PUBLIC SPENDING ON HEALTH AND

LONG-TERM CARE :

A NEW SET OF PROJECTIONS

Christine DE LA MAISONNEUVE

and

Joaquim OLIVEIRA MARTINS

2ND MEETING OF THE JOINT NETWORK ON FISCAL SUSTAINABILITY OF HEALTH SYSTEMS

March 25-26, 2013

1

Steady growth of public Health + LTC spending

Public Health and LTC expenditure as a % of GDP, OECD countries

2 Source: OECD Health database (2011).

The share of health and LTC expenditure has

increased in total public expenditure (unweighted average of OECD countries)

3

WHAT DRIVES HEALTH EXPENDITURES?

Health care expenditure

Demography Income Residual

Relative prices

Technology Institutions and policies

An income elasticity of 1.8

could explain most of the

expenditure growth

If price elasticity is below 1 then price

increases also increase expenditure

4

1) Demography: The projections are based on health care

expenditure profiles by age-groups (normalised by GDP p.c.)

Sources: EC + National sources

Spending p.c.

in group [i]

normalised by

GDP p.c.

5

Why health care expenditure curves display such a profile? 04

59

1014

1519

2024

2529

3034

3539

4044

4549

5054

5559

6064

6569

7074

7579

8084

8589

9094

95+

Health care expenditure curve

36

32

28

24

20

16

12

8

4

0

Time to death (months)

Proximity to death

04

5

9

10

14

1

51

9

20

24

2

52

9

30

34

3

53

9

40

44

4

54

9

50

54

5

55

9

60

64

6

56

9

70

74

7

57

9

80

84

8

58

9

90

94

9

5+

Survivors

Healthy ageing

6

2) Income: Health expenditures rise with income…

Health expenditure per capita (LHS) GDP per capita (RHS)

10.3

10.4

10.4

10.5

10.5

10.6

10.6

10.7

10.7

7.2

7.4

7.6

7.8

8.0

8.2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

United States

10.1

10.2

10.2

10.3

10.3

10.4

10.4

7.2

7.3

7.4

7.5

7.6

7.7

7.8

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

France

10.2

10.2

10.3

10.3

10.4

10.4

10.5

7.5

7.5

7.6

7.6

7.7

7.7

7.8

7.8

7.9

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Germany

10.2

10.2

10.2

10.3

10.3

10.3

10.3

10.3

10.4

10.4

10.4

7.2

7.3

7.3

7.4

7.4

7.5

7.5

7.6

7.6

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Japan

10.0

10.1

10.1

10.2

10.2

10.3

10.3

10.4

10.4

10.5

10.5

7.2

7.3

7.4

7.5

7.6

7.7

7.8

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sweden

10.2

10.2

10.3

10.3

10.4

10.4

10.5

10.5

10.6

7.2

7.3

7.3

7.4

7.4

7.5

7.5

7.6

7.6

7.7

7.7

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Canada

7

Public health expenditure and GDP (in logs)

… but what is the value of the Health income elasticity?

Source: Getzen (2000) and authors’ compilation. 8

Papers Elasticity

Individuals (Micro)

Newhouse and Phelps (1976) <1

Manning et al. (1987) ≈0

Regions (Intermediate)

Feldstein (1971) 0.5

Backer (1997) 0.8

Nations (Macro)

Newhouse (1977) 1.3

Fogel (1999) 1.6

Taking into account cointegration

Baltagi and Moscone (2010) <1

Bech et al . (2011) ≈1

Dreger and Reimers (2005) ≈1

Freeman (2003) ≈0.8

Narayan et. al (2011) <1

Using Instrumental Variables

Acemoglu et al. (2009) 0.7

Holly et al (2011)0.75-0.95

(In the fixed effect model and much

smaller in the dynamic one)

This paper0.5 - 1.0

(Depending on the specification)

3) Residual: Estimation of the expenditure residual

(1995-2009) assuming an income elasticity of 0.8

Average annual growth rate (in %)

Health

spendingAge effect

Income

effectResidual

Memo item:

Residual with

unitary income

elasticity

Selected countries:

Australia 4.1 0.4 1.7 1.8 1.4

Canada 2.6 0.6 1.3 0.8 0.5

France 1.6 0.5 0.9 0.3 0.0

Germany 1.7 0.6 0.8 0.2 0.0

Italy 3.1 0.6 0.4 2.1 2.0

Japan 2.7 1.2 0.4 0.7 0.5

Korea 11.0 1.1 3.1 6.5 5.7

Portugal 4.6 0.6 1.2 2.4 2.0

Sweden 3.2 0.2 1.6 1.4 1.0

United States 3.6 0.3 1.1 2.3 2.0

Brazil 4.8 0.6 1.2 2.9 2.6

China 11.2 0.6 7.3 3.0 1.3

India 6.6 0.3 4.2 2.0 1.0

OECD total average 4.3 0.5 1.7 2.0 1.5

BRIICS average 6.2 0.5 3.2 2.5 1.7

Total average 4.6 0.5 2.0 2.0 1.5

9

How to project the residual?

• Part of the residual expenditure growth can be explained (cf. econometric estimates):

Relative Prices and Technology 0.8% p.a.

Other (eg. institutions and policies) 0.9% p.a.

• But there is not enough information to project these drivers individually

• Thus the residual is projected as a whole (as in 2006) and sensitivity to different assumptions tested

• Residual growth is the same for all countries in order not to extrapolate country-specific idiosyncrasies over a long period (e.g. country-fixed effects)

10

1.7% p.a.

Long-term care expenditure

Demographic drivers

(Dependents)

Life expectancy

at birth

Health expenditure

Non-demographic

drivers

Income Cost-disease Informal care

supply: women 50-64 labour force participation

11

II. Projections of Long-term Care expenditure

The drivers of LTC expenditure

Income elasticity=1

Baumol effect=growth rate of total labour productivity (elasticity=1)

Projected levels of public Health and LTC expenditure

(as a % of GDP in 2060)

12

0

2

4

6

8

10

12

14

16

OECD BRIICS

LTC

Health care

Average 2006-2010

Average 2006-2010

Cost-containment

scenario

Cost-pressure scenario

Cost-containment

scenario

Cost-pressure scenario

Cost pressure: healthy ageing, income elasticity=0.8, residual=1.7% per year

Cost containment: healthy ageing, income elasticity=0.8, residual phasing out over the

projection period

Convergence mechanism based on differences across countries in health shares to GDP

in the base year compared with OECD average

Changing structure of health expenditures

Shares of expenditure by age in total expenditure

0

10

20

30

40

50

60

70

2010 2030 2060

People aged below 65

People aged over 65

13

NB: Non-demographic effects are assumed to be homothetic across ages, so they do not change the structure

Results are robust to changing assumptions

Income

elasticity=0.6

Income

elasticity=1

Country specific

residual

Compression

of morbidity

Expansion of

morbidity

Percentage point deviations from cost-containment scenario in 2060

OECD average -0.6 0.8 0.9 -0.7 0.8

BRIICS -1.0 1.4 0.0 -0.8 1.2

Total average -0.7 0.8 0.8 -0.7 0.9

14

Health expenditure

Income

elasticity=2

Life expectancy

plus 2 standard

deviation

Life expectancy

minus 2 standard

deviation

Cost-pressure

health-care

expenditure

Percentage point deviations from cost-containment scenario in 2060

OECD average 0.9 0.3 -0.2 0.1

BRIICS 0.9 0.3 -0.2 0.1

Total average 0.9 0.3 -0.2 0.1

LTC expenditure

THANK YOU !

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