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New Zealand's Long-Term Fiscal Position [June 2006]

6   Health

Health care is a major component of government spending in New Zealand and has been rising both in real terms and as a proportion of GDP for a long time. Average per capita real growth in health spending from 1950 to the present has been 3% and has accelerated to over 4% from the early 1990s.

Figure 6.1: Government health expenditure has been rising since 1950.

Source: The Treasury[37]

This chapter discusses what has been driving health spending decisions in the recent past, presents a base-case projection for future spending and discusses alternative scenarios for different modelling assumptions.

The future health status of the population

An understanding of the future course of the health status of the population is key to modelling future health spending.

As discussed in Chapter 4 on demographic and economic assumptions, the structure of the New Zealand population is changing. The key issue is how this change will affect health spending.

In any particular year, health-care costs in OECD countries increase with age. In addition, the developed and developing worlds are undergoing population ageing. These two facts have led many to conclude that population ageing will inexorably lead to large and rapid increases in health expenditure.

Richardson and Robertson (1999), however, caution that drawing simple conclusions like this might not be a secure basis for policy development:

. . . it is not necessarily true that future costs will be dominated by ageing and it is possible—as a matter of logic—that ageing per se may have no effect. The existence of a cross-sectional distribution of health costs . . . does not imply that over time aggregate health costs will be determined by the age composition of the population and the costs per age cohort . . . . The belief that there is a fixed medical need for each cohort of the population and that there is a well defined set of services required to meet these needs has been labeled by Evans (1984) as the “naive medical model.” The deterministic view that health expenditures are defined fairly precisely by technical factors is simply wrong.

Indeed, international research has led to some uncertainty about the link between population ageing and health expenditure.[38] Econometric studies have produced mixed findings on the relationship between changes in countries’ population age structure and changes in their health expenditure.

Kotlikoff and Hagist (2005) studied the growth of health spending in 10 OECD countries from 1970 to 2002. While total health spending has increased 2.5 times faster than GDP over this period in the countries studied, most of this has been due to increases in “benefit growth” (where “benefit” is defined here as health expenditures per person at a given age). They note:

Had there been no benefit growth, healthcare spending would still have grown because of demographics, specifically changes in the age composition of healthcare beneficiaries and increases in the total number of beneficiaries. But with no benefit growth, healthcare spending in our 10 countries would have grown, on average, only one fifth as fast.[39]

More fundamentally, the focus on age structure may be misplaced, because underlying health status, rather than age, may be the real determinant of the demand for health care. More technically, it is “time-until-death” that determines the cost of health care, not age itself. Miller (2001) studied the pattern of annual spending by Medicare, the United States Government’s health programme for the elderly. He showed that the average annual Medicare cost of 95-year-old Americans who were nine years from death was $2,100. In contrast, the average cost of Medicare for a 75-year-old in the last year of life was $13,500.

Moreover, the relationship between age and health status varies over time. This point is important. In many countries, what it means to be “old” is changing. Not only are we seeing many more people survive into old and very old age, we are seeing many more active, healthy old people. While the evidence available is still inconclusive, researchers have developed ideas that suggest that gains in longevity will translate into lower health-care costs in the future.


  • [37]Preparing a long-term data series for health spending presents definitional issues. It is not clear whether the data use the same bundle of goods and services since 1950. We are confident, however, that the data presented here do, at a high level, accurately reflect the trend in spending over the past 50 years.
  • [38]See O’Connell (1996).
  • [39]Kotlikoff and Hagist (2005), p. 1.
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