(This essay was published in the South China Morning Post on 27 August 2014.)

 

Four factors determine spending on health care: the size of the population, the proportion of elderly persons in the population, the average income per person, and the cost of health care services. All four factors imply that health care spending will grow rapidly in Hong Kong.

 

In 2011, total domestic spending on health care was 5.12 percent of GDP, of which 49 percent was in the public sector. I predict our health care industry can grow to between 10.3 percent of GDP in 2041 and possibly between 17.6 percent in 2100. If we allow for cross-border export of medical services it will rise to 13.3 percent in 2041 and 32.3 percent in 2100. By comparison, finance at its peak in 2007 constituted 12.9 percent of GDP and manufacturing in 1981 constituted 31.8 percent.

 

Let me explain how I obtained my projections.

 

Consider first the effects of demography (changes in population numbers and ageing). The Hospital Authority’s published health care costs show that treating elderly populations is a lot more expensive than other age groups. In 2009-11 it spent on average $3.1 million per year for every 1,000 persons aged 15-64, but $11.4 million for those aged 65-74 (3.68 times more) and $25.3 million for those aged 75 or above (8.15 times more).

 

These figures allow us to derive a “health care cost weighted population” measure using population projection figures from the Census and Statistics Department (up to year 2041) and the United Nations (up to year 2100). Hong Kong’s ageing population means there is a huge gap between the growth of the population and the “health care cost weighted population” (see chart).

 

On actual expenditure, it should be noted that societies spend more on health care as they get richer, depending on the growth rate of GDP per working person (or productivity) and the income elasticity of demand for health care (the responsiveness of health care spending to increases in income). I therefore make several assumptions in projecting Hong Kong’s health care industry.

 

First, Hong Kong’s past GDP growth rate per working population (of 4 percent) will be sustained. Second, the baseline health care income elasticity will be the same as that of OECD countries (excluding the U.S.) of around 0.8. Third, the income elasticity will rise to 1.0 under a high-growth scenario of exporting medical services across the border.

 

The cost of providing medical and health services is the final element determining health expenditures. Between 1989/90 and 2010/11 this increased by 2.5 percent per year (measured as the ratio of the price deflator for the medical services component in GDP relative to the GDP price deflator).

 

Rising health care costs have two opposite effects on demand. A one-for-one direct effect is that a 1 percent increase in cost leads to a 1 percent rise in expenditure so long as the health care demand remains unchanged.

 

But higher costs lower the quantity demanded (by the price elasticity of demand), so what is the net effect? OECD estimates (excluding the U.S.) of price elasticity are around -0.4. Therefore, a 1 percent increase in health care costs will on balance increase health care expenditure by about 0.6 percent. So multiplying a 2.5 percent annual cost increase by 0.6 contributes to a 1.5% growth in health care expenditures.

 

Combining the effects of demographic changes, income growth, and cost increases leads me to predict that by the end of the century, health care could conceivably become as important as manufacturing once was and financing is today.

 

Such increases in health care spending will stress our current fiscal arrangements of meeting half the costs from the public purse, unless the quality of care is sacrificed. Politically, no government would wish to offend the elderly vote. To hold down costs, more medical and health personnel have to be trained and foreign trained ones allowed to register. That means policy and rule changes. Will these changes indeed be made to enable our next growth industry to blossom?

 

 

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