Public investments for long-term economic growth: the case of health

Michael Stolpe

The crisis has shot holes in government budgets devoted to pro-growth public goods. This column argues that health-related public goods support long-term economic growth. Governments may be more inclined to focus on spending related directly to jobs, such as education and welfare-to-work programmes, but health should not be forgotten

Crisis or not, healthcare cries out for large-scale public investments that lock in what appears to be an historic trough in government borrowing costs in many of the world’s advanced countries. The opportunity is to bring forward and expand the creation of health-related public goods that can support economic growth for a long time – as happened in much of the 20th century, when the spread of modern medicine helped trigger an unprecedented doubling of life expectancy, accompanied by a savings and investment boom in much of Europe, the Americas, Australia and many countries in Asia (Fogel 2004). If future longevity gains are accompanied by further gains in labour productivity and later retirement, per capita lifetime incomes will continue to grow and further increase the demand for better health.

Reform is necessary

Yet simply expanding today’s healthcare delivery systems and the services that already exist would not be efficient. Required are more potent and entirely new cures, derived from biomedical research, a public investment good par excellence. Medical conditions that were once rare, such as certain cancers, Alzheimer’s, other neuro-degenerative and age-related chronic diseases, will become prevalent. For two main reasons, the payoff from fighting these diseases is expected to be large and increasing:

As morbidity and mortality from other causes continue to decline, the prospect of greater longevity makes surviving any particular disease more valuable to every individual.

In addition, as the elderly’s population share grows, society’s willingness-to-pay for curing their specific diseases will rise much faster than anyone’s individual willingness-to-pay.

Global imbalances in health research

The theory of public goods suggests countries with faster ageing populations ought to be more heavily invested in health research and development. Yet my research, included in the 2011 White Paper of the European Medical Research Councils (European Science Foundation 2011), shows that in Japan and especially in Europe, the global leaders in population ageing, health research is still done on a far lower scale than in the US, where as a percentage of GDP the relevant government budget appropriations are more than twice as large (at close to 0.3%) as the weighted average in 13 major European countries for which accurate information is available. All public health research, i.e. biomedical research performed in the public and private non-profit sectors, attracts around twice as much spending in the US as in the 27 EU member countries combined. Relative to GDP, the US spends roughly four times as much – around 0.4% – on public health research as the EU as a whole.

Per capita of the population, Europe’s spending on public health research in 2009 was merely €41, one third lower than Japan’s and more than two thirds lower than US spending, evaluated at purchasing power parities. This low figure for the EU contrasts sharply with its relatively large per capita spending on healthcare: €2,750 in 2009. To be sure, the US (at €6,400 in 2009) spends more than twice as much, but Japan (at €2,350) manages to spend less on healthcare than does the EU – in spite of even more advanced population ageing. The international spending differences in public health research are so out of line with spending on healthcare that they cannot be attributed solely to different relative input prices, such as researchers’ wages, but strongly suggest differences in government priorities.

Europe’s health-research needs

Does Europe then have a massive underinvestment problem in public health research waiting to be fixed? In the past, Europe may have gotten away with relatively little research of its own by free riding on the fruits of US health research, the quantitative and qualitative world leader. But this strategy is less likely to work as well in the future – for several reasons:

Amid more advanced population ageing, Europe has a more urgent need to prioritise new and more effective treatments for diseases of the elderly.

The relevance of environmental factors and their interaction with genes in the development of many diseases, which scientists are beginning to understand, implies that finding successful new treatments increasingly requires country- and epidemiological milieu-specific research designs, and new findings are less likely to be directly transferable internationally.

The efficient delivery to patients of a continuous stream of medical innovations requires a well-developed local infrastructure for health technology assessments and practice evaluations, for the speedy flow of relevant information within health systems and for the prudent management of risks, in terms of adverse health as well as unanticipated financial effects, that these innovations may create.

Given the gestation and dissemination lags involved, many relevant public goods – such as basic, clinical and translational research and the infrastructure to deliver evidence-based medicine to patients – will have to be deployed long before population ageing peaks.

Investment obstacles and underexploited complementarities

In addition to the expansion of public health research, obstacles to private investments should be removed. Biomedical research has long tended to yield exceptional rates of return to society (see Murphy and Topel 2003, European Science Foundation 2011) widely exceeding the returns business investors can appropriate in this field (see Jena and Philipson 2008) – an observation economists interpret as evidence of obstacles preventing the efficient translation of society’s latent demand for innovations into an appropriate supply response. Many potential innovations whose social payoff would exceed their cost are not being made. To overcome these obstacles, governments must use a range of tools to facilitate the diffusion and adoption of cost-effective healthcare technologies, increase the financial rewards for health-improving innovation and better align private incentives with social priorities. They can exploit four important complementarities in this endeavour:

First, between research and evaluation.

To find the optimal mix and level of spending, governments must rethink and improve the design of economic evaluations that they increasingly use as a basis for regulatory intervention, pricing policies and access restrictions to protect their national health system from excessive spending.

Second, between public and private research – governments should use the commitment implied by public investments to signal that private business too will be rewarded for aligning its research investments with society's long-term priorities amid population ageing.

Third, between public and personal health investments – by making long-term commitments, governments can also induce greater individual health investments as people anticipate higher lifetime productivity in all kinds of disease prevention, including physical exercise and leaner diets, when the supply of health-related public goods is increased, improved and sustained.

As I argue elsewhere (Hostenkamp and Stolpe 2008), compression of the time spent in ill health before death can enable and induce workers to extend their labour-market participation beyond the currently normal retirement age1 – a trend well underway. In only ten years to 2011, the employment rate of 60 to 64 year olds in Germany more than doubled, from 21.4 to 44.2%, and that of 65- to 69-year-olds almost doubled, from 5.4 to 10.1%, according to OECD data (2012).

Fourth, national governments can exploit international complementarities by recognising medical knowledge as a global public good that enhances the local production and delivery of care.

Adopting new medical technologies is one important way to access the world's rapidly expanding stock of medical knowledge. Governments may be tempted to take the worldwide stock as given, but they would undermine its future growth if they treated medical knowledge as a free good or put a cap on spending for new technologies that is unrelated to any reasonable estimate of societal benefits.

Health research and European growth

A key policy question is how to compare societal benefits with the costs of developing new healthcare technologies. To adopt an existing technology, it may suffice to evaluate its benefits in the jurisdiction for which the adoption is made. But when it comes to decisions about the development of new technologies, including new medical knowledge, societal benefits should be valued globally – in terms of the health gains they are expected to generate worldwide. These valuations would take into account that countries’ time profiles of health and welfare benefits from a given innovation may vary widely as they depend on economic, demographic and other country-specific conditions (Becker, Philipson and Soares 2005). Countries with faster ageing populations may enjoy larger productivity gains in their workforce and greater benefits from later retirement than countries with younger or slower ageing populations.

In the decades ahead, Europe has the potential to lead the world in healthy ageing. Not only do Europeans, along with Japanese people, already enjoy greater longevity than, for example, US citizens, but they also tend to enjoy better health at any given age. In many European countries, mortality for people aged 20 to 65 is more than one third lower than it is in the US (Knoll Rajaratnam et al. 2010; Institute of Medicine 2013). In the aftermath of the financial crisis, the growing size of Europe’s elderly cohorts is boosting the social rate of return on health-related public-good investments at a time when the borrowing costs of many European governments are at record lows. These governments should expand their health research not only with their own populations, but with all of Europe in mind. With sufficient translation of health improvements into longer, more productive working lives, Europe’s currently depressed economies can thus be supported in returning to sustained long-term growth and in generating the additional tax revenue that will eventually help governments balance their books.

References

Becker, Philipson and Soares (2005), “The Quantity and Quality of Life and the Evolution of World Inequality”, The American Economic Review, 95(1), 277 – 291.

European Science Foundation (2011), “A Stronger Biomedical Research for a Better European Future”, EMRC White Paper. Strasbourg 2011, available at www.esf.org.

Fogel (2004), The Escape from Hunger and Premature Death, 1700 – 2100: Europe, America and the Third World, Cambridge, Cambridge University Press.

Hostenkamp and Stolpe (2008), "Optimal Health and Pension Policies amid Population Aging", Kiel Working Paper 1428.

Hostenkamp and Stolpe (2012), “The Social Costs of Health-related Early Retirement in Germany: Evidence from the German Socio-economic Panel”, Schmollers Jahrbuch 132(2), 323 – 357.

Institute of Medicine (2013), “U.S. Health in International Perspective: Shorter Lives, Poorer Health”, Washington DC, available at www.iom.edu.

Jena and Philipson (2008), “Cost-effectiveness Analysis and Innovation”, Journal of Health Economics, 27, 1224-1236.

Knoll Rajaratnam, Marcus, Levin-Rector, Chalupka, Wang, Dwyer, Costa, Lopez and Murray (2010), “Worldwide Mortality in Men and Women aged 15—59 years from 1970 to 2010: A Systematic Analysis”, The Lancet 375(9727), 1704 – 1720, doi:10.1016/S0140-6736(10)60517-X.

Murphy and Topel (2003), Measuring the Gains from Medical Research: An Economic Approach, Chicago and London, University of Chicago Press.

OECD (2012), “Thematic Follow-up Review of Policies to Improve Labour Market Prospects for Older Workers”, Germany.

For a calibration of changes in the timing of retirement that would be triggered by improved health among disadvantaged workers – even without further changes in retirement laws – in Germany, see Hostenkamp and Stolpe (2012).