In my previous chart we noted that health care costs in Canada have soared to 12.7 per cent of GDP from 7 per cent in 1975.
Although health care costs will always rise with inflation and population growth, they can’t be an ever-growing percentage of GDP, since that would crowd out other necessary spending. One factor that could help explain why these costs are rising so quickly is an aging population: older people need more health care.
This week, we quantify just how much the rise in health care costs is owing to aging. (I have done this using known statistics about the relative cost for each five-year age group and applying it to the ever-changing population of each five-year age group.)
To produce the chart, I established the base cost for health care equal to total health care costs in 2005. That number happened to be $140.6-billion, or 9.9 per cent of GDP. This baseline is somewhat arbitrary but is useful to show just how much spending changed year-by-year since then.
I set the baseline cost for subsequent years up until 2025 equal to 9.9 per cent of GDP in each year and any spending over that number is defined as “excess health care cost.”
As the chart shows, a significant portion of the excess costs stem from an aging population - in fact more than half of it. But there are other factors that are driving health care costs significantly higher and they are not general price inflation or population growth – since those are accounted for in the GDP.
Other reasons might include increased use at all ages but if this is quantified anywhere, I am not aware of it. Certainly, higher utilization occurred in the early years of the COVID-19 pandemic, since the chart shows a spike in costs around 2020 and 2021.
It is not clear, however, what is driving the higher costs in other years and whether the extra spending is leading to better outcomes. This would be good to know since the excess costs from factors other than aging amount to $40-billion in 2025 alone.
In my opinion, a basic problem is that our health care system is not transparent. We need an annual report to provide insights on whether our health care dollars are being spent effectively.
Such a report could quantify metrics such as wait times for emergency and special technology like MRIs for instance, and whether higher spending is leading to better medical outcomes.
But simply reporting that governments are throwing more money at the system is not very helpful.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator.