University journal of Information Technology and ...

UNITE: VOL.1 (NO.2) / December 2014 / ISSN: 2335-0628 / UDK: 369.64(073)

University journal of Information Technology and Economics Available online: http://www.unite.edu.rs/ System for submission: http://www.unite.edu.rs/ojs

AGING OF THE POPULATION AND ITS INFLUENCE TO THE AGGREGATE HEALTH CARE COST IN THE U.S.A. Ognjen Ridić, Senad Bušatlić, Goran Ridić International University of Sarajevo (IUS), Hrasnička cesta 15, 71210 Sarajevo, BiH, [email protected], [email protected] Sarajevo School of Science and Technology (SSST), Hrasnička cesta 3a, Sarajevo, 71 000 Sarajevo, BiH, [email protected]

Article Info

Abstract

Article history:

Health care costs consume the largest portion of the gross domestic product (GDP) in the most countries. We tried to find the link between the aging of population and aggregate health care cost. Initially the study assumes that the aging of the population does have a significant relationship with the increases in the total national health care cost. A quantitative research survey with 80 participants was conducted to collect data for analysis. However, the findings of the study suggest that this (contrary to the primary-retrospective research) did not have a significant relationship to the national aggregate health care cost.

Received 25 Sep.2014 Received in revised form 29 Dec 2014

Keywords: aging of the population, aggregate health care cost, cost driver.

INTRODUCTION Health and maintenance of health represent the critical aspects of human life (Zuckerman & McFeeters, 2006). Health care resources are limited. Orszag (2008) stated that the rational use of these resources poses the challenge for every nation including the United States of America. Kling (2006) analyzed that rising health care costs in the United States can be described as one of the nation’s central economic challenges. Health care costs exert the most power over the federal government’s long term fiscal balance. If this spending trend continues, (under the present legislative environment), as projected in the future, the budget deficit could reach levels that may threaten long-term economic stability, competitiveness and growth. In the order to review the retrospective and prospective research aspects, scientists Newhouse (2003) discussed that the aging of the population has been also contributing to the aggregate health expenditures. The elderly spend more on medical care than the non-elderly. In 2008 Orszag found that the proportion of the elderly in the total population has been increasing. The individuals over the age of 65 spend about three times as much per person on medical care as do those under age of 65,

but their share of population has only grown from about eight percent in 1950 to approximately 12 percent in 1987. In the last 50 years the population had shown only gradual aging increases. In that situation, the aging played only a minor role in the large medical spending increases (Ridic 2010). DISCUSSION The objective of this study has been to research the claim in scientific circles and even among politicians in the United States of America, that the aging of the population by itself was a major contributor to the annual increase for health care demand and, thus, the total national health care spending. The projected increase in the fraction of the aging population from the current 12.7 percent to about 20 percent by 2030 is not a trivial matter in national health policy. This impact is especially important on the labor market and the political economy of financing health care [Reinhardt, 2003]. The other factors will be dominant drivers on health care spending in the future, as well. Blaming Medicare's future economic pressures mainly on demographic factors beyond policy makers' rather may represent a distraction from more important challenges. The analyses that Evans and collegues

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Ognjen Ridić / University journal of Information Technology and Economics / Vol.1 (No.2) / December 2014 / pp. 34-37

conducted in their Canadian study and Richardson and Robertson in their Australian study make the important poing that there is nothing fixed or clinically imperative about currently prevailing, age-specific health care use or spending levels, nor do countries need to accept it as an unalterable fact that age-specific per capita national health spending in the future must necessarily increase for all age groups, and especially for the elderly population [Zuckerman & McFeeters 2006] [Gonzalez 2009]. Very gradual future increases in the fraction of the U.S. population aged 65 and older appear as one of the lesser health policy challenges now confronting the U.S. society (Ridic 2010). Declining future ratio of workers to elderly Americans will cause stresses in the political economy of transferring financial and real resources to the elderly. Regardless of how health care for the elderly is financed, the aging of the population implies that a gradually increasing part of the national economic output will have to be allocated to the elderly. The aging population tends to attract these goods and services into their households with their dedication of scarce financial resources, which move real resources, in the similar way as the magnet moves paper clips. The main focus of this study is the effect of the population aging on the future demand for the health care. The aging can also affect total national health spending through the supply economic side of the health care sector, as the ratio of workers to retirees tends to decrease. For a traditionally labor intensive sector such as health care, this decline is likely to increase the unit labor cost of its products, unless the sector finds ways to reduce its heavy reliance on labor [Mahar 2006] [Zuckerman & McFeeters 2006]. One effective response to this economic pressure from the labor market will be development and use of labor-saving technologies that can minimize the health sector's traditional reliance on human labor. Some of these technologies have not been fully developed-for example, in the field of genomics and nanotechnology. Other potentially labor-saving technology already exists-for example, information technology (IT), but so far has been sparingly used in the U.S. health care market, which is by far the largest national market in the world [Boccuti & Moon 2003]. Health care costs in the United States do increase faster than the growth of the gross domestic product (GDP), [OrszagCongressional Budget Office 2009]. Within time period between 1993 and 2003, total U.S. health care costs' growth showed an increase of 6.6 percent per year. These costs were larger than the nominal GDP, which, in average grew 5.2. percent per year. (see Figure.1.)

Figure 1. Projected private and goverment health spending for the period 2007-2082 (as percentage of aggregate GDP) Source: (Orszag-U.S. Congressional Budget Office, 2009)

From Figure 2. it is evident that the national health care spending – per person, as percentage of GDP in 1960 was 5.4 percent or US $1,066.00 per person; in 2007 it increased sharply to 16.2 percent or US $7,421.00 per person. The final projection till 2018 shows that these costs will continue to consume even larger portion of 20.3 percent of GDP or an astonishing US $13,100 per person, annually. (Department of Health and Human Services 2007)

Figure 2. Controlling projected skyrocketing health care costs Source: Department of Health and Human Services Although the opinions of the economic scholars vary, newer studies do show that if only the age structure of the U.S. population changed over the period 2000-2030, then average

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annual per capita health spending would be projected to increase at an average annual compound rate of only 0.4 percent over this long forecast horizon. Some academic researchers have reached the consensus that the aging of the population may account for only two percent of the aggregate spending increase for 50 year period between 1940 and 1990. As the baby boomer generation reaches the retirement age, it is expected that the effect of aging will increase [Cutler & Meare 1999] [Smith, Newhouse and Freeland, 2009], [Newhouse 2003]. Simulation of Medical Expenditures Panel Surveys (MAPS) confirm the general proposition trends found elsewhere in the literature that, by itself, the aging of the U.S population, over time is not likely to become a major driver of cost increases in the demand for health care and of national health spending [Reinhardt, 2003].

Table 1. Relationship between aging and total costs (as part of the original quantitative research) Correlations Source: Authors’ own research calculations

Medical costs are on the rise

Pearson Correlation Sig. (2-tailed) N

The individuals 65 and older spend more on health care than others.

In order to confirm these sometimes contradicting claims we conducted our own quantitative research on 80 via stratified-random sampling participants in the U.S. State of Connecticut. Our research study had a retrospectiveperspective character. Research questions were created and literature review was performed to investigate documented research results on the link between the aging of population and aggregate health care cost. Hypotheses statement was created, evaluated and finalized. A quantitative survey research instrument was conducted to collect data for analysis utilizing medical field professionals, patients and graduate students. The testing of the hypothesis statement “There is significant relationship between aging of the population and overall health care costs” was performed by using the bivariate correlation method within the SPSS program. RESULTS By testing the hypothesys that “There is significant relationship between aging of the population and overall health care costs” we found that no significant relationship was found between the aging of the population and total national health care costs. Pearson correlation factor r = -.055 and 2-tailed-significance factor was .630, p > .05. (See Table 1).

1

-.055 .630

80

80

-.055

1

Pearson Correlation

Sig. (2-tailed)

METHODOLOGY

Medical costs are on the rise

The individuals 65 and older spend more on health care than others.

N

.630 80

80

CONCLUSION In the debate on health policy, it is widely believed that the aging of U.S. population is a major driver of the annual growth in the demand for the health care and in national health spending. In the face of the impending retirement of the babyboom generation starting soon after 2010, this belief has lent great urgency to the search for a reform of government insurance for retired people –(Medicare), to assure that future financial sustainability of that program. Simulations based on more recent data are used to show that the aging of U.S. population would add only about half percentage to the total annual increases in national health spending (projected in the past to be around 7.3 percent over 2002-2012 period), if all age specific health spending per capita did not rise for supply side or other reasons. Furthermore, the demand-side effect of aging can be expected to remain a relatively modest contributor to the growth in health spending even during the period 2012-2030, when the baby-boomers (i.e. generation born from 1945 till 1964) join the ranks of the retired. To check this statement we conducted our own study. Initially, the study assumes that the aging of the population does have a significant relationship with the increases in the total national health care cost. However, the findings of our study suggest that this cost item did not have a significant relationship to the national health care cost. The results of our study also confirm the findings that the aging of the population is too gradual a process to rank as a major cost driver in healh care, although the individuals 65 and older tend to average three to five times that for younger Americans in

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any year per capita health spending. This study had contradicted the findings of the literature review of some researchers. REFERENCES 1. Newhouse, J.P. (2003) An iconoclastic view of cost containment. Health Affairs, 12, pp. 154-171. 2. Orszag, P.R. (2009) Growth in health care cost: Testimony before the Congressional Budget Office (CBO). United States Senate. 3. Zuckerman, S., & McFeeters, J. (2006) Recent growth in health expenditures. The Commonwealth Fund/Alliance for Health Reform. 914, pp.1-14. 4. Mahar, R. (2006) Money driven medicine: The real reason health care costs so much. 1st ed. Harper Collins Press. New York. 5. Gonzalez, A. (2009) Health care spending per capita. Organization for Economic Cooperation and Development (OECD). United Nations. USA Today. 6. Reinhardt, U.E. (2003). Does the aging of the population really drive the demand for health care? Health Affairs, 22, (6), pp.27-39. 7. Boccuti, C., & Moon, M. (2003) Comparing Medicare and Private Insurers: Growth Rates in Spending over Three Decades. Health Affairs, Mar/April 2003, pp.230-237. 8. Cutler, D.M., & Meare E. (1999) The Concentration of Medical Spending: An Update. NBER Working paper no. 7229. Cambridge, Mass. 9. Department of Health and Human Services. (2007) Controlling projected skyrocketing health care cost. 10. Smith, S., Newhouse, J.P., & Freeland, M.S. (2009) Income, insurance and technology: Why does health spending outpace economic growth? Health Affairs, 28, (5), pp.1276-1284. 11. Ridic, O. (2010) The contribution of eight cost drivers to the total national health care cost. Masters Research Project. Department of Management and Leadership Studies. Albertus Magnus College. New Dimensions. New Haven and East Hartford, State of Connecticut, U.S.A. 12. Plojovic, Š. (2008) Statistika, University of Novi Pazar, Novi Pazar, Serbia 13. Plojović, Š., Ujkanović, E., Bušatlić, S., Ridić, O., Mogući modeli promene visine penzija i efekat na PIO fond, Ekonomski izazovi : časopis Departmana za ekonomske nauke Internacionalnog Univerziteta u Novom Pazaru ISSN: 2217-8821 SG=p I 98.- God. 3, br. 6 (2014), str. 22-40 14. Plojovic Š., Mogućnosti primene statističkih modela u makroekonomskoj analizi, University Review (Univerzitetska misao), issue: 06 / 20 07, pages: 156-176

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