3 Previous simulation models of ageing and health expenditures
Three distinguishing features of the model used in our study are: (i) it is highly aggregative: (ii) it is based on cohorts rather than individuals; and (iii) it divides the population into a finite number of groups. This section describes earlier health expenditure models that share these features. Some research on health expenditure has used alternative modelling strategies (Manton and Stallard 1992, Wanless 2002), but these alternative models are not discussed here.
3.1 A stylized example
Table 2 builds on the simple example presented in Table 1 above. The population is disaggregated into two groups, “young” and “old”. The first and second columns of the table show launch year and projected population sizes for these two groups. The third and fourth columns show observed and projected costs per person. Projected values for total expenditures are obtained by multiplying and summing.
| Population | Costs per person | |||||
|---|---|---|---|---|---|---|
| Young | Old | Total | Young | Old | Total expenditure | |
| Launch year | 70 | 20 | 90 | $10 | $30 | 70×$10+20×$30=$1300 |
| Projected (fixed costs) | 80 | 40 | 120 | $10 | $30 | 80×$10+40×$30=$2000 |
| Projected (costs×3) | 80 | 40 | 120 | $10×3=$30 | $30×3=$90 | 80×$30+40×$90=$6000 |
The “Projected (fixed costs)” row shows what expenditure would be if costs per person, within each age group, were to remain at their initial level. In the example shown, total expenditure is higher in the fixed cost projection than it is in the initial year. This increase reflects the growth in total population, and the growth in the population share of the high-cost older age group, which rises from 22% (20/90) to 33% (40/120). Fixed-cost projections are one method for measuring spending pressures due to population change.
The “Projected (costs x 3)” row shows what expenditure would be if cost per person, within each age group, were to increase by a factor of three. Costs can increase for many reasons, including, for instance, technological change, increases in wages for health workers, and an expansion in the range of conditions that are treated.
Many studies also project GDP, to permit the calculation of expenditure as a percent of GDP. The GDP projections use the same method as the expenditure projections, with GDP per employee (ie labour productivity) taking the place of cost per person. In general, a rise in the population share of older people has opposing effects on health expenditure per capita and GDP per capita: it raises the former and lowers the latter. Appendix 2 provides further details on the projection of GDP[2].
Notes
- [2]We use real GDP throughout this paper.
