6.4  Comparison of results from different versions of the model

In Section 3.2 we distinguished between health expenditure models that incorporate cost differences by age and sex alone, and models that also incorporate differences by health status. Johnston and Teasdale (1999) and Treasury’s Long-Term Fiscal Model[8] are examples of the former; Cutler and Sheiner (1998) and our model are examples of the latter.

We have constructed an “age-sex” version of our model that uses only age and sex, and ignores disability and distance to death (see Section 4.5). Table 12 compares results from this version and the full model. The indicator used in Table 12 is the ageing and health effect in 2051, with the effect normalized to 100 in 2002. The right-most column of the table shows the percentage difference between the projected ageing and health effects. Because the different versions of the model use the same numbers for population size, and for coverage and price, any projected values for expenditures will differ only to the extent that results for the ageing and health effect differ. If, for instance, the age-sex version of the model yields a value for the ageing and health effect that is 10% higher than the full version, then the age-sex version will also yield a value for total expenditure that is 10% higher.

Scenario 1 in Table 12 is our benchmark case of 1.5% annual decline in mortality rates, and 0.5% annual decline in disability rates. Under this scenario the age-sex model produces an ageing and health effect that is 18% higher than the full model. Figure 9 helps explain why. It shows health expenditure in 2051 under the age-sex and full versions of the model, using the same mortality and disability assumptions as Scenario 1. (Coverage and price is not important to the comparison, so its growth rate has been set to zero.) The age-sex model, which ignores the assumed changes in disability and distance to death, projects per capita expenditures for older age groups that are substantially higher than the full model.

Figure 9 – Health expenditure per capita in 2051, under the age-sex and full versions of the model

Note – These results assume that, after 2002, mortality rates decline at 1.5% per year, disability rates decline at 0.5% per year, and the coverage and price effect is constant.

As the second scenario of Table 12 shows, the gap between the age-sex and full models is not greatly affected by changes in the assumption about mortality decline. The third scenario shows, however, that the divergence is strongly conditional on assumptions about disability: if disability rates are assumed to remain constant, then the basic and full versions of the model give virtually the same results.

To identify more clearly the reason why the age-sex and full versions of the model give different results, we have set up two ‘”intermediate” versions. The first, the “distance-to-death” version, incorporates age, sex, and distance to death, but not disability; the second, the “disability” version, incorporates age, sex, and disability, but not distance to death (see Section 4.5 for details.) Experimentation with the different versions shows that, when disability rates are assumed to decline, the distance to death version gives results close to the age-sex version, while the disability version gives results close to the full version. When disability rates are assumed to remain constant, all four versions of the model give similar results. Varying the mortality rate affects all models by approximately the same amount. The apparent implication is that disability has a potentially large influence on expenditures, while distance-to-death effects do not.

6.5  Distribution of expenditure by age

Older people, on average, have much poorer health than younger people. There is therefore much greater potential for health improvements to offset pressures for growth in per capita spending on old people. This difference is captured in our model. Under the standard assumption of 0.5% annual decline in disability rates, the proportional increase in per capita spending is substantially lower for older people than it is for younger people. Table 13 shows some representative numbers.

Notes – Calculations assume that disability rates decline at 0.5% per year, mortality rates are decline at 1.5% per year, and coverange and price increases at 1.5% per year.

Even with the slower per capita growth, however, the share of total health expenditure going towards older people is projected to grow substantially over coming decades. Figure 10 shows results from our benchmark scenario, together with back-casting results for 1950/51. The expenditure share of people aged 65 and over rises from 29% in 1950/51 to 40% in 2001/02 and 63% in 2050/51. The reason why the expenditure share of older people rises is that their population share rises. The reason why the expenditure share of older people is higher than their population share is that, even with slower growth, per capita expenditure on older people remains much higher than per capita expenditure on younger people.

Figure 10 – Distribution of expenditure by broad age group

Note – The calculations are based on the assumption that disability rates decline at 0.5% per annum and mortality rates decline at 1.5% per year from 2002 to 2051.

Alternative assumptions yield slightly different results. For instance, more pessimistic assumptions for disability decline yield slightly greater increases in the share of expenditure going to older people. However, the basic qualitative finding—that the expenditure share of old people rises substantially—is robust to many different specifications of health trends.