NCPA - National Center for Policy Analysis


July 26, 2006

In recent decades, government healthcare spending in industrialized countries has grown much faster than gross domestic product (GDP).  Although researchers have investigated a number of contributing factors, including improvements in medical technology, population aging, medical inefficiency, waste, and unhealthy behavior, relatively little is known about how much each factor contributes to overall cost growth.

The expansion of government benefit levels -- defined as average inflation-adjusted government health care expenditures on people at a given age -- explains three quarters of the growth in public health care expenditures since 1970, conclude Laurence Kotlikoff and Christian Hagist.

For example:

  • On average, inflation-adjusted government expenditures on health care in the 10 countries studied have grown by nearly 5 percent per year since 1970.
  • Absent any growth in government benefit levels, demographic change would have caused government health care spending to grow by 1.23 percent per year.
  • The United States had the highest annual government health care spending growth rate over the period, 6.23 percent per year, or twice its average GDP growth rate of 3.1 percent.
  • Had U.S. government benefit levels not grown, U.S. government health care spending would have grown at half the rate of U.S. GDP.

Assuming that benefit levels grow at historic rates for the next 40 years and then grow at the same rate as per capita GDP and assuming a 7 percent discount rate, the United States, Norway, and Germany are slated to spend around 12 percent of their future output on government health spending.  At a 3 percent discount rate, the U.S. government will spend around 19 percent of future GDP on health, followed by Norway at 17 percent, and Japan at 13 percent.

The authors conclude that the fiscal fallout of expanding health care benefits is likely to be "particularly severe" for the United States, imposing "a huge additional fiscal burden on the American public.

Source: Linda Gorman, "Comparing Government Healthcare Costs in Ten OECD Countries," NBER Digest, July 2006; based upon: Laurence Kotlikoff and Christian Hagist, "Who's Going Broke? Comparing Growth in Healthcare Costs in Ten OECD Countries," National Bureau of Economic Research, Working Paper No. 11833, December 2005.

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