Health
Research insight
January 14, 2022

Rethinking public health spending sustainability

Health care spending has been increasing across developed economies over the last decades. Studies show that higher expenditures are linked with new technologies, innovation, productivity differences and population ageing. Forecasts suggest that health spending will keep on increasing in the next years. This fuels concerns regarding the sustainability of such growth.

A significant share of health spending is publicly financed. This means that individuals often do not pay for health care directly. Instead, the government acts on behalf of citizens, by collecting taxes and financing the health care sector. This entails translating society’s preferences into national budgets and public policies. Such translation is not easy. Even though elections are a channel through which voters are expected to reveal their preferences, not all choices are made explicitly by voters.

Arguing in favour of a larger share of health spending in national budgets implies deciding on how to finance such spending. Either taxes must increase (today or in the future, through debt accumulation), or some other public expenditures must be reduced.

Assuming constant taxes, the discussion on higher public health spending implies a decision on which type of public expenditure is more valuable. Economically, this implies a comparison on the marginal benefits of each type of expenditure. For instance, is the next euro better used in the public health care sector or in the public education system?

Permanently crowding out other forms of public expenditures to finance increasingly higher levels of public health spending is unlikely to be sustainable in the long run. This unsustainability arises from the fact that some public expenditures cannot be permanently reduced. Moreover, such extreme reductions would probably not reflect society’s preferences.

However, this does not mean that the mix between different types of public expenditures should be kept constant throughout time. For instance, sudden shifts in preferences can contribute to change the desired mix between public expenditures. Actually, research suggests that the COVID-19 pandemic might have shifted citizens’ preferences towards higher (permanent) levels of public health spending.

How can we be sure that these higher expenditure levels are financially sustainable? In the coming years, the debate on whether societies should spend more in public health spending should address three main issues. Firstly, should the increase in public health spending be used to substitute private health spending? Or should we aim to an overall increase in total health spending? Secondly, is there an increase in coverage and a broader range of services provided by public health systems? Does this reflect an actual increase in health services provision, or is it associated with a price effect? Finally, are citizens willing to pay higher taxes? If not, which other public expenditures should be crowd out to finance higher levels of public health spending?

The answers to these questions are not straightforward but will determine whether future increases in public health spending are financially sustainable or not. This implies establishing a large consensus in society on the financing mechanisms and the trade-offs in play. Are we collectively willing to pay for more and better health spending?

Eduardo Costa

Eduardo Costa

Adjunct Assistant Professor & Researcher at Nova SBE Health Economics & Management

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