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The rising cost of health

Posted on September 25, 2015 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Human health is the number one priority for people. Living a healthy life and enjoying well-being of mind and health of body is something that we all aspire to. Public policy can play a vital role in informing, equipping and resourcing people to achieve better health.  As Irish society ages there will be increased demand for health services including provision of acute or high-dependency care for older members of the population. According to the latest OECD data ( Health at a Glance Indicators, 2015 ) total spending on health came to 8.1% of GDP in 2012.

This compares with an average of 8.8% in 2012 across the 21 EU member states for which OECD reported. Clearly these numbers are influenced, among other factors, by the age-structure of countries. We would expect countries such as Germany to spend more on health, other things the same, than Ireland given the older population in Germany. One of the dramatic impacts of the 2008-2012 recession and fiscal adjustment is that the share of non-public, i.e. ‘out-of-pocket’ and private health insurance contributions went up from 25% just before the crash in 2008 to 31% in 2012. This was among the highest in the EU in 2012.

 

How much would a publicly funded health service cost? This depends on many factors including long-term upwards pressures on spending arising from growing population, ageing populations, better and more expensive treatments and changes in lifestyles and behaviour. It also depends on the efficiency with which public (and private) health providers deliver services. In common with the Irish school system that owes is current make-up in terms of governance and structure to carefully negotiated arrangements in the 19 th century, the Irish health service reflects an implicit or explicit negotiated settlement involving a wide range of actors within the system each with their own interests, ethos and inherited assumptions.

On the assumption of a constant annual growth rate in GDP of 4% per annum (and assuming prices increase on average by 1% per annum implying a real growth in GDP of 3% per annum) total current spending on health by public and private bodies – as measured by the OECD – would increase from its current estimated level of just over €15 billion per annum in 2015 to €23 billion in 2025. This is based on no changes in population age-structure or no changes in underlying costs or efficiencies. The probability is that costs will rise even if further efficiencies are possible. It is difficult to calculate the likely impact of ageing population on health spending given uncertainties about demographic developments. However, it is not unreasonable to assume a constant annual upward pressure on the health budget of at least €300 million (or very approximately 2% of the annual total of €15 billion in 2015)  arising from various sources. Since total current public spending, as measured by the OECD in 2012, was in excess of €10 billion a substantial increase in public spending on health may be expected over the coming 7 years ‘just to stand still’ in terms of the quality and volume of services to a growing and ageing population.

Given a hypothetical situation where all health spending, in ten years time, were publicly sourced through a universal health system and abolition of all private charges and integration of existing private health insurance into a public health system (whatever the precise details of this in terms of funding) it is possible that total public spending would rise from its current estimated level of €10.6 billion in 2015 to €23 billion in 2025. This increase of over €12 billion would come from a combination of rising GDP (4% nominal per annum), long-term secular trends related to population, age-structure and treatment costs (2% per annum) and a gradual hypothetical phasing out of private contributions between 2016 and 2023. On the basis of this contrived scenario total spending on health would come to 9.3% of GDP in 2025 – all of it from public sources and funded through general taxation (or alternatively some type of expanded social insurance model). Clearly, such a level of increase would put huge pressure on public finances and would, it could be argued, be so unlikely to be politically accepted as to be impossible to achieve by any Government regardless of its political hue.

The estimations, cited above, are extremely crude but illustrative. More work will be needed to refine the underlying assumptions especially those relating to the impact of population and age-structure change on health spending where there is much uncertainty about the scale of change. A key policy challenge in the coming years will be to reform the health system to ensure better utilisation of existing resources as well as invest in early prevention to avoid heavy cost outlays later.  There is evidence based on Eurostat sources that expenditure on outpatient services are in excess of that in other Eurozone economies.

 

Drivers of change can come from employee-led innovation among other factors. For example, best practice in other jurisdictions should be examined to identify ways in which health staff are more in the driving seat of change and reform. Health care specialisms are costly especially in countries and regions where population is dispersed such as in the Republic of Ireland. There may be lessons to be learned from other countries in similar circumstances (e.g. Finland comes to mind).

In a Policy Paper on a proposed Universal Health Insurance by the Adelaide Society the private health insurance model of funding was described as:

  1. unfair to public patients
  2. not effective: it ‘rations’ care creating long waiting lists
  3. grossly inefficient and very poor at relating performance and outcomes to the financial allocations provided; indeed it rewards not treating patients in order to keep within ‘rationed’ allocations
  4. perverse in the incentives it creates for those employed to provide care.
  5. involves payment for GP services for nonmedical card holders, inhibiting proper utilisation of primary care – this is counter productive in health prevention terms and leads to inappropriate use of accident & emergency services.
  6. gives poor value to those paying supplementary private health insurance despite rising premiums and requires out-of-pocket payments for basic care at primary care level for everyone except medical card holders.

Whatever the future prospects for the Irish health system and the future of health policy and funding it is clear that the provision of health will continue to absorb a significant proportion of GDP and it is sure that this will rise somewhat in the decades before us. The above calculations, while extremely crude and illustrative, communicate the point that there are no easy options facing future Irish Governments as it wrestles with an expanding and ageing population and competing demands on scarce public finances. All of this puts the debate – such as it is – on cuts in the taxation of income in perspective.

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