Notes on Ageing and its affect upon Health Expenditures

Jeff Richardson
Centre for Health Economics
Monash University
http://www.buseco.monash.edu.au/centres/che/

The notes below summarise my concerns about the analysis of ageing and health costs. The comments are not specifically about the PC report which does not draw strong conclusions and is cautious in its statement of the implications of the study. Rather, the comments which I have made publicly on a number of occasions are directed at those who might conclude from the various projections that ageing will create unacceptable cost pressures and that their control should be a major task of government policy.

In Summary: At the aggregate level the link between ageing and cost is at best problematical and at worst unknown. The ‘naïve needs model’ – as Evans describes the assumption of fixed needs and fixed treatment regimes – is contradicted by almost all the evidence to date. (It is strikingly different from the usual economic model with its emphasis upon flexibility and substitution opportunities.) Consequently, to focus attention upon the results of rigid need based projections without the clearest possible disclaimers may well mislead the focus of policy

Does Ageing Increase Health Care Costs

My conclusions are as follows:

(i)	Ageing need not increase health care costs. It is misleading to cite the point in time distribution of total costs between age cohorts. (PC page 6.1 dot 4)

(ii)	Ageing has probably been unimportant to date.

(iii)	Its impact in the future is very hard to assess.

In the two figures below the average cost per age cohort – the age cohort profile – is represented for four time periods, t1… t4. The bold line represents average national health spending. A(t1)… A(t4) are the ages of the cohorts which have average national expenditure.

Figure 1 illustrates a logical point. Average national expenditures may be unrelated to the age of the population. In this figure they are constant. As the population ages the cohort spending profile adjusts downwards. Figure 2 is the more realistic case. Total and average national costs increase and the cohort spending profile rises by an amount determined by the magnitude of national expenditures and the extent of the ageing of the population.

In both of these cases the budget may have been set autonomously and the age profile of the population determines how resources will be distributed between cohorts. In the second case – Figure 2 – the critical issue is whether or not the budget has varied because of the ageing of the population. The answer to this question could be yes or no but the observed relationship between age and spending could be the same with either answer. That is, an increase in health spending between age cohorts plus an increase in the national health budget plus the ageing of the population does not indicate causation. 

		Figure 1

		Figure 2

If there is a causal relationship it is not necessarily true that each dollar increase in age related ‘need’ causes an increase of $1 in the budget. Some part of the $1 might be absorbed into trend spending. In principle, anxious policy makers could react to ageing by increasing the budget by more than $1. However when the ageing effect is spread over many years, as has occurred and will occur, the small annual effect is more likely to be fully absorbed and have no causal influence.