The Long-term Costs of Health Care

Almost irrespective of the country you live in, the increasing costs of healthcare are unavoidable. For governments, the stresses are particularly acute, as both aging populations and the increasing cost of treatments add financial pressures year on year. Yet as a new study by the Institute of Fiscal Studies (IFS) confirms, we should not underestimate the extent to which the shape of the state has already changed. Most notably to accommodate even greater spending in the areas of health, long-term care and social security. Conversely, spending in many other policy realms, most notably defence, has fallen considerably as a consequence. Yet while the report rightly warns of tough choices ahead, it would be folly to imagine that any of these trends are either unintended or irrational. Indeed, history can tell us a lot about how the composition of public spending changes dynamically over time – usually on the basis of quite rational, long-term decision making by our politicians.

During the 1990s, spending on the NHS grew at record pace as the Blair government sought to close the gap between the UK and its neighbours on the continent. As Paul Johnson, Director of the IFS and one of the authors of the report concludes, “The current government’s plans are very much consistent with this trend”. Similarly, where some areas of policy such as housing and policing are set to suffer in an arguably indiscriminate fashion, historical reductions in other areas, such as defence, reflect rational reactions to changing conditions. Indeed, the defence budget makes for an interesting, if brief, case study.

In October of 1962, the Cold War reached its zenith during the Cuban Missile Crisis, as Soviet ships approached the quarantine line set by the United States along the coast of the Caribbean island. In the end, nuclear war was narrowly averted and the crisis came to a relatively peaceful end. Yet only five years before that, the Soviet Union had shocked the West by launching its first space satellite, Sputnik. The reaction was one of hysteria on both sides of the Atlantic. Anglo-American nuclear cooperation was rekindled as a consequence in 1958 and British and American defence spending rocketed in response to both events. By the end of the 1970s, defence spending in Britain accounted for 10% of total public spending. Arguably, the response was at least vaguely in proportion to the threat.

Since then however, spending on national defence has fallen by an astonishing 40 per cent. Yet as shocking as this figure may be in symbolic and numerical terms, it largely reflects a dramatic change in conditions. The Cold War ended in 1989/1990 not with a bang but with a whimper and as substantial as the threats we face today are, the resources required to meet them are almost entirely different. Thus, as a composition of total public spending in 2010-11, defence spending accounted for only 6%. The lesson here is simple. Much like the forces of supply and demand in the market place, the precise composition of public spending reacts intelligently to the current day pressures facing the state. Conversely, while some pressures have lessoned, even greater forces have emerged to replace them. The cost of modern day healthcare is first amongst them.

According to the new report from the IFS, by 2014-15, spending on the health service in Britain will account for nearly a third of all public spending, while overall public spending is set to fall considerably over the same period. Specifically, while spending on health accounted for a mere 10% of total public spending in 1978-79, today it stands at 18%. That figure is set to increase dramatically over the course of this decade as the NHS faces growing financial pressures, predominately as a result of changing demographics.

Indeed, given the pressures of both an aging population and the increasing costs of providing care to patients, it should come as no surprise that government expenditure on healthcare has grown. Yet as healthcare expenditure has swelled, other areas of spending have declined significantly to make room. And defence is not the only loser. For example, while defence spending has dropped from 10% in 1979 to 6% in 2011, spending on housing and support for industry has also been trimmed, by nearly two thirds over the same period. Hence while it is arguable that a proportion of the cuts — particularly in the defence budget — merely reflect changing conditions on the ground, it is also clear that other areas are being squeezed indiscriminately as our spending on the health service balloons.

Commenting on the report, Paul Johnson, the Director of the IFS, reiterated this point stating that “The way the state spends our money has shifted to a remarkable extent towards spending on health and social security over the past 30 years”. Critically, Johnson added, “This change has been possible because the state has withdrawn from other areas of activity – defence, housing and industrial support”.

Yet as well as simply detailing the problem, the report also elucidates on some of the tough choices facing us a nation going forward. Namely, “governments have three choices – increase total spending to accommodate these changes, reform health and pension spending dramatically to cap future costs, or cut back elsewhere”. Crucially, while cuts to defence expenditure since the late 1970s may well have been prudent —¬ and partly reflective of dramatically changing conditions in the post-Cold War world — there will come a point at which this argument will lose its potency. This forgetting the myriad of other policy areas that will also continue to be squeezed as healthcare spending continues to rise. Hence, as much as the current government’s NHS reform package may not offer the perfect prescription, it is difficult to take seriously the argument that doing nothing was ever an option at all.