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Modelling New Zealand's Long-term Fiscal Position - PP 06/01

Non-parametric programmes – Health

Total 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.

Figure 20: Government health expenditure, in constant 2000 dollars, and as a percentage of GDP
Figure 20: Government health expenditure, in constant 2000 dollars, and as a percentage of GDP.
Source: The Treasury

In contrast to the case of NZS, there is not a single parameter-driven scheme in place for health spending.  Rather, there is a complex set of policies, which is usually described as “the public health system.” 

Modelling the future course of health spending is a particular challenge. In contrast to the case of NZS, there is not a single parameter-driven scheme in place. Rather, there is a complex set of policies, which is usually described as “the public health system.”

The Government currently funds large amounts of health care provided by private suppliers. For example, doctors visits are subsidised via the Primary Health Organisation system; pharmaceuticals are subsidised via the Pharmaceuticals Benefits Schedule operated by Pharmac; treatment of personal injury from accidents is reimbursed - sometimes in part, sometimes in whole - by the ACC scheme. It also supplies heath care services in kind (principally though the hospitals operated by District Health Boards).

Overall health spending is thus the result of a myriad of individual purchase decisions made by successive governments about what to fund and what to provide.

For the purposes of the Statement, and consistent with the “current policy” approach, we are assuming that the broad features of the existing health system remain in place and that future governments will continue to make purchase decisions much as they have in the past. Rates of growth in expenditure are extrapolated from the past.

Using this approach, the result is that government decisions are driven by a combination of demography, cost and policy decisions. The model does not, however, separately define the effects of each of these three elements. Rather, it projects current expenditure forward to 2050, applying:

  • cost weights to a demographic projection (we allow these to change through time - see below)
  • an income (GDP) effect, plus
  • a residual growth factor.

The result is a health-cost projection that incorporates demographic and non-demographic growth factors.

Given the fiscal and social importance of health spending, we have set out below an extended discussion of some of the underlying drivers of that spending.

Demography

Demographic drivers are changes in the composition of the population that result in changes in the pattern of medical treatment and, thus, government spending.

The amount of public spending on a 70-79 year old is four times the spending on a 20-29 year old.   However, just because the population is ageing, it does not necessarily follow that health expenditure will increase.

This can be thought of as a system where governments decide what treatments will be available to people in various categories (neonates, the young, the elderly, etc) and sufficient funding is made available to meet the required expenditure. For example, a government might decide that everyone over age 65 presenting to a DHB with pulmonary embolism (blood clots in the lung) will receive a course of Warfarin (an anticoagulant)free of charge. If the number of people over 65 increases by 15% and the frequency of pulmonary embolism remains constant, then funding for Warfarin treatments will increase by 15%.

Figure 21 below shows that per capita spending on personal health rises steeply with age. Personal health includes primary, secondary and tertiary medical care – about 70% of total public health spending (the rest consists of spending on disabilities, health education, mental health). The chart shows that the amount of public spending on a 70-79 year old is four times the spending on a 20-29 year old. However, just because the population is ageing, it does not necessarily follow that health expenditure will increase.

Figure 21: Per capita personal health costs by age/gender in 2003/04
Figure 21: Per capita personal health costs by age/gender in 2003/04.
Source: Ministry of Health

The upward slope of these curves reflects the fact that the older you get, the greater are your chances of ill health and dying. The reduction at the older ages is due to the cost of dying which tends to fall in very old age (April, 2004). The actual impact of an increase in life expectancy on health spending depends of what happens to people’s health status as they get older.

The fact of an increase in life expectancy means that there has been a change in the health status of the population. There is an unsettled debate in the medical literature on what is happening, and is likely to happen in the future, to health status. The first bar in Figure 22 represents a life before the increase in life expectancy. There are three possibilities for changes in health status, which are illustrated in a stylised form in the lower three bars. In each case, they take as given an increase in life expectancy: people are, on average, living longer. The question they seek to answer is whether those extra years of life are, to put it crudely, lived in “good” or “bad” health.[31]

The most optimistic scenario is that health is improving across the board.  This is known as a “compression of morbidity.” 

The first, and most optimistic, scenario is that health is improving across the board. This is known as a “compression of morbidity”:people both live longer and have fewer years of bad health.

The second is a “shift to right” or “dynamic equilibrium”: the absolute period of bad health stays the same, but falls in relative terms as the absolute period of good health increases.

The final and most pessimistic scenario is known as an “expansion of morbidity”: the absolute period of good health stays the same, with all the increased years of life expectancy being in poor health. A severe expansion of morbidity would see the absolute period of good health reducing.

Notes

  • [31]In Figure 22, we have neatly divided a person’s life into discrete periods of good and bad health. For many people, this is clearly not the case.
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