attributable to the transfer of FNIHB to ISC and consequent decreased expenditures for pharmaceuticals and medical supplies;
• $83.8 million decrease in professional and special services primarily comprised of the transfer of FNIHB to ISC and resulting decrease in such services for the Non-Insured Health Benefits program and partially offset by the timing of expenditures to the Public Health Agency of Canada under the Shared Services Partnership Agreement;
• $71.2 million decrease in personnel costs due to the transfer of FNIHB employees to ISC and partially offset by increases for signing bonuses and retroactive salary payments resulting from the signing of collective agreements;
• $62.3 million decrease in transportation and communications mainly attributable to the transfer of FNIHB to ISC for Non-Insured patient travel expenditures; and,
• $62.8 million decrease in revenues netted against expenditures, causing an increase in net operating expenditures, related mainly to services of a non-regulatory nature for the Non-Insured Health Benefits program that were transferred to ISC.

Risks and Uncertainties

Health Canada is dedicated to enhancing the health and well-being of Canadians. It operates in a dynamic and complex environment characterized by internal and external drivers of change, which could potentially be disruptive to the Department's ability to achieve its objectives (e.g. new innovative products, technologies, substances, foods and emerging product categories, evolving relationships between various levels of government, unforeseen health crises, scientific and technological change, and cyber security).

Health Canada recognizes that its success in fulfilling its mandate is directly related to the effective management of risk. Sound risk management equips the Department to respond proactively to change and uncertainty by using risk-based information to support effective decision-making, resource allocation, and, ultimately, better results for Canadians. Additionally, it can lead to more effective service delivery, better project management, and an increase in value for money.

As a result, the Department employs integrated risk management tools, including the development of a Corporate Risk Profile and monitoring of risk management strategies, to proactively and systematically recognize, understand, accommodate and capitalize on new challenges and opportunities, with a focus on results. In addition, the Department has appropriate internal control systems in place, proportionate to the risks being managed.

Prudent management within a constrained fiscal environment is required to manage potential impacts on departmental programs and services. Health Canada continues to manage through effective engagement across the Department, a sound governance structure, as well as through the use of longer-term planning. The Department's executive-level committee on Finance, Investment Planning and Transformation recommends overall direction for financial management and control, and ensures alignment of investments with departmental strategies and transformation initiatives. Each branch is required to have a multi-year financial management plan that has been reviewed by this committee to confirm that it has a plan in place to address the financial context.

Program expenditures experience natural fluctuations from year to year depending on a variety of factors beyond program control (e.g. emerging health events and novel drug therapies), 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. 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

There have been no significant changes in relation to operations, personnel and programs during this quarter.

Approved by:

Original signed by Simon Kennedy
Simon Kennedy
Deputy Minister
Ottawa, Canada
Date: November 21, 2018

Original signed by Randy Larkin
Randy Larkin
Assistant Deputy Minister and
Chief Financial Officer
Ottawa, Canada
Date: November 19, 2018

Statement of Authorities (unaudited)

* Includes only Authorities available for use and granted by Parliament at quarter end
(S) - Statutory Vote

* Includes only Authorities available for use and granted by Parliament at quarter end
(S) - Statutory Vote

Departmental Budgetary Expenditures by Standard Object (unaudited)