Modeling Health Spending Financial Sustainability

Abstract

In most OECD countries, health spending has been increasing over the last decades, often surpassing GDP growth. Current challenges faced by health systems - including the COVID-19 pandemic - pose additional concerns regarding whether societies can sustain continuous health spending growth. Such problem is particularly relevant in the context of public health spending. In the absence of significant economic growth, the room for further increases in public health spending without constraining other public spending is somewhat limited.On this paper I propose an exploratory analysis on the concept of financial sustainability of public health spending. I relate the sustainability concept with fiscal space of public finances and with the crowding-out of other public expenditures. I develop a static model where health contributes directly both to utility and output.The model suggests that increases on public health spending are not necessarily undesirable from a public finances' standpoint: the crowding-out of non-health public expenditures depends on the tax rate and coverage level of public health spending. Thus, economic growth is not a sufficient condition to achieve financial sustainability of health spending. Moreover, achieving financial sustainability by adjusting coverage levels might compromise ensuring the social sustainability of public health spending. Hence, this paper contributes to the debate on whether current increases of public health spending are desirable and sustainable.