1 Introduction
The average 30 year old New Zealand male currently receives about $900 of health care per year from the government health care system; the average 90 year old male receives about $16,000 of care. Statistics New Zealand projections suggest that the number of 30 year old males will increase by about 20% over the next 25 years, while the number of 90 year old males will increase by 150%. The apparent implication of such numbers is that population ageing is about to add substantially to government health expenditures. Health currently accounts for about 20% of government expenditure, so rapid increases in the cost of health care has serious implications for government finances.
But there is room for scepticism, or at least reservations, about a close link between population ageing and spending pressures. Econometric studies have produced mixed findings on the relationship between changes in countries’ age structure and changes in their health expenditures (O'Connell 1996). More fundamentally, the focus on age structure may be misplaced, because underlying health status, rather than age itself, may be the real determinant of the demand for health care, and the relationship between age and health status varies over time.
This paper presents a model of how the demographic and health profile of the New Zealand population is changing, and how these changes create pressures for increased government health expenditure. The model is applied to historical data, to estimate the contribution of demographic and health changes to historical growth in expenditures. The model is also used to construct projections for the coming decades. These projections are used to answer questions such as the following: Will demographic and health trends create greater spending pressures in the future than they have in the past? Could improvements in health status offset the extra spending pressures created by population ageing? How will expenditure be distributed among different age groups? How sustainable are recent trends in health expenditures?
Projecting decades into the future requires some strong assumptions. There are also some important gaps in data on current health expenditures in New Zealand. The result is that the projections presented in this report are necessarily simple and approximate. Imperfect as they are, however, the projections are still preferable to the alternatives, which are to forgo discussions of generational equity and fiscal sustainability altogether, or to base such discussions entirely on intuition and implicit assumptions.
It is important to emphasize that this report deals exclusively with government health expenditure: it makes no attempt to model private health expenditure. Government health expenditure currently makes up about 80% of total health expenditure in New Zealand (Ministry of Health 2004). It should also be noted that the definition of government health expenditures used in this report differs from the definition used in many overseas studies, in that it includes long-term care as well as acute care. In New Zealand, acute and long-term care are currently funded through the same appropriation, “Vote Health”.
The next section of the paper reviews some of the links between ageing, health, and health expenditures. Section 3 summarises previous models of health expenditure. Section 4 describes the main elements of our model, and Section 5 describes how the model has been operationalized. Sections 3 to 5 are all relatively brief and non-technical; the mathematical details are reserved for the Appendix. Section 6 presents results from the historical analysis and projections, and the final section summarizes the report’s findings and draws out some of the implications.
The model has been constructed by an inter-disciplinary team from the Treasury and the Ministry of Health.
