Friday, 4 September 2015

Some good budget deficit news to come? The falling rate of increase in health spending

In the days not long gone when the Abbott government considered the rising budget deficit to be the nation's principal economic problem, it was the continuing rise in health spending that got much of the blame. The spending just kept going up at a faster rate than the overall inflation rate and the warnings of "unsustainability" have featured in all three of the Intergenerational Reports prepared by the Federal Treasury.
The Executive summary of the latest Intergenerational report released earlier this year said Australian Government real health expenditure per person is projected to more than double over the next 40 years.
Australian Government health expenditure is projected to increase from 4.2 per cent of GDP in 2014-15 to 5.5 per cent of GDP in 2054-55 under the ‘proposed policy’ scenario. In today’s dollars, health spending per person is projected to more than double from around $2,800 to around $6,500. State government expenditure is also expected to be significantly higher.
If no changes to policy had been made, health expenditure was on track to reach
7.1 per cent of GDP in 2054-55 under the ‘previous policy’ scenario.
The report explains how non-demographic factors, including higher incomes, health sector wages growth and technological change, are more significant drivers of the projected increase than demographic changes. The area of largest growth is Medicare services, which is projected to increase by over 15 per cent per person in real terms over the next decade. 
All very depressing if you are a budget deficit worrier. But there are signs in recent years that the above average inflation in health is coming to an end. And today I noticed this commentary from the United States: Chart of the Day: The Future of Health Care Costs Looks Surprisingly Rosy.
It points to a recent paper out of the Schaeffer Center for Health Policy and Economics at USC showing that the annual increase in health care costs has been dropping steadily for more than 30 years. The green arrow shows the trendline.

Obviously this won't go on forever. But once again, it shows that the recent slowdown in health care costs isn't just an artifact of the Great Recession. That probably helped, but the downward trend far predates the recession. Bottom line: there will still be spikes and valleys in the future, but there's every reason to think that the general trend of health care costs over the next few decades will be either zero (i.e., equal to overall inflation) or pretty close to it.
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