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7.3  Results

Under the historic trends scenario, health spending continues to grow faster than GDP, increasing from 6.9% of GDP in 2009 to 10.7% in 2050. This increase equates to average nominal growth of 5.0% per year.

As Figure 7.4 shows, this projection is a continuation of a long-run trend. The spike in this ratio at the beginning of the projection period represents a continuation of recent spending growth in the context of a flat or declining GDP due to the economic recession. The ratio declines slightly between 2010 and 2016 because of forecasts of relatively slower health spending growth in the short term in the context of GDP growth increasing back to long-run trend.

The model shows that although the ageing of the population becomes increasingly important, it is not projected to be the dominant driver of spending growth. The impact of ageing accounts for around 0.5 percentage points of spending growth per year at the beginning of the projection period, or around 10% of the annual increase in health spending. This ageing effect rises through the projection period, peaking in the late 2020s and early 2030s at around 1.2 percentage points, or 20-22% of the annual increase in health spending.

Setting aside the impact of raw population growth, the main drivers of spending are the decisions around the costs and coverage of the health care system. This finding mirrors the result obtained in the 2006 Statement, and is also consistent with other New Zealand-specific modelling of future health costs, such as Bryant et al (2004), the OECD (2006), and Winton (2009).

Figure 7.4 - Health, 1950-2050 - actual and projected (Historic trends)
Figure 7.4 - Health, 1950-2050 - actual and projected (Historic trends).
Source: The Treasury

7.3.1  Sensitivity analysis

Modelling future health spending is an inherently uncertain task. The complex interactions between the drivers of spending, the ambiguous impact of future technological developments, and the fact that service entitlements are generally not specified all mean that projecting future health spending is not straightforward. Given this uncertainty, we apply a number of sensitivity tests to the parameters used in the base case to quantify the potential impacts of different, but plausible, assumptions about real input price growth (w), productivity growth (a), and non-demographic volume growth (p).

This sensitivity analysis, discussed below, produces results that range from health care spending comprising 9.6% to 15.4% of GDP in 2050. This range compares with the base result of 10.7%.

We have not tested changes to demographic parameters, such as the implicit assumptions about longevity, the incidence of disability or future mortality rates. This is partly due to time constraints, and partly due to the fact that sensitivity testing in the 2006 Statement showed that alternative assumptions about the incidence of disability or reductions in mortality had relatively small impacts on health spending as a share of GDP.

Real input price growth

A higher value for the annual price growth of clinician labour could be considered plausible, given the fact that New Zealand competes internationally for increasingly specialised clinician skills (see Medical Training Board, 2009). Our base case assumes real wage growth in the health sector follows economy-wide wage growth over the long run - set at 1.5% per year in the model. We also model an illustrative scenario where real wages for hospital-based clinicians grow at the higher rate of 2.5% per year - equivalent to additional wage growth of 1.0 percentage point per year.

In estimating the effect on health spending, we assume that clinician labour costs are around 10% of health spending - an assumption based on data from DHB consolidated accounts.[21] This assumption leads to overall real wage growth in health care being 1.6% per year - ie (0.1 x 2.5%) + (0.9 x 1.5%). Real input price growth (w) is therefore 1.28% per year, after the labour share scalar of 0.8 is applied (as explained in Section 6). Under this scenario, health spending increases to 11.1% of GDP in 2050 - slightly higher than the base result of 10.7% of GDP.

The assumption of a 1.0 percentage point real wage premium can be extended to hospital-based nursing costs, which comprise around 12.5% of health spending. Using this higher real growth rate for both clinicians and nursing wages gives a real input price growth rate (w) of 1.38% per year. Under this scenario, health spending increases to 11.5% of GDP in 2050.

Productivity growth

The result is sensitive to assumptions about the productivity of health care services, as Figure 7.5 shows. A lower productivity assumption than the base case assumption of 0.3% sees health spending grow more rapidly, since fewer services are obtained for a given level of spending. For example, the model shows that if zero productivity gains are assumed, health spending grows more quickly, reaching 12.0% of GDP in 2050. An assumption of productivity declining by -0.3% per year sees health spending reach 13.4% of GDP by 2050.

Conversely, an assumption of higher productivity leads to slower growth in health spending, since more services are provided each year for a given amount of spending. An assumption of productivity gains of 0.6% per year leads to health spending reaching 9.6% of GDP in 2050. These results suggest, unsurprisingly, that productivity gains can make a difference to the rate of spending growth over the long run.

Figure 7.5 - Health spending under a range of productivity assumptions
Figure 7.5 - Health spending under a range of productivity assumptions.
Source: The Treasury

Non-demographic volume growth

As discussed earlier in Section 6, the assumption of 0.8% per year for non-demographic volume growth is a judgement, based on aggregate expenditure trends across all public services funded by the government. A slightly higher value of 1.0% per year could be considered appropriate for health care, depending on the period of history being examined. This higher value would fit with an assumption that health care is an area where technological developments are likely to play a relatively strong role in driving future demand for services - beyond that driven by demographic changes. Using an assumption of 1.0% growth in non-demographic growth per year produces a result where health spending reaches 11.6% of GDP in 2050 - higher than the base case by nearly 1 percentage point of GDP.

Combined effect of high cost growth assumptions

The assumptions informing the sensitivity tests that give rise to a faster rate of spending growth can be combined to produce a high cost growth scenario; low productivity (-0.3%), high non-demographic demand growth (1.0%) and high input price growth (1.38%) due to a wage premium for hospital-based clinicians and nurses. The combined effect of these assumptions produces a result where health spending reaches 15.4% of GDP in 2050.

7.3.2  Comparison with previous projections

The base case within the 2006 Statement projected health spending to reach 12.4% of GDP in 2050 - 1.7 percentage points higher than the historic trends base case in the 2009 Statement. Similarly, the average nominal growth rate of health spending in the 2006 Statement was 5.8% per year, compared with 5.0% in the 2009 Statement.

As discussed in section 2.5, there are a range of factors that account for the differences between the projections in 2009 versus 2006. The relatively slower path of projected health spending growth in the 2009 Statement is largely due to the change in the non-demographic components of the modelling approach - such as the use of non-demographic demand growth and constant productivity gains in place of the abating residual growth factor. In the 2006 Statement, the annual increase in non-demographic factors begins at 4.5%, declining to 3.5% in 2050, as the residual growth factor abates from 1.0% to zero due to assumed cost containment measures. This rate of growth is initially higher than the constant rate of 3.7% used in 2009, creating a higher spending base to which other drivers are subsequently applied over the projection period.

Both Statements project a range of results for health spending as a share of GDP. The 2006 Statement produced a low cost growth scenario of 9.7% and a “high elasticity” scenario of 15.7% of GDP in 2050. These scenarios were based on varying the base case assumptions, such as the income elasticity of demand for health care and cost containment measures. This range is similar to that obtained in the 2009 Statement, where health spending is projected to reach between 9.6% and 15.4% of GDP in 2050.

The OECD (2006) has also projected a range of future spending levels for publicly-funded health spending in New Zealand. Under a cost pressure scenario, where the effect of technology and higher prices continue to rise at the historical rate, health spending was projected to reach 12.6% in 2050. Under a cost containment scenario, where governments pursue policies to manage spending growth, health spending was projected to reach 10.0% in 2050.

The range of published results indicates that there is no single, or correct, projection of health spending growth. Much depends on the choice of modelling approach, the period of history used for estimating the strength of different drivers, and the assumptions about future technological changes. But the common feature of the projections discussed above is that health spending is expected to continue to increase faster than national income, and therefore rise significantly as a proportion as GDP - anywhere from 50% more, to a doubling as a proportion of GDP over the next 40 years.

Notes

  • [21]Consolidated accounts for District Health Board annual plans show clinician personnel costs comprise around 20% of DHB provider arm expenditure, which itself accounts for around half of publicly-funded health expenditure.
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