The View

Health care could account for almost a third of Hong Kong GDP by end of century

Rising health-care expenses and income growth could result in the sector accounting for a third of Hong Kong's GDP by the end of the century

PUBLISHED : Tuesday, 26 August, 2014, 3:19pm
UPDATED : Wednesday, 27 August, 2014, 1:18am

Four factors determine spending on health care: the size of the population, the proportion of elderly people in the population, the average income per person, and the cost of health-care services. They imply that health-care spending will grow rapidly in Hong Kong.

In 2011, domestic spending on health care was 5.12 per cent of gross domestic product, of which 49 per cent was in the public sector. I predict our health care industry can grow to 10.3 per cent of GDP in 2041 and possibly 17.6 per cent in 2100. If we allow for cross-border export of medical services, it will rise to 13.3 per cent in 2041 and 32.3 per cent in 2100.

Health care could become as important as financing is today

By comparison, finance at its peak in 2007 constituted 12.9 per cent of GDP and manufacturing in 1981 made up 31.8 per cent.

Let me explain how I obtained my projections. Consider the effects of demography (changes in population numbers and ageing). The Hospital Authority's published health-care costs show that treating elderly populations is more expensive than other age groups. In 2009-11 it spent on average HK$3.1 million per year for every 1,000 people aged 15 to 64, but HK$11.4 million for those aged 65 to 74 (3.68 times more) and HK$25.3 million for those aged 75 or above (8.15 times more).

These figures allow us to derive a "health-care cost weighted population" measure using population projection figures from the Census and Statistics Department (up to the year 2041) and the United Nations (up to the year 2100). Hong Kong's ageing population means there is a huge gap between the growth of the population and the "health-care cost weighted population".

On actual expenditure, it should be noted that societies spend more on health care as they get richer, depending on the growth rate of GDP per working person (or productivity) and the income elasticity of demand for health care (the responsiveness of health-care spending to increases in income). I therefore make several assumptions in projecting Hong Kong's health care industry.

First, Hong Kong's past GDP growth rate per working population (of 4 per cent) will be sustained. Second, the baseline health-care income elasticity will be the same as that of Organisation for Economic Co-operation and Development countries (excluding the United States) of about 0.8. Third, the income elasticity will increase to 1 under a high-growth scenario of exporting medical services across the border.

The cost of providing medical and health services is the final element determining health expenditures. Between 1989-90 and 2010-11, this increased by 2.5 per cent per year (measured as the ratio of the price deflator for the medical services component in GDP relative to the GDP price deflator).

Rising health-care costs have two opposite effects on demand. A one-for-one direct effect is that a 1 per cent increase in cost leads to a 1 per cent rise in expenditure so long as the health-care demand remains unchanged. But higher costs lower the quantity demanded (by the price elasticity of demand), so what is the net effect? OECD estimates (excluding the US) of price elasticity are about minus 0.4. Therefore, a 1 per cent increase in health-care costs will on balance increase health-care expenditure by about 0.6 per cent. So multiplying a 2.5 per cent annual cost increase by 0.6 contributes to a 1.5 per cent growth in health-care expenditures.

Combining the effects of demographic changes, income growth and cost increases leads me to predict that by the end of the century, health care could conceivably become as important as manufacturing once was and financing is today.

Such increases in health-care spending will stress our current fiscal arrangements of meeting half the costs from the public purse, unless the quality of care is sacrificed. Politically, no government would wish to offend the elderly vote.

To hold down costs, more medical and health personnel have to be trained and foreign trained ones allowed to register. That means policy and rule changes. Will these changes be made to enable our next growth industry to blossom?

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong