EUROPEAN PAPERS ON THE NEW WELFARE

Health Care System in the Industrialised Countries and the Role of Private Insurance

Population ageing has contributed to the upward trend of health costs. If we analyze the distribution of per capita health care expenditure and the changes in population within the same age group, we can conclude that the increase in health care spending is attributable solely to demographic trends. Such a phenomenon would only account for less than one fourth of the increase of health care costs, while other dynamics, linked to technological advances and to income, prevail. State-of-the-art technology contributes to cost containment, because it improves productivity of the resources employed, or the effectiveness of therapies and of prevention treatments, but generally it is more expensive than traditional therapy. This is why the use of technology is considered one of the chief causes of health care inflation.
In the literature, a debate has developed on the consequences of increased longevity on the morbidity rate of the population. According to Gruenberg (1977), since we live longer, we need more treatments because we are more exposed to the chronicization of diseases. Manton (1995) argues instead that alongside longevity, we witness a parallel deferral of disease and disablement, and the total number of years spent in bad health remains the same. Fries (1980) starts from the assumption that health improvement, which postpones disease to an older age, results in the compression of the population’s morbidity rate. Empirical evidence shows that health care costs concentrate in the last months of life of an individual (death-related costs). In a scenario characterized by a longer life, mortality has been postponed to the oldest age brackets, with a reduction in health care service consumption for middle age classes which offsets higher costs for the most elderly (Roos, et al. 1987; Batljan and Lagergren, 2004).
The economic literature has also investigated the connection between the demand for health care services and income. In particular, the question as to whether health should be considered as a luxury or rather as a necessity (elasticity of the demand as compared to an income higher or lower than one respectively) has been tested empirically. In the first case, the basic idea is that once primary needs have been met, the remaining income should be used to satisfy special needs, whereby heath protection would acquire importance4.
These studies have produced different conclusions, depending on how the issue has been approached. Someone affiliated with an insured group might have little incentive to reduce his/her consumption of health care services, in particular if the group he/she belongs to is a large one; his/her impact on the group is irrelevant; in this case, the demand for health services is independent of the income of the individual.
Generally, the empirical test on aggregated data at the national level showed that the income elasticity of demand for health care was greater than 1. As a matter of fact, studies on national expenditure indicate that 90% of changes in expenditure is attributable to variations in per capita income, whereas differences in the health status have a negligible impact. According to other studies, the rise of the share of health care costs associated with the income growth is the result of a spurious correlation, and is due to factors like technological progress that is more advanced in industrialised countries. Finally, others argue that since health treatments are ‘labour–intensive’, expenditure increases alongside with the rise in income.
Additional studies on individual spending show that most of the changes in expenditure (from 50% to 90%) are due to differences in health status, thus the elasticity of income is low or negative. Yet, data analyses carried out before the Sixties, when insurance was less common and most of the payments were made out of the citizen’s own pocket, showed a greater income elasticity.
To conclude, there are studies investigating the relationships between specific expenditure and income typologies. The out-of-pocket expenses for dental treatments, plastic surgery, the use of eyeglasses or for other kind of treatments show a greater-than-one elasticity as compared to income. This is probably due to the fact that these treatments can partly be considered unnecessary. In particular, the decision to undergo plastic surgery to look better or to receive special dental treatments (e.g. veneers) cannot be considered a necessity, all the more so since people who resort to them generally have higher incomes.
Regardless of the abovementioned theories, health care expenditure has always increased more rapidly than income. In the United States, from 1980 to 2003 the increase accounted for 4.4% in real terms – twice as high as economic growth (2%). The situation was more or less the same in Europe, even though there were differences across countries, especially in Germany, where over the same period of time health care expenditure rose by 3.2%, as against a 1.6% increase in GDP.

4 This correlation might also conceal supply elements. For instance, industrialised countries may allocate more resources to health care with fewer budget constraints as compared to countries that have implemented cost-rationalization measures.


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