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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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