What is driving health care costs?
A recent report by the Canadian Institute for Health Information provides information about the major drivers of health care costs in the past decade, which include growing salaries for health care workers and greater intensity of treatment.
The report suggests that the aging population is not a major contributor to rising health care costs.
These findings clash with many headlines about the costs of health care, and suggests that while costs are gradually increasing, they are not “out of control”.
Growth in government spending on health care
In our uncertain global economy, the challenge of increasing health care costs is a concern to citizens and decision makers. Health care spending by governments has increased at a rate of 7.4% per year over the last decade in Canada. Like many comparable countries, the growth in health care spending has exceeded the rate of economic growth.
Health spending, while growing at a modest rate, is taking up an increasing proportion of public dollars. In Ontario, health care spending in 2011/2012 is projected to be over $47 billion of the provinces’ $124 billion expenses. Crowding out of other expenses, such as housing and social services, is a challenge decision makers must face with growing health expenditures and shrinking government revenues.
The figure below shows that Canadian health care spending in the past 35 years has mirrored the fiscal circumstances of the government. The dramatic decrease in health care spending during the recession of 1991 to 1996, between the red and orange lines in the table below, strongly suggests that the same might happen in the next few years.
No demographic time bomb
Although many Canadians believe that the aging population is driving health care costs in Canada, the CIHI report suggests that this is not the case, which is consistent with other research. While total health care costs doubled from 1998 to 2008, the share spent on Canadian seniors hardly changed at all – from 43.6% in 1998 to 43.8% in 2008. To read more about the debate on whether the aging population is affecting the sustainability of the heath care system, click here.
Salaries are a major driver
The salaries of doctors, nurses and other skilled health care professionals have risen more quickly than the average Canadian salaries in the last decade. As well, the report notes that compensation for doctors grew faster than the wages of other health and social service workers in the past decade. With the Ontario Medical Association and Ministry of Health and Long-Term preparing for the renegotiation of physicians’ salaries through the Physician Services Agreement in March 2012, this is an area many will be watching to see whether growth is curbed.
Over one in four health care dollars in Canada is spent on hospitals. With about 60% of hospital budgets consumed by staff wages, this is a major component of health care spending .
Hospital cost drivers
The report identified the costs of providing hospital care as “another area worth monitoring” given the costs of medical technology and rising staff salaries. Hospital costs decreased significantly from 1991 to 2001, both in absolute terms and as a proportion of the health care budget. The hospital share of total public health care spending was 47% in 1991, and was reduced to 37% in 2001. However, in the past ten years the proportion of health care spending on hospitals has remained steady at 37%.
The past decade has seen changes in how people use hospitals – a higher intensity of services for hospital inpatients, fewer hospital beds and more hospitals shifting to providing more outpatient procedures . While hospitals in Ontario are generally felt to be efficient, there are challenges in meeting future demands.
Pharmaceutical costs – a mixed picture
Drugs greatly benefit many patients, and are also an important cost driver. Over the last few years, the changes in drug costs has been complex. Fewer new drugs on the market, a number of drugs coming off patent, and more price negotiation by governments have contributed to a decline in the growth of drug costs. On the other hand, greater use of drugs by Canadians (such as drugs to decrease cholesterol) and an increase in the population has contributed to a small overall increase in drug costs. In 2001, drugs accounted for 8% of public health care spending; this increased to 9% in 2011.
The figure below shows the share of public health expenditures accounted for by hospitals, doctors, drugs and other health care institutions over the past 20 years.
The facts and the future of health care
Knowing the drivers behind health care costs, do you think that there is a way for some of these cost drivers to curbed? Join the debate.