Health Care Spending: What the Future Will Look Like

Studies | Health

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


Projecting the Past into the Future

Table IV - Elderly Share of the Population

Although it is somewhat hazardous to extrapolate past trends many decades into the future, it is instructive to examine the path we are on now. If the 10 countries do not change course, what does the future hold?

Population Aging Over the Next 50 Years. 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 — a 75 percent increase. Table IV shows how the population share of the elderly will change in the 10 countries through time. Japan, which is currently the oldest of our countries, will retain that ranking, 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 population that is elderly 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, not much greater than the elderly share of the Japanese population today. By mid-century, the proportion of the elderly population across all 10 countries will increase from an average of about 15 percent today to 26 percent.

"The elderly share of the population in all 10 countries will increase from an average of about 15 percent today to 26 percent in 2050."

Since spending on health care is much higher for the elderly than for the young, continuing to let benefits grow as a country ages will accelerate the increase in health care spending. In the United States, for example, real government health care spending increased 690 percent between 1970 and 2002. If real benefit levels continue to grow at historic rates, real U.S. health care spending will increase 750 percent over the next 32 years. Absent past benefit growth, U.S. total real health care spending would have grown 160 percent between 1970 and 2002. And absent future benefit growth, it would grow 180 percent over the next 32 years. While demographics matter to overall health care spending, they are swamped in importance by benefit growth.

Table V - Government Health Care Spending as a Percentage of Gross Domestic Product

Government Health Care Spending as a Percent of GDP at Mid-Century. By mid-century government health care spending will claim a much larger share of national resources than it does today, in all 10 countries. [See Table V.] If current trends hold, by 2050 government health care spending will claim a whopping one-third of United States GDP. Over the next 50 years, resources supporting government health care spending will double in Australia and Spain and almost double in Norway. More modest increases are predicted for Canada and Sweden. [See Figure II.]

"Health care spending as a percentage of GDP will double in Australia and Spain over the next 50 years."

Analyzing the Reasons for Growth. Figure III shows how much of the expansion of government health care is due to demographics versus benefit growth (based on Table A-II in the Appendix). As the figure shows, if Canada manages to control budget growth in the future the way it has in the past, almost three-fourths of the growth in spending by mid-century will be due to the aging of the Canadian population and only one-fourth will be due to benefit expansion. In Japan, demographics will account for almost one-third of the spending increase, and benefit expansion will explain the other two-thirds. Demographics will account for about one-fourth of the spending increase in Sweden (28 percent), and slightly less than one-fourth in Austria (22 percent). By contrast, demographics alone will cause only 12 percent of the spending increase in Spain, Austria and the United States, and 11 percent in Norway.

Figure II - Government Health Care Spending as a Percent of Gross Domestic Product in 2050

"By 2050, government health care spending will claim one-third of the U.S. economy if current trends continue."

The United States versus Japan. Japan's government is now spending only 6.7 percent of the nation's output on health care. If Japan maintains the same annual real benefit growth of 3.57 percent it experienced from 1970 to 2002 and its current rate of labor productivity, government health care 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 one-third of its future GDP on health care.

"Excessive benefit growth is a more important factor than rising health care costs."

The difference between Japan's 18 percent and the United States' 33 percent is remarkable given that Japan is already much older than the United States and will age much more rapidly in the coming decades. The difference accentuates the obvious: Excessive growth in benefits can be much more important than aging in determining long-term health care costs. Moreover, the fact that projected U.S. health care expenditures are so high — the highest of any of our 10 countries when measured relative to GDP — suggests that the United States may be in the worst overall fiscal shape of any of the OECD countries, even though its demographics are among the most favorable.

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

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