WHAT FUTURE FOR HEALTH AND LONG-TERM CARE SPENDING?

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1 WHAT FUTURE FOR HEALTH AND LONG-TERM CARE SPENDING? Christine de la MAISONNEUVE Joaquim OLIVEIRA MARTINS OECD The future of health spending and the implications for policy, Bruegel Panel Discussion Brussels, 26 June

2 Steady growth of public Health + LTC spending Public Health and LTC expenditure as a % of GDP, OECD countries Source: OECD Health database (2011). 2

3 WHAT DRIVES HEALTH EXPENDITURES? Health care expenditure Demography Income Residual Only an income elasticity of 1.8 could explain most of the expenditure growth Relative prices Technology Institutions and policies With low price elasticity (<1) a price increase also increases expenditure 3

4 Health care expenditures seem to be related with Age (Health expenditures per capita by age group) Spending p.c. in group [i] normalised by GDP p.c age (middle of 5-years age brackets) Sources: EC + National sources 4

5 Aging per se can only explain a small part Health care expenditure curve Costs related to the proximity to death are independent of age Time to death (months) Survivors costs may shift with healthy ageing Healthy ageing 5

6 Health expenditures grow in line with income Public health expenditure and GDP (in logs) Health expenditure per capita (LHS) GDP per capita (RHS) United States France Sweden Germany Japan Canada Recent studies point towards a relation lower than 1:1 ( ) 6

7 What is the expenditure residual? Average annual growth rate of health expenditures per capita (in %) Health spending Age effect Income effect Residual Memo item: Residual with unitary income elasticity Selected countries: Australia Canada France Germany Italy Japan Korea Portugal Sweden United States Brazil China India OECD total average BRIICS average Total average With an income elasticity of 0.8 7

8 How to project the expenditure residual? A large part of the residual expenditure growth (on average 2% per annum) can be explained by: Relative Prices and Technology 0.8% p.a. Other (e.g. institutions and policies) 0.9% p.a. 1.7% p.a. But these drivers cannot be projected individually, so the residual is extrapolated as a whole and sensitivity to different assumptions tested The residual is the same for all countries in order not to extrapolate current country-specific idiosyncrasies over a long period 8

9 Very different drivers for Long-term care Long-term care expenditure Demographic drivers (nb of dependents) Nondemographic drivers Life expectancy at birth Health care expenditure Income (elasticity=1) Income Weak Productivity Cost disease is driven by the growth rate of aggregate labour productivity (elasticity=1) Informal care supply Labour force participation

10 Dependency increases dramatically with Age > age (middle of 5-years age brackets) Source: EC AWG Nb: For the projections an average curve was computed

11 LTC costs/dependent are not related to Age age (middle of 5-years age brackets) Assumption used in the projections: average constant cost per age by country Source: EC AWG

12 Public LTC expenditure as a % of GDP LTC expenditure levels and Income y = x R² = Log Real GDP per capita (2005 PPP US$)

13 Projected levels of Public Health and LTC expenditure (as a % of GDP in 2060) Costpressure scenario Costcontainment scenario Costpressure scenario 8 6 Average Costcontainment scenario LTC Health care 4 Average OECD BRIICS 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 13

14 Changing age structure of Health expenditures Expenditure shares below and above People aged below 65 People aged over NB: Non-demographic effects are assumed to be homothetic across ages, so they do not change the age structure of spending 14

15 How it compares with other projections? OECD (2013) OECD (2013) EC - AWG IMF US CBO (Cost-containment scenario) (Cost-pressure scenario) (Reference scenario) (Extended Baseline Scenario) In 2060 % pp difference from 2010 In 2050 % pp In 2060 % pp difference from 2010 difference from 2010 France Germany Italy Netherlands Spain United Kingdom EU USA Source: OECD, IMF, "The Economics of Public Health Care Reform in Advanced and Emerging Economies", European Commission, "The 2012 Ageing Report" and Congressional Budget Office, "The 2012 Long-term Budget Outlook". 15

16 THANK YOU! 16