Should we be concerned about a forecasted doubling of health care spending?

Public spending on health is the largest single item of public spending in the UK. Public spending on health has taken up an increasing share of GDP, tripling from 2.8% in 1955/56 to 8.3% in 2022/23. The Office of Budgetary Responsibility (OBR) forecasts that, without reform, this is set to continue – with health spending expected to rise to 14.5% of GDP by 2073/74. That means the UK will be spending £1 in every £7 of its national wealth on health. The OBR is not alone in thinking this – and the UK is not alone in this likely trajectory. Other studies show similar trajectories in the UK and other wealthy countries.

Why is this the case? Is it inevitable? Most importantly, is it actually a problem – and if so, what do we do about it?

Is an increase in health spending a problem?

Whichever way you look at it, health spending in the UK has been increasing over time – whether relative to GDP, or per person. And since the 2000s, on both these measures, it has been increasing faster than the average for Organisation for Economic Co-operation and Development countries (OECD) – as the two graphs below show.

Whether that is sustainable is hard to say. The composition of government spending, and spending on a particular area at that, is only one part of the overall picture of fiscal decisions the government must make – others include decisions on tax and borrowing which affect overall how much there is available to spend, and then the balance of spending within that. But I will focus here on health spending.

On the one hand, you might think spending on health isn’t necessarily a bad thing. Having good health is important – poor health makes it harder to do the things we care about, and good health makes it easier to flourish. And if health spending has been rising since the dawn of the NHS, why should we be particularly concerned now?

There are a range of reasons health spending is on the rise. These include but are not limited to: increased expectations of how healthy we should be and the level of support and service we should be getting from health care services; technological advancements (such as innovative cancer treatment) that are making health care more expensive; demographic factors such as an ageing population; increasing prevalence of worsening health in the working population; and constraints on productivity growth.

The first two reasons in the list above – increasing expectations around our health and the level of support we are entitled to, and that health spending is rising in part because we have access to better but more expensive technologies, meaning more people can access treatments for a wider range of health problems – are not necessarily bad things. As incomes rise, people are typically willing to pay more for a given improvement in health. This is slightly contested among economists but does appear to hold true in the UK and other rich western nations – health is a luxury good. Calling health a luxury good may sound odd to many people but in economic terms it means that as we get richer, we spend more on something. Growth in per-person health spending has been at least double per-person GDP between 2000 and 2022 in all but two advanced (OECD) economics (Ireland and the US). Empirically it seems, we do tend to spend more on health care as we get richer. In fact, the largest driver of increased health spending in the OBR’s modelling is due to this increasing demand for health spending as incomes – and expectations – grow.

And health spending is not just a cost on the balance sheet but an investment at a national level. Improving health can influence economic growth in a range of ways: better health improves labour market participation and worker productivity; higher life expectancy creates incentives to invest in education and other capital. In contrast, health-worsening events such as pandemics can take an enormous toll and negatively impact economic growth. In the UK currently, over 2.5 million people are economically inactive due to ill health and even more (over 3 million) working-age people are in work but with a work-limiting condition. Healthy life expectancy is lower than the state pension age¹.

On the other hand, while health spending has been rising since the advent of the NHS, it seems reasonable to question whether it can continue to rise indefinitely. The composition of public spending has changed over time – 50 years ago we spent more on defence, pensions and education than we did on health. Now health is the biggest single area of spend – with more spent on health than on defence and education combined. Simply put, cuts in defence have broadly matched gains in health spending as a proportion of GDP. But given international headwinds, this trend seems unlikely to continue.

Secondly, while the UK is not alone in the general trend of increasing health spending, we are an international outlier in terms of the rate of growth. In the first half of the 1990s, the UK was below average, spending around 6% of GDP compared to an advanced economy median of 7.5%, yet now it is above average. Although this is in part due to lower-than-average GDP growth and not just higher-than-average health care spending growth, nevertheless, we are spending increasingly higher amounts of national wealth on health care.

It is important to recognise that spending on health, particularly health care, may not always be the optimal path if the goal is to improve health. Although there is a significant correlation between health expenditure and measures of health such as life expectancy – countries that tend to invest more in health care tend to have higher life expectancies – there are exceptions. The US spends more on health as we typically measure it than any other country, and yet its health outcomes are worse than many other countries that spend less. Meanwhile, the UK has been spending increasing amounts on health over the last decade with limited increases in life expectancy.

Any decision about resource allocation comes with an opportunity cost – the more we spend on health care, the less we have to spend on other things we might reasonably suggest are good investments that might also in the long-term impact health such as education or welfare (assuming tax and borrowing policy are not altered.) Even if our focus was health alone – spending on health care does not always lead to optimal health outcomes, and a different spending mix might have better health outcomes.

¹ Healthy life expectancy is the average number of years a person can expect to live in good health, based on how individuals perceive their health.

Is a continued rise in health spending inevitable?

The amount we spend on health is in part a political choice, but also depends on a range of factors, including technological developments and expectations as described above, but also demographic changes, the level of health – particularly chronic conditions – among the population, and the level of productivity in the health service.

Productivity concerns are the second largest driver of increased costs, according to OBR modelling (after increasing expectations of health care as discussed above). This is certainly something that can be mitigated – and indeed is a current major focus of government policy, with its focus on technology and other productivity improvements.

And demographic factors such as population ageing do not appear to be driving the increase as much as you might think. While the UK population is expected to increase by over 13 million people by 2070, of which two-thirds is projected to be from over 65s, it turns out ageing in and of itself doesn’t drive a huge increase in health care costs. This is because typically the highest health care costs fall in the last six months of life, regardless of when you die.

It is more concerning that there had been an increase in both chronic conditions and comorbidities across the life course. In short, people are getting ill slightly earlier in life and spending more years of their life in ill health. But this is not necessarily inevitable and could potentially be mitigated as well. After all, the UK appears to be a bit of an outlier in terms of working-age health. For example, the reported prevalence of health limitations amongst working-age adults is higher in the UK than in many European countries.

It is reasonable to assume and plan for some increase in health care spending over time. But the amount it does increase can be mitigated, in large part by thinking about how to spend money on health. The OBR has a range of scenarios, which show that with different action – and relatedly therefore different assumptions about pathways for different cost drivers – spending growth can be curbed. It is important to emphasise that spending growth can be contained – but is unlikely to be completely stopped.

The question is, how can we achieve this? I think the answer is to think differently about how we are spending money on health.

What does this all mean for policy-makers?

In my view, how much the government spends on health is a vitally important question. Should we be concerned about an ever-increasing quantum spent on health care? Yes, because it is not necessarily bringing the desired gains in health, and because it crowds out spending for other areas – that in themselves are important and may also improve health.

We should be asking ourselves: how can we best use our national resources – including funds, but also staff and other resources – to maximise health? The key to truly ‘shift the curve’ – ie, curb the expenditure line going up unchecked, is to get serious about prevention, about intervening early, about spending our resources so that people are able to live their lives in good health rather than needing expensive healthcare.

What might that look like? One option is to consider the composition of health spending. Only a very small fraction of what we currently classify as health spending is on preventive care or public health – around 5%. It feels like the current balance is not conducive to a system truly trying to keep us healthy. The old adage, we are funding the ambulances at the bottom of the cliff, rather than building a fence at the top to stop people falling off in the first place, feels apt here (almost literally). The government has started to recognise this, by promising to shift funding from acute hospitals into the community. But so far there is little evidence of this happening, or published plans of how and when it might happen. To truly prevent ill health, a more radical rebalancing, so that more funding is spent preventively, is a necessity – one that moves even beyond the current promised shift into the community, and that encompasses local authority and other public health spending as well. The Chartered Institute of Public Finance and Accountancy has been doing research into how to do this in practice.

Second, you could look beyond what we traditionally think of and measure as health spending. There could be a full reconsideration of how public spending is allocated. If health is the main goal, we should be seriously looking at all the factors that can worsen health – poverty, poor housing and so on, and scoring budget policy decisions on how they impact health, not just on cost. I do not think we can seriously make a step change in the nation’s health without seriously reconsidering welfare policy to ensure that fewer people live in poverty. Arguably, the government’s health mission – which appears to have somewhat fizzled out – could have done this. It hasn’t. But there are examples from other countries – such as New Zealand’s wellbeing budget approach which assessed all spending in terms of health, wellbeing, the environment and other social outcomes – that could provide a blueprint for how to do this.