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Who's Going Broke? Comparing Growth in Healthcare Costs in Ten OECD Countries

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  • Christian Hagist
  • Laurence Kotlikoff

Abstract

Government healthcare expenditures have been growing much more rapidly than GDP in OECD countries. For example, between 1970 and 2002 these expenditures grew 2.3 times faster than GDP in the U.S., 2.0 times faster than GDP in Germany, and 1.4 times faster than GDP in Japan. How much of government healthcare expenditure growth is due to demographic change and how much is due to increases in benefit levels; i.e., in healthcare expenditures per beneficiary at a given age? This paper answers this question for ten OECD countries -- Australia, Austria, Canada, Germany, Japan, Norway, Spain, Sweden, the UK, and the U.S. Specifically, the paper decomposes the 1970-2002 growth in each countrys healthcare expenditures into growth in benefit levels and changes in demographics. Growth in real benefit levels has been remarkably high and explains the lions share %uF818 89 percent %uF818 of overall healthcare spending growth in the ten countries. Norway, Spain, and the U.S. recorded the highest annual benefit growth rates. Norways rate averaged 5.04 percent per year. Spain and the U.S. were close behind with rates of 4.63 percent and 4.61 percent, respectively. Allowing benefit levels to continue to grow at historic rates is fraught with danger given the impending retirement of the baby boom generation. In Japan, for example, maintaining its 1970-2002 benefit growth rate of 3.57 percent for the next 40 years and letting benefits grow thereafter only with labor productivity entails present value healthcare expenditures close to 12 percent of the present value of GDP. By comparison, Japans government is now spending only 6.7 percent of Japans current output on healthcare. In the U.S., government healthcare spending now totals 6.6 percent of GDP. But if the U.S. lets benefits grow for the next four decades at past rates, it will end up spending almost 18 percent of its future GDP on healthcare. The difference between the Japanese 12 percent and U.S. 18 percent figures is remarkable given that Japan is already much older than the U.S. and will age more rapidly in the coming decades. Although healthcare spending is growing at unsustainable rates in most, if not all, OECD countries, the U.S. appears least able to control its benefit growth due to the nature of its fee-for-service healthcare payment system. Consequently, the U.S. may well be in the worst long-term fiscal shape of any OECD country even though it is now and will remain very young compared to the majority of its fellow OECD members.

Suggested Citation

  • Christian Hagist & Laurence Kotlikoff, 2005. "Who's Going Broke? Comparing Growth in Healthcare Costs in Ten OECD Countries," NBER Working Papers 11833, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11833
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    References listed on IDEAS

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    Cited by:

    1. Stoian, Andreea & Obreja Brasoveanu, Laura & Dumitrescu, Bogdan & Brasoveanu, Iulian, 2015. "A new framework for detecting the short term fiscal vulnerability for the European Union countries," MPRA Paper 63537, University Library of Munich, Germany.
    2. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    3. Laurence J. Kotlikoff, 2007. "Is the U.S. Bankrupt?," Boston University - Department of Economics - Working Papers Series WP2007-015, Boston University - Department of Economics.
    4. Friedrich Breyer & Normann Lorenz & Thomas Niebel, 2015. "Health care expenditures and longevity: is there a Eubie Blake effect?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(1), pages 95-112, January.
    5. repec:agr:journl:v:4(605):y:2015:i:4(605):p:309-320 is not listed on IDEAS
    6. Glorie, K.M. & van Oostrum, J.M. & Dur, A.J. & Kazemier, G. & Wagelmans, A.P.M., 2010. "Physician Incentive Management in University Hospitals: Inducing Efficient Behavior Through the Allocation of Research Facilities," Econometric Institute Research Papers EI 2010-58, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    7. Maurizio Bussolo & Johannes Koettl & Emily Sinnott, 2015. "Golden Aging," World Bank Publications, The World Bank, number 22018, January.
    8. Seher Sülkü & Asena Caner, 2011. "Health care expenditures and gross domestic product: the Turkish case," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 12(1), pages 29-38, February.
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    12. Nicolas R Blancher & François Haas & John Kiff & Oksana Khadarina & Paul S. Mills & Parmeshwar Ramlogan & William Lee & Yoon Sook Kim & Todd Groome & Shinobu Nakagawa, 2006. "The Limits of Market-Based Risk Transfer and Implications for Managing Systemic Risks," IMF Working Papers 06/217, International Monetary Fund.
    13. Andreea Claudia ȘERBAN & Mirela Ionela ACELEANU, 2015. "Current Demographic Trends – A New Challenge for the Labour Market," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(605), W), pages 309-320, Winter.
    14. Andreas KUHN & Rafael LALIVE & Josef ZWEIMÜLLER, 2007. "The Public Health Costs of Unemployment," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 07.08, Université de Lausanne, Faculté des HEC, DEEP.
    15. Sørensen, Rune J., 2013. "Does aging affect preferences for welfare spending? A study of peoples' spending preferences in 22 countries, 1985–2006," European Journal of Political Economy, Elsevier, vol. 29(C), pages 259-271.
    16. Max Groneck & Christoph Kaufmann, 2014. "Relative Sectoral Prices and Population Ageing: A Common Trend," Working Paper Series in Economics 69, University of Cologne, Department of Economics.
    17. repec:bla:obuest:v:79:y:2017:i:3:p:319-347 is not listed on IDEAS
    18. Hendrik Jürges & Vincent Pohl, 2012. "Medical guidelines, physician density, and quality of care: evidence from German SHARE data," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(5), pages 635-649, October.
    19. Mukesh Chawla & Gordon Betcherman & Arup Banerji, 2007. "From Red to Gray : The "Third Transition" of Aging Populations in Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 6741, January.
    20. W Todd Groome & Nicolas Blancher & Parmeshwar Ramlogan & Oksana Khadarina, 2006. "Population Ageing, the Structure of Financial Markets and Policy Implications," RBA Annual Conference Volume,in: Christopher Kent & Anna Park & Daniel Rees (ed.), Demography and Financial Markets Reserve Bank of Australia.

    More about this item

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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