Chapter

V Medical Care

Author(s):
Edgardo Ruggiero, Peter Heller, Menachem Katz, Robert Feldman, Richard Hemming, Peter Kohnert, Ziba Farhadian, Donogh McDonald, Ahsan Mansur, and Bernard Nivollet
Published Date:
September 1986
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In the past two and a half decades, the growth in government expenditure on health and medical care has been explosive, more than doubling as a ratio to GDP in the seven major industrial countries. An increasingly large fraction of the expenditure has been directed toward the elderly population—far greater than its share in the population (Table 23 and 24). Considering that the aging of industrial country populations will accelerate in coming decades, the issue of rising medical expenditure becomes of particular concern. This chapter focuses on the factors likely to influence the evolution of spending on medical care in the next few decades. Its results will underscore the emphasis placed by most of the seven major industrial countries on the need for containment of medical costs and the implementation of measures to achieve this.

Issues in the Modeling of Long-Term Projections of Medical Expenditure

Among the different types of social expenditure, long-term projections of expenditure on medical care are subject to the greatest uncertainty, reflecting the number and complexity of its determinants. Demographic factors will clearly be important in influencing the growth of medical expenditure. The frequency of illness, its severity, and the complexity of the treatment procedures required are all age-related, dropping sharply after the first year of life and increasing progressively after age 60. This is mirrored by higher medical expenditure for the elderly. For example, in Japan per capita inpatient expenditure is three times greater in the 65–69 age group than in the 15–64 age group; the multiple is more than 5 for the age group 70 and over. In the United Kingdom, an individual aged 75 and over spends, on average, more than twice as much as an individual aged 65–74 and eight times as much as an individual aged 15–64 on all medical services. As the proportion of the elderly increases, the potential demand for medical services should also increase, ceteris paribus (see Table 25).

The expected improvements in life expectancy are not likely to be associated with a significant reduction in morbidity.45 In fact, the lengthening of the human life span is likely to be associated with chronic illnesses or other disabilities, most of which will require both medical care and other forms of personal care assistance. For example, in the United States, the prevalence of chronic conditions among the elderly is estimated at double that of individuals aged 45–64 and five times that of individuals aged 17–44.46 It is difficult to predict whether medical advances will limit the impact of the illnesses presently associated with old age and the likely cost of such technologies.

The 1960s and 1970s were periods of significant expansion in the share of the population eligible for public medical insurance programs. Such coverage typically includes inpatient and outpatient care, and in many countries the purchase of pharmaceuticals. Excluding the United States, coverage rates exceed 90 percent of the population for most medical services (Table 26), with typical copayment rates of 90 percent for hospital care. In the United States, coverage was extended to virtually all of the elderly, though more than two thirds of the medical services consumed by the population under age 65 remain privately financed. Thus, with the possible, though unlikely, exception of the United States, expanded population coverage would not be expected to be a factor in explaining the growth of future medical expenditure.

Relative price effects were significant in most countries in explaining the growth of government medical expenditure in the past two decades (OECD (1985)), with the price deflator for medical services rising more rapidly than the GDP deflator in all of the seven major industrial countries except France and Canada (Table 27).47 The factors underlying these trends are complex, but the institutional characteristics of the systems of medical care delivery have played a major role. On the supply side, the providers of medical care have lacked the incentive to provide cost-efficient care because of the fee-for-service nature of reimbursement.

As with other publicly supplied services that are highly labor intensive, limits on the ability to substitute capital for labor may also induce a positive relative price effect. To the extent that medical and paramedical workers are able to maintain their relative income positions vis-à-vis other segments of the labor market for which average labor productivity is rising, this would give rise to a relative price effect, but this may not be sustainable over the longer term particularly in those countries where physicians’ salaries are relatively high. Government policy plays a critical role in this regard. Even in countries where the government is not the direct employer of most medical and paramedical workers, its role as a third party financing agent is so important that it can exert a dampening impact on the market power of the medical profession and of the industries supplying medical equipment, supplies, and drugs. Such government actions have become increasingly more common in almost all of the seven major industrial countries.

The average growth in real benefits has been the dominant factor underlying the growth in real expenditure on medical care in the past two decades. Estimates by the OECD suggest that average real benefits rose by 6.5 percent a year between 1960 and 1975 and by almost 3 percent annually between 1975 and 1981 for the seven major industrial countries as a whole (Table 27). This is in contrast to a relative price effect of about 1 percent annually and to demographic and coverage effects of significantly less than 1 percent annually over the whole period. In using the OECD historical results to determine appropriate assumptions for this study’s projections, it should be noted that, under the OECD methodology, the statistics on the past growth in average real benefits in the medical care sector are likely to be overstated to the extent that they are inclusive of what this present study would categorize as demographic effects. Specifically, in the OECD study, the growth in average real benefits in the medical sector is calculated as a residual (e.g., net of the effect of demographic factors, the expansion in client coverage, and relative price effects). Since their demographic effects do not take account of the change in the age structure that occurred between 1960 and 1981 (but rather only the change in the size of the total population), it is likely that some of the imputed growth in average real benefits simply reflects the effect of a shift toward the elderly in the age composition of the recipients and the higher per capita medical expenses of the elderly. Evidence on the shift in the age composition and on the growth of average real benefits between 1960 and 1980 is provided in Table 28.

When breaking down the factors that are likely to determine the growth of real expenditure per capita (net of coverage, demographic, and relative price effects), the complexity of the underlying relationships becomes apparent. Factors involving the degree of autonomy and discretion of the consumer, the medical practitioner, and the medical institutions in their choice of the quantity and quality of care to be provided are at the heart of the process. These factors include the extent to which financial constraints impinge on the decision-making process and influence the incentive to economize in the choice of care. This incentive is critically shaped by the nature of the medical insurance system prevailing in a country. Where open-ended third party financing systems operate, there may be little incentive for the medical practitioner to limit the services provided or to provide cost-efficient care.48 Historically, the high level and indeed the increasing share of payments by third party insurers (whether government or private) has insulated patients from the cost of medical services. Where the practitioners have the effective market power to set the cost of services, this may further stimulate a rise in costs. In situations where government-imposed budget constraints determine the available resources to a hospital or practitioner, as in the United Kingdom, it would be expected that the quantity and quality of services provided for a given episode of illness would be significantly different.

Another factor likely to influence average benefits is the development of medical technology. Many of the new medical techniques allow for treatments thought infeasible until recently. They are also quite costly. Technological progress in the medical sector has tended to focus more on improving the quality and scope of medical care than providing existing services in a less costly fashion. The demand for more sophisticated technology is likely to be bolstered by expectations on the demand side as real income levels rise, with the negative effects of higher prices on consumer expectations being dampened to the extent of limited patient-copayrnent formulas. On the other hand, in most countries a significant gap is still evident between the development of such medical techniques and their effective availability to the average patient in need of them.

In effect, national statistics on government medical expenditure per capita (i.e., average benefits) by age group in a given period, and their growth over time, are a reflection of the cumulative impact of various economic, institutional, and technological factors. Historically, this impact has resulted in a dramatic growth in average benefits far exceeding the rate of growth of productivity in the countries in this study. Equally clear, the factors inducing the growth in benefits are not wholly exogenous and can be influenced by public policy measures. Indeed, the government plays a very direct role in the process through its role as a third party financing agent. Even where the government’s role is smaller (as in the United States), private third party financing is encouraged by government tax subsidies. Governments are now increasingly concerned about the cost of medical care and are moving to implement policies to achieve some degree of control (see the section on Policy Issues below). This being said, it is difficult to judge the likely degree of success of such policies.

In view of these many uncertainties, the projection model used in this study was deliberately kept simple. Country-specific estimates of average expenditure for medical care per capita in 1980,49 disaggregated by age group and by type of medical service (inpatient, outpatient, drugs), were obtained. Several estimates were then made as to the possible growth of real expenditure per capita. In effect, such growth rates will reflect the joint effect of any further expansion (or reduction) in coverage, any relative price effect, and any growth in real benefits and intensity of demand arising from the multiplicity of factors mentioned above. Such a growth rate will be denoted as the growth of the “medical costs” variable. One assumption would limit the growth in real medical costs per capita to the growth in productivity, with the rate of increase assumed to be equal across the different types of medical service. This assumption is effectively equivalent to evaluating the pure demographic effect on the ratio of medical expenditure to GDP, holding productivity constant at 1980 levels.50

By historical standards, this assumption would represent a significant moderation in the growth of medical expenditure per capita (Table 7), particularly in France, Japan, and the United States, where the combined growth rate of average benefits and the relative price effect has been more than double that of both the historical growth in productivity during the period 1974–84 and the assumed future productivity growth used in these projections. For the remaining countries, limiting the growth in the medical costs variable to the rate of growth of productivity would represent a significant slowdown from recent historical experience.

Table 7.Cost and Productivity Factors Assumed in the Medical Sector Projection Model and Historical Statistics(In annual percentages)
Assumed Growth in:Historical Statistics
Medical costs variableProductivityProductivity GrowthSum of relative price effect and average real benefit growth rate
Country1980–20251974–841960–751975–81
Canada2.01.50.56.91.8
France2.52.02.28.64.9
Germany, Fed. Rep. of2.52.02.47.42.8
Italy2.52.21.17.23.2
Japan3.53.02.615.16.7
United Kingdom2.01.41.64.92.2
United States2.51.60.35.14.7
Sources: OECD, Social Expenditure: 1960–1990, Problems of Growth and Control (1985): OECD. Economic Outlook, various issues; and Fund staff estimates.
Sources: OECD, Social Expenditure: 1960–1990, Problems of Growth and Control (1985): OECD. Economic Outlook, various issues; and Fund staff estimates.

A scenario more closely corresponding with historical experience on medical costs, but also compatible with assumptions made by country sources, would assume rates of growth in the medical costs variable that exceed the rate of productivity growth by 0.3–0.9 percentage points annually. With the exception of Canada, growth rates for this cost variable are assumed to be less than those experienced during the period 1975–81. The model does not attempt to impose expenditure ceilings per se, so that specific government policies that set ceilings on overall expenditure (such as the cash-limits approach to budgeting in the United Kingdom) would not be directly reflected.51 Other cross-country differences in policy and their effects on costs are subsumed within the assumption on the growth rate of the medical costs variable.

The model takes 1980 as the base year and does not take account of changes in the ratio of medical expenditure to GDP between 1980 and the present. To the extent that actual costs have risen faster than assumed here (e.g., in Canada and the United States), the projected expenditure ratio would be understated unless medical costs could be brought back to the trend implied by these projections.

Finally, these projections relate only to the growth in personal medical care outlays. Additional public expenditure on capital investment in medical care, medical research and education, and medical administration additionally account for up to 1 percent of GDP in those countries for which data are readily available (i.e., Canada, Italy, and the United States). For the purpose of projections of total social expenditure, such expenditures are assumed to remain constant as a percentage of GDP (and are included in the projections of medical expenditure indicated in Table 14).52

Medical Expenditure Projections, 1980–2025

Table 8 presents, in index form, the effects of demographic developments on the absolute level of medical care expenditure, assuming no increase in real expenditure per recipient in any age group or in coverage (i.e., simply the effect on outlays of the change in size and structure of the population). There is a sharp divergence in growth across countries, ranging from only a modest increase in the Federal Republic of Germany, Italy, and the United Kingdom to a substantial increase in Canada, Japan, and the United States. The development of real spending reflects two factors: changes in the age structure and the absolute size of the population.

Table 8.Real Government Expenditure on Medical Care, 1980–20251(Index: 1980 = 100)
Country1980200020102025
Baseline demographic scenario
Canada100128140174
France100117125130
Germany, Fed. Rep. of100104107103
Italy100113117121
Japan100130140147
United Kingdom100105105115
United States100130144180
“Greater aging” demographic scenario
Canada100130142174
France100120129149
Germany. Fed. Rep. of100103105100
Italy100114118123
Japan100139150153
United Kingdom100106108119
United States100132148188
Source: Fund staff estimates.

Excluding expenditure on medical research and education, administration, and capital investment in the medical sector: assumes no increase in real expenditure per capita by age group over 1980 levels.

Source: Fund staff estimates.

Excluding expenditure on medical research and education, administration, and capital investment in the medical sector: assumes no increase in real expenditure per capita by age group over 1980 levels.

Thus, while a more aging population tends to have more rapidly growing expenditure, if other things remain constant, this can be offset by the scale factor. The Federal Republic of Germany’s population ages much faster than that of France, Italy, and the United Kingdom, but it shows a smaller expenditure growth because of a declining population size. Medical expenditure in France will grow much faster than in the United Kingdom, despite slower aging and a lower initial expenditure share on the elderly, because of faster growth in the population. It is also interesting to compare Canada and the United States. Canada’s population is aging more rapidly and will have a slightly faster growth in its total population, yet in the United States expenditure on medical care will grow somewhat more rapidly. The reason lies in the much higher share of government expenditure on medical care that is allocated to the elderly in the United States (Table 23).

Neither scenario would be particularly worrisome for any country if demographic factors alone were the only influence on the growth of real medical expenditure. Such a growth in expenditure would be small in comparison to the growth in total output, so that the ratio of medical expenditure to GDP would drop to 70 percent of its present value by the year 2000 and would be even lower in subsequent years. This scenario would be extremely unlikely, given the historical evidence that suggests that medical costs per capita will continue to rise in real terms.

Chart 12 illustrates the effects of the assumption that real medical costs per capita rise at the same rate as productivity. This assumption is equivalent to estimating the effects of demographics on the ratio of government expenditure on medical care to GDP, holding output per worker constant at 1980 levels (and adjusting the size of the labor force for demographic and unemployment trends). It significantly modifies the picture implied in Table 8, particularly for Canada, the Federal Republic of Germany, and the United States. The rapid growth of total expenditure in Canada and the United States is accompanied by significant population growth. Once allowance is made for the increased labor force, the expenditure ratio is seen to grow substantially less. In the Federal Republic of Germany, on the other hand, the low growth in real expenditure in Table 8 is due to a declining population size. When the declining labor force is taken into account, the burden of the pure demographic effect is as large as in Canada or in the United States. In four countries (Canada, the Federal Republic of Germany, Japan, and the United States), the ratio of government medical expenditure to GDP rises by 26–34 percent over the 45–year period—the equivalent of approximately 1.6 percent of GDP in the first three countries and 1 percent of GDP in the United States. For the three other countries, lower growth rates are projected, with the ratio of medical expenditure to GDP rising by 0.7–0.9 percentage points by 2025.

Chart 12.Government Medical Care as a Percentage of GDP, 1980–2025

A more realistic scenario would assume average medical costs rising more rapidly than productivity, as indicated in Table 7. This results in a substantial increase in the ratio of medical expenditure to GDP over the whole period (Chart 12). By the year 2000, the ratio will increase by approximately 0.4–1.2 percentage points of GDP, rising particularly rapidly in France, the Federal Republic of Germany, and Japan. Between 2000 and 2010, further increases in the ratio would occur, again raising it by approximately 0.4-1.0 percentage points of GDP. The United Kingdom is an exception in this regard, with the medical expenditure ratio rising only slightly.53 The most dramatic increase in the expenditure ratio would be observed between 2010 and 2025, particularly in Canada and the United States, but also to a significant extent in the Federal Republic of Germany, Italy, Japan, and the United Kingdom. By the year 2025, government medical expenditure will have almost doubled as a ratio of GDP in the United States and will be approximately 60–70 percent higher in Canada, the Federal Republic of Germany, Italy, and Japan, relative to 1980.

It is important to stress that approximately two thirds of the prospective increase in the medical expenditure ratio to GDP derives from the difference between the growth in the medical costs variable and the rate of productivity growth in the economy. A growth of 0.5 percent a year relative to productivity adds about 25 percentage points to the absolute level of expenditure by the end of the 45–year period. Thus, the assumed rate of growth of costs relative to productivity growth has great potential to exacerbate or alleviate the demographic effect.54

Adoption of more pessimistic economic assumptions and the “greater aging” scenario leads to a higher medical expenditure ratio, but with the exception of France, not dramatically so. Through the year 2010, the ratio is no more than 0.3 percentage points of GDP higher in any of the countries than in the baseline scenario. However, between 2010 and 2025, the assumption of “greater aging” in the population leads to a significantly greater increase in the expenditure ratio (relative to the baseline scenario) in France and the United States, rising in these countries by a further 1.3 and 1.0 percentage points of GDP, respectively. Relative to 1980, the impact of aging on medical expenditure is greatest in Japan and the United States; in the case of the United States, the higher share of medical care expenditure on the elderly offsets its slower aging.

The importance of immediate efforts to contain costs is illustrated in Table 9. The column for 1980 indicates the ratio of medical expenditure to GDP in 2025 if, as of 1980, the medical costs variable were to rise no faster than productivity. The remaining columns indicate the expenditure ratios that would prevail in 2025 if costs were to rise at the assumed cost factor of Table 7 through 2000, 2010, and 2025, respectively.

Table 9.Effect of Delaying Medical Cost Control Efforts: Medical Expenditure in 2025 as a Ratio to GDP1
Growth in Medical Costs Field to Rate of Productivity Growth as of:2
Country1980200020102025
Canada5.56.36.77.2
France7.58.38.79.4
Germany. Fed. Rep. of7.78.48.99.7
Italy5.86.16.46.7
Japan6.47.17.58.1
United Kingdom6.16.97.38.0
United States4.45.55.96.6
(Relative to 1980 ratio to GDP)
Canada127144153166
France112124130140
Germany, Fed. Rep. of126137145159
Italy118125130137
Japan134149157169
United Kingdom112127133146
United States132167178200
Source: Fund staff estimates.

Excluding expenditure on medical research and education, administration, and capital investment in the medical sector.

Otherwise, assumed to rise at the cost factor shown in Table 7.

Source: Fund staff estimates.

Excluding expenditure on medical research and education, administration, and capital investment in the medical sector.

Otherwise, assumed to rise at the cost factor shown in Table 7.

Delay of such efforts to contain costs to the year 2000 would add approximately 0.7 percentage points of GDP in medical care expenditure, using the historically conservative cost factors indicated in Table 7; delay to the year 2010 would add 1.2–1.5 percentage points of GDP. This assumption of delay highlights the importance of the efforts for cost containment currently underway in these countries—and which are likely to be emphasized even more as the demographic situation changes.

Policy Issues

Several issues are likely to appear on the agenda for health and medical care policy in the foreseeable future and will have important consequences for the evolution of expenditure on medical care. These include:

  • (a) Elimination of existing inefficiencies in the delivery of specific medical services. This is particularly relevant in a period when budgetary outlays are under considerable pressure.

  • (b) Elimination of questionable excesses in the medical procedures used for the treatment of cases.

  • (c) The possibility of further substitution of capital for labor in medical treatment practices.

  • (d) The implicit trade-offs that inevitably arise from efforts to control costs and expenditure in the medical care industry, particularly at a time of rapid technological change in medical science. In part, this is a trade-off between equity and efficiency objectives. However, equally difficult ethical issues also arise in regard to the appropriate treatment technology and services for the very elderly and the terminally ill, raising questions as to the value of the marginal net benefit associated with additional increments of care.

  • (e) The increased demand for services accompanying the rapid growth in the population of the very elderly (i.e., age 80 and over).

  • (f) The emerging structural imbalances between the changing demand for health services and the capacity for their provision.

  • (g) The extent to which government policies should be used to encourage a healthier “life-style” (or discourage adverse behavior) by individuals, given the evidence that many medical problems are behavioral in origin.

  • (h) The effect of new diseases on the average cost of providing medical care.

Most countries in this study have been preoccupied in recent years with the problem of controlling the growth of government expenditure on medical care, and cost containment is likely to continue to be a major priority in the foreseeable future. In part, this has taken the form of efforts to improve the efficiency with which services are provided—to eliminate excess capacity, to offset imperfections or excessive power in the market through which medical services and supplies are provided, and to eliminate the degree to which almost 100 percent third party copayment rates have led to excessive demand for medical care by patients and excessive supply of services by physicians and hospitals. Other policies have attempted to shift a greater share of the cost burden to the insured population and to increase their cost consciousness.

A brief and by no means comprehensive survey will suffice to illustrate the types of policies emphasized in some of the countries. Changes in reimbursement procedures to hospitals and physicians have been introduced in several countries as a means of precluding an excessive pass-through of charges to medical insurance systems.55 Such changes have been associated with efforts to limit the increase in the reimbursement rate over time. The introduction by the United States in 1983 of a prospective payment system for inpatient care is one example.56 In Italy, changes have been made in the reimbursement procedure for general practitioners. In Japan, actions have been taken to reduce “excessive treatment” through closer monitoring of claims and periodic revisions to the reimbursement price to reflect the actual cost of medicine and medical treatment.

In the Federal Republic of Germany, since the mid–1970s, the government has followed a policy aimed at containing expenditure growth, partly through legislative changes but also through negotiations with physicians’ associations, hospitals, and representatives of health insurance companies and the pharmaceutical industry. These actions have led to some restraint in the volume of services provided and to modifications in the tariff structure of medical services. In late 1984, the German Government also attempted to provide greater profit incentives to hospitals as a means of containing costs.

In Canada, physician profiles are constructed from claims data in order to identify physicians whose billing patterns deviate sharply from the average. Those with excessive billing are subject to the possibility of sanctions. In addition, global caps are imposed on total reimbursements for physicians (see United States, U.S. Congress, Congressional Budget Office (1986)).

In France, policies were introduced in 1980 to limit physicians’ fees through a uniform fee schedule mechanism and in 1984 to set an annual ceiling for hospital expenditures, forcing hospitals to live within fixed means (Godt (1985) and Laurois (1984)). This latter policy has already led to some self-restraint by hospitals (as manifested by a decline in the average length of stay). Direct authority was also given to the Ministry of Health to phase out excess bed capacity in government hospitals. Finally, in France, the Federal Republic of Germany, and the United States, reimbursement rates have not been allowed to capture the full effects of inflation.

These changes directly affect the incentive system facing suppliers of medical care and hopefully lead to more cost-effective procedures. Whether these changes will actually reduce overall costs is not yet clear.57 For example, in the United States, the changes in the reimbursement system have led to a reduction in the average length of stay in hospitals. It is not yet clear whether this has been offset by increased admissions, a shifting of care to an outpatient basis (where a prospective payment system has not yet been introduced), or by a tendency to classify patients according to more expensive diagnostic categories.

Governments have also attempted to increase the share of costs borne by the individual, both as a means of increasing the share of financing by the private sector and also as a means of discouraging wasteful consumption of medical services. In Japan, for individuals under age 70, the enrollee’s copayment rate was recently increased under the Health Care Act from 0 to 10 percent (subject to certain major medical provisions); for individuals over age 70, inpatient and outpatient care, which was previously free, is now subject to a nominal charge. Recent evidence suggests that total medical payments to insurees in the three months since implementation were 10 percent below the level of the previous year (the first decline in the monthly data since 1971.58 In Italy, patients are now required to pay some part of the cost of drugs. In the United States, legislative efforts are underway to increase both the copayment rate and the contribution rate by pensioners with respect to Medicare. In France, a minimum day-rate payment imposed in 1984 created an incentive for patients to reduce hospital stays (Godt (1985)), p.163).

Though the approaches described above may discourage wasteful consumption, particularly of ambulatory care and drugs, significant cost-sharing will prove more difficult in situations where expensive hospitalization is required, thus defeating the purpose of insurance. Also, increased cost-sharing for some services can lead to substitution in demand for other services for which the individual’s copayment rates are lower.

Another issue relates to whether individuals should bear higher copayment rates according to their lifestyle or habits (e.g., smoking, excessive drinking, taking drugs, etc., which increase the risk of illness). In effect, should individuals not be encouraged to lead healthier life-styles, rather than taxed to support the more medically costly life-styles of others?

Finally, it should be noted that some governments have been moving toward an overall ceiling on government medical expenditure. Such a ceiling exists already in the United Kingdom, whereby approximately 80 percent of expenditures on medical care are “cash-limited” and subject to extensive efforts to minimize the limits of expenditure totals. This ceiling brought about a sharp slowdown in the rate of increase of public expenditure on health and medical care from an average annual rate of about 5 percent between 1960 and 1975 to about 2 percent during the period 1975–81. The Canadian federal authorities replaced an essentially open-ended cost-sharing formula for the provinces with a fixed revenue-sharing formula, thus pressuring the regional authorities to rationalize their delivery systems, modify copayment rates, and limit physicians’ earnings. In Italy, the “regionalization” of hospitals under the new National Health System represented an attempt to impose some overall limits on the growth in medical expenditure, though this has not been very successful to date.59

Cash limits will succeed only if efficiency gains prevent reductions in service. The authorities of the United Kingdom recognize that the demographic pressures of an aging population will be associated with increased demand for medical services and that technological advances are likely to lead to a net increase in costs. These developments will not necessarily be reflected in an increase in cash-limited health programs. In effect, cash limits provide an incentive constantly to search for improvements in efficiency—otherwise new services can only be introduced at the cost of cutting back existing services.

Ultimately, however, the difficult issue becomes one of controlling costs without compromising other policy objectives, particularly with respect to the quality of care provided. Rapidly changing technology further complicates this trade-off. While technological change in medical science can lighten the trade-off, allowing improved quality of care to be purchased less expensively, many new developments portend the capacity, albeit expensive, to improve substantially the prospects for surviving previously fatal illnesses. Will it be necessary to ration the more expensive technologies, and if so, what criteria will be applied? How does one judge the marginal benefits of additional treatment? Should the cost of repair or transplant of critical human organs be covered by health insurance programs and, if so, how should the costs be distributed among participants?

These issues become particularly complex for the very elderly and raise difficult ethical issues. In the United States, more than a quarter of total Medicare spending arose from the treatment of enrollees in the last year of their life, even though such enrollees constituted only 5 percent of the enrolled population.60 How much of such expenditure was of “lifesaving” value? Could there have been a shift of care from more expensive hospitals to less expensive hospices?61 At what point does one cease to pursue intensive medical treatment of the hopelessly ill or of those who are senile? Conversely, should mentally competent patients have the right to refuse life-sustaining medical treatment?

Another issue that will become increasingly relevant, and fraught with cost implications, is long-term chronic care for the very elderly. It was noted in Chapter III that the very elderly (i.e., individuals 80 and over) are the most rapidly growing segment of the population. The relatively greater need for medical expenditure for this group, under the existing system of coverage and benefits, is covered in the above projections (albeit imperfectly, for lack of disaggregated data). However, this group will have additional needs that are only partially covered under the present social insurance systems of most countries.62 The prevalence of chronic illness conditions, serious activity limitations, and the need for assistance in the activities of daily living is dramatically greater for this age group.

In the U.S., persons age 65 and older are almost five times more likely to suffer activity limitations than persons under 65 years, and persons age 85 and older are twice as likely to suffer activity limitations as persons aged 65 to 74. Persons over 75 are over 20 times more likely to need personal care assistance in at least one activity of daily living (such as bathing, dressing, eating, and toileting) than are persons under age 65. Thus, in addition to a growing need for acute care, an aging population will also be accompanied by a growing need for long-term and maintenance care, including a vast array of social services as well as personal care.63

Such conditions as Alzheimer’s disease, arthritis, limiting heart conditions, hypertension, osteoporosis (bone disease), incontinence, hearing and vision failure, and depression become increasingly common in the older age groups. More importantly, with age, an individual is more likely to experience more than one of the above conditions.

Should there be an expansion in the coverage of social insurance to provide more comprehensive coverage for alternatives to hospital care for the very aged (e.g., in nursing homes, old age homes, congregate and sheltered housing, home health care, homemaker care, adult day care, respite care)? Present social insurance for nursing homes or other alternatives is limited in most countries. In fact, much of the heavy (or often inappropriate) utilization of high-cost, acute-care hospital capacity for the treatment of the chronically ill elderly population derives from the higher certainty of coverage of the cost of hospitalization under most government medical insurance schemes. As with hospice benefits, it is uncertain whether expanded insurance coverage of nursing home facilities would reduce the cost to the insurance schemes of such care, as the expanded coverage might well offset whatever substitution effect arises from a shift out of acute-care and psychiatric hospitals.

With the shift in the age structure of the population, an associated change will take place in the underlying structure of demand for services, creating imbalances between available physical capacity and professional manpower resources and the structure of demand. This change will undoubtedly create short-term transitional adjustment difficulties. For example, the share of government expenditure on medical care consumed by the age group 65 and over will substantially increase. In the Federal Republic of Germany, Italy, and the United Kingdom, it will increase by 7–9 percentage points between 1980 and 2025: in Canada, Japan, and the United States, the increase will be even more dramatic (Table 10). This increased share will be reflected in a change in the demand for particular services, with obviously increased needs for nursing home facilities and for professionals and paraprofessionals trained in geriatric care. An associated problem will be the need to “retool” plants and retrain professionals in specialities less in demand.

Table 10.Percentage of Government Medical Care Expenditure on the Elderly Population, as Projected in the Baseline Scenarios, 1980–20251
Country1980200020102025
Canada33.338.040.953.1
France
Germany. Fed. Rep. of233.133.639.042.6
Italy31.836.237.440.6
Japan27.437.743.848.3
United Kingdom42.144.144.349.4
United States50.054.455.664.6
Source: Fund staff estimates.

Costs rise as assumed in Table 7.

Over age 60.

Source: Fund staff estimates.

Costs rise as assumed in Table 7.

Over age 60.

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