Balancing the health budget: chronic disease investment pays big dividends

Australians may be living longer but lifestyle-related chronic diseases are now the leading cause of illness, death and disability. Nearly 40% of Australians aged 45 and over have two or more chronic diseases, such as arthritis, asthma, back problems, cancer, chronic obstructive pulmonary disease (COPD), heart disease, diabetes and mental health conditions.

Health expenditure in Australia accounts for about 10% of GDP and the cost of health care continues to rise faster than inflation. Treasurer Joe Hockey has left the door open for a GST on health, while states premiers have flagged increasing the GST to 15% or Medicare levy to 2% to cover the rising cost of health.

But so far the debate about reining in health costs has largely overlooked the economic benefits of implementing policies to reduce chronic diseases. This can be done via education programs to lower risk factors such as smoking and weight gain, and by early detection and treatment programs.

To illustrate the impact of improved health on the broader economy, researchers at Victoria University’s Centre of Policy Studies translated the results of a Finnish study of the effects on health of a large-scale diabetes educational program into Australian conditions.

The Finnish program involved one-to-one counselling and group sessions covering nutrition, physical activity and weight management. Scaled up to Australian conditions, close to a million people would be involved, at a cost of about A$0.5 billion.

If such a program produced comparable lifestyle effects to those in Finland, the gain to GDP would be A$4.5 billion a year, which amounts to 0.3% of GDP. Compared with efficiency gains available from policies in areas such as taxes and trade, this is a huge gain.

Why are the potential gains so large?

Economic models of potential savings capture two key connections between the economy and chronic disease.

The first is obvious: treating chronic disease is expensive. It pushes our taxes higher and reduces our ability to enjoy other forms of public and private consumption, such as good roads, public transport, education and housing.

The second key connection is less obvious but critically important: chronic disease reduces our ability to work. People with poor health – especially in the 49-plus age group – participate at significantly lower rates in the work force than people with good health.

Data from the Household, Income and Labour Dynamics in Australia (HILDA) survey show that the fraction of potential workers in each age group that are employed declines sharply with poor health:

Chronic diseases such as diabetes are a major factor in poor health which is, in turn, a significant contributor to reduced labour supply and employment.

But where should we direct funding for prevention and intervention?

We modelled two comparable health programs aimed at improving health status transitions. One program reduces the number of older people who move to poor health. The other reduces the number of younger people who move to poor health.

The economic modelling figures give a resounding victory for improving health transitions for the older group. The gains to GDP and employment are ten times larger for the program that improves transitions for older people than for the one that improves transitions for younger people (see chart below).

There are two reasons. The first can be seen from the first chart: employment of older people is considerably more sensitive to their health status than employment of younger people.

The second depends on the dynamics of health transitions. Once members of the older group fall into poor health, often associated with chronic disease, they tend to stay there with low labour force participation. By contrast, young people tend to suffer more temporary episodes of poor health, bouncing back to good health quickly.

So what does all this mean?

We should think of health as not only an area of social policy but also a major component of economic policy. The potential contribution of good health policy to the economy far outweighs the contributions of most other micro-economic reforms.

Finally, we should not just think of health policies in terms of costs. Costs are important, but health influences the economy in a far more profound way through labour supply. Improving peoples’ health enables them to contribute more to the economy by staying employed. This is especially true for people over 50. Keeping this group healthy is largely a matter of reducing their incidence of chronic disease.

Maureen Rimmer does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.