Healthcare Costs and Spending
What’s the Issue?
Healthcare spending, both public and private, has increased over the past several years. Healthcare spending as a percentage of the Gross Domestic Product (GDP) has also increased since the late 1990’s. And, in several provinces, over the last decade, healthcare is taking a greater share of the provincial budget.
What’s going on to cause these increases in healthcare spending? To understand that, one must consider how a change in healthcare spending is calculated. First of all, think about ratios: ratios (e.g. 10/100 = 10%) have both numerators (10) and denominators (100). Healthcare spending is the numerator, while the state of the economy, or Gross Domestic Product (GDP), is the denominator.
First, consider the healthcare spending numerator. Understanding how accurately healthcare spending is calculated is complicated by several factors. For instance:
- Are only traditional Medicare expenditures on hospitals and physicians included or all healthcare spending?
- Is the total adjusted for inflation?
- Does it represent private and public spending or only public spending by governments?
- Is it adjusted for population growth to allow meaningful per capita comparisons?
Health spending may increase for a number of reasons, but it is not always clear how someone has put together these factors when spending figures are presented. Consider the following possibilities:
- If more people are getting hip surgery, a higher use of that service might increase costs.
- If patients are using higher priced brand name drugs rather than cheaper generics, then the over all prescription expenditures would go up.
- If physicians’ fees increase, then there would be an increase cost of services.
Most of the confusion in looking at health spending, however, comes from changes in the economy. This is represented by the denominator in the healthcare spending ratio. When the economy does poorly, Gross Domestic Product (GDP) grows slowly, or even shrinks. This means that the same health expenditures will amount to a higher share of GDP. Conversely, when the economy is booming, health spending forms a relatively lower share of GDP.
Similarly, the percentage of government spending which flows to healthcare is influenced not only by the size of healthcare spending, but also by how governments decide to spend their money:
- Has spending changed for other public programs? This includes moving some programs from provincial to regional or local governments.
- Have revenues changed from tax cuts or increases? This can mean that the same spending for health amounts to a larger or smaller share of what provincial and territorial governments are spending.