The Social Costs of Population Ageing: Is health care for older populations sustainable?

Public discourse in recent years has been dominated by doom and gloom predictions that the social costs of ageing populations are like a tsunami which will engorge the health and pension systems in North America and Europe. We are told that our systems are unsustainable, that countries will go bankrupt if they don’t reduce their current commitments.

In an earlier issue we presented data projections of the OECD on the costs to public budgets of pensions and income support for the elderly. The data demonstrated among other things that there are countries which, because they are more advanced in their ageing cycle, are already incurring the kinds of costs that Canada and the USA are fearing twenty years from now, and their economies are still quite healthy.

In this issue we look at projections of the growth of health care costs which are related directly to population ageing. Two sources are consulted: The World Health Organization (WHO) whose projections focus specifically on the costs attributable to ageing; and the OECD, whose projections include effects of technological developments and of benefit improvements, while also separating health care and long-term care to show the different cost trajectories. Both analyses indicate that population ageing is not the major driver of increases in health care costs.

The purpose here is not to minimize the effects of population ageing, but to see them in perspective. It is important to develop social policies for societies which are going through an ageing cycle, with a view for the long term, to manage costs; to promote health, engagement, happiness; and just as importantly, to foster solidarity across generations. In a future issue we will address this challenge and this opportunity. Following are our summarized sources for this segment:

The World Health Report 2013

The report forecasts health expenditures of five countries, on a per capita basis, for the period 2010-2060. It assumes that per capita costs for each age group will remain stable, and that the costs per unit of health service also remain constant (i.e. no increases in efficiency and no lowering of unit costs due to better technology). The countries included in the study are the Czech Republic, Germany, Hungary, the Netherlands and Slovenia.

The findings show that cost increases associated with ageing populations are modest: never more than one percent per year, and falling back toward zero between 2030 and 2050. The results were consistent across all five countries.

In their words:

The common assumption that population ageing will drive future health expenditure to unaffordable levels is not supported by this analysis. These results are in line with some other assessments which have found that ageing is not expected to incur substantial
increases in health-care costs…
…, although older people are major consumers of health care, other factors – notably technological developments – have a greater effect on total health care costs

Their message is not to minimize the concern about health costs and older populations, especially when growing numbers of elderly may be supported by labour forces which are not growing, or growing more slowly.

Yet these challenges are not insuperable. The measures that can be taken include: promoting good health throughout life, thereby increasing the chance that additional years of life are spent in good health; minimizing the severity of chronic disease through early detection and care; improving the efficiency of health systems…

Click to access 9789240690837_eng.pdf

Earlier OECD Projections for 2000-2050

The OECD notes that projecting health care expenditures is less certain than pension costs, because of the much greater variation in factors of supply and demand. As well, the cost factors differ greatly between older population groups, and those in the final year of life. The OECD also includes non-age-related factors such as higher incomes (therefore better services) and technology change. Rolling in all these factors for fourteen countries where all the data were available, they projected an average total increase in health care spending of 3 to 3.5 per cent of GDP for the 2000-2050 period. In Australia, Canada, the Netherlands, New Zealand and the USA, the increases are 4 per cent or slightly more.

Click to access 2085481.pdf

Fiscal Implications of Ageing: Projections of Age-Related Spending (OECD)

Projections 2013 for the period 2010 to 2060

This paper proposes a new set of public health and long-term care expenditure projections till 2060… It disentangles health from long-term care expenditure as well as the demographic from the non-demographic drivers, and refines the previous methodology, in particular by better identifying the underlying determinants of health and long-term care spending and by extending the country coverage to include BRIICS countries. A cost–containment scenario and a cost-pressure scenario are provided together with sensitivity analysis. On average across OECD countries, total health and long-term care expenditure is projected to increase by 3.3 and 7.7 percentage points of GDP between 2010 and 2060 in the cost-containment and the cost-pressure scenarios, respectively.

So these projections are more complicated, separating more factors, separating health care and long-term care, and considering both optimistic and pessimistic scenarios. But the result is the same with respect to population ageing as a major driver of social costs.

The drivers of expenditure increases will differ between spending categories: health care
spending will be pushed up mostly by the combined effect of technology, relative prices and exogenous factors (such as institutions and policies), while pressures on long-term care costs will originate more from weaker productivity gains than from factors within the economy as a whole. Under reasonable assumptions about improving health conditions of the elderly in ageing societies (the so-called “healthy ageing” hypothesis) and the response of health spending to rising incomes, pure demographics and income effects will play only a minor role in the projected increase of public health and long-term care expenditures.

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