The Methodology of Health Care, Long-term Care and Education Projections
Methodological Compendium, author: Aleš Bělohradský.
The long-term public expenditure projections described in this compendium are comprised of non-pension age-related expenditures, i.e. the expenditures on health care, long-term care and education. All of the models are macro-simulation models based on yearly gender and age cohort data. In addition, the Ministry of Finance of the Czech Republic also prepares pension expenditure projections, which are described in a separate compendium (Marval & Štork, 2018).
Generally, long-term projections serve as a tool for evaluating long-term trends and tendencies under certain assumptions and policy choices. It allows a powerful comparison of the impact on expenditure of various socio-economic evolution paths, and even (especially in the case of pensions) of different policy schemes. It must be stressed that the projections are not predictions in the sense that we would forecast the exact future values. Moreover, it is not very likely that the projected development path will take place exactly. All projections are held primarily under the “no-policy-change” assumption. This means that it reflects the impact on the current system as if it would remain unchanged for the rest of the projection period. It is not probable that the institutional and economic structure stays the same or the government never comes up with any policy reform, but the projections help to understand the impact of the major drivers and to assess the magnitude of their effects. Therefore, it is a handy tool for evaluating the impact of proposed policy reforms with respect to long-term fiscal sustainability, or in other words to answer the “what if” questions regarding future development.
Every projection is the subject of high uncertainty in several dimensions ranging from underlying demographic factors to assumptions on the pace and scope of technological progress. Therefore, the projections are presented in a range of sensitivity scenarios, considering different evolutions of the underlying factors. Most notably, health and long-term care projections distinguish demographic and non-demographic factors. The demographic part is not only about population growth, but also about the effects of ageing. We cannot be certain how increasing life expectancy affects health care needs, as we can only guess whether the gains in life expectancy will be spent more in good or bad health. This is the first strand of uncertainty captured by sensitivity scenarios. Non-demographic factors cover income and price effects, technological progress or cost convergence within the European Union. It is far more complicated to project these types of drivers, as they are dependent on the whole complexity of future development from technological inventions to the global political situation. When implementing this in the projections, it brings a great deal of uncertainty. While speaking about the effects of ageing, however, it is usually restricted to the demographic factors. The last type of sensitivity scenarios would aim at certain policy changes. We generally do not consider these alternatives, with the only exception in this compendium being the projection of higher enrolment rates in tertiary education.
Health and long-term care expenditure projections produced by the Ministry of Finance of the Czech Republic are largely based on the methodology of the European Commission’s Ageing Working Group (EC, 2017) and Organisation for Economic Co-operation and Development (de la Maisonneuve & Martins, 2013). Both methodologies separate expenditure projections for health and long-term care, as they are characterized by distinct cost profiles and slightly different drivers. The European Commission further distinguishes evolutions of in-kind and cash benefits in long-term care. The income effect in the former is connected to GDP per capita and to GDP per hours worked in the latter. The long-term care has two separate, though interconnected parts: health and social. The methodologies of the Organisation for Economic Co-operation and Development and European Commission differ in defining the delimitation of health and long-term care. In our projections, we strengthen their interconnectivity by combining relevant scenarios together and interpreting them in conjunction. Moreover, we put more stress on the non-demographic factors of the expenditure development.
Besides health care and long-term care, we also consider the evolution of education expenditure, which is also connected to the demography and age composition of population. Education expenditure projection is based on the European Commission (2017) methodology. It stems mainly from demographic developments for each education level, employing certain assumptions on enrolment rates.
Although we present some illustrative results in the final section of this compendium, they should not be considered as the actual projections of the Ministry of Finance of the Czech Republic. The aim of this text is to describe the methodology. Also, the illustrative results show only the scenarios which differ in methodology. Besides that, there is a wide range of possible sensitivity scenarios based on different assumptions, such as different population projections.
In Chapter 1, we briefly introduce the most important assumptions, regarding demographic projections in particular. Then we describe the methodology: for health care in Chapter 2, for long-term care in Chapter 3. Chapter 4 accounts for the question of convergence to the European levels. Chapter 5 describes education projection methodology and finally, all illustrative results are provided in Chapter 6.