Is universal access in peril?
The Swedish welfare state is one of the most generous and comprehensive in the developed world. For Swedes it is deeply entrenched as a reflection of egalitarian values. The fact that Sweden scores high on many indicators of trust and social cohesion is often linked to the general principle of universal access to social programs, in contrast to the more selective principles of access applied in many other countries.
Accordingly, the future financial sustainability of the welfare state in general and health care in particular is crucial to Swedish society. Several projections of future demographic developments indicate that the present organization, financing and functioning of the Swedish health care system will require a substantial increase in taxes. Will the aging population create financial strains that ultimately make it necessary to abandon universal access to health care?
So far the political answer to such projections has consisted of proposals to increase employment, lower the average age at which working life begins, postpone retirement or raise efficiency in the provision of public services. High employment has always been a priority in Swedish economic policy. The current intense debate about retirement age will probably lead to legislation delaying retirement. Over the last two decades major efforts to make service delivery more efficient have been undertaken, especially at the local government level.1
But so far the principle of financing social programs through general tax revenue and providing equal access to services for all has not been challenged, and polls show that it would be politically dangerous for any politician to do so. Support for the principle is especially strong in the case of health care. According to several polls, a large majority are prepared to pay higher taxes if necessary to maintain the standards and principles of health care provision. The problem is that the same majority would probably adjust their employment and working hours, their tax compliance and their willingness to invest in skills training in response to higher taxes.
Over the last two decades the Swedish welfare state has changed. The picture of a generous, even overly generous, cradle-to-grave system does not hold as true today. There are, for example, much tighter eligibility rules in sickness and unemployment insurance. These changes have mostly concerned cash transfer programs, not services such as health and education (figure 1).
In some areas the quality of services may have deteriorated since 1993. But in health care almost every quality indicator shows improvement. Despite these improvements and an aging population, health care requires the same share of GDP as in 1980. This has led many politicians to conclude that there is no financing problem provided Sweden can keep present tax levels. This conclusion is wrong, as I will explain.
Health care financing today
In Sweden, as in other countries, health care is one of the biggest financial responsibilities of government. Table 1 shows the sources of health care financing.
The Swedish health care system combines integration and decentralization. The 21 directly elected county councils are responsible for primary and specialized health care. Traditionally, most health care services are provided by the county councils, which work much like American HMOs or the health regions established by the larger Canadian provinces. This structure is gradually changing. An increasing share of health care is provided by private companies, but financed by the county councils. Today, private operators produce 30 per cent of primary care and 7 per cent of specialized health care. Patients have been given greater freedom of choice of health care providers and are less restricted to their own county council.
The 390 municipalities are responsible for primary health care for the elderly and home care. They are also responsible for long-term care of the elderly and people with disabilities, which is not classified as health care.
The county council tax is a flat-rate income tax, at present 11 per cent of taxable income; 90 per cent goes to health care. The municipality tax is currently 21 per cent of taxable income; 6 per cent of the municipalities’ tax revenues are for health care.
The private out-of-pocket contribution to health care financing is 17 per cent, a share that has been fairly stable. But this figure is based on the national accounts where health care is broadly defined and includes nonprescription pharmaceuticals, medical appliances (like eyeglasses) and some services not normally associated with health care. With a narrow definition (primary and specialized care including prescription pharmaceuticals), private funding is estimated at 9 per cent. As in most countries, expenditures for dental care are largely paid by individuals, except for children and the elderly. Private funding covers 60 per cent of total expenditures for dental care.
Swedes incur a smaller financial burden than people in many other countries. As can be seen in figure 2, on a purchasing power parity (PPP) basis, Sweden ranks 12th among OECD countries in terms of total health care expenditure per capita and 13th in terms of share of GDP. Among the Nordic countries, all with similar health care models, Sweden spends less per capita than Norway (the most expensive country after the United States) and Denmark (whose spending is very close to Canada’s), but more than Finland.
The public share of total health care expenditure (with the broad definition in national accounts) is high, but not the highest among OECD countries. As a share of GDP, public health care expenditure is actually higher in the United States than in Sweden. (Public expenditure is substantially higher in the United States when health-related tax deductions are taken into account.)
Health care and elderly care are to some extent communicating vessels. Deficiencies in health care imply higher expenditures for elderly care and vice versa. In Sweden, long-term care (which covers elderly care) is a public undertaking to a much larger extent than in most other countries. Among the European Union countries public expenditure for long-term care, measured as a share of GDP, is higher only in Denmark.
In 2010, for the first time since 1970, the (unweighted) average rate of growth in health care expenditures among OECD countries in real terms was nearly zero. This was a marked decline from a yearly growth rate of 4.8 per cent between 2000 and 2009. Statistics for 2011 indicate a further decline in the growth rate. Obviously the economic crisis beginning in 2008, and the ensuing public sector debt crisis, have put a brake on the trend toward growth in health care expenditures.
Sweden has been less affected by the post-2008 crisis than most other OECD countries, at least so far. In Sweden, health care expenditures grew by 2 per cent in 2010. However, figures from the county councils indicate that growth of health care expenditures declined somewhat in 2011.
It is difficult to compare health care statistics between countries and over time. Definitions and organization of health care delivery change continuously. The OECD figures are the best we can get. According to the OECD health data base, total per capita health care expenditures have grown substantially more slowly in Sweden than in other countries. In 1970, Swedish health care expenditures were ranked third highest among OECD countries. As figure 2 illustrates, today Sweden is in the middle.
To some extent this move to the middle is due to the fact that Swedish per capita GDP growth was below the OECD average for a long period but since the late 1990s has been above the OECD average. Simultaneously, real health care expenditure growth in Sweden has been below the OECD average since 2000.
Another explanation is the deep fiscal crisis in Sweden in the early 1990s that necessitated radical cuts in public spending. The cause of the crisis was somewhat similar to that of the crisis of 2008: a bursting real estate bubble and a crisis in the banking sector. Sweden’s crisis was not as severe as the drama we are currently witnessing in southern Europe – Sweden was fortunately able to devalue its currency – but it was serious enough to change public expectations and place a premium on continuous improvement of public services.
The third explanation of the lower Swedish growth in health expenditures is a slow increase in the prices of health care resources during the 1980s. This is not captured in OECD statistics, which use the GDP price deflator to calculate inflation-adjusted prices for health care and consequently disregard price changes in the health sector relative to the rest of the economy. In the national accounts, use of a price index for public and private consumption of health care makes it possible to distinguish volume and price movements. The Swedish national accounts have changed several times, making it impossible to construct a perfectly coherent time series. Therefore, I’ve done my own calculation of health care expenditures on the basis of different versions of national accounts. The figures should be interpreted with caution.
By my calculations, Sweden experienced slightly lower health care price inflation than general inflation measured by the GDP price deflator between 1980 and 1991. Why this happened remains to be explained in detail. One important factor was low increases in public-sector wages, especially at the local level. Occupations like nursing had a lower wage growth during these years than did much of the private sector. Why this relative wage effect? Previous expansion of higher education generated large additions to the health sector work force. And since the county councils were the only employers at the time, they could exercise a certain monopsonistic power to hold down wage growth.
The demographic challenge
Aging populations in OECD countries reflect lower fertility rates over the last several decades and increases in life expectancy. Increased life expectancy is to some extent a consequence of improved health care. As can be seen in figure 3, Sweden is in a more favourable position than the average European country. Sweden’s dependency ratio is rising, but aging is more rapid elsewhere in the EU area.
An aging population implies higher health care costs. Swedish data on the age distribution of health care use show that the average cost is four times higher for a person aged 75–80 than for a person aged 50–55. If age-specific cost data are applied to demographic projections, we get an initial estimate of the impact of demographic changes alone on future health care costs. For Sweden the result of such an exercise is an annual growth of between 0.7 and 0.9 per cent. As the total population is projected to grow by 0.4 per cent a year, the aging of the population increases per capita health care costs by a minimum of 0.3 per cent a year.
The European Commission’s aging project has produced several scenarios for the evolution of public health care expenditures. One of these is the “demographic scenario,” which tries to isolate the demographic impact on health care expenditures as a share of GDP based on uniform growth assumptions. The result is shown in table 4. Unsurprisingly, it confirms that the demographic challenge seems to be less accentuated in Sweden than in many other countries.
If long-term care is included, the picture changes a bit because public expenditures in this area in Sweden are high. But the conclusion still holds: the aging population implies higher public expenditures, but less so in Sweden than is other countries.
These simple demographic calculations have been challenged. One objection is that age is not the relevant variable to catch the demographic component. We tend to consume much of our cumulative lifetime health care during the last years of life, especially the very last year. There is evidence that old people over time tend to be in better physical shape. This has led to the optimistic conclusion that health care needs will be postponed to higher ages, which means that increased longevity will not affect health care costs. To the extent that this is true, calculations that project current age-specific health care costs overstate the impact of demography. Projections based on proximity to death could be a better predictor.
The hypothesis that postponed morbidity has no fiscal impact is challenged by another hypothesis saying that the link between health status and health care consumption is more complex than implied above. Better health at advanced ages implies that these patients are making more use of advanced medical interventions. For example, hip replacements are now done on much older patients than before. Life expectancy is rising to some extent because of medical advances.2 Reduced mortality from several diseases implies that more patients have time to get a second serious expensive-to-treat disease. Total lifetime health care consumption is thus raised.
The main objection to simple projections based on present age-specific health care costs is that time series analyses of health care costs or cross-country comparisons do not identify demography as an important cost driver. Around 10 per cent of variation in health care cost per capita can be attributed to demographic factors. Evidence based on historical data does not rule out the possibility that demography will become more important in the future than in the past, especially if economic productivity tends to deteriorate. In the Swedish case, health care expenditures per capita have grown substantially more than can be explained by demography, but this difference has become smaller over the last 15 years.
In my opinion, the fiscal challenge of demography is exaggerated. If we focus only on the relative cost of per capita care among old people, it looks dramatic. But health care is not only for the elderly, as is evident from figure 4. People over the age of 80, whose population share has experienced the most rapid increase in recent decades, still consume only 15 per cent of total health care (see cumulative distribution). I agree with the following overview of the research in this area: “While different studies show different results due to differences in methods and data, the general impression is that ageing as such can be expected to only cause modest increase in health care expenditure per capita in the future.”3
The real challenges that will need to be met are higher income, better health care technology and rising prices.
The first challenge: higher income
Most projections of future welfare state financing assume a steady annual real GDP growth rate of between 1.5 and 2 per cent. Over a long period this implies a substantial accumulated increase in wealth and consumption opportunities. A yearly 2 per cent annual growth rate implies a doubling of consumption opportunities in 35 years. We will as countries become a lot richer.
Good health is a core value for everyone. The hopes and expectations of a healthier life are a strong driver increasing demand for health care. It is natural that increased wealth to a large extent be used for better health care. Wealthier nations normally spend more on health care relative to their wealth. Per capita health care expenditure correlates extremely well with per capita GDP. There is almost a linear relation, as can be seen in figure 5.
However, we should not assume that this high correlation is a causal relationship. Two rising variables will often show a high correlation. It is more relevant to look at changes over time. As can be seen in figure 6, relative growth of per capita GDP and health care costs are positively correlated and the cross-country trend lines have a positive slope. However the relationship is less significant than when calculated on levels.4
Several analyses of the determinants of change in health care expenditure over time and between countries (including many relevant variables) have shown that income is the strongest cost driver. It is a good general rule that future GDP will tell us more about future health care expenditures than any estimate based on demography or health status. The income elasticity is slightly above 1 – that is, if real GDP grows by 1 per cent, real health care expenditure will increase by slightly more than 1 per cent.
The second challenge: better health care
With higher income we can afford to buy more health care. But it will probably also be better and more valuable health care. New and more efficient technology, pharmaceuticals and such mean that conditions that used to be incurable can now be treated. Advanced interventions are possible for vulnerable and older patients. New diagnostic techniques allow us to know more about our current or potential illnesses, for better or worse.
What advances will the future bring? The optimistic scenario is that health care will efficiently treat more conditions and raise human well-being. But at what cost? We may be approaching what pessimists have called “flat curve medicine.” New and very expensive interventions will provide small additions to health. Despite small benefits and high cost, the medical profession and patient groups will exert strong pressure to introduce these methods. Hence, according to the pessimists cost efficiency will decline.
Changing values and attitudes in society result in higher demand for health care. Knowledge of new pharmaceuticals or other techniques spreads fast among patients, and we want the best available, regardless of cost. Public awareness of differences among health care providers, and refusal to accept such differences, are growing. These changes constrain health managers’ ability to undertake cost-utility planning and imply provision of highest-quality care in all circumstances.
The scope of health care is expanding. What used to be normal inconveniences in life become curable sicknesses. This trend increases demand for health care. Health care providers are treating problems that medicine cannot solve.
The third challenge: higher prices
As can be seen in table 3, the price of health care normally increases more rapidly than the general price level. This is the “Baumol effect.” Real wages in health care (and in other service sectors) tend to increase in line with wages in the business sector. Since service sectors are more labour-intensive than goods-producing sectors and often subject to lower productivity increases, the price of services rises relative to goods. In other words, the opportunity cost in terms of goods of one hour of medical treatment rises over time.
However, the quality of an hour of medical treatment increases with better technology, experience of providers and other improvements. If we put an economic value on the additional benefit from an hour’s treatment over time, the opportunity cost per quality-adjusted hour is probably not rising. For example, if we use a normal valuation of a saved life in some acute condition (stroke, heart infarction) to adjust over time the benefit from an hour of care, the cost of a quality-adjusted hour of medical care may be falling.
The problem is that we do not generally buy or sell health care services in any OECD country’s health care system. We have two markets: one for health care resources (such as the labour market for medical staff or the market for medical appliances) and another for health insurance, which in return for premiums or taxes promises high-quality medical treatment when needed.
The fact that health care resources become more expensive is not necessarily a problem. If real wages increase uniformly in the labour market, the share of average income we need to reserve for health care is unchanged. However, if we want to benefit from advances in health care, we need to increase the share of income going to health care. This in turn requires that income elasticity outweigh price elasticity, which obviously has been the case so far.
The quest for justice in health care
The challenge of health care financing is basically about how we understand justice in this particular sector. If we had no concerns about fair distribution of the expected increase in health care consumption we would have no financing problem. We could imagine a model where public health care offers the level of care that can be provided within the present financing structure and let individuals’ willingness to pay decide any further improvements. However, this would not be compatible with the Swedish view of justice in the health care area.
Distributional justice is often treated in terms of income distribution. But most societies define just distribution differently in different areas. Even if we could imagine a society in which economic resources were distributed in a way that fulfilled our expectations of distributional justice, we would still not agree that income differences should be reflected in access to health care. The welfare state is best understood as a means to shelter some basic areas from the market or inherited wealth.
This view of justice is expressed in the Swedish Health Care Act, which states that high-quality health care should be provided to everyone on equal terms. The only acceptable criteria in prioritizing health care resources are differences in need. The willingness or ability to pay, status in society or even age should not be taken into account. Planning of public health care should also take privately provided health care into consideration.
These requirements define a rather narrow framework for health care financing. Taxes must remain the main source of revenue. Out-of-pocket payments are compatible with the requirements of justice as long as these are not a source of funding but just the kind of modest copayments that are necessary in every insurance system. Additional health insurance is an option. But the demand for health care on equal terms requires insurance open to all and with uniform premiums. This in turn cannot be arranged without pooling between different insurers and consequently state involvement.
The ultimate choice is contentious: either higher taxes or reformulation of the meaning of a just health care system.
The choices ahead
Health care is basically a combination of an insurance plan, with its classic difficulties such as moral hazard, and a delivery system reliant on professional decision-making – by nurses, pharmacists and, above all, doctors. Cost control is difficult. It is an understatement to say that the rapid increase in health care spending in many countries over the last decade has not entirely been a planned process.
The fact that Sweden has moved from being a high-cost nation in the early 1970s to the middle among the rich countries today (figure 5) is often interpreted as a success for the ability of the Swedish integrated health care system to contain costs. But cost containment can be too successful if quality deteriorates or new cost-efficient techniques are delayed or prevented. There are no signs of that yet. In the few international comparisons of health care outcomes, Sweden often ranks near the top. The main deficiency with Swedish health care has been low accessibility.
If future economic growth corresponds to the long-term trend, it is highly probable that the demand for health care will increase as a share of total income. A constant health care share will suffice for constant care quality per capita. But medical advances and health-oriented attitudes will exert strong pressure to improve quality of care.
If the additional health care tends to be “unnecessary” or cost-inefficient, we might accept a less equitable solution where purchasing power has a bigger influence on the distribution of health care resources. However, recent efforts to prioritize publicly supplied care have shown how hard it is to exclude any service. There is a tendency to regard even cost-inefficient treatments as a right. This is morally problematic if the intervention is costly and the increase in healthy life is expected to be very short.
We should expect health care expenditure to outpace income growth over the next quarter century. With the present financing system, this requires higher taxes. A possible option is to introduce an additional insurance plan with a uniform premium. That would be compatible with the requirement of health care on equal terms, but still a step away from the Swedish solidarity model. The benefit of such an additional insurance plan, from which children and elderly would have to be exempted, is to avoid adding to distorting marginal tax effects.
It is always dangerous to base projections of the future on past history. There are a lot of reasons why the future may differ from our present projections:
- Health care could be more efficient. There are deficiencies and waste in health care organization: inadequate patient safety leading to unnecessary infections, lack of coordination between levels of health care and so on. But efforts to raise efficiency have been on the agenda, in Sweden and other countries, since at least the early 1990s. Those who project higher efficiency must give reasons why these efforts will be more successful in the future.
- The present economic crisis could be a turning point in international health care. The need in many countries to focus on cost containment could lead to a reorientation of medical research and management philosophies to less costly solutions.
- Employment rates could be higher in the future than normally assumed. There is political pressure in OECD countries to raise the average retirement age and change negative attitudes toward older workers. But, like health care, free time is highly valued. Increasing material wealth will in the long run create strong pressure to shorten working hours. The political rhetoric to work more and longer to save the welfare state seems a bit naive when there is no direct link between increased work on the one hand and access to health care on the other.
In the face of an uncertain future, there are two possible strategies. One is to wait and see and take action when needed. The second is to rely on the shaky cost projections of the fiscal implications of aging, and reform social policy to make it sustainable. This may include a limitation of the public commitment to health care. The first strategy makes it difficult for individuals to make choices (do I need private health care insurance?). The second implies the risk of taking decisions that turn out to be unnecessary, inadequate or wrong. The best option is probably to undertake reform with caution, while remaining prepared to change course on short notice.