The expansion of government benefit levels -- defined as average inflation-adjusted government healthcare expenditures on people at a given age -- explains three quarters of the growth in public healthcare expenditures since 1970.
In recent decades, government healthcare spending in industrialized countries has grown much faster than GDP. Although researchers have investigated a number of contributing factors, including improvements in medical technology, population aging, medical inefficiency, waste, and unhealthy behavior, relatively little is known about how much each factor contributes to overall cost growth. In Who's Going Broke? Comparing Healthcare Costs in Ten OECD Countries (NBER Working Paper No. 11833), coauthors Laurence Kotlikoff and Christian Hagist conclude that the expansion of government benefit levels -- defined as average inflation-adjusted government healthcare expenditures on people at a given age -- explains three quarters of the growth in public healthcare expenditures since 1970.
On average, inflation-adjusted government expenditures on healthcare in the ten countries that are the focus of this paper have grown by nearly 5 percent per year since 1970. Absent any growth in government benefit levels, demographic change would have caused government healthcare spending to grow by 1.23 percent per year. The United States had the highest annual government healthcare spending growth rate over the period, 6.23 percent per year, or twice its average GDP growth rate of 3.1 percent. Had U.S. government benefit levels not grown, U.S. government healthcare spending would have grown at half the rate of U.S. GDP.
The data on benefit growth suggest that healthcare is a "luxury good." As income rises, governments, acting on behalf of the public, spend proportionately more on healthcare. The authors estimate the percentage change in government healthcare spending for a given percentage change in per capita GDP growth: they find that rates range from 1.1 in Canada to 2.3 in the United States, with a ten-country average of 1.7.
Profiles of government health spending by age show significant variability across countries. Per capita government healthcare expenditures on those over age 74 are twice as high as on people 50-to-64-years old in Austria, Germany, Spain, and Sweden. In the United States, government expenditures on the elderly are 8 to 12 times higher than on those aged 50 to 64. In Japan, Norway, the United Kingdom, Canada, and Australia, the relative spending factors range from 4 to 8.
Assuming that benefits will continue to grow at historic rates for the next 20, 40, or 60 years, Kotlikoff and Hagist "age" the population to determine the present value of projected government health spending as a fraction of the present value of projected GDP. Assuming that benefit levels grow at historic rates for the next 40 years and then grow at the same rate as per capita GDP and assuming a 7 percent discount rate, the United States, Norway, and Germany are slated to spend around 12 percent of their future output on government health spending. At a 3 percent discount rate, the U.S. government will spend around 19 percent of future GDP on health, followed by Norway at 17 percent, and Japan at 13 percent.
Because "American's elderly are politically very well organized, and each cohort of retirees has, since the 1950s, used its political power to extract ever greater transfers from contemporaneous workers," the authors conclude that the fiscal fallout of expanding healthcare benefits is likely to be "particularly severe" for the United States, imposing "a huge additional fiscal burden on the American public. Norway is in similar shape in terms of its healthcare costs, but Norway does not have to bear the burden of paying for a large military. In addition, it has significant oil wealth to help cover its costs.
-- Linda Gorman