Findings
Improvements in health could offset a significant proportion of the age-related spending pressures
Improvements in health could offset around a third of the extra health costs of an ageing population
We constructed two sets of expenditure projections: one that only took account of changes in age structure, and one that also incorporated changes in health status within each age group. The second set produced results that showed growth in expenditure from 2002 to 2052, about one-third lower than the first set. In other words, the model suggested that improvements in health could offset about one third of the extra costs attributable to population ageing.
The figure of one third depends crucially on the assumption that disability rates decline at 0.5% per year and mortality rates decline at 1.5% per year. If, instead, disability rates were to remain roughly constant, or mortality rates were to decline more rapidly, then little such offsetting would occur.
Rise in proportion of expenditure on the aged
The share of expenditure on people over 65 will grow to 63% by 2050/51 due to the ageing population and despite decreasing disability among the elderly
Figure 2 shows, the expenditure share of people aged 65 rose by about 11 percentage points over the past 50 years, and is projected to grow by a further 23 percentage points over the next 50 years. The model suggests that by 2051 over 60% of government health expenditure will go towards people aged 65 and above.
The increase in the proportion of total spending going towards the aged occurs despite the fact that, in our model, expenditure per young person rises more quickly than expenditure per old person. The reason why expenditure per young person grows more quickly is that their disability rates are already low. Low disability rates mean that there is little scope for further reductions to restrain expenditure growth.
- Figure 2 – Distribution of expenditure by broad age group
Note – The calculations are based on the assumption that disability rates decline at 0.5% per year and mortality rates decline at 1.5% per year from 2001/02 to 2050/51.
The continuing importance of non-demographic determinants of expenditure growth
Non-demographic factors such as technology, coverage levels, and input prices will continue to have more effect on health expenditure than demographic factors such as population ageing
Figure 3 shows historical trends in per capita expenditure growth and its determinants from the 1950s. As described above, the model allows us to distinguish between expenditure growth due to “ageing and health” effects, and growth due to “coverage and price” effects. Coverage and price effects include such things as expansion in the range of treatments offered, increases in wages and drug costs, and increases in overheads. Coverage and price effects clearly drove the long-run trends and the fluctuations around these trends during the period shown.
- Figure 3 – Historical growth rates for per capita health expenditure and its determinants
Note – The graph shows 5-year moving averages, centered on the years indicated.
In the 1950s and 1960s, government health expenditure grew extremely rapidly, though demographic conditions were, if anything, reducing the need for spending. Real per capita expenditure actually fell several times during the 1980s and early 1990s, just as demographic change started to absorb extra expenditure. Spending has increased quickly since the early 1990s, because growth in coverage and price has risen to 3-4% per year.
Future health expenditure growth rates are also likely to depend predominately on non-demographic factors. Our projection model suggests that population ageing will add around half a percentage point to annual per capita expenditure growth. Unless growth rates for coverage and price becomes much lower and more stable in the future than they have been in the past, then they will overwhelm the effects of ageing.
Current growth rates, if sustained, would lead to large increases in health expenditure as a percent of GDP
If coverage and price were to grow at a modest 2.1% per year, then government health expenditure would reach 12% of GDP in 2050/51.
The model can be used to ask how fast the coverage and price effect can grow if government health expenditure is to equal a given percentage of GDP by 2050/51. In 2001/02, government health expenditure accounted for 6.2% of GDP. Under our benchmark set of assumptions, coverage and price could grow by a mere 0.7% per year if health expenditure were to be restricted to 6.2% of GDP in 2050/51. If health expenditure were allowed to rise instead to 12.0% of GDP, then coverage and price could grow at 2.1% per annum. As can be seen in Figure 3, coverage and price has grown at a significantly more than 2.1% per annum for most of the period since 1950, and has been growing at 3-4% per annum in recent years.
Our model can say nothing about the “optimal” ratio between government health expenditure and GDP. However, it does provide us with better insights into the drivers of public health expenditure trends, and confirms that growth in coverage and prices is the key determinant of spending.
