6.2  Historical expenditure growth and its components

6.2.1  Total expenditure

Figure 5 shows government expenditure on health, expressed in 2001/02 dollars. As far as possible, the expenditure series is based on the same set of services as was provided through Vote Health in 2001/02. This means, for instance, that the series includes Disability Support Services throughout the 1990s, even though DSS was funded through the Ministry of Social Welfare in the early 1990s and funded through the Ministry of Health in the late 1990s.

Figure 5 – Government health expenditure, in 2001/02 dollars, and as a percent of GDP

Source: Expenditure and GDP data from Treasury

As can be seen in Figure 5, government expenditure on health has grown from about one billion dollars in 1950/51 to over seven billion dollars in 2001/02. Growth rates have fluctuated markedly: expenditures grew very slowly from the mid-1970s to the mid-1990s, for instance, but have grown much more quickly since then. Much of the slow growth in the 1980s coincided with periods of high inflation, when nominal expenditure was increasing even as real expenditure fell.

As explained in Section 4.2, our model can be applied to the historical expenditure series, to show what proportion of observed growth was attributable to population change and what was attributable to other causes:

Here, and in the rest of this paper, all expenditures are real. The “ageing and health effect” measures expenditure increases necessary to offset unfavourable trends in age structure and health. The “coverage and price effect” is a residual term, capturing expenditure growth that is not attributable to population growth or to ageing and health trends. It includes such things as the introduction of new technologies, the expansion in the range of conditions treated, and rising wages for health workers.

Note – Calculations assume that disability rates constant from 1951 to 2002.

Table 10 shows the results from applying this analysis to historical data for New Zealand. The numbers for “expenditure” and “population size” are calculated directly from the total expenditure and total population series. The results for the ageing and health effect are calculated using the model and the data, and assumptions on age structure and health. “Coverage and price” is calculated by subtracting the growth rates for population size and the ageing and health effect from the growth rates for expenditure. Figure 6 plots the data summarized in Table 10.

Figure 6 – Annual growth rates for government health expenditure and its components 1951-2002

Note – The results for coverage and price and total expenditure are 5-year moving averages.

During the period 1951-2002, the ageing and health effect made a relatively small contribution to overall growth in health expenditure. Population growth made a more substantial contribution. However, the dominant factor was clearly growth in coverage and price.

We experimented with various alternative specifications for expenditure in different health statuses and for disability decline. The main substantive result was, however, unchanged. Coverage and price consistently emerged as the most important component of expenditure growth, population growth the second most important, and ageing and health the least important.

During the 1950s and 1960s, spending grew extremely rapidly, though demographic conditions were, if anything, reducing the need for spending. Real per capita spending actually fell several times during the 1980s and early 1990s, just as demographic change started to absorb extra expenditure. Spending has risen quickly since the early 1990s, well in excess of what would be predicted from demographic trends.