7 Summary and conclusions
The New Zealand population will age substantially over coming decades. Older people consume more health resources than young people, so population ageing is likely to exert upward pressure on government health expenditure. Evidence from New Zealand and overseas suggests, however, that the main determinant of health service use is not age but health, and that the reason why older people consume more resources is their poorer health. Investigations of future health expenditure can therefore profit from looking at health status as well as age structure.
International research on health expenditures generally uses two measures of health status. The first is disability rates and the second is “distance to death”, or the proportion of people in their last year of life. We construct projections of both these measures, linked to our projections of age structure. Based on a systematic review of the international evidence, we argue that disability rates within each age group are likely to decline, though we also experiment with specifications in which age-specific disability rates are held constant.
When combined with estimates of cost by age, sex, and health status, these projections can be used to model spending pressures due to population ageing. In this paper we refer to such pressures as the “ageing and health” effect. Because New Zealand, unlike some other developed countries, lacks good data on costs by health status, we have had to estimate these costs indirectly. This is an important limitation of our study. We do, however, investigate whether our findings our sensitive to alternative specifications of costs.
We use the model to examine how government health expenditures are distributed among different age groups. Under our benchmark assumptions, the share of people aged 15-64 falls from 52% in 1950/51 to about 31% in 2050/51, while the share of people aged 65 and over rises from 29% to 63%. This shift in expenditure shares occurs despite the fact that, under our benchmark assumptions, expenditure per old person grows less quickly than expenditure per young person. The reason expenditure per old person grows more slowly than expenditure per young person is that there is more scope for offsetting spending pressures through lowering disability among the elderly, since the disability rates of elderly people are relatively high. If these disability reductions did not take place, then the expenditure share of older people would increase further.
The model’s results on expenditure by age, and hence expenditure shares, are driven mainly by changes in health status. Health status is, however, only one of the factors determining expenditure by age. Other factors include technology, expectations, and social priorities. The model’s results do, however, suggest that there will be an increasing disjunction between those who pay for government health services—mainly the working-age population—and those who receive them – mainly older people.
Assuming moderate declines in age-specific disability rates, spending pressures attributable to the ageing and health effect will grow over the next 25 years, but perhaps no more quickly than they have grown over the past 25 years. In other words, the annual proportional increases in government health spending required to accommodate changes in age structure and health may be no larger up to the mid-2020s than they have been since the 1970s. Spending pressures are likely to grow more quickly after the mid-2020s. Spending pressures will also be higher if disability rates do not decline. The results do, nevertheless, suggest that population ageing may not necessitate large increases in the growth rate of government health expenditure.
Experiments with our model suggest that falling disability rates do more to offset spending pressures than distance-to-death effects. This is plausible, since people in their last year of life never make up more than one percent of the total population, and account for a relatively small fraction of costs, whereas people with disabilities currently make up about 12 per cent of the population. Some overseas studies have found distance-to-death effects to be important, but these studies have looked at elderly populations, which have a disproportionately high number of people in the last year of life (Miller 2001, Spillman and Lubitz 2000). We are, however, unable to estimate distance-to-death effects precisely, given the weakness of the underlying cost data. Regardless of the exact contributions of disability and distance to death, it seems likely that trends in age structure and health status will do less to raise the growth rate for government health expenditures than is sometimes assumed.
We have analysed historical expenditure growth to examine the relative contributions of age structure and health and of the remaining factors, which we group together under the term “coverage and price”. Coverage and price includes things such as technological change, conditions treated, and input prices including wages. A high growth rate for coverage and price means that substantial new resources are flowing into government health services, net of what is required to offset demographic changes. These new resources may be committed to better or expanded treatments that improve population health, or they may simply be absorbed in price rises; we make no attempt to differentiate between the two situations.
The analysis of historical trends shows that, between 1950/51 and 2001/02, growth in coverage and price was the main source of long-run growth in government health expenditure. It was also the main cause of fluctuations in the growth rate. During the 1950s and 1960s, government health expenditure grew extremely rapidly, though demographic conditions were, if anything, reducing the need for spending. Real per capita expenditure actually fell several times during the 1980s and early 1990s, just as demographic change started to absorb extra expenditure. Spending has increased quickly since the early 1990s, because growth in coverage and price has risen to 3-4% per year.
If coverage and price has been the decisive factor in the past, it is also likely to be decisive in the future. Varying assumptions about coverage and price within plausible bounds has a much greater effect on eventual levels of health expenditure than varying assumptions about disability. The earlier Ministry of Health study, and overseas studies, reached similar conclusions (Cutler and Sheiner 1998, Jacobzone et al 2000, Johnston and Teasdale 1999, Miller 2001). Creedy and Scobie (2002) report similar findings for other social expenditures such as pensions.
This raises the question of how much growth in coverage and price New Zealand can afford. The answer depends, of course, on the definition of affordable. We investigate the consequences of three possible definitions. The first is that government health expenditure is held to 6.2% of GDP in 2050/51, which is the same percentage as 2001/02. The second is that government health expenditure is reaches 9.0% of GDP in 2050/51, and the third is that it reaches 12.0% of GDP in 2050/51, or somewhat less than twice current levels. Under our benchmark assumptions for disability, mortality, and labour productivity, the targets of 6.2%, 9.0%, and 12.0% are consistent with annual growth rates for coverage and price of 0.7%, 1.5%, and 2.1%. Whether values of 0.7%, 1.5%, and 2.1% are considered low or high by historical standards depends on the historical period chosen. However, all are low compared with 3-4% annual growth in coverage and price since the mid-1990s. The implication is that recent growth rates could not be sustained indefinitely if the long-term goal of constraining expenditure to 6-12% of GDP were to be adopted.
