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7  Health care

7.1  Drivers of health spending

Publicly-funded spending on health care has more than doubled as a share of GDP over the past 60 years, rising from around 3% in 1950 to 6.9% in 2009. In dollars per person, the amount spent by the government has risen from $550 per person in 1950 to $2,870 per person in 2009 (both in 2009 dollars). Figure 7.1 shows how health spending per person has grown faster than GDP per person, in real terms, over this period. This trend has been particularly marked since the mid-1990s.

Figure 7.1 - Health spending and GDP per person - inflation-adjusted
Figure 7.1 - Health spending and GDP per person - inflation-adjusted.
Source: The Treasury

The drivers of this growth in health spending are both demographic and non-demographic in nature. Most research suggests that non-demographic factors, such as income growth and technological change, have historically played a larger role in the growth of health spending than demographic factors, such as an ageing population (Bryant et al, 2004; OECD, 2006; Smith et al, 2009). These factors are discussed in more detail below.

7.1.1  Demographic factors

Demographic factors that affect health spending include population growth and the age distribution of the population. As discussed Section 3, New Zealand's population is ageing as a greater proportion gradually shifting into the older age groups. Population ageing affects health spending, since older people tend to need more health care - as Figure 7.2 shows. In reality, age is being used as a convenient and effective proxy for the real drivers of health spending - since “distance to death” and the incidence of disability are more direct drivers of health spending than age per se (“distance from birth”). These issues are discussed more fully, in a New Zealand context, in Bryant et al (2004) and in the 2006 Statement.

Figure 7.2 - Health cost weights, by age group
Figure 7.2 - Health cost weights, by age group.
Source: Ministry of Health

Nevertheless, the effects of population ageing on heath spending have been relatively modest in recent decades - accounting for no more than 10 to 15% of the real increase in spending per person since 1970.[17]

Although this ageing effect will become progressively more important through the 2020s and 2030s, it is not usually projected to become the dominant driver of future spending growth. The main drivers of health spending have been, and will continue to be, income growth and technological change - both of which affect the demand for, and the cost of supplying, health care.

7.1.2  Non-demographic factors

Non-demographic factors, such as income growth and technological change, affect both the supply of, and demand for, health care. Furthermore, health sector institutions and policy settings also affect how these drivers give rise to growth in health spending. These various factors interact with each other in ways that are not fully understood. Consequently, there are different approaches to understanding the drivers of past and future health spending. A typical approach, which we employ here, is to project the future using assumptions derived from a decomposition of past spending - using the known values of factors such as GDP growth (for example, OECD, 2006; Smith et al, 2009).

National income growth matters. Economy-wide productivity growth drives real incomes, and the long-run cost of labour - the major input into health-care services. Since productivity gains tend to be relatively low in labour-intensive service industries, such as health, the real cost of delivering health care has tended to rise over time. Higher incomes also tend to be accompanied by higher public expectations of the range and quality of health services.

Public expectations of the health system also increase as technology progressively extends the range of possible treatment options. For example, treatments for heart disease have evolved from bed rest and aspirin in the 1950s, to a range of treatments that now include coronary bypass surgery and angioplasty. New treatments provide real benefits to patients but tend to involve new spending with relatively high unit costs. Although technological innovation can lead to a decline in the cost of a service, overall spending can rise if the use of the service increases.[18]

As discussed earlier in Section 6, the productivity of publicly-funded services can affect spending growth. But the productivity of health care services is difficult to measure accurately for a number of reasons, such as the lack of comprehensive information about service outputs. Although some macro-economic approaches to productivity measurement suggest there are long-run productivity gains in health care services (eg Tripplett and Bosworth, 2003), health system-level measures of inputs and outputs show declining productivity. Available measures of this type tend to be relatively recent short-run series.

In the case of New Zealand, the productivity measure covers hospital-based services, given data limitations for non-hospital services. System-level examples of a recent decline in health care productivity include measures from New Zealand (Ministry of Health, 2009), the United Kingdom (Office of National Statistics, 2006) and the Netherlands (Chessa and Kleima, 2003). In each case, the measured decline is due to outputs growing more slowly than recent growth in inputs, although as each study notes, there are real difficulties in measuring the changing quality of outputs. These measures also need to be looked at alongside other proxy indicators of system productivity, such as the average length of stay in hospitals. For example, technological developments and administrative practices in hospitals enabled the average length of stay in public hospitals in New Zealand to be halved between 1989 and 2001 - suggesting some productivity gains over this period (Ministry of Health, 2008).

The institutional arrangements within the health system - how services are funded, and how and where they are delivered - also matter for spending growth. In a health system dominated by public funding, as the New Zealand system is, these cost and coverage pressures can lead to government initiatives to expand services and increase existing entitlements. In recent years, discretionary policy choices have been a major driver of the growth in health spending - accounting for at least half of the increase between 2002 and 2008 - in addition to spending increases to manage price and volume pressures.[19] In addition, the government relies on agents at all levels of the health system, including District Health Boards (DHBs), Pharmac, and clinicians, to allocate resources and manage cost pressures. The way people are organised and motivated affects how efficiently resources are used, and how spending pressures are managed.


  • [17]New Zealand Treasury (2006), OECD (2006).
  • [18]Congressional Budget Office (2008).
  • [19]Calculated from Ministry of Health data on Vote Health initiatives.
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