Health Care Spending: What the Future Will Look Like

Policy Reports | Health

No. 286
Wednesday, June 28, 2006
by Christian Hagist and Laurence J. Kotlikoff

Executive Summary

1European critics of the U.S. health care system often focus on the private provision of health care and health insurance. Yet the more important difference between the United States and other developed countries is the failure to control government spending. Other countries employ global budgets and control access to expensive drugs and new technology. The United States, by contrast, has very meager spending controls. If current trends continue, U.S. government health care spending will consume an ever growing portion of national income — far more so than any other developed country.

Government health care expenditures have grown much more rapidly than the economy in all developed countries. Between 1970 and 2002 these expenditures per capita grew at almost twice the rate of gross domestic product (GDP) per capita in 10 countries studied: Australia, Austria, Canada, Germany, Japan, Norway, Spain, Sweden, the United Kingdom and the United States.

  • Over the past 30 years the annual rate of growth in real per capita government spending on health care was highest in Norway (5.3 percent), followed by the United States (5.1 percent) and Spain (5.1 percent).
  • The growth rate was lowest in Sweden (2.6 percent) and Canada (3.1 percent).

Health care spending changes over time because of increases in benefits or changes in the age structure of the population. Because older people consume more health care than younger people in every country, aging populations will inevitably cause spending increases. However, benefit growth has been remarkably high and accounts for 75 percent of overall health care spending growth in the 10 countries analyzed. There are clear differences among the countries:

  • Although aging explains only one-fourth of the growth of government health care spending overall, it explains almost half the growth (46 percent) in Canada and one-third (33 percent) in Australia and Japan.
  • On the other hand, aging explains a little more than one-tenth of the growth (12 percent) in government health care spending in the United Kingdom, Austria and Norway.

Going forward, demographics will play a significant role in determining overall increases in health care spending. In 2002 the share of the population 65 and older in our 10 countries averaged 15 percent. By mid-century it will average 26 percent. Japan will remain the oldest of our countries, ending up in 2050 with 37 percent of its population age 65 or older — twice the ratio today. In Spain, Canada and Austria, the share of the elderly population will also double. The United States will retain its ranking as the youngest of the 10 countries. Its 2050 elderly share is projected at 21 percent.

By mid-century government health care spending will claim a much larger share of national resources than it does today.

  • If current trends hold in the United States , by 2050 government health care spending will claim one-third of GDP.
  • Government health care spending as a share of GDP will triple in Norway (to 25 percent) and more than triple in Australia and Spain (to 21.1 percent).
  • More modest increases are predicted for Canada and Sweden , where the numbers will reach 13.5 percent and 12.9 percent, respectively.

By comparison, Japan 's government is now spending only 6.7 percent of the nation's output on health care, and spending will total 18.2 percent of GDP by mid-century. In the United States, government health care spending now totals about 6.6 percent of GDP. But if it continues to let benefits grow for the next five decades at past rates, it will end up spending 32.7 percent of its GDP on health care.

No country can spend an ever-rising share of its output on health care, indefinitely. There is a limit to how much a government can extract from the young to accommodate the old. When that limit is reached, governments go broke. Of the 10 countries considered here, the United States appears most likely to hit this limit.

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