Healthcare expenditure: a future in question

OECD Directorate for Employment, Labour and Social Affairs
Page 15 

Healthcare costs are rising as patients become more demanding and new technologies spread. The trend is likely to accelerate in coming years as the ageing of the baby-boom generation and lengthening lifetimes cause the number of elderly people in OECD countries to rise sharply. But how much will it cost to take care of this elderly population, and should we adapt public health spending to cope?

Public expenditure on health soaks up a large part of government budgets. And there are fears it could rise as ageing in OECD countries accelerates. Already, three-quarters of spending on healthcare and long-term care for the elderly is financed through the public sector. The over-65 age group accounts for 40-50% of healthcare spending and their per capita healthcare costs are three to five times higher than those under 65. In 10 years¡¦ time the baby-boom generation will begin to retire. Calculating exactly how much more money will be needed, who will provide it and the best way to spend it, is as complex a task as it is urgent.

The sums at stake are enormous. Overall health spending, including long-term care for the elderly, already accounts for around 9% of GDP in OECD countries. And there is a question mark over how much money will be available in the future, given an expected slowdown in GDP growth as the progressive decline in fertility rates since the late 1960s causes labour supply to expand more slowly.

Healthcare costs have stabilised at an average of just over 8% of GDP across 24 OECD countries for most of the past decade, with long-term care for the elderly ¡V from home help to long-term institutional care ¡V averaging a further 1%.How much expenditure might increase is difficult to say as there are numerous factors at play whose impact is quite uncertain. Past studies provide only limited guidance. Key factors that might explain rising costs up to the early 1990s appear to have been rapid introduction of new technologies and strong incentives to supply health services, and higher demand for healthcare, itself a reflection of rising incomes and a more educated public.

Furthermore, the fact that the cost of healthcare is largely covered by insurance may have spurred some extra demand too. But the precise effect of each factor is hard to measure, and statistical analysis has been able to account for only about half of the total increase in costs. Even more puzzling, these studies generally find that change in the age structure of the population has had little effect on expenditure, even though the increase in per capita care costs in recent years has, to a large extent, been concentrated among the elderly.

Despite these difficulties, the OECD and national researchers have attempted to project increases in health and long-term care costs over the period to 2050*. The result indicates that the ratio ¡V the proportion of individuals aged 65 and over in the population ¡V will double over the next 50 years in OECD countries. Using this as a starting point, countries forecast an increase in expenditure over the 2000-2050 period of 3 to 3.5 percentage points of GDP, averaged over the 14 countries for which this data is available. But the differences across countries are large, with increases of 4 percentage points or more projected for Australia, Canada, the Netherlands, New Zealand and the United States. Some of the variation arises from slower growth in the dependency ratio in some countries. But the key difference probably lies in their varying assumptions about other factors affecting health and long-term spending, for example, the impact of technological change.

There is some uncertainty surrounding these estimates though. Take life expectancy, for instance. This may increase by more than the projected 4.5 years, which means a larger share of the elderly in the total population. At the same time, a significant part of expenditure on healthcare and long-term care is concentrated in the last few years of life. So, if the average age at which dependency or illness sets in also increases in step with longer lifetimes, then costs will go up by less. Moreover, recent trends suggest that there have been reductions in disability in a number of countries and, if this were to continue, the need for long-term care for the old and frail ¡V particularly in high-cost nursing homes ¡V will not increase by as much as expected.

Much will also depend on what kind of healthcare the elderly demand or are offered. US studies show that most of the increase in expenditure among more senior age groups reflects a more intensive use of high-cost technology. The number of older people undergoing procedures such as coronary artery bypass graft or hip replacement multiplied by between three and 10 times for the oldest age groups between 1987 and 1995. Because individual countries have not included the possible effects of such shifts in their calculations, the increase in spending could be much higher than expected. Policymakers may have to consider whether the recent spread of new technologies is worth encouraging further, particularly as research has shown that in certain cases cheaper, older methods are as effective.

Future demand for long-term care will also be a challenge. Most of these services are provided by the state in the Nordic countries ¡V long-term care expenditure represented 3.8% of GDP in Sweden in 1997. But in countries such as Spain, Italy and Greece, where the elderly have traditionally been cared for within the family, spending is estimated to be less than 0.5% of GDP. Demand in future years will clearly be affected by families¡¦ ability, and willingness, to care for their parents. That will depend to a great extent on questions like whether the participation rate of women in the paid workforce will rise further and on whether the real, rather than the official, age of retirement increases or not. The public sector will probably continue to finance at least part of the additional supply of care, though the elderly themselves may be asked to help pay more, as they are likely to be better off than in the past.

Demand is by no means the only uncertainty affecting healthcare forecasts. Pressures from new ¡§pathologies¡¨ like AIDS and antibiotic-resistant bacteria could change the outlook considerably. Another item to consider is future labour costs in the health sector; these are a great unknown though may rise in some countries. Budget tightening has already led to complaints of worsening work conditions from healthcare workers in some countries. Indeed, some countries are currently finding it difficult to recruit and retain nurses (the UK, for instance, recruited heavily from Spain in 2001) and other medical personnel, and as the labour market is expected to become tighter in coming years, this may increase wage pressures.

Nonetheless, there is considerable scope for policy to limit spending increases or to improve the effectiveness of healthcare. There is some evidence that healthcare spending is lower ¡V and has grown less rapidly ¡V in countries with ¡§gatekeeper¡¨ systems where family doctors oversee access to specialists and hospital care. But there are political limits to cost-containment policies.

Governments will also need to pay more attention to the goals of public health spending. Up to now, the bulk of spending has been on curative acute care medicine whereas much healthcare is now becoming focused on treating chronic conditions, particularly among the elderly, rather than on communicable diseases as in the past.

But it would be better if these chronic conditions could be prevented, by lifestyle improvements, for instance. Such changes are notoriously difficult to introduce but they could prove to be the best long-term method of improving healthcare performance.

Governments could also consider public and private partnerships to reduce the overall burden on the public finances. Getting a better balance between inpatient and outpatient care is also important as medical technology makes it more feasible to treat people outside the hospital environment. However, without some brake on individual demand, cost control will only be achieved by rationing.

Finally, healthcare suppliers need to be careful about using medical technology too much in areas where marginal benefits are low and costs are high, such as the use of chemotherapy beyond a certain point, and perhaps not enough in other areas where cost-effectiveness is more attainable, such as the timely use of thrombolytics after a heart attack.

Technology has been one of the driving forces behind past cost increases and it is time this is given closer scrutiny, so that only those technologies yielding significant improvements should be fully funded by the public purse. Pressure on health systems will no doubt continue strong in the future as populations age. All the more reason for policymakers to find ways of improving productivity of healthcare systems and searching for better value in delivering quality to citizens and patients.

* National models were used to forecast likely spending trends, based on population projections by Eurostat for EU countries, and national statistical agencies for the remaining ones. Some common assumptions were applied for estimating future employment and GDP growth for all countries. The 14 countries were Australia, Belgium, Canada, the Czech Republic, Denmark, Finland, Japan, Korea, the Netherlands, New Zealand, Norway, Sweden, the United Kingdom and the United States.


 Dang T., Antolin P., Oxley H., "Fiscal implications of ageing: projections of age-related spending", OECD Economics Department Working Paper, OECD, 2001.

 Economic Outlook, OECD, June 2001.

 Jacobzone, S., "An Overview of International Perspectives in the Field of Ageing and Care for Frail Elderly Persons", Labour Market and Social Policy Occasional Papers, No. 38, OECD, Paris, 1999.

 Jacobzone S., "Healthy Ageing and the Challenges of New Technologies, can OECD social and Health Care systems provide for the future?", proceedings of the workshop held in Tokyo on "Healthy Ageing and Biotechnology" in November 2000.

©OECD Observer No 229, November 2001 

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