Healthcare costs to pose a 'fiscal risk'

IMPROVEMENTS in technology are unlikely to curtail Australia's growing healthcare costs, which are projected to rise in every age group and expose the Commonwealth to "fiscal risk", a Treasury official says.

By InvestSMART · 11 Jul 2012

By InvestSMART ·
11 Jul 2012

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"The important thing about health projections is that it's not just about the ageing effect it's also about the increase in real per-capita costs of health expenditure with technological change," Phil Gallagher, manager of the retirement and intergenerational modelling unit, the tax analysis division, said yesterday.

"Health is actually a very productive industry," he said. "Every time a new technology comes around that lowers costs, demand goes up, swamping any decline in outlays.

"Demand and technological pressures are projected to lift health spending across every age group. This is not just about the aged . . . we're saying that for every age group, because health is a superior good, health costs will increase."

Speaking at a conference of economists in Melbourne, Mr Gallagher drew attention to the skyrocketing costs of the federal pharmaceutical benefits scheme since the 1990s, particularly for people aged 65 and above.

"So overall . . . we've got ageing population effects . . . but we think the demand for health services will expose the Commonwealth to fiscal risk," he said in a speech on the implications of population ageing for Australian fiscal policy. Citing the latest international report, released in 2010, Mr Gallagher said that as a proportion of gross domestic product, spending on health was projected to rise from 4 per cent in 2009-10 to 7.1 per cent in the 40 years to 2049-50.

Age-related pensions and aged care were projected to rise from 2.7 per cent and 0.8 per cent of GDP, to 3.9 per cent and 1.8 per cent respectively in 2049-50. The report warned that spending on healthcare and age-related pensions could almost double to about 50 per cent over the decades to 2050 "without action to curtail spending growth".

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Frequently Asked Questions about this Article…

What did the Treasury official say about Australia’s growing healthcare costs?

A Treasury official, Phil Gallagher, warned that Australia’s healthcare costs are projected to rise across every age group and could expose the Commonwealth to a "fiscal risk." He highlighted that rising demand and real per‑capita cost increases driven by technological change are key drivers of higher health spending.

How will technological improvements affect healthcare costs in Australia?

According to the article, technological change can lower unit costs but often increases demand for treatments. Mr Gallagher said new technologies that lower costs tend to boost demand so much that any cost savings are swamped, leading to higher overall healthcare spending.

Is the rise in healthcare costs just because Australia’s population is ageing?

No. The article stresses it’s not just the ageing population. Treasury modelling says health spending is projected to rise for every age group because health is a "superior good" and demand — plus real per‑capita costs from technological change — will lift spending across all ages.

How much is health spending projected to increase as a share of GDP by 2049–50?

Citing a 2010 international report, the article states health spending was projected to rise from about 4% of GDP in 2009–10 to roughly 7.1% of GDP in the 40 years to 2049–50.

What are the projections for age‑related pensions and aged care as a share of GDP?

The article reports that age‑related pensions were projected to increase from 2.7% to 3.9% of GDP, and aged care from 0.8% to 1.8% of GDP by 2049–50.

How have costs for the Pharmaceutical Benefits Scheme (PBS) changed?

The article highlights that federal PBS costs have skyrocketed since the 1990s, with particularly large increases for people aged 65 and above.

What does it mean that rising health costs could "expose the Commonwealth to fiscal risk"?

The phrase means increasing demand and higher per‑capita health costs could put pressure on federal finances. If health and age‑related spending grow as projected, this creates a budgetary strain that the Commonwealth may need to manage through policy changes or spending adjustments.

What’s the key takeaway everyday investors should know about these healthcare spending projections?

Everyday investors should note the projections point to sustained growth in health, pension and aged‑care spending as a share of GDP. That trend signals longer‑term fiscal pressures for the Commonwealth, driven by demand and technological change, which can influence broader economic and policy settings over decades.