Health Care Spending: What the Future Will Look Like

Studies | Health

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

Health Care Spending Trends

Table I - Per Capita Growth of Government Health Care Spending and Gross Domestic Product

"Government health care spending in developed countries has grown twice as fast as their economies."

Government health care expenditures have been growing much more rapidly than gross domestic product (GDP) in all OECD countries. Between 1970 and 2002 these expenditures grew at almost twice the rate of GDP across the 10 countries. There are substantial differences among the countries, however, due largely to differences in governments' willingness to expand health care spending rather than to differences in demographic changes.

Health Care Growth versus the Growth of Per Capita Output. Table A-I in the appendix shows the level of government spending on health care per capita and per capita output in each of the 10 countries for 1970 and 2002. The table also shows how the percentage of each country's resources spent on government health care programs has increased over the period. Table I in the text shows the average annual growth per capita of health spending and GDP in each of the countries.

As Table I shows, 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). Overall government health spending per capita grew 1.9 times as fast as GDP per capita in the 10 countries. Spending grew 2.6 times faster than GDP in the United States, 2.4 times faster than GDP in Germany and 2 times faster in Japan.4

"Health spending changes over time because of benefit increases and changes in the age structure of the population."

Analyzing the Reasons for Growth. Government health care spending can be thought of as having two components: the average amount of spending on people at different ages (the level of benefits) and the number of people in each age bracket. 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, the aging of the population will cause an increase in spending. Table II shows how spending varies by age in the various countries. Canada, for example, spends 7.5 times as much on people in their 80s as it spends on people in their 50s. In Australia and the United Kingdom the ratio is more than four to one. In Austria, Spain and Sweden, however, the spending ratio for the two age groups is close to two to one.

Table II - Health Care Benefit Age Profiles

Note that the figures for the United States (an 11-to-one ratio of average spending on all those in their 80s versus all those in their 50s) cannot be compared directly to the figures for other countries because U.S. expenditures are for two specific populations — the elderly and the poor — whereas government health programs in the other nine countries cover most of the population. Thus spending profiles are quite different in the United States. In the case of Medicare, virtually all U.S. citizens qualify once they reach age 65. But only the disabled qualify prior to age 65.

"Benefit growth explains the lion’s share – 75 percent – of overall health care spending growth in the 10 countries."

How much of the growth of government health care spending is due to demographic change (aging) and how much is due to increases in benefit levels? As shown in Table A-II in the appendix, benefit growth has been remarkably high and explains the lion's share — 75 percent — of overall health care spending growth in the 10 countries.5 Norway , Spain and the United States recorded the highest annual benefit growth. Norway averaged 5.0 percent per year. Spain and the United States were close behind at 4.6 percent.6

Again, there are clear differences among the countries. Although aging explains about 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-eighth (12 percent) of the growth in government health care spending in the United Kingdom, Austria and Norway. [See Figure I.]

Figure I - Reasons for the Growth of Government Health Care Spending

The last two columns of Table A-II compare total government health care spending growth to GDP growth with and without benefit growth over the 32-year period. Total real health care spending grew an average of 4.9 percent per year across the 10 countries. Had there been no growth in benefits, average spending would have increased at a rate of only 1.2 percent. Hence, three-fourths of health care spending growth can be traced to the growth of benefits.

During the same period, real GDP in these 10 countries was also growing, just not as rapidly. Real GDP grew an average of 2.9 percent annually. On average, government health care spending grew 1.7 times faster than GDP. Absent benefit growth, total health spending would have grown only 0.4 times as fast.

As the first column of Table A-II shows, the United States clocked the highest annual average real growth in spending, 6.2 percent per year. This is twice its 3.1 percent GDP growth rate. Had the level of benefits not increased, U.S. health care spending would have grown only half as fast as the economy. In addition to the United States, total real health spending grew in excess of 5 percent per year in Norway, Spain, Australia and Japan. Among all 10 countries, Sweden had the most success in keeping health care spending from growing faster than the economy. But even in Sweden health care spending grew 1.5 times faster than output [column four of Table A-II].

Explaining the Growth of Benefits. What explains the high rates of benefit growth in these countries? One explanation is the emergence of costly product innovations.7 A good example is Spain 's acquisition of CT scanners. Spain had only 1.6 CT scanners per one million inhabitants in 1984 compared with 11 per million in the United States.8 By 2001, Spain had 12.3 CT scanners per one million inhabitants vs. 12.8 in the United States.9 Japan also expanded its use of medical technology over the 32-year period. Indeed, Japan appears to now have the largest number of CTs of any developed country.10

"Costly advances in medical technology help explain the high rates of benefit growth."

Of course, technology doesn't arise spontaneously. It is acquired, and at considerable cost. The willingness of developed countries to pay larger shares of national income for advanced medical technology as well as medications suggests that health care is a "luxury good."11 The ratio of benefit growth rates to per capita GDP growth rates range from 1.14 in Canada to 2.29 in the United States. On the average, the ratio equals 1.73. This implies that for each 10 percent increase in per capita income there is a 17 percent increase in government spending on health care, on the average.12

Table III - Government Health Care Spending as a Percentage of Total Health Care Spending

Benefit Growth Through Expansion of Government's Share of Health Spending. Total benefit payments may be thought of as having two sources of expansion: (1) the growth in spending on people at a given age and (2) the growth in the percentage of the population at various ages covered by government programs. In the United States, for example, the rate of growth in Medicare spending per enrollee is close to the per person growth in spending by the privately insured.13 But over time, the number of enrollees in government health care programs has expanded, largely because of the increase in Medicare disabled enrollees. The growth in Medicaid spending has been fueled by the expansion of the eligible population to include the near-poor in addition to individuals in families with incomes below the poverty level. As a result, government health care spending has grown about 11 percent faster than private sector spending (10.79 percent versus 9.76 percent).14 In the other nine countries, by contrast, government health programs effectively cover the whole population, regardless of age. Thus there is little room for expansion of the beneficiary population.

"Government spending has expanded to 44.9 percent of total health care spending in the United States over the past three decades."

Overall, as shown in Table III, public sector spending has expanded from 36.4 percent to 44.9 percent of total health care spending in the United States over the three decades. The government's share of health care spending also grew significantly in Australia (from 60.5 percent to 67.5 percent), Germany (from 72.8 percent to 78.6 percent) and in Japan (from 69.8 to 81.5 percent).

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