1. Canadian Institute for Health Information

2. Health Care Cost Drivers: Macro-Economic Trends Perspective
January 27, 2011

3. Overview
Health spending and overall economic growth: how do they compare?
How do Canada’s spending trends compare with those of other countries in the OECD?
What are the effects of possible cost drivers?
Inflation
Population growth
Aging
Others
What are the key issues to watch for in the future?
OECD: Organisation for Economic Co-operation and Development

4. General Context

5. Total Health Expenditure Growth Varied Throughout Three Distinct Periods
Sources
National Health Expenditure Database, CIHI; Statistics Canada
The annual growth rates in total health expenditure (nominal dollars) have varied during the past 35 years. With high inflation and a recession in the early 1980s, annual growth in total health expenditure peaked at 17.8% in 1981.
From 1992 to 1996, the second period, health expenditure per capita declined, especially when real per capita health expenditures grew at negative rates in the mid-nineties. This largely reflected provincial government cut-backs in health care spending, which suggests that health expenditure can be influenced by the economic context and fiscal policy.
After the period of fiscal restraint, the third period started in the late nineties with reinvestment in the health care sector. Since 2002, there has been a deceleration in health care spending.

6. Per Capita in Constant 1997 Dollars
P/T Government Spending on Health: Three Distinct Periods
Per Capita in Constant 1997 Dollars
Sources
National Health Expenditure Database, CIHI; Statistics Canada
P/T: Provincial/Territorial
Provincial and territorial government health expenditure per capita in constant (1997) dollars decreased during each of the four years from 1993 to 1996.
P/T government health expenditure per capita in constant dollars grew more rapidly from 1996 to 2008 than it did at any other time since Growth is expected to continue in 2009 and 2010, but at a slower pace.
The 2008 estimate is approximately $52 per capita more than it would have been if the trend for the first period (from 1975 to 1992) had continued.
The last two years of forecasted numbers may suggest a new trend of bending down the spending curve.

7. Canada: One of the Highest Growth Rates in Health Spending Among G7 Countries
Average Annual Growth Rate of Real Total Health Expenditure per Capita, 1998 to 2008
Source
OECD Health Data 2010, October Edition
* Japan’s estimate is for the period from 1998 to 2007.
† For Canada, the 2008 health expenditure figure is an estimate.
GDP: Gross domestic product
Compared to other developed countries of the G7 group, Canada had a higher than average rate of growth of health expenditures between 1998 and The growth rate in Canada (3.4% a year) was equal to that of the United States, but was lower than in the U.K. For Canada, this period saw a reinvestment in health starting in the late 90s and a series of health accords put in place by Canadian governments in the early 2000s.
The expenditure data is taken from the OECD database, which may differ from the nationally reported estimates. The expenditure estimates are deflated using the GDP deflator.
2008 is the latest year available.

8. Public-Sector Health Expenditure–to-GDP Ratio Rising Over Time
Public-Sector Health Expenditure as a Proportion of GDP and GDP Growth
Sources
National Health Expenditure Database, CIHI; Statistics Canada
Public-sector health expenditure has grown faster than GDP over the past 35 years. This trend is similar to the total health expenditures (including public sector and private sector).
Public-sector health expenditure as a proportion of GDP was 5.4% in During the late 1970s, public-sector health expenditure increased at rates that were almost identical to the rate of growth in GDP. The two rates of growth diverged during the early 1980s. GDP fell during the 1982 recession and did not recover to its pre-recession level until Public-sector health expenditure continued to grow during this time. Consequently, the ratio of public-sector health expenditure to GDP increased, from 5.2% in 1979 to 6.3% in 1983.
Canada experienced another recession from 1990 until The ratio of public- sector health expenditure to GDP increased, reaching 7.4% in Public-sector health expenditures then grew more slowly than GDP between 1994 and 1998; consequently, the public-sector health-to-GDP ratio fell each year in that period until it reached 6.5% in Public-sector health expenditure has grown faster than GDP since the early 2000s, with the result that the ratio of public-sector health to GDP has trended upwards for the last decade and reached 7.6% in Due to recessionary forces, the growth in GDP is forecast to be negative in 2009 (4.5% decline), leading to a relatively higher ratio of public-sector health to GDP at 8.4% in In light of the recent economic recovery, GDP is forecast to rebound in 2010, which will cause the ratio to drop slightly to 8.3% in 2010.
Note that the GDP growth rates are in current dollars, not in constant dollars.

9. Total Health Spending as a Share of GDP Increased in All G7 Countries
Total Health Expenditure as a Share of GDP †
Source
OECD Health Data 2010, October Edition
* For Japan, 2007 is the latest available year.
† For Canada, the 2008 health expenditure figure is an estimate.
Expenditures devoted to health care were growing at a higher rate than GDP in all G7 countries over the period from 1998 to As a result, health expenditures as a percentage of GDP have increased in all G7 countries. The highest increases were observed in the U.S. (2.6%), the U.K. (2%), Italy and Canada (1.4% in both countries).
2008 is the latest year available.

10. Public-Sector Shares Remain Unchanged Since 2000
Sources
National Health Expenditure Database, CIHI; Statistics Canada
2010f: forecast
In 2010, public share of hospitals and physicians stayed the same since 2000.
In 2010, public share of drugs was 4% higher than in 2000.
The shares of public-sector spending on other institutions and other professionals dropped 3% for each category in 2010, compared with 2000.
Definitions of the selected categories can be found in Canadian Institute for Health Information, National Health Expenditure Trends, 1975 to 2010.

11. Economic Context

12. Positive Correlation Between GDP Growth and Total Health Expenditure Growth
Source OECD Health Data 2010, October edition
This graph shows a positive correlation between GDP growth and total health expenditure growth in OECD countries, including Canada. Like other OECD countries, Canada’s health expenditure grew faster than GDP but closer to the OECD average over the period from 1998 to This does not take into account other factors that may impact health expenditures. For example, it does not adjust for population aging, technological change or changes to the delivery of health care among OECD countries.
Most countries lie above the 45 degree line, which demonstrates that health expenditures grew faster than GDP during this time period.

13. More Economic Growth, More Spending on Health
Canada, 1976 to 2010
45 degree line
Sources
National Health Expenditure Database, CIHI; Statistics Canada
In contrast to the international picture, Canada experienced a modest correlation between the growth in GDP and the growth in total health expenditure in the past 35 years. The time period from 1993 to 1996 fell below the 45 degree line (see the red circle), which reflects that the growth of total health expenditures was slower than GDP growth.
In the future, as governments enter a period of fiscal restraint, it will be interesting to observe if the growth in health care spending will be similar to or below the rate of GDP growth. This would be reflected in points either on or below the 45 degree line.
Period of Fiscal Restraint

14. Findings

15. Average Annual Growth Rate, 1998 to 2008
Population Growth and Aging Account for Less Than 2% of Growth in Public-Sector Health Spending
Average Annual Growth Rate, 1998 to 2008
Sources
National Health Expenditure Database, CIHI; Statistics Canada
Taken together, population growth and aging account for 1.8% of the growth in public-sector health spending during the 1998 to 2008 period; this is a lower weight than general inflation.
General inflation is measured by the GDP deflator—Implicit Price Index (IPI) for the whole economy. Note that this differs from the Consumer Price Index (CPI) which reflects the inflation in the private sector only.
The “Other“ category is a residual, which may include such factors as income effects, fiscal position, technology, the difference between health sector price inflation and general inflation, level of morbidity, etc. Technology could be in the form of new programs, such as new oncology drugs and gastric bypass surgery (bariatric surgery).

16. Inflation Rates Differ Slightly Depending on the Price Index Used
1997 = 100
Index
Sources
National Health Expenditure Database, CIHI; Statistics Canada
The GDP deflator is the implicit price index (IPI) for the whole economy and, as such, it is representative of what is happening in the general economy, both in the public and private sectors. Over the 1998 to 2008 period, the growth rate was 2.8% and tended to fluctuate more than the other indices.
The IPI for the government current expenditure is the deflator for all expenses from the government. As such, it does not necessarily represent what is happening specifically in the health sector. The implicit price index for government current expenditure is used as a proxy to deflate public-sector health expenditures in NHEX. The health component of the Consumer Price Index (CPI) is used to deflate the private sector.

17. Hourly Wage in the Health Sector Relatively Higher Than in the General Economy
Source Survey of Employment, Payroll and Hours (SEPH), Statistics Canada

18. P/T Government Health Care Spending Highest on Seniors . . .
Sources
National Health Expenditure Database, CIHI; Statistics Canada

19. . . . But Impact of Population Aging Minimal Over Time
Sources
National Health Expenditure Database, CIHI; Statistics Canada
While Canadians older than age 65 account for less than 14% of the population, they consume nearly 44% of all health care dollars spent by P/T governments.
However, the share spent on Canadian seniors has not changed significantly over the past decade—from 43.6% in 1998 to 43.8% in 2008.

20. The Impact of Aging Does Not Vary by Year
Sources
National Health Expenditure Database, CIHI; Statistics Canada
While general inflation increased at an average annual rate of 2.8% over the 10-year period, it was at its highest in 2008 (4.7%) and its lowest in 2002 (1.0%).
On the other hand, there is little variation in population growth. It ranged from 0.8% to 1.2%. For aging, it ranged from 0.82% to 0.86%.
“Average” in the chart shows the average annual growth rate between and 2008.

21. Average Growth Rates per Capita for Older Seniors Are Among the Lowest
Average Annual Growth in P/T Government Health Spending by
Age Group, 1998 to 2008
Sources
National Health Expenditure Database, CIHI; Statistics Canada
The average annual growth in P/T government health spending during the period from 1998 to 2008 was lower among seniors (65+) compared with non-senior age groups (less than 65).

22. Population Growth and Aging: Two Demand-Side Factors With Wide Variation Across Jurisdictions
Sources
National Health Expenditure Database, CIHI; Statistics Canada
Among the provinces, the historical impact of the aging effect is higher than the national average in the Atlantic provinces and Quebec. It is lower in Manitoba, Saskatchewan and Alberta. Inter-provincial migration could be one of the reasons responsible for this result. For example, the booming economy in Alberta may have been more likely to attract younger people.
Note that the Northwest Territories and Nunavut are combined on this chart, as the two territories were one in 1998.

23. Technology: A Likely Important Supply-Side Factor Responsible for Health Care Spending Growth
Technological improvement is one of the factors responsible for increases in health spending
The size of its effect is difficult to quantify, but three general approaches are often used:
The residual approach (what is left after the quantifiable factors are accounted for)
The proxy approach (use of an alternative indicator)
Case studies (cost–benefit analysis, including changes in outcomes)
The residual approach is based on the assumption that technology is responsible for all changes not accounted for by the other quantifiable factors. It provides a rough, often overestimated measure of the effect of technological improvement since it includes a series of other non-quantifiable factors. Examples include Newhouse (1992), Peden and Freeland (1998), and Oliveira and de la Maisonneuve (2005).
The proxy approach uses an alternative measure to proxy the total impact of technology. For example, Okunade and Murthy (2002) used R&D spending and DiMatteo (2005) used time as proxies. Such variables are only proxies and have weaknesses.
Case studies examine changes in cost/benefit of medical innovations over time: the effect of a specific technology on the cost of treating a particular medical condition is assessed. Barbash and Glied (2010) illustrated the case of robot-assisted surgery in driving health care cost in the U.S. The additional cost of using a robot-assisted procedure rose to about $3,200 or 13% of the cost of these procedures. The most relevant studies are the ones that include many significant conditions, such as in Cutler and McClellan (2001) where five medical conditions were selected, Baker et al. (2003) where the supply of 10 selected technologies was compared to health care utilisation and spending. Also, the Canadian literature that measures health care price after accounting for improvements in quality of care is growing: Ariste et al. (2006) for AMI; Constant et al. (2006) for four types of cancer. CADTH (2010) is developing an approach where health technology assessment data will be used to calculate the population health gains associated with the cost of technological innovations over time.
While new technologies have a cost-increasing effect (by increasing volume, a.k.a. treatment expansion, and/or unit cost), there are some that might decrease total costs (by treating already treatable diseases in a better and more efficient way, thereby decreasing unit cost without increasing volume). The so-called "half-technologies“—those that do not prevent or cure the disease, but only treat the symptoms—tend to be cost-increasing. On the other hand, the "high-technologies"—those that prevent and cure diseases— tend to bring interesting cost/effectiveness results (Weisbrod 1991).

24. Technology in Health Care
Medical technologies may include
Robotic devices that facilitate delicate surgical procedures
Computers that help clinicians in decision-making
Medical devices (including imaging equipment)
Pharmaceuticals
Electronic health records and electronic medical records
Technological change consists of
Innovation:
New products and techniques
Utilization:
Changes in clinical practices and demand due to pharmaceuticals and non-pharmaceutical products
Influences on the “Health Care Technology Cost-Driver” by Steve Morgan (University of B.C.) and Jeremiah Hurley (McMaster University). From the article, genetic testing services and the goods and services that accompany these tests may become a major health care cost driver.
Development of new drug therapies is rapidly progressing, with more than 800 new oncology drugs in the pipeline over the period 2000 to Khoo et al., “New Drugs and Indications Over the Past Ten Years,” in Report Card on Cancer in Canada, 2009–2010 (Toronto, Ont.: Cancer Advocacy Coalition of Canada, 2010).

25. Technology Could Be One of the Most Important Components of the Other Factors
Of the 7.4% average growth in health spending from 1998 to 2008, 2.8% may be attributable to other factors such as
Technology
Health-sector price inflation—no ideal measure, but some measures suggest that it is somewhat higher than economy-wide inflation
Level of morbidity, lifestyle changes—no evidence of an increasing impact on health spending growth. To the contrary, some even suggest a declining impact (OECD, 2006)
Fiscal position—allowing governments to implement new or enhanced programs.
Price increase, as approximated by hourly wage increase in the health and social assistance sector, has been around 3.1% while wage increase in the economy as a whole was around 2.5%. This suggests relative wage in the health sector is 0.6% higher than in the general economy. The May 2010 TD Economics Special Reports came up with a similar estimate (0.6%) for Ontario and labeled it a "Health Premium." Note that social assistance is included in the category.
It is reported that technological change is responsible for up to a quarter of the health expenditure growth in the U.S. (Lewin Group, 2002; PricewaterhouseCoopers, 2002). The Conference Board of Canada suggested this could be the same in Canada (Conference Board of Canada 2004 report: Understanding Health Care Cost Drivers and Escalators).

26. Stable Trends in the Shares of Total and Program Expenditures Over the Last Few Years
Total P/T Government Health Expenditure as a Proportion of Total Program Spending
Sources National Health Expenditures Database, CIHI; Financial Management System (FMS), Statistics Canada
Note FMS data is estimated for 2009 (2009 is the most recent year of data available).
In 1998, 33.1% of program expenditures (total expenditures less debt charges) were spent on health care. Following strong growth of health expenditures over the last decade, combined with more modest rates of growth in total expenditures, the health expenditure shares of program expenditures increased to 39.2%, in This share has been stable over the last five years.

27. Public-Sector Health Spending Growing Faster Than Revenues; Still Some Increases in Other Government Programs
Source Statistics Canada
AAG: Average annual growth.
Even in a decade where there was substantial investment made in health, there was also growth in other sectors. After adjusting for population and inflation, health expenditure increased more than total revenue (3.4% vs. 1.4%). However, spending in transportation/communication and education also increased more than revenue (2.0% and 1.5%). This was facilitated by a decline in debt charges (-5.6%).

28. Biggest Share of Public-Sector Health Care Funding Still Goes to Hospitals, Stable Since Early 2000
Sources
National Health Expenditure Database, CIHI; Statistics Canada
While still the largest health care expenditure, the proportion of public-sector health dollars spent on hospitals has decreased by over 10% in two decades. Subsequently, the proportion of spending on drugs has increased by nearly 4% in the same period of time. The proportion of physician services expenditures has decreased slightly in the last 20 years.
The proportions of other institutions and other professionals have been pretty stable over the past 20 years.

29. Growth in Total Health and Drug Spending in 2010 Lowest in Last 10 Years
Sources
National Health Expenditure Database, CIHI; Statistics Canada
AAG: average annual growth.
In 2010, the Drugs category is forecasted to grow at the lowest rate among the categories. However, the 10-year average annual growth rate for Drugs is the highest among the categories.

30. Key Findings F/P/T fiscal positions—deficits/future constraint
Inflation—health-sector concerns
Impact of technology—increasing
Categories of spending—physicians taking a larger share of the total in recent years

31. Future Issues to Keep an Eye On
Growth in health care spending similar to the rate of GDP growth
Population aging having a modest impact on health expenditures
Fewer savings from debt service charges and government deficits having a moderating influence on the growth of health care spending
Growth in physician spending

32. Questions?
Contact Information
National Health Expenditures
Canadian Institute for Health Information
Phone:
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33. Thank You
To reach us:
Health Expenditure Section of CIHI, by phone at , by fax at or by at