Health Care Spending: What the Future Will Look Like

Studies | Health

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


Conclusion

Indeed, three-fourths of overall health care expenditure growth in the 10 OECD countries analyzed— and virtually all of the growth in health care expenditure per capita — reflect growth in benefits. Although OECD countries are projected to age dramatically, benefit growth, if it continues apace, will remain the major determinant of overall health care spending growth.

Because of different growth rates, our projections envision a radical divergence in health care spending by mid-century. But are such divergences sustainable?

One way to think about the unsustainability of the current path over time is to compare the United States and Canada. If private sector health care spending grows at the same rate as the public sector, the United States will be spending two-thirds of its national income on health care by 2050. By contrast, Canadians living across the border will be spending less than one-fifth. At the extreme, two outcomes are imaginable. U.S. citizens at that point could be enjoying medical technology breakthroughs that greatly enhance the quality of life, breakthroughs that would be denied to Canadians. Or the United States could be spending enormous amounts of money on care that provides only trivial quality of life improvements — in which case, Americans will be forgoing all sorts of other goods and services to which Canadians will have access. In either case, the radical divergence in living standards by populations whose underlying cultures are very similar is hard to imagine.

"No country can spend an ever-rising share of its output on health care, indefinitely."

Regardless of the benefits of health care spending, the very rapid growth documented here is clearly unsustainable. No country can spend an ever-rising share of its output on health care, indefinitely. Benefit growth must eventually fall in line with growth in per capita income. The real question is not if, but when, health care benefit growth will slow down. Raising benefit levels is one thing. Cutting them is another. If OECD governments spend the next three decades expanding benefit levels at their historic rates, the fiscal repercussions will be enormous and in large part irreversible.

The fiscal fallout is likely to be particularly severe for the United States. Like Norway and Spain, its benefit growth has been extremely high. But unlike Norway, Spain, and other OECD countries, the United States appears to lack both the institutional mechanisms (such as gatekeepers to control patients' access to care) and the political will to control its health care spending. America's elderly are politically very well organized, and each cohort of retirees has, since the 1950s, used its political power to extract ever greater transfers from younger workers. The recently-legislated Medicare drug benefit is a case in point. The present value costs of this unfunded liability are roughly $10 trillion, all to be paid for by future taxpayers.

There is, of course, 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 the most likely to hit this limit.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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