Good morning everybody.
Welcome to this second day of this Lindau symposium.
Before we start, I would like to make a few announcements.
First, I have been told by the organisers that the buses tomorrow morning will leave very much on time,
which means that you should make sure that you are her at the Inselhalle at 7:45 at the latest,
there will be no bus there after 7:50.
Secondly, a few of the headsets that were issued yesterday, are still missing,
so if anyone finds that you still have one somewhere, would you please return them to the organisation.
Following these mundane matters, it’s a pleasure to introduce Professor Robert Fogel,
who was awarded the prize in 1993 for his contributions to economic history,
bringing both economic theory and quantitative analysis to bear on economic history.
And he will be talking about forecasting changes in the cost of healthcare 2000 to 2040.
ROBERT FOGEL. Thank you very much.
In attempting to forecast the cost of healthcare a generation into the future, several different issues must be considered.
The first of these is the likely downward trend in age-specific prevalence rates of chronic diseases and disabilities.
Secondly, there is the rate of change in the cost of treating these conditions.
Will advances in biotechnology reduce or increase the cost of treatment?
A third issue is the likely increase in the number and proportion of the population that is elderly.
A fourth issue is the rate of growth of per capita income,
and the impact of economic growth on the demand for the quantity and quality of healthcare.
Each of these issues is so large and complex that it would take a book to address them properly.
My aim in this paper is merely to outline the issues and sketch some tentative answers.
One of the most important debates among health economists and biomedical specialists in the United States and other rich,
that is OECD nations, is whether rapid advances in biotechnology will spare their health systems from a financial crisis.
The debate turns on four propositions.
First, there is now convincing evidence that prevalence rates of chronic diseases declined during the 20th century.
Second, the rate of decline in these prevalence rates has accelerated.
In the American case, prevalence rates declined at the rate of about 1% per annum between 1910 and 1980.
Between the early 1980s and 1989, they declined at about 1.2% per annum.
During the 1990s the rate of decline further accelerated, reaching the level of about 2.0% per annum.
Some investigators believe that a rate of decline in annual prevalence rates of about 1.5%
would be enough to offset the rise in cost of healthcare.
Thus stabilising the share of health costs and GDP at its current level of about 15%.
Third, there is an unresolved issue regarding how much of the decline and the prevalence rates of OECD nations
has been due to the improvements in the environment.
And how much has been due to biomedical interventions.
Partitioning the decline in prevalence rates into environmental effects and medical intervention effects
is quite complex because of the long reach of nutritional and other biomedical insult at earlier ages
on the odds of developing chronic diseases at middle and late ages.
Although such lifecycle effects have long been suspected in particular diseases,
only recently has the substantial body of evidence, bearing on the interconnection being amassed.
Longitudinal studies connecting chronic diseases at maturity, middle ages and late ages to conditions in utero,
infancy and early childhood were reported with increasing frequency beginning in the 1980s
and extending through to the end of the 20th century.
The exact mechanisms by which malnutrition and trauma at early ages
affect waiting times to the onset of chronic diseases are still unclear.
But it seems reasonable to infer that environmental insults during the period when cell growth is rapid
could lead to long lasting impairments of vital organs.
It is important to emphasise that medical interventions
have not only contributed to the decline in prevalence rates of chronic conditions but also to the reduction in their severity.
Advances in both surgical and drug therapies have significantly reduced the rate
at which chronic conditions turn into disabilities that severely impair functioning.
Such interventions have been especially effective in genital-urinary, circulatory, digestive and musculoskeletal conditions.
However many of the surgical procedures are quite expensive
and the cost of the new and effective drugs is increasing sharply,
mainly because of the large investments in developing these drugs.
Fourth, there is a debate over whether the mounting evidence of the long-term decline
in the prevalence rates of chronic diseases means that the supply of credible chronic conditions is declining.
The word ‘supply’ here distinguishes the physiological burden of healthcare from the demand for healthcare services
that may rise even if the physiological burden remains constant or declines.
Moreover to address the question of whether declines in age-specific physiological prevalence rates
will relieve the current fiscal pressure on the healthcare systems of OECD nations,
it is necessary to weight the existence of a particular chronic disease by the cost of treating that condition
which generally increases with age.
Such an index is shown in figure 1.
In this figure, the burden of per capita healthcare costs, which is based on US data, is standardised at 100 for ages 50-54.
Figure 1 shows that the financial burden of healthcare per capita rises slowly in the 50s,
accelerates in the 60s, accelerates again in the 70s and accelerates even more rapidly after the mid-80s.
The financial burden at age 85 and older is nearly six times as high as the burden at age 50-54.
Notice that the financial burden of healthcare for ages 85 and over is over 75% higher than at ages 75-89.
However the physiological prevalence rates, by which I mean number of conditions per person,
is roughly constant at age 80 and over.
Cost rise, even though the number of conditions or co-morbidities per person remains constant,
because the severity of the conditions increase or because the cost of preventing further deterioration,
or even partially reversing deterioration, increases with age.
It should be kept in mind that standard prevalence rates merely count the number of conditions,
neglecting both the increasing physiological deterioration with age and the rising cost of treatment per condition.
Figure 1 indicates that to forecast the future financial burden of healthcare
it is necessary to make use of a function of the age-specific cost of healthcare, such as that shown in Figure 1.
What then can be said about the likely movements in the curve of the road of burden of healthcare costs over the next generation?
Figure 2 lays out three possibilities.
The first is that there will be a proportional downward shift in the curve that’s shown on the diagram as case A.
This is the curve obtained by using the change in prevalence rates,
which implies a shift downward at a constant average rate at all ages.
The example shown in figure 2 implies a decline in average prevalence rates of about 1.2% per annum,
which locates all the points in case A at about 2/3 of the previous level.
A second alternative shown as case B in figure 2 is that the curve of the disease burden by age will shift to the right.
The case B curve was constructed on the assumption that, over the course of a generation,
the average age of onset of chronic diseases is delayed by about five years.
This assumption is supported by a number of epidemiological studies in the Netherlands, Britain, the United States and elsewhere.
The forecast is based partly on evidence that the average age of onset of chronic disabilities has been declining
since the start of the 20th century.
It is also based on studies of the relative cost of healthcare by years before death.
These studies have produced the curve shown in figure 3,
which is standardised on the average cost of healthcare for all persons aged 65 and over in the US Medicare program.
Figure 3 shows that five years before the year of death annual healthcare cost is virtually the same,
as all annual Medicare costs per capita.
By the second year before death, the cost has risen by about 60%.
And in the year of death, the annual cost exceeds the average by over four times.
Indeed expenditures on persons during the last two years of life account for 40% of all Medicare expenditures.
The pattern portrayed in figure 3 has not changed significantly over the past two decades.
The relative constancy in healthcare costs by years before death supports case B in figure 2 because it implies that,
no matter how far to the right the healthcare curve shifts, a specific cost will eventually rise sharply,
as the proportion of persons who die in any given age category increases.
This line of reasoning implies that healthcare costs may continue to increase,
even if the age of onset of chronic diseases is delayed, because the proportion of the cohort living to late ages will increase.
Moreover the cost of keeping disabilities under control may rise
because more effective drugs and procedures may be more expensive than the current set.
Will the 21st century witness as large an increase in the average life expectancy of rich countries?
That is an increase of 30-40 years, as occurred during the 20th century.
Most experts believe it will not.
The middle estimate of the US census bureau, for example, is that increases in life expectancy between 2000 and 2050
will only be about seven years.
The estimated increase for the entire 20th century is just 13 years.
This is less than half the increase that occurred during the 20th century.
The same conservatism is evident in the projections of the UN, OECD and other national and international agencies.
This pessimistic projection rests on several propositions.
Perhaps the most widely accepted is the proposition that opportunities for large reductions in mortality rates
are possible only when death rates under age five are very high.
Proponents of this view argue, for example, that the sharp decline in US mortality rates during the 20th century
was the result of a unique opportunity that cannot be replicated by those nations that have already experienced it.
The opportunity to wipe out the majority of deaths due to acute and infectious diseases,
which were concentrated in infancy and early childhood,
whereas more than one third of all deaths at the turn of the 20th century were of children under five.
Today infant and childhood deaths are less than 2% of the annual total.
By contrast, deaths among persons aged 65 and older, which accounted for just 18% of the total in 1900,
have grown to 3/4 of all deaths.
Thus at the start of the 21st century the argument goes that more than 90% of birth cohorts who live to age 50
begin to suffer from an increasing number of chronic diseases,
because their vital organ systems naturally loses their effectiveness with aging
and this deterioration eventually increases to a point where life can no longer be sustained.
I'm going to skip over several of the best paragraphs I’ve ever written!
The increase in life expectancy, coupled with stability in fertility rates,
will lead to an increased share of the population over age 65.
Since the per capita consumption of healthcare services rises with age,
the ageing of the US population would by itself lead to an increase in the burden of healthcare.
However, as table 1 shows, the effect will be modest,
raising annual per capita consumption from about $3,800 in 1999 to about $4,400 in 2040.
This is a rise of just 16% in 41 years, or an annual growth rate of 0.4%.
However the demand for healthcare will grow much more rapidly than indicated by table 1.
Hence changes in the age structure are a minor factor in the rise of the burden of health services
over the next several decades, the main factor is the increase in the demand for healthcare.
The principle factor driving the growth and expenditures on healthcare is demand.
As people get richer, they want to spend a larger share of their income on improving their health.
The fact is that the structure of consumption has changed drastically in the US since the late 19th century.
The growth in the demand for healthcare has to be evaluated in that context.
Table 2 presents the change in the structure of consumption in the United States between 1875 and 1995.
The trend and the structure of consumption in other OECD countries has been quite similar.
The term ‘expanded consumption’ takes account of the fact that,
as income has increased, consumers prefer to take an increasing share of their real income in the form of leisure
rather than in purchasing more commodities, as would be possible if they did not reduce their hours of work.
One notable feature of table 2 is the change in the share of incomes spent on food, clothing and shelter,
which is declined from 74% of expanded consumption to just 13% over the 120-year period.
Another striking change is the share of income spent on healthcare, which is increased nine fold, from 1% to 9%.
For purposes of forecasting the most important feature of table 2 is the last column,
which presents the long term income elasticities for each category of expenditure.
The income elasticity for food and clothing are quite low,
which means that the share of these items in total consumption will continue to decline.
Notice that shelter, which includes most consumer durables, is closer to but still below 1.
On the other hand, the income elasticities for healthcare, education and leisure are all well above 1.
An income elasticity of 1.6 means that income expenditures on healthcare in the United States
are likely to rise from the current level of 15% to somewhere between 21% and 29%,
depending on how rapidly you think per capita income will grow by 2040.
Is that bad?
Should such a development be avoided?
Should government seek to thwart consumer demand for healthcare?
Such a policy would be necessary only if OECD nations lacked the resources to provide that much healthcare.
However the growth in the productivity of traditional commodities including food, clothing, shelter and consumer durables
will release the required resources to provide expanded healthcare.
In the United States a century ago it took 1,700 hours of work to purchase the annual food supply for a family.
Today it requires just 260 hours.
If agricultural productivity grows at just 2/3 of its recent rates,
then by 2040 a family’s annual food supply may be purchased with about 160 hours of labour.
A recent study of the role of the changing benefits in costs of healthcare,
conducted by investigators at the National Bureau of Economic Research,
concluded that the benefits of healthcare services over the past 40 years have more than justified their costs.
This analysis suggests a fundamental repositioning of the public debate about medical care
from how governments can limit spending to how to get the most out of spending that is undertaken.
Other NBER investigators have also suggested changing the methods of healthcare financing,
so that the consumer demand for increasingly effective services is not unnecessarily thwarted.
Public policy should not be aimed at suppressing the demand for healthcare.
Expenditures on healthcare are driven by demand,
which is spurred by income and by advances in biotechnology that make health interventions increasingly effective.
Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy
at the beginning of the 20th century, healthcare is the growth industry of the 21st century.
It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries,
including manufacturing, education, financial services, communications and construction.
The pressure to suppress healthcare expenditures arises from the way that governments and businesses
currently provide insurance in OECD countries.
These institutions need to provide a basic and affordable package of health services.
Beyond that, they should offer additional policies at higher costs, which provide upscaled service such as private rooms.
The most expensive alternative procedures in medicines.
The shortest waiting line, the fullest coverage of optional services.
And access to physicians anywhere in the country, not just in local channels.
I might add they should also promise 80 channels on TV.
Healthcare is not a homogenous good.
All of which is essential.
There are large luxury components in healthcare that may appeal to some texts but are not necessary for sound basic healthcare.
It is of course necessary to provide medical care for those who are too poor to purchase it from their own resources.
But for those with more resources, shifting to private savings accounts to health services
is an effective way to relieve pressure on the finances of both businesses and governments.
I made the time, thank you very much.
(Applause).
(ROBERT AUMANN) A lot of healthcare is provided by public bodies like governments, insurance companies, things like that.
And the consumer of healthcare does not generally buy his own healthcare, at least in many cases.
I don’t know exactly how it is in the United States, but I think in most countries in the world, developed countries,
it’s provided by public bodies of one kind and another.
And it is a very great problem, specifically in Israel, deciding which drugs, which technology,
which treatments to provide in the framework of a healthcare system.
Do you have any idea how to do that?
What kind of principles to apply in order to make a choice of treatments that are made available
and those that are not made available?
(PROFESSOR FOGEL) Well, maybe the best way to answer that question is to tell you a personal story.
In 2001, when we were at the 100th anniversary of the Nobel Prize, my wife caught a cold in Stockholm.
By the time we got to England, it had turned into pneumonia.
I took my wife to Guy’s and St. Thomas’s Hospital, which many people consider to be the best research hospital in London.
And the nurses who examined her and the doctor who examined her in the emergency room listened to her with a stethoscope
and said: “you have pneumonia”.
We are going to take you into the hospital and they put her on a course of Cipro, eight days.
In 2005, I gave the Hitchcock lectures at Berkeley and Enid caught a cold again and we went to the local emergency room
and they listened to her, they said her lungs were clear, but just to be sure let’s take an x-ray.
So that step was omitted in the British healthcare system.
In the US healthcare system we have redundancies that exceed all the other redundancies.
I think it’s really driven, what to do is driven by the level of healthcare and how people want to spend their money.
It is not really driven by government policy.
Government policy is trying to squelch a demand that refuses to be squelched.
I think that every healthcare system in Europe, all of the OECD countries is in crisis.
And much of the talk about health economists in these countries is how to gradually shift over to some sort of privatised system.
And many third world countries have already made that shift,
they are already on a fundamentally private system with forced savings.
So we are talking about private healthcare based on government policy, which forces you to save for the healthcare system.
I think that is the likely way that it will proceed throughout the rich countries of the world.
In the United States, because we are so wealthy we insist on instantaneous or nearly instantaneous service.
The average waiting time in England for a hernia operation is over two years.
If you told an American ‘you have a hernia, don’t worry, we can get you in in 2011’, you'd have a riot on your hands.
They’d expect to be taken in at most a month.
If it got to six weeks they’d be calling their representative, their senator, the mayor,
saying ‘what is going on with this terrible health system?’
So we spend a lot of money not on better healthcare in a fundamental way
but on all of these ancillary aspects of convenience of healthcare.
The thing I liked best is when my wife was in Guys and St. Thomas there was one telephone for 20 beds.
Can you imagine an American getting well without a telephone next to their bed?
No TV, there wasn’t even a radio.
I had to buy my wife one of these little battery operated radios so she could listen to something.
There are as many beds per capita in England as in the United States, but they are concentrated in a few hundred huge hospitals.
We have six thousand hospitals in the United States, every community has to have its own hospital
and it has to have a full staff of everything.
Surgeons who can do by-pass operations and so on.
All of this is a function of wealth, of per capita income.
Rich countries want a lot of conveniences along with their healthcare.
Poorer countries are limited to the fundamentals of healthcare and very poor countries don’t have good healthcare systems.
By the way, the World Health Organisation set up a commission on macroeconomics of health a few years ago,
which I was a member of.
And one of the issues that came up in very poor countries:
Should you subsidise healthcare for rich people?
Should you establish healthcare systems?
And the answer that we came to was ‘yes’.
Because if you didn’t do it, the rich people would go to Europe or some other place for their healthcare.
And there would be no indigenous healthcare system for the poor.
So you may sometimes have to get into the anomaly of subsidising healthcare for the rich,
so that you have a medical establishment that can serve the poor
who can’t afford to get on a jet and go to an OECD country for their healthcare.