Tuesday, December 4, 2007

Aging poplulation does not make our health system unsustainable.

This is from the progressive economics forum. Much more publicity is given to reports such as that of the Fraser Institute that claims that present medicare spending is unsustainable. Of course what the Fraser institute means is that the spending should be private. This then limits medical care on the basis of income. In fact in general the misnamed free market is a device for rationing goods on the basis of income.
Marc Lee shows that present spending levels are sustainable given reasonable assumptions about the economy. Even as it is we spend considerably less than the US as a percentage of GDP (private and public expenditure combined). However, other universal systems spend considerably less as percentage of GDP than we do.

Marc’s testimony to the Senate on population aging and health care
Posted by Marc Lee under fiscal policy, demographics, health care.
December 3rd, 2007

I was a testator (if I was a woman I’d be a testatrix!) to the Senate Special Committee on Aging today, along with national treasure, Bob Evans, a couple reps from the Canadian Institute on Health Information, and UNB’s Joe Ruggeri. We all pretty much agreed that aging is not the issue it is made out to be. As Evans says, the intellectual debate is over, but the notion that we are headed over a cliff due to the greying of Canada is a zombie that inhabits our media.
And as timing would have it, the Fraser Institute for the Economically Insane just released its 2007 “sky is falling” health care report today. The conclusion is hardly a shocker: the Fraser finds once again that public health care is unsustainable.
Below is my testimony, which is largely based on my recent study for CCPA.
Testimony to the Senate Special Committee on Aging
December 3, 2007
Thanks to the Senate for having me here by videoconference today to speak to the issue of population aging and the public health care system. I wrote a report on this issue that was released in September by the CCPA, and I believe you have copies.
What I did in the report was to isolate the different cost drivers in the public health care system. I looked back to 1975 for a historical overview of how those factors have affected costs, then projected forward to 2056 based on Statistics Canada’s population forecasts and the average health care inflation rate over the past decade.
My finding reinforces those of past studies of the issue: Population aging, in and of itself, is but a small contributor to rising cost pressures in the health care system. Based on current projections there is little to suggest a demographic time-bomb about to go off.
The main cost drivers, in addition to an aging population, are population growth and health care specific inflation. Put these three together and one can determine a minimum amount of annual public spending increase necessary to maintain the existing level of services while accommodating a larger and older population.
On this basis, public health care spending must increase by 4.4% per year in the near term in order to maintain a sustainable level of services (by the 2030s the rate slows as population pressures ease). Population aging alone requires about 1% per year in additional public expenditures. So, while the demographic changes over a quarter-century due to aging are indeed profound, this change happens relatively slowly and the associated annual increase is actually less than either population growth or inflation.
What really matters for sustainability is the share of public health care spending relative to our GDP. That is, as long as nominal GDP growth averages 4.4% per year or more, there is no sustainability problem. If future economic growth rates are consistent with those over the past decade (average of 5.6%) or two (average of 5.4%), they will actually lead to public health care expenditures falling as a share of GDP.
In my paper I estimate public health care spending relative to GDP for a few scenarios of nominal GDP growth. Even if GDP growth was to slow to 4% per year (a level that is well below historical trends) existing levels of service could be maintained with only a small increase in health care expenditures relative to GDP over the next three decades. Public health care expenditures would rise to 8.4% of GDP by 2038, when they hit their peak. After this, as population pressures ease, they fall back to 7.6% by 2056.
One thing I have not mentioned yet but that is essential in thinking about health care spending is the enrichment or expansion of public health care services over time. My study tries to distinguish between annual spending increases required to maintain the same level of services from additional spending that expands the suite of health care services available under the public umbrella.
The issue of enrichment is historically significant. The average Canadian receives more than one and a half times more health care services as his or her equivalent three decades ago. So one important reason why health care spending is higher today is that we provide more services, including things like long-term care and home care, more expansive drug coverage, but also new surgical techniques, and new diagnostic technologies.
In fact, the real challenge for financing the health care system is advances in these technologies – the essentially unlimited potential to expand the realm of the possible. For example, compared to 1990/91, an 80-year-old in BC today is twice as likely to have a knee replacement, cataract surgery, or coronary bypass.
Highly technologically-intensive, end-of-life care poses some particularly challenging ethical dilemmas in cases where quality of life or health status is not ameliorated despite great cost. In fact, according to some important studies, it is not so much the rise in costs as one ages, as it is the expenditures made in one’s final year of life irrespective of age.
In my modeling, as long as economic growth rates are consistent with those in the past, if we maintain the current level of public health care spending to GDP, there is still room left over to accommodate new technological advances or to expand the system in other ways. But this is not unlimited, and at some point, if we want more technology, or expansion of other services, then we will have to pay a greater share of our income in order to have it. And that means being more rigorous about the costs and benefits of different technologies through health technology assessments, as recommended by the Romanow report.
By the numbers, the historical average enrichment rate is just under 2% per year over the 1975 to 2006 period. In my paper, I find that a 1% annual enrichment rate would require an increase in public health care expenditures from 7.4% of GDP in 2006 to a peak of 8.5% by 2038, but then falling back to 7.7% by 2056. This would, however, enable the average Canadian to enjoy 63% more health care services by 2056.
To conclude, it is a myth that an aging population will render the public health care system unsustainable. The good news is that the challenges facing public health care are not demographic factors beyond our control, but technological issues that, while profound, are suitable to a public process that is well within our control. In other words, like every other policy area, we need to make choices, and to do that we need a healthy democratic debate.

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