An International Look at the Medical Care Financing Problem

Abstract

As populations age and medical spending rises, there is no doubt that the medical system will account for an increasing part of economic activity. But how much more, and which countries will be most affected? Those are the questions I address in this paper. To answer them, I develop a model to forecast medical spending in OECD countries. The results yield several important conclusions, ranging from 2 to 4 percent of GDP in the next half century. Expected technological innovation in medicine raises the projected increase in the next 30 years to as high as 9 percent of GDP. Overall, the US and Japan will be among the most affected countries, with the UK being least affected. In Japan, the primary issue is demographic change, while medical cost increases are more important in the US. David Cutler Department of Economics Harvard University 1875 Cambridge Street Cambridge, MA 02138 dcutler@harvard.edu and NBER Virtually all developed countries are worried about how to finance medical care. Medical costs are increasing more rapidly than tax revenues to pay for them, and populations are aging, each of which increases the burden on the public sector. In the United States, we speak of a ‘Medicare crisis’ and a ‘Social Security crisis’, where the government will no longer be able to meet its health care bills. Other countries have an ‘aging crisis’, or an ‘Old Age Insurance crisis’. There is no doubt that medical care costs are certain to increase. But by how much? What is the magnitude of reform that is needed? Those are the questions I address in this paper. To answer them, I develop a forecast model of medical spending in OECD countries. The model uses as inputs current spending on medical care, and the demographic mix of the population as it stands now and as it is expected to change. The model estimates the share of medical spending in GDP in the future. Since most countries pay for the bulk of medical services publicly, this forecast is closely related to the increase in the public sector financing burden that can be expected. The results yield several important conclusions. First, all OECD countries can expect an increase in the cost of medical care over time. On the basis of demographic change alone, the typical country can expect medical care to increase by 2.2 percent of GDP in the next 30 years, and by 3.6 percent of GDP in the next half century. Including continued technological innovation in medicine at the rate experienced in the past raises the projected increase in the next 30 years to 5.7 percent of GDP. Interestingly, the data suggest that the medical care problem is about equally split between the consequences of aging and the consequences of technological change in medical treatments.