Medical costs to rise, and not just for the aged

IMPROVEMENTS in technology are unlikely to curtail Australia's burgeoning healthcare costs, which are projected to rise across 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 of the tax analysis division, said yesterday.

"Health is actually a very productive industry. Every time a new technology comes around that lowers costs, demand goes up, swamping any decline in outlays. Examples are diagnostic imaging, pathology testing, nuclear medicine you can think of any technology. Once they get cheaper, they become far more widespread.

"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 for population ageing on Australian fiscal policy.

Citing the latest international report, released in 2010, Mr Gallagher said as a proportion of GDP, spending on health is projected to rise from 4 per cent in 2009/10 to 7.1 per cent in the 40 years to 2049/2050.

Age-related pensions and aged care are 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 spending on health, age-related pensions and healthcare 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…

Why are Australia’s healthcare costs projected to rise across every age group?

According to a Treasury official quoted in the article, rising healthcare costs are driven not just by population ageing but by increases in real per‑capita health expenditure linked to technological change. New medical technologies (diagnostic imaging, pathology, nuclear medicine) often become cheaper per unit, which increases demand and usage and can swamp any cost declines — so spending is expected to rise for every age group.

How much is health spending in Australia expected to grow as a share of GDP?

The article cites a 2010 international report projecting that health spending will rise from about 4% of GDP in 2009/10 to around 7.1% of GDP in the 40 years to 2049/50.

What does the Treasury mean when it says rising health costs expose the Commonwealth to ‘fiscal risk’?

‘Fiscal risk’ in this context refers to pressure on the federal budget from growing demand and costs for health services. The Treasury speech warned that without policy action to curb spending growth, rising health, pension and aged‑care costs could strain public finances over coming decades.

How are age‑related pensions and aged care projected to change as a share of GDP?

The article notes projections that age‑related pensions will increase from about 2.7% of GDP to 3.9% by 2049/50, and aged care spending from about 0.8% to 1.8% of GDP over the same period.

What has driven increases in costs for the Pharmaceutical Benefits Scheme (PBS)?

The article highlights that federal PBS costs have skyrocketed since the 1990s, with particularly large increases in spending for people aged 65 and over. This reflects higher usage and the introduction of new, often costly, medicines.

Will medical technology improvements reduce overall healthcare spending?

The article argues they are unlikely to. While many technologies lower the cost per procedure, they tend to increase access and usage — as technologies become cheaper they become more widespread — so overall health spending can still rise.

What should everyday investors watch for in relation to rising healthcare costs in Australia?

Investors should monitor government health‑spending projections and budget signals, PBS cost trends, policy changes around aged care and pensions, and technological adoption in medical services (diagnostics, pathology, nuclear medicine). These indicators can signal fiscal pressure and sector‑level shifts that affect markets and portfolios.

What is the long‑term warning if spending growth is not curbed?

The report cited in the article warned that spending on health, age‑related pensions and healthcare could almost double over the decades to 2050 — to about 50 percent — unless action is taken to curtail spending growth, highlighting a significant long‑term fiscal challenge.