UNTO häKKINEN , PEKKA mARTIKAINEN , ANjA NORO , ElINA NIhTIlä , mIKKO PElTOlA Aging , Health Expenditure , Proximity of Death and Income in Finland

INDTRODUCTION................................................................................................................................ 7 DATA.AND.METHODS......................................................................................................................... 9 . Data............................................................................................................................................ 9 . Methods.................................................................................................................................... 10 RESULTS............................................................................................................................................ 13 . Long-term.care.(LTC).patients.................................................................................................... 13 . Non.long-term.care.(non-LTC).individuals................................................................................... 14 . Total.expenditure....................................................................................................................... 15 CONCLUSION.AND.DISCUSSION....................................................................................................... 20 ACKNOWLEDGEMENTS..................................................................................................................... 21 References......................................................................................................................................... 22 Appendix.tables.1–4.......................................................................................................................... 23 Aging, Health Expenditure, Proximity of Death and Income in Finland STAKES, Discussion Papers 1/2007 INTRODUCTION Health care expenditure has usually been seen as a function of the size of the population, its age composition and age/-sex specific utilisation rates. According to this “naive” approach health expenditure will increase when population increases in size or people move from an age group of lower health expenditure to an age group of higher expenditure. This view has been widely challenged. In a seminal study Zweifel et al. (1999) argued that the main demographic driver of health-care costs may be time to death rather than age. The relationship between age, time to death and health expenditure has been extensively studied in recent years, using data from different countries(Seshamani and Gray, 2004a and 2004b; Stearns and Norton, 2004; Zweifel et al., 2004;Werblow et al., 2005). However, its precise effects are not clear and due to the different methodologies of data gathering, calculation and coverage of cost, the results vary significantly (Economic Policy Committee and European Commission, 2006). More over, it is currently well recognized that health expenditure is not only determined by aging or other demographic factors such as sex distribution, but by a complex series of demand and supply side factors such as health status of the population, economic growth, new technologies and medical progress, organisation and financing of the health care system and health care resources. For example, two recent projections of health expenditure assumed that income is the main non-demographic driver of future health expenditure (Economic Policy Committee and European Commission, 2006; OECD, 2006). This is based on results of numerous studies on income elasticity of health care expenditure. But there are concerns with this approach. Income elasticity tends to increase with level of aggregation, i.e. the higher the level of aggregation, the higher the elasticity. In the studies using individual-level data, income elasticises are usually small or even negative. The high positive income elasticises (above unity) found in macro studies may result from a failure to control many important factors such as prices and health status. It can also be assumed that at the aggregate level, income is closely related to the use of new technology and products. For example, in Finland as in other developed countries expenditure on pharmaceuticals has increased more rapidly during the last decade than other health expenditure or GDP. The main driver for the increase has been the introduction of new and more expensive medicines. The relationship between health expenditure and income is important also from a broader perspective. Many developed countries finance the majority of essential health services from public finance sources and endorse the equity principle that these services ought to be allocated on the basis of need, and not on the basis of willingness or ability to pay for services. Willingness or ability to pay is usually measured by income. This paper has two aims. First we revisit the debate originally introduced by Zweifel et al. (1999) on the ‘red herring”, i.e. the claim that population aging will not have a significant impact on health care expenditure (HCE), using a Finnish data set. As in a Swiss study (Werblow et al., 2005), we decompose HCE into several components (including long-term care) and analyse both survivors and deceased individuals. We also compare the predictions of health expenditure based on a model that takes into account the proximity of death with the predictions of a naive model, which includes only age and gender and their interactions. Secondly, we extend our analysis to include income as an explanatory variable. This allows us to analyse at the individual level the effect of income on health expenditure and also relate it to the proximity of death. In addition, for non-institutionalized individuals we have information on need for services (morbidity). Thus we will evaluate the equity aspects of health care utilization. The paper is organized as follows. Firstly, we briefly describe aspects of the Finnish health care system that are relevant to these analyses. This is followed by a description of the data and Aging, Health Expenditure, Proximity of Death and Income in Finland STAKES, Discussion Papers 1/2007 methods. Our results section starts with an analysis of individual components of health care expenditure and finishes with an analysis of total expenditure. After that we use our results for projecting the health expenditure. This is followed by an analysis on the effect of income, while the final section discusses the findings and conclusions. Finnish health care system In its institutional structure, financing and goals, the Finnish health care system is closest to those of other Nordic countries and the UK, in that it covers the whole population and its services are mainly produced by the public sector and financed through general taxation. Finland’s 432 municipalities (local government authorities) are responsible for providing “municipal health services”. Municipal taxes, state subsidies and user charges finance the municipal health services. Municipally provided services include primary (mostly services produced in health centres) and specialist health care. Municipalities are responsible for other basic services, such as nursing homes and other social services for the elderly, child day care, social assistance and basic education. In addition, National Health Insurance (NHI) subsidises the use of specific private health services and outpatient medicines. In Finland, the hospitals (i.e. university, central and regional hospitals) owned by hospital districts (federations of municipalities) produce most of the specialised outpatient and inpatient services. However, some municipalities produce some specialist services themselves in their own health centres. In addition, some health centres also provide long term-care services. Municipalities (public hospitals and nursing homes) pay for the drug expenditures of in-patient care, while in outpatient care, both the patients and the NHI contribute to the expenditure. User charges and cost-sharing play a prominent role in funding health services. Costsharing is lower for municipal services than for the privately provided services and products, particularly prescribed medicines, which are eligible for NHI reimbursement. For example, user charges represent about 10% of the total cost of services provided by health centres, about 5% of the cost of hospital services, but about 35% of the cost of drugs prescribed outside hospitals. If patients need long-term care in a health centre ward or an “old peoples’ home”, up to 80% of their income will be charged for their accommodation, provided a (low) minimum amount is available for their own use. Aging, Health Expenditure, Proximity of Death and Income in Finland STAKES, Discussion Papers 1/2007 DATA AND METHODS