Healthcare projections in Treasury s Long-term Fiscal Model

Healthcare projections in Treasury s Long-term Fiscal Model An actuarial perspective Aaron Park and Marcella Lau March 2017

Overview How do you project healthcare costs? Part 1 The Treasury model Part 2 Exploring an alternative approach The context... Side 2 of 20

Healthcare takes up a chunk of the economy From a 2015 OECD report: Includes public and private spending NZ overall expenditure is at 9.5% Source: Health at a Glance 2015: OECD Indicators, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/health_glance-2015-en Side 3 of 20

The role of the Treasury Required by law to produce, every four years, a Statement on the Crown s Long-Term Fiscal Position Highlight challenges that will face future governments Provide public with evidence based insights Includes 40-year projections on the fiscal position based on the LTFM Side 4 of 20

Treasury projection of government spending Only some of these classes show proportional increases Finance costs due to funding deficits Healthcare goes from 6.2% in 2015 to 9.7% by 2060 Methodology differences: ground up approach vs. constrained historical Demographic base is preferable, where applicable Source: Based on figures published by the New Zealand Treasury at http://www.treasury.govt.nz/government/longterm/fiscalmodel Side 5 of 20

Underlying healthcare drivers Future demographic structure Historical costs Increasing demand Rising service prices Side 6 of 20

Healthcare in the 2016 LTFM Forecast expenditure level (year 2020) 5 year transition towards stable % of GDP Bottom up approach from 2025 Modelling Demographic factors, Non-demographic factors, Π, l = (1 + )(1 + Π )(1 + l ) 1 Side 7 of 20

Non-demographic factors CPI growth (Π) 2% pa x Elasticity of healthcare service costs ( ) +1.25 Labour productivity index (l) x Elasticity of healthcare labour costs ( ) 1.5% pa* +1.35 = (1 + )(1 + Π )(1 + l ) 1 *transitions into Side 9 of 20

Population factors Group health expenditure % x Group population growth Allocation by class Female Male Under 15 6% 7% 15 to 24 5% 4% 25 to 44 12% 7% 45 to 64 11% 11% 65 to 84 15% 14% Over 84 7% 3% 55% 45% Sourced from Stats NZ Healthy ageing retardant factor Improvements in life expectancy 75% weighting Side 11 of 20 = 1 + h h h h h h + h h

Demographic Analysis Multi-State Markov Model Health μ σ Sickness δ δ Death ( ) = ( ) Side 12 of 20 = + 1

Disability Services 0.035 Transition Rates from Non-Disabled to Disabled Also + 5% of births 0.030 0.025 0.020 0.015 0.010 0.005 $2,500 Males Cost of Disability p.a. Females 0.000 0-4 5-14 15-24 25-44 45-64 65-74 75+ $2,000 $1,500 $1,000 $500 Costs outside of age range plotted are higher $- 5-9 10-14 15-24 25-44 45-64 Side 13 of 20

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ 0 4 5 9 10 14 15 19 20 24 25 29 30 34 35 39 40 44 45 49 50 54 55 59 60 64 65 69 70 74 75 79 80 84 85+ Mental Health & Addiction Services $25,000 $20,000 Male Cost of MHAS p.a. Female 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 Transition Rate From Non-MHAS to MHAS Client Male Female $15,000 $10,000 $5,000 $- Side 14 of 20

5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ Cost of Birth, Living and End of Life = x Cost ($000) of Males Modelled using Last 8 Years 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 Modelled Actual 0 700,000 Cost ($000) of Females Modelled using Last 11 Years 600,000 500,000 400,000 300,000 200,000 100,000 0 Modelled Actual Side 15 of 20

2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 Comparison with the LTFM 180 160 140 Core Health Expenditure 11.3% of GDP 10.2% 9.7% 120 100 Demographic: 0.8% 1.1% p.a. (w/o H.A.) 80 60 Non-demographic: 4.6% p.a. 40 20 0 Treasury w/o Healthy Ageing Treasury Modelled w/o Healthy Ageing Modelled Side 16 of 20

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Cost ($b) 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Cost ($b) Cost by Component 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% No Healthy Ageing 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Health Cost Breakdown Birth and Living Mental Health & Addiction Disability Support Services End of Life Birth and Living Mental Health & Addiction Disability Support Services End of Life w/o Healthy Ageing Side 17 of 20

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Cost by Age 2060 Males Treasury Model Model w/o H.A. 0-14 y.o. 4% 5% 4% 15-64 y.o. 16% 20% 18% 65+ y.o. 24% 23% 24% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Male Total Cost Split 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Female Total Cost Split 2060 Females 0-14 15-64 65+ Treasury Model Model w/o H.A. 0-14 y.o. 4% 5% 4% 15-64 y.o. 18% 20% 18% 65+ y.o. 34% 27% 31% 0-14 15-64 65+ Side 18 of 20

Summary Built upon 2004 Treasury paper model: Multi-state Markov model Incorporated mental health & addiction Included cost of birth Altered definition of end of life Comparison with Treasury 2016 LTFM Cost Healthy ageing Age breakdown Side 19 of 20

Further Investigations Monte Carlo simulation By beginning age and health status: Lifetime health costs Life-long constant real premiums Use to model effect of government policies Valuation approach Intergenerational fairness e.g. public insurance Investment approach Fiscal effectiveness e.g. reduction of addiction Side 20 of 20