Ageing and Health Expenditure

[Red herring]

An important discourse in economics of aging and health expenditure is how demographic

changes affect future health care expenditures, especially for the elderly. Health
expenditures are expected to rise with the higher proportion of elderly since older adults
incur higher per capita health expenditure compared to the young. With an aging
population, health care expenditure will thus increase. The correlation between age and
health care expenditures seems to make sense. However, whether people indeed spend
more as they live longer is an important empirical question. Skiasdas health state model
predicts that if there is improvement in health state, the healthcare expenditure will be
postponed to latter part of the lifecycle.

Zweifel et al. (1999) posited that the focus on age was a red herring, meaning it is not the
real issue. They argued that health care expenditures increase with proximity to death. It is
time to death (TTD) that matters, not age. However, the research methodology of this
paper was strongly criticised for not adjusting endogenity of health care spending and that
they used a selection model that was not well identified. For instance, there is endogenity
because expected time to death may affect how aggressively doctors pursue treatment.

Felder et al.(2010) addressed the endogeneity of TTD using panel data of deceased
individuals and survivors with 2SLS estimation. They found that time-to-death continues to
be a highly significant determinant of health care expenditure and concluded that ‘red
herring’ hypothesis seems to be robust with regard to both the measurement and
endogeneity of time-to-death.

Breyer and Lorenz (2021) revisited the “red herring” hypothesis and attempted to
understand what empirical findings are suitable to derive the predictors of future health
care expenditure.

1. Implications for future expenditure increases

a. Overestimation of HCE
In previous literature trying to estimate the effect population ageing has on
healthcare expenditure, time to death or TTD was not considered when running
empirical studies. Recent studies have shown that this resulted in overestimations
of the effect of population aging on healthcare expenditures. The overestimations
ranged widely with studies in America seeing an overestimation of 15% on
healthcare expenditures and studies in Denmark seeing an overestimation of 50%.
This could possibly imply that TTD accounts for future expenditure increase more
than ageing population. In any case, the overestimation of healthcare expenditure
because of TTD implies that it may be beneficial to review healthcare policies to
answer healthcare expenditure regarding TTD rather than ageing population as
initially thought about.
b. Uncertainty In Future Healthcare Policies
 Next, empirical studies were unable to account for future policy decisions on
healthcare expenditure and long-term care. This means that the studies are unable
to take political decisions into account which might have been taken in view of
scarcity of public funds. It is possible that with tax and subsidies reforms or major
political changes in the future, public funds can be majorly influenced. This
invalidates today’s estimates of future healthcare expenditure. Since we are looking
at future healthcare expenditure, uncertainty in future healthcare policies and
political decisions will mean that estimates of the aging population on healthcare
expenditure may be biased in calculations. As such, there is a need to constantly
update our estimates of future healthcare expenditure so that the estimates can be
as accurate as possible.
c. Underestimation due to larger increases in OADR
Another pertinent implication is an underestimation of future healthcare
expenditure due to larger increases in the old-age dependency ratio or OADR in the
future. Several red-herring studies have found that population ageing had a positive
but small effect on health care expenditure (HCE) including Zweifel et al. However,
whether the exogenous variable which is population ageing in this case has a large
impact on an endogenous variable which is HCE depends on the extent/speed at
which the population ages.
D. Under-preparation of public health insurance system
● Red herring study findings that describe the ageing-HCE relationship as a “red
herring” → RHH-1: Population ageing due to rising life expectancy as such does not
cause an increase in per-capita HCE
The final significant implication is that it may lead to an under preparation of the
public health insurance system. Given that several red herring studies have
concluded that population ageing due to rising life expectancy does not cause an
increase in per-capita HCE, publication and dissemination of such early red herring
literature may lead to journalists and politicians underestimating the impact of
imminent ageing of the population on the financial viability of social health
insurance which makes them underprepared for future expenditure increases

2. Other Factors of growth of HCE in aging society

a. Time to Death
The authors have found that HCE were signifcantly and steeply rising towards the
individual’s death, while the patient’s age turned out to be insignifcant, even when
the time period before death was extended to 20 quarter. Some countries have
found that Time to death actually increases healthcare expenditure as well. Research
has shown that for the case of britain, hospital costs started rising as early as 15
years before a patient’s death (and increased by a factor of ten from 5 years before
death until the last year),
Studies on netherlands have also shown that there was a clear effect of proximity of
death on HCE, while the impact of age was relatively modest. As mentioned by
Fabian, mentioned above there is an overestimation of HCE when TTD is not
included
In Italy, from 2006–2009, found that for primary care expenditures that age is a
much better predictor than TTD: Even though expenditures increased fivefold
between age 40 and 80, the increase in the last year of life amounted to only 30 per
cent compared to an average year. However, An important weakness of most of the
empirical analyses discussed above is their dependence on cross-sectional data so
that the impact of population ageing due to rising longevity, which is a development
over time, could not be measured directly. To deal with this problem, it is necessary
to analyze time series or panel data
b. GDP
When income grows, people might be willing to spend more on health, and they
can do so without any changes in the tax or contribution rate as long as expenditures
grow in line with GDP. However, in countries with a strong tradition of stable rates of
(payroll) taxes for financing Social Health Insurance, difference between the growth
rates of GDP and HCE may be accounted from medical progress as well as Baumol’s
cost disease where the rise of wages in jobs that have experienced little or no
increase in labor productivity in response to rising salaries in other jobs that have
experienced higher productivity growth
c. Unforeseen Pandemic
The third factor would be unforeseen pandemics. Let’s take for example covid-19 in
which elderlies are affected more and this will account to elderly death rates,
decreasing time to death. Moreover, unforeseen pandemics like covid-19 will also
result in an increase in healthcare expenditure for example singapore increasing
healthcare spending and even drawing on past reserves to fund covid packages.
D. Political Pressure
This may be explained by their ‘single-mindedness’.. As individuals get older, they
tend to become more focused on healthcare issues when making voting decisons.
Naturally, with an aging population, there will be a greater share of elderly voters.
These single-minded elderly may then change their votes based on the political party
that provides them with the most beneficial health care regardless of other issues.
This means there will be relatively more swing voters among the elderly and hence
higher political sensitivity. So with more political demand for public HCE, politicians
trying to maximize electoral success will actually propose and implement higher HCE
as they recognize the political influence of the elderly will continue growing along
with its share. The likely consequence is increased longevity, leading to additional
demand for health care again. With more resources allocated to health care, the
cycle starts all over again. This vicious cycle is also called the “Sisyphus Syndrome”,
resulting in a continuous increase in HCE.
e. Medical advancement through technological innovation
It was found that new medical tech is responsible for 40-50% in annual HC cost
increases.
According to a study by the Journal of the American Medical Association, people
tend to associate more advanced technology and newer procedures with better care,
even if there’s little to no evidence to prove that they’re more effective.
This assumption leads to both patients and doctors often demanding the newest
most expensive treatments available.
Given that these developments are still unconventional in the market, they are
substantially more high-cost. Older treatments are also being replaced with better
but costlier methods
For instance, the Da Vinci robotic system is increasingly being used to perform
minimally invasive surgeries like hysterectomies, removal of prostate gland or
tumours, instead of the conventional keyhole method. However, the equipment
itself comes with a price tag of US$2M and the robotic procedures are typically 50%-
80% more expensive than that of open surgery for the patients.
Therefore, although medical advances have been serving the healthcare
industry well for the past few decades and extending the lives of people, they are
also contributing to the overall increase in HC costs and the overutilization of
expensive technology.
f. Wrong Incentives [Real reason to the increase in healthcare expenditure]
The next factor that determines the growth of healthcare expenditure in aging
society mentioned in the paper is the wrong incentives for patients, doctors and
hospitals caused by government regulation of the health care sector. This was
dubbed as one of the real causes to the growth of the healthcare expenditure.
We interpret the wrong incentives for patients to be regulations that disincentivizes
people to recover from their illness which will in turn prolong their condition and
increases expenditure on healthcare.
An example of such wrong incentives for patients can be observed in Singapore in
the severe disability insurance scheme, also known as the Eldershield, which
provides basic financial protection to those who need long-term care especially in
their old age.
In order to be eligible to receive monthly cash payouts, one must be severely
disabled meaning one must be unable to do 3/6 of the activities of Daily Living (ADL).
For someone receiving monthly payout for being severely disable, he does not have
any incentives get better as the moment he becomes mildly disabled, which is being
unable to do 1 or 2 of the ADL, then he will not be eligible to receive the monthly
payouts. This is especially so for those who are highly dependent on the monthly
payout.
 As such, wrong incentives given by the government tend to make people be less
inclined to recover and thus demand more healthcare services which leads to the
increase in healthcare expenditure.
g. Inefficiency and Overprovision
There are asymmetries of information present in the healthcare market where the
healthcare providers know much more about diseases and treatments than patients.
It is said that prices for many medical services and technologies are considered as
trade secrets and such lack of transparency throughout the healthcare system gives
rise to inefficiencies in the market, resulting in greater healthcare expenditure.
According to another paper, which presented a framework to conceptualise and
measure outpatient overprovision in Tanzania regions, where tests and treatments
were categorized as necessary and unnecessary. Unnecessary care was defined to be
a waste of resources and it was shown that 53% of 1995 drugs prescribed and 43% of
891 tests ordered were deemed unnecessary. Such overprovision of healthcare
services suggest considerable waste and expenses which contributes to the rising
healthcare expenditure.

Conclusion
In conclusion, the paper suggests that we can tentatively conclude that future population
ageing will increase healthcare expenditure. However, we should be aware of how future
circumstances may alter the magnitude of this effect. Besides population ageing, there are
many factors that contribute to the increase in healthcare expenditure, hence we should
come up with studies to measure the impact of these factors on healthcare expenditure. It
is crucial to examine the underlying reasons that are causing an increase in healthcare
expenditure so as to implement targeted policies to keep healthcare affordable in the long
run.