Non-parametric programmes – Health (continued)

Figure 22: Possible future health states in years of life

A joint study by the Treasury and the Ministry of Health (Bryant and Teasdale et al., 2004), investigates the effect of improvements in mortality and morbidity on health spending. Bryant and Teasdale et al. assume that across both genders and all ages, mortality declines by 1.5% per year and that prevalence of disability within each age group declines by 0.5% per year. This produces a set of results that involve a compression of morbidity.

At first sight, it might be thought that these combined assumptions would see expenditure fall through time: fewer people are getting sick in any year and they are living longer. But we are still mortal. Everyone dies eventually.

It is a stark fact that our most extensive and expensive experience of the health system often occurs as it tries, and eventually fails, to cure us of our last illness or injury. It may be the case that the costs of treating this last event seem to decrease with age.

Thus, it is likely that demographic changes will see average health care costs increase. But the effect is not likely to be great. Extrapolations from Bryant and Teasdale et al. (see Figure 23) suggest that up to about age 55, there is a 3%-5% reduction in the average annual health care costs, while after that age, there is an increase of about 5%, with a marked increased (over 15%) for those 95 years and older.

Figure 23: Compression of morbidity has a small impact on average health costs (males) across most age groups

Source: Derived from Bryant and Teasdale et al, 2004

Cost increases

Advances in medical science are allowing more conditions to be treated, but in increasingly costly ways.  This is not a universal trend. Overall, however, health is becoming more expensive.

Less benign are the assumptions about costs. Internationally, the average cost of health treatments is increasing. Advances in medical science are allowing more conditions to be treated, but in increasingly costly ways. For example, advances in immuno-suppressant drugs have allowed more people to undergo organ transplants. New drug treatments for formerly fatal conditions sometimes come at a very high cost.

This rise in average costs is not a universal trend: for example, advances in techniques such as keyhole surgery are allowing people to be treated much more cheaply (and, often, more effectively). Overall, however, health treatments are becoming more expensive.

International experience is also that health expenditure increases with income, both at the individual level (in the case of private provision) and nationally (for public health systems). Our modelling assumes an income elasticity of demand for public health services around unity. Unit elasticity means that average growth of per capita demand for health services is the same as the growth of nominal GDP per capita (a measure of aggregate income).

Details of the modelling approach to health spending

We introduce a different approach to modelling health spending from the one traditionally used in the LTFM and will devote some space to describing this.

The assumption that the per capita health costs by age (such as those depicted in Figure 21) will remain the same over the next half century is commonly made, although it has been challenged.[32]

As population ageing accelerates over the next two decades and the age distribution moves to the right along the cost profiles (Figure 21), we would expect rising health spending (if these profiles don’t also change). Other increases in health spending come from a (non-demographic) shift upwards in the profiles so that cost rises are independent of the age of the recipient.[33]

As population ageing accelerates over the next two decades, we would expect rising health spending.   Other increases in health spending come from a (non-demographic) shift upwards in the profiles.

In analysing the drivers of total real per capita health spending over the period 1950 to 2005, we make two simplifying assumptions: that the implicit proportions of spending by age and gender in the cost profiles (such as those in Figure 21) have remained the same over the past three or four decades; and that aggregate health spending covers roughly the same bundle of services throughout this period (as we don’t have data indicating how this may have changed through the decades).

Running historical demographic changes through the fixed-cost profiles suggests average annual growth purely from ageing (the change in age structure) has been around 0.2-0.4 percentage points a year through the period, a relatively minor contributor to the annual growth of total real per capita health costs since the 1950s (3.0%). This growth analysis is highly dependent on the deflator (CPI is used here) and the period covered.

Estimates in the literature of the income elasticity of demand for public health services range from 0.9 to 1.2 and centre on unity. Using New Zealand data for the period 1950 to 2005 produced an estimate of 1.16.