April 21, 2021

Health’s insatiable demand for expenditure

Ageing population is a major factor

Traditionally, healthcare has been one of the largest areas of appropriations for government spending in New Zealand. Government expenditure on health, as a proportion of GDP, has been steadily increasing over the years. In 2005, 5.6 percent of the GDP was allocated to spending on health. By 2020, this share had risen to 6.5 percent. Moreover, since 2005, per capita expenditure on health has risen from $2837 (adjusted for inflation) to $3742 in 2019.

By 2048, nearly a quarter of our population will be aged over 65

Health spending is driven by both non-demographic and demographic factors. Historically, changes in healthcare spending have largely been a result of non-demographic factors such as higher wages in the health sector, a wider range of conditions being treated and technological advancements. However, our population structure is undergoing some important changes. The population of older people is growing at a much faster rate than overall population growth. Between 1991 and 2020, the number of people aged over 65 doubled. Today, this age group makes up 16 percent of our population and forecasts predict that by 2048, this share will have increased to about 24 percent.

Older people use a significantly higher proportion of health services than their younger counterparts. According to the Ministry of Health, people aged over 65 currently use over 42 percent of health services despite the fact that they make up just 16 percent of the population. This means that the remaining 84 percent of people use less than 58 percent of the public health services available to them. Projections show that by 2025, half of all public health services will be used by those over 65 years of age, which will increase to 63 percent by 2051.

The average 85 year old uses 16 times more healthcare than the average 40 year old.

Consequently, our rapidly ageing population is likely going to continue to exert an upward strain on the government’s health expenditure. A working paper by The Treasury from 2004 illustrates the effect of age on healthcare demand. It finds that the average 40 year old receives approximately $1000 of healthcare annually. By the time a person reaches 75 years of age, this number will have increased to $7000; and by 85, the average New Zealander receives about $16,000 worth of healthcare each year. The high demand for healthcare services by older people, coupled with the projected changes to New Zealand’s demographic structure imply a rising pressure on health expenditure as a share of GDP in the future.

Despite the added pressures of demographic trends, improvements in non-demographic factors can help alleviate some of these pressures and keep government spending in check. Advancements in health technology will contribute to a reduction in disability rates, shorter hospital stays and improved efficiency in surgical procedures. The need to increase health expenditure in the future depends on a mix of the issues outlined above. In order for health spending to remain at sustainable levels, it is important that the downward pressures of non-demographic trends be maximised and non-demographic spending be lowered to offset the potentially rapid increase in demographic spending.

The steady increase in health spending by the government has translated to higher life expectancies, on average.

In our April 2021 series on government expenditure, we have argued that in other key areas of government expenditure, increased spending has not necessarily resulted in improved outcomes. However, health is a notable exception. The steady increase in health spending by the government has translated to higher life expectancies, on average. Government spending in this area has contributed to improvements in technology, better nutrition and cleaner living, all of which have resulted in people living longer. Since the early 90s, average life expectancy in New Zealand has gone up by nearly six years, with the average New Zealander now living up to 82 years of age. This demonstrates just how vital investment in public health resources is to improving the overall health of a nation’s population.