6.6  Future trends in health expenditures

Models such as ours can, in principle, generate projections of future expenditure levels. Supplied with plausible assumptions about demographic trends, health trends, productivity growth, and cost growth, the model produces numbers for future health expenditure. We are, however, reluctant to generate these projections.

One reason for this reluctance is the difficulty of choosing values for the coverage and price term. As Section 6.2 demonstrates, coverage and price was the main determinant of health expenditure growth in the past. The results in Section 6.3 suggest that the ageing and health effect will contribute more to future expenditure growth than it has to past growth. But coverage and price will nevertheless continue to be important. This means that obtaining sensible predictions for overall expenditures is only possible if coverage and price can be modelled satisfactorily. The main objective of our research, however, has been to understand the contribution of population ageing to health expenditure growth, and we have simply treated coverage and price as an undifferentiated “everything else” term. Our model is designed for making predictions about extra increments in health expenditures attributable to population ageing, such as those in Section 6.3. It is not designed for making predictions about overall expenditures.

Moreover, even if we had a more sophisticated model of coverage and price, the standard methods for projecting government health expenditures would still be problematic, at least for government health expenditure in New Zealand. The standard methods essentially treat overall expenditure as an outcome, and trends in demography and coverage and price as determinants of this outcome. This may be appropriate for forecasting expenditure in health systems like private health care in the United States, where there is no overall expenditure cap, and where trends in coverage and price emerge from large numbers of decisions by large numbers of actors. But it is perhaps not appropriate for forecasting expenditure by the public health system in New Zealand, where the government has final say on overall expenditure levels. In this case, it is probably more accurate to treat coverage and price as an outcome, and overall expenditure as a determinant.

This, in any case, is what Figure 11 does. Rather than answering the traditional question “What level of health expenditure would be implied by a given growth rate for coverage and price?”, it answers the question “What growth rate for coverage and price would be consistent with a given level of health expenditure?”

In constructing Figure 11, we needed to choose values for health expenditure as a percent of GDP in 2050/51. We started by setting expenditure as a percent of GDP in 2050/51 equal to its level in 2001/02, at 6.2%. To obtain a “large” value for expenditure, we doubled 6.2% and rounded, yielding 12.0%. We chose 9.0% as an intermediate value. The choice of values was obviously somewhat arbitrary, and we have made no attempt to rank them by probability or desirability.

Figure 11 – Growth rates for the coverage and price effect consistent with selected values for expenditure as a percent of GDP in 2050/51

Note – In both cases, mortality rates are assumed to decline at 1.5% per year, and GDP per employee is assumed to grow at 1.5% per year.

In our model, the relationship between expenditure levels and coverage and price depends on assumptions about mortality, disability, and GDP per employee. Figure 11 presents results from two sets of assumptions. Both assume that mortality rates decline at 1.5% per year and GDP per employee grows at 1.5% a year. The results shown in the left panel assume that disability rates decline at 0.5% per year; the results in the right panel assume constant disability rates. The implied growth rates for coverage and price range from 2.1% per year (for the case where health expenditure reaches 12.0% of GDP and disability rates decline) to 0.4% (where health expenditure stays at 6.2% and disability rates are constant).

The right-hand panel shows results from a sensitivity test in which age-specific disability rates are assumed to remain constant. The associated growth rates for coverage and price are all lower than the benchmark case by about 0.4 percentage points. We conducted another sensitivity test using a growth rate for GDP per employee of 1.0% per year rather than 1.5%. The results are not shown here, but are close to those in the right-hand panel.