Model for Predicting Convergence of Health Care Expenditures as a Share of GDP

Presenter: Bianca Frogner, John Hopkins School of Public Health

Abstract

Rationale: Health care experts have had an ongoing debate about the sustainability of health care expenditure (HCE) growth. An important component of the debate is the estimated share of the GDP that health care will consume in the future. There is little evidence with theoretical underpinnings in the peer-reviewed literature regarding the future growth path of HCE.

Objective: This paper provides evidence of asymptotic convergence of HCE as a share of GDP in six industrialized countries: Australia, Canada, Finland, France, Germany and the United States. This paper demonstrates that the growth in total HCE as a fraction of GDP is decelerating and is approaching a predictable value.

Modeling Approach: This paper presents a model of HCE growth with health care labor and wage rate as the primary independent variables. The theoretical framework for understanding the relationship between the independent variables is a Cobb-Douglas production function. The selected mathematical model is a tangent hyperbolic (S-shape) function. This function is chosen based on observation of the best fit with the available data as well as its property of having asymptotic behavior in both tails. The model separates HCE into two major categories that exhibit different growth trends: professional services (physicians, hospitals, and long-term care) and pharmaceuticals.

Study Population and Data: Total HCE and subcategories of HCE, labor and wage rate data from 1970 to 2005 for six OECD countries, were used to model growth of HCE as a share of GDP. This model has a form suitable for predicting long-run future behavior.

Results and Conclusions: The model shows that the growth in total HCE as a share of GDP is decelerating currently; i.e., the growth rate is projected to be declining in the long run future. The implication is that HCE will asymptotically approach a steady state value as a share of GDP. Pharmaceutical expenditures appear to be at the point of inflection; i.e., changing from acceleration to deceleration in terms of growing as share of GDP. However, the pharmaceutical expenditures will also asymptotically approach a fixed fraction of GDP in the long run future.