5.2  The expenditure sub-model

5.2.1  Health expenditure series

The government pays for a variety of services that contribute in some way to health, ranging from hospitals to public health campaigns to medical schools. Not all such services are paid for under “Vote Health”, the budget allocated to the Ministry of Health. The allocation of services to Votes changes over time. For instance, between 1992/93 and 2001/02 Disability Support Services was transferred out of Vote Social Welfare into Vote Health. These services accounted for about 8 per cent of Vote Health expenditure in 2001/02. For a schematic representation of the relationship between health services and Votes, see Figure 3.

Figure 3 – The relationship between Vote Health and government health services

When, in our projections, we refer to “government health expenditures” we mean expenditure by the government on the basket of services that were provided through Vote Health in 2001/02. Ideally, we would like to construct an historical expenditure series based on exactly this definition.

We have two sets of data with which to construct such series. The first is annual figures on Vote Health in the period 1950/51 to 2001/02, assembled by the Treasury from official year books. The second is annual estimates for “total net transfers” to Vote Health for the period 1993/94 to 2001/02. These transfers indicate expenditure on services moved from other Votes into Vote Health since 1992/93.

To construct our historical expenditure series from these data, we have made two assumptions. The first is that the range of services provided under Vote Health remained the same over the period from 1950/51 to 1992/93. The second is that the ratio between expenditure on services provided through Vote Health in 1993/94 and expenditure on services provided through Vote Health in 2001/02 remained the same throughout the period 1950/51 to 2001/02. A different way of stating the same assumption is that growth rates for both those services always provided through Vote Health and those services previously provided under other Votes are the same throughout the period.

Our assumptions are unlikely to be fully met in practice. The resulting expenditure series are nevertheless better suited to our purposes than the unadjusted Vote Health series, particularly for the 1990s. Details on the calculations are shown in Appendix 2.

5.2.2  Per capita health costs in 2001/02

The Ministry of Health database provides estimates of expenditure by age, sex, and service group. The same service groups are used in Treasury’s Long-Term Fiscal Model. Lacking direct measures, we used these data to construct indirect estimates of expenditure by age, sex, and our four health statuses (disabled decedent, non-disabled decedent, disabled survivor, non-disabled survivor.) Table 7 summarizes our assumptions on how expenditures were distributed.

Table 7 – Assumptions about distribution of expenditure within each age-sex group in 2001/02

Service group	Expenditure by health status
Public health	Per capita expenditure equal for all health statuses
Disability support services	No expenditure on non-disabled survivors and non-disabled decedents; per capita expenditure equal for disabled survivors and disabled decedents
Mental health	As for disability support services.
Personal health	Per capita expenditure for non-disabled and disabled decedents fixed at $10,000, based on overseas data and limited New Zealand data on costs and distance to death.  At ages 0-54, per capita expenditures equal for disabled and non-disabled survivors.  At ages 55 and over, per capita expenditure of non-disabled survivors equal to that of non-disabled survivors aged 50-54.  Per capita expenditure for disabled survivors calculated as a residual.

The resulting costs per capita are summarized in Figure 4. Given that these estimates are, unavoidably, tentative, we carry out sensitivity tests based on alternative estimates. We construct these alternative estimates by altering the assumption about the “cost of dying”, which in Figure 4 is $10,000.

Figure 4 - Expenditure per capita by health status in 2001/02 (males and females combined)

Note – Strictly speaking, the graphs shows expenditure per person-year lived.