Amongst the countries of the Organisation for Economic Co-operation and Development (OECD), health expenditure has on average exceeded the rate of economic growth by 2% annually for the past sixty years.  All advanced economies are facing a similar situation where spending on healthcare could rise to the extent that other areas of public spending, such as education, infrastructure or policing, will suffer.  Nor is it clear that high expenditure results in high returns:  there is no simple causal relationship between higher health expenditure and better health outcomes.

Health expenditure growth is a result of two trends.

• First, demand for healthcare has grown rapidly in recent decades, a development which is likely to accelerate.  This is partly a consequence of getting richer: as income rises people have more resources to spend on healthcare.  This is particularly true in the emerging countries of Brazil, Russia, India, China and South Africa, where incomes are increasing rapidly. 

Demand growth is also a consequence of ageing populations:  in the OECD countries the number of over 65s for each person under 65 is set to increase substantially for every country by 2050.  Older populations are far more likely to suffer from an increased prevalence of non-communicable diseases (NCDs) such as diabetes, coronary heart disease and mental illness.  These are expensive long-lasting conditions, consuming approximately two-thirds of healthcare resources in advanced economies.  Non-communicable diseases are no longer a worry just for high-income countries; the total economic burden is projected to exceed a staggering $21 trillion in low and middle-income countries from 2011-2030. This is about the same size as the 2010 economies of the US, Germany, France and the UK combined.

• The second key trend that explains increasing health expenditure is that we are spending more on the average patient.  Technological innovation often reduces costs in other industries such as personal computing.  In healthcare, however, the focus has traditionally been on providing new drugs, equipment or techniques that deliver the best possible outcomes with little attention to cost.  Healthcare innovation is clearly necessary if we are to continue the rate of healthcare improvement and meet expanding demand.  The costs of this innovation, however, could make health systems unsustainable. 

This is a summary of the Linklaters Innovation in Healthcare report.  To receive a copy of the full report with complete methodology, interview and research references, please contact: LinklatersHealthcare@linklaters.com