Executive Summary
The average person aged 65 or over currently costs New Zealand’s public health system about five times as much as the average person under 65. Over the next 50 years, the proportion of the population aged 65 and over is expected to double. As a result, population ageing will influence government health care expenditures. This will raise concern about intergenerational equity of such spending, and pose complex ethical issues about investment in health sector interventions. This report updates and extends previous work carried out by the Treasury and Ministry of Health on this issue. It outlines a model developed in the Treasury to project future health expenditure.
The international empirical evidence suggests that per capita spending on health care is highest for disabled people, and for those in the last year of their life. Per capita spending rises with age because older people are more likely to be in at least one of these two categories. There is a measured increase in the disability rate in the population – this reflects the increase in the proportion of older people, who are more likely to be disabled. The international evidence suggests a decline, over time, in disability rates.
One approach to projecting health expenditure is to predict the combined effects of population ageing and cost increases. Sources of cost increases include technological change, broadening the range of conditions treated, and wage rises. In the model outlined in this report, the rate of growth in real per capita expenditure is assumed to vary between age groups. The model is innovative in that it also makes allowance for the improving health status of the population over time, and for the fact that a large proportion of lifetime costs are associated with the last year of life (the ‘distance to death’ effect). Both of these factors should work to reduce demographic pressure on health spending.
The model reported in this paper uses cost and population values for 2002, extracted from the Ministry of Health’s Expenditure Database, and from Statistics New Zealand’s 2001 Census and Vitals Data and its 2001 Household Disability Survey. Plausible ranges for growth in GDP per worker, trends in fertility, migration, mortality and disability rates were taken from the following sources: Treasury’s long term fiscal model; Statistics New Zealand projections; and a systematic review of the international literature on disability trends, respectively.
Health spending is also driven by non-demographic factors – things such as wage and cost increases, increases in the coverage of the public health system and technological advances. We use historical averages (derived by backcasting our model) for this factor to examine its influence. The modelling shows that overall health spending is more sensitive to assumptions about this factor than to assumptions about demographic influences.
Anticipated improvement in the health status of future generations has complex effects, as the net effect of mortality improvement is to increase spending pressure (mortality improvement contributes to population ageing and increases the length of time lived with disability – swamping the ‘distance to death’ effect which acts to decrease spending).
Our model shows that demographic pressure is relatively low until 2020 but that it increases after this time. If overall government health spending is to stay within reasonable levels of GDP then non-demographic spending will need to be significantly lower than historical rates. For example, to keep government health spending under 9% of GDP until 2050, growth in non-demographic spending would need to average 1.5%. To keep spending under 12% of GDP, growth in non-demographic spending would need to average 2%. This is lower than the average historical rate of growth in non-demographic spending: over the last 50 years it has been 2.35%; and over the last five years it has been 4%. This rate is clearly unsustainable over the longer term if the government is to maintain its current fiscal objectives.
The model results also suggests that population ageing will significantly change the spread of spending through the population. The expenditure share of those aged 65 and over has risen from about 29% of total government health expenditure in 1951 to about 40% today. Our model suggests that this will rise further to 63% in 2051. The political economy effects of having 25% of the population aged over 65 are noted but not examined.
