Projections of health care expenditures as a share of the GDP: actuarial and macroeconomic approaches

Abstract

STUDY QUESTION. Can the steady increases in health care expenditures as a share of GDP projected by widely cited actuarial models be rationalized by a macroeconomic model with sensible parameters and specification? DATA SOURCES. National Income and Product Accounts, and Social Security and Health Care Financing Administration are the data sources used in parameters estimates. STUDY DESIGN. Health care expenditures as a share of gross domestic product (GDP) are projected using two methodological approaches--actuarial and macroeconomic--and under various assumptions. The general equilibrium macroeconomic approach has the advantage of allowing an investigation of the causes of growth in the health care sector and its consequences for the overall economy. DATA COLLECTION METHODS. Simulations are used. PRINCIPAL FINDINGS. Both models unanimously project a continued increase in the ratio of health care expenditures to GDP. Under the most conservative assumptions, that is, robust economic growth, improved demographic trends, or a significant moderation in the rate of health care price inflation, the health care sector will consume more than a quarter of national output by 2065. Under other (perhaps more realistic) assumptions, including a continuation of current trends, both approaches predict that health care expenditures will comprise between a third and a half of national output. In the macroeconomic model, the increasing use of capital goods in the health care sector explains the observed rise in relative prices. Moreover, this "capital deepening" implies that a relatively modest fraction of the labor force is employed in health care and that the rest of the economy is increasingly starved for capital, resulting in a declining standard of living.