Feature Data Briefing

Rises in healthcare spending: where will it end?

BMJ 2012; 345 doi: http://dx.doi.org/10.1136/bmj.e7127 (Published 01 November 2012) Cite this as: BMJ 2012;345:e7127
  1. John Appleby, chief economist
  1. 1 King’s Fund, London, UK
  1. j.appleby{at}kingsfund.org.uk

John Appleby examines why countries spend more and more of their wealth on healthcare and assesses the long term affordability

In the past half century spending on healthcare across virtually all countries—regardless of how they are funded and organised—has increased substantially. At approaching £1 in £10 of its economic wealth, in 2010 the UK devoted more than twice the share of its gross domestic product (GDP) to public plus private healthcare spending as it did in 1960.1

Some countries have seen spending rise much faster (fig 1). The US spent around 5% of GDP on healthcare in 1960. Today it is nudging 18%, and in total the US spends almost the same on health as all other countries in the Organisation for Economic Cooperation and Development (OECD) put together. Germany, France, and the Netherlands now spend around €1 in €8 on healthcare. Millions of people around the world are employed in the labour intensive healthcare industry. Directly employed staff in the NHS account for around 1 in 25 of the working age population. How has all this happened and why? And where will it all end?

Figure1

Fig 1 Total (public plus private) health spending as a percentage of GDP in OECD countries, 1960-20101

The trivial answer to how it has happened is, of course, that countries—from individual consumers of healthcare to governments—have made choices to spend more. But why? And the equally trivial answer as to where it will end is clearly the obvious limit of a finite GDP. As Herbert Stein, chairman of the US Council of Economic Advisers during the Nixon administration, observed, if something cannot go on forever, it will stop.2 But when?

Evidence from many studies across many countries suggests that changes in four demand and supply factors largely account, separately and in combination, for the inexorable rise in spending over the past 50 years: population, income, technology, and cost.3 4 5 6 To these a fifth should be added: deliberate acts of government policy to widen access to healthcare. These have been taken in most countries at some time—from the setting up of Medicaid in the US in 1965 and the NHS in the UK in 1948, to Germany’s social health insurance legislation in the 1880s.

Not just growing populations but increasingly ageing populations have slowly increased the demand for healthcare. However, the effect of ageing has not been as great perhaps as popularly supposed, in part because of “healthy ageing” effects. The OECD estimated that it contributed just 0.4% of the average 4.3% annual growth in healthcare spending across all OECD countries between 1970 and 2002.3

At a national level, at least, substantial growth in real GDP seems to explain a much greater proportion of the increase in healthcare spending in all countries. As we have become richer our spending of choice has been health.

On the supply side, the past 50 years have seen enormous increases in the number and types of new medical technologies—not just drugs and equipment but surgery and modes of care. More things can be done to more people—generally at higher cost. And on cost, the prices of the inputs to healthcare have tended to rise in line with, or even faster than, costs in the economy as a whole—a reflection of the “cost disease” identified by William Baumol in labour intensive industries where the productivity increases that could offset rising pay costs are hard to achieve.7

No end in sight

So what of the next 50 years? Many countries carry out exercises to project health spending into the long term. In the US the Congressional Budget Office and the trustees of the Medicare fund carry out regular projections (fig 2).8 9 In the UK the Office for Budget Responsibility (OBR) looks at public spending, including health and long term care for up to 50 years ahead (fig 3).10 None attempts to forecast or predict spending, but on the basis of varying assumptions about future populations, health status, the historical effects of rising national income, etc, they produce a set of plausible future spending paths. All suggest higher spending as a proportion of GDP in future.

Figure2

Fig 2 US healthcare spending projections to 2082: “Excess cost” rate continues at historical averages8

Figure3

Fig 3 Long term health spending projections for UK, 2016-17 to 2061-62. (Figures for 2011-12 to 2015-16 are estimates; future projections start from 2016-17)10

For the NHS, the OBR projects spending in a range from a fraction of a percent of GDP more by 2062 to nearly 17% (more than double their 2016-17 baseline of 6.8%). Even at 17% (a little below US spending in 2010) with GDP projected to treble its real value by 2062, NHS spending could take a bigger share and still leave room for real growth in all non-healthcare areas of the economy.

Affordability is, at least in the longer term, not really the problem. The real problem is how we will know at what point the extra pound we decide to spend on healthcare produces less than a pound’s worth of benefit. As Stein would say, that’s when things cannot (or should not) go on forever and it’s time to stop.

Notes

Cite this as: BMJ 2012;345:e7127

Footnotes

  • Competing interests: The author has completed the ICMJE unified disclosure form at www.icmje.org/coi_disclosure.pdf (available on request from the corresponding author) and declares no support from any organisation for the submitted work; no financial relationships with any organisation that might have an interest in the submitted work in the previous three years; and no other relationships or activities that could appear to have influenced the submitted work.

  • Provenance and peer review: Commissioned; externally peer reviewed.

References