Health care sustainability

I released a study today, How Sustainable is Medicare? A Closer Look at Aging, Technology and Other Cost Drivers in Canada’s Health Care System, available for download here. This essentially a national version of one I did last fall for BC only. With national data I was able to make projections 50 years into the future.

The CP wire story is quite good:

Aging baby boomers not a major burden to health-care costs: report

September 12, 2007 – 17:36


OTTAWA (CP) – Canada’s aging population will have little impact on the cost of maintaining a viable national public health-care system over the next 40 years, says a new report.

The report by the Canadian Centre for Policy Alternatives seeks to debunk the “myth” of runaway costs as baby boomers enter their final years.

The 33-page research paper from senior economist Marc Lee predicts the aging baby-boomer generation will add less than one per cent to health-care costs each year. And it says the cost of maintaining the health-care system well into the future will be easily met by economic growth.

Taking into account aging, population growth and inflation, Lee says Canada’s public system can be maintained at current levels by increasing expenditures about 4.4 per cent a year. That’s below the nominal growth in the economy, which has averaged 5.4 per cent over the past 20 years.

If the economy were to grow at a faster rate, Canadians could easily afford to enrich health-care services, the report states, while keeping expenditures at the current 7.5 per cent of GDP.

“There’s a notion in the public that as the baby-boom generation recedes into retirement years, this is going to push health-care costs over the cliff, but it’s not true,” Lee says.

“When you look at population aging over the next 25 years, it’s a pretty major shift. But it is happening slowly.”

And health-care costs, the study found, do not rise uniformly as people age. In fact, most of the costs associated with aging occur in the last year of life, at rates about 50 to 100 times higher than seniors in general.

Using published health-care and population data, Lee concludes that aging contributed a mere 0.8 per cent to the cost of public health care in the last decade. Extrapolating into the future, he says the costs associated with aging will rise slightly but remain less than one per cent per annum over the next 40 years.

That doesn’t mean that health-care costs won’t rise much above estimated 4.4 per cent per annum, the report notes, but if they do it will likely be because of spiralling costs of new technologies, including new drugs, and rising expectations from Canadians – not aging.

“The real challenge for future health-care expenditures comes not from an aging population, but the amount of spending per person as represented by a wide range of new technological interventions,” the report concludes.

The report’s analysis may appear controversial to many in the public, and even among some politicians who have warned of spiralling health costs, but it is supported by the evidence, says Steven Lewis, a health policy consultant and adjunct professor at the University of Calgary and Simon Fraser University.

The biggest cost drivers in the health-care system, he says, are for new drugs, diagnostic imaging and usage, all of which can be managed.

Drug costs have risen from 9.6 per cent of the total health-care bill in 1985 to 17.7 per cent in 2004. As well, use of expensive diagnostic imagining, such as MRIs, has increased five-fold in the past decade.

But it is unclear whether Canadians are getting their money’s worth from such costly advances, says Lewis.

“There’s lot of new drugs being prescribed in place of older ones that were just as good and a lot cheaper. As well, we didn’t use to do much heart surgery on people over 80 because it was unsafe – now it’s pretty safe. So there’s a constant increase in the use of health-care services.”

Lee says one issue Canadians may have to address is what level of medical intervention is appropriate for very elderly people, noting that “billions could disappear into extremely expensive end-of-life treatments that prolong life by days or weeks, but do little to restore health or enhance quality of life.”

The good news, he says, is that Canadians can make those kinds of decisions based on ethical and medical considerations, not because of cost pressures brought on by the onslaught of aging baby boomers.

The paper’s summary:

A popular myth is that an aging population will render the public health care system unsustainable. This paper contributes to a public dialogue on health care sustainability by providing a better understanding of cost pressures in public health care and what they mean for the future in terms of sustainability.

This paper finds that 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. Instead, the real challenge for financing the health care system is advances in technological possibilities, broadly defined to include pharmaceutical drugs, new surgical techniques, new diagnostic and imaging technologies, and end-of-life care. These challenges can be addressed most efficiently and equitably in the context of a public system.

This paper undertakes a detailed analysis of cost drivers in the health care system. It finds that:

• Population aging has been a cost driver, but a very small one compared to other sources. The impact of population aging was 0.8% per year over the past decade. This is consistent with other studies of population aging.
• Inflation (as reflected in salary increases and higher cost of supplies) has been the biggest cost driver over the past decade, with increases averaging 2.5% per year, followed by population growth at 1% per year.
• The expansion (or “enrichment”) of health care services over time (such as new technologies, long-term care, home care and pharmaceutical drugs) is also an important factor. The average Canadian receives more than one and a half times more health care services as his or her equivalent three decades ago.
• Research shows that the cost of dying is very high – one-third to one-half of a typical person’s health care expenditures happen in the final year of life.

The paper then projects future health care costs based on the key cost drivers and situates those estimates in the context of economic growth. To accommodate future population growth, aging, and inflation, health care expenditures must rise by 4.4% per year; that is, simply to stay at the same level of services. For three scenarios of economic growth, we find that population aging is manageable if we have reasonable rates of economic growth:

• In the high-growth scenario (6% nominal GDP growth per year), public health expenditures fall from 7.4% of GDP in 2006 to 3.0% in 2031.
• In the medium-growth scenario (5% annual growth), they fall to 4.8% of GDP by 2056.
• Even if the economy were to fare poorly by historical standards (4% annual growth), existing levels of service could be maintained with only a small increase in health care expenditures relative to GDP over the next three decades. Health care expenditures 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.

By simply dedicating the same proportion of new economic output to health care – even after accounting for population growth, aging and health care inflation – we would also have scope for some modest expansion of services. Put differently, if economic growth rates in the future are consistent with those over the past decade (average of 5.6%) or two (average of 5.4%), they will lead to public health care expenditures falling as a share of GDP.

The paper models two additional scenarios where the suite of health care services is enriched in the context of medium economic growth (5% annual growth in nominal GDP). The historical average enrichment rate is just under 2% per year over the 1975 to 2006 period. After the same adjustments for population growth, aging and inflation, the paper finds:

• 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, then falling back to 7.7% by 2056. It would enable the average Canadian to enjoy 63% more health care services by 2056.
• A 2% annual enrichment rate would require public health care expenditures to grow to 12.6% of GDP by 2056, but would provide 164% more health care services per person.

Thus, greater expansion or enrichment of public health care in the future is possible, but depends on societal willingness to pay more for more and better services, technologies and care.

The real challenge for future health care expenditures comes not from an aging population but the costs associated with a wide range of new technological interventions:

• Despite a major increase in surgeries, waiting lists are still an issue because technology has increased the number of people who can avail themselves of such surgeries. 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.
• Increases in the price of prescription drugs and shifts toward more expensive drugs are a large part of the growth of drug expenditures, but have not necessarily been accompanied by improved health care outcomes. Cost efficiencies could be gained through a national pharmacare program.
• Expensive end-of-life treatments raise ethical dilemmas, particularly when they prolong life by days or weeks, but do little to restore health or enhance quality of life. Greater use of palliative care and “advanced health directives” (that allow older people and their families to choose a suitable level of medical intervention if serious illness develops) may point to a future where the health care costs of dying are less than today.
• A thorough process of health technology assessment is required to ensure that new technologies provide benefits in accordance with their costs.

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.

One comment

  • Excellent work, Marc. That CP Newswire story was printed in about 15 newspapers this morning. Thank goodness for media concentration!

    The Fraser Institute, Senator Kirby, Janice MacKinnon, Jeffrey Simpson, the BC government, and others have forcefully argued that healthcare spending will soon occupy far more than 50% of provincial budgets. However, their key (and often unstated) assumption is that government budgets will continue to shrink relative to GDP, not that health expenditures will grow faster than GDP. Their argument really speaks to the unsustainability of tax cuts rather than to the alleged unsustainability of medicare.

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