Health and the economy: A vital relationship

Healthcare performance is strongly dependent on the economy, but also on the health systems themselves. This link should not be underestimated.

Investment in health is not only a desirable, but also an essential priority for most societies. However, our health systems face tough and complex challenges, in part derived from new pressures, such as ageing populations, growing prevalence of chronic illnesses, and intensive use of expensive yet vital health technologies.

Moreover, we must deal with higher expectations of citizens and resolve persistent inequities in access and in health conditions among different groups. Little wonder that the issue of how to ensure the financial sustainability of health systems, while making a positive contribution to macroeconomic performance, has moved to the top of the policy agenda across the OECD area. Much of the work undertaken in the OECD Health Project has aimed at providing policymakers with the evidence they need to promote more value for money in the health sector, while ensuring universal access, equity and raising quality of care. We have learned a lot, though there is more to discover.

A basic message has emerged: investments in health and the design of health financing policies should be addressed in terms of the interaction between health and the economy. Just as growth, income, investment and employment are a function of the performance and quality of the economic system, its regulatory frameworks, trade policies, social capital and labour markets, etc, so health conditions (mortality, morbidity, disability) depend not just on standards of living, but on the actual performance of health systems themselves. Let us go over some of these interactions.

Health performance and economic performance are interlinked. Wealthier countries have healthier populations for a start. And it is a basic truth that poverty, mainly through infant malnourishment and mortality, adversely affects life expectancy. National income has a direct effect on the development of health systems, through insurance coverage and public spending, for instance. As demonstrated in 1997 by the WHO Commission on Macroeconomics and Health for a panel of 167 countries, while health expenditures are determined mainly by national income, they increase faster than income.

Another well-known relationship is an institutional one. Take the case of tobacco use. Efficient fiscal systems in the OECD have meant that increases in taxes on tobacco could reinforce other public health policies like rule-based restrictions on smoking in public places. Some countries have gone very far in this respect, with Ireland actually banning smoking in its famous pubs! Such courageous initiatives cannot succeed without institutional backing, whether legalistic or otherwise.

Another example of how institutional arrangements can help is through universal provision of insurance coverage, which a larger fiscal base and a small informal sector help to attain. Globalisation in general, and trade liberalisation in particular, also affect healthcare, via constrained pricing and trade policies of pharmaceuticals, and the need for enhanced health surveillance across borders and populations.

The effects of health on development are clear. Countries with weak health and education conditions find it harder to achieve sustained growth. Indeed, economic evidence confirms that a 10% improvement in life expectancy at birth is associated with a rise in economic growth of some 0.3-0.4 percentage points a year.

Disease hinders institutional performance too. Lower life expectancy discourages adult training and damages productivity. Similarly, the emergence of deadly communicable diseases has become an obstacle for the development of sectors like the tourism industry, on which so many countries rely.

Policy choices cannot be taken lightly. Health financing, through out-of-pocket expenditures, is inequitable and can expose whole populations to huge cost burdens that block development and simply perpetuate the disease/poverty trap. On the other hand, health systems need financing and investment to improve their performance, yet this need cannot in turn impose an unfair burden on national spending or competitiveness.

This is a very delicate balance for policymakers to have to strike. There are other challenges too. For instance, in high-income countries, the lack of benefit portability associated with employer-provided health insurance often constrains worker mobility, so impeding the efficiency of labour markets we all want to see. And there are indirect effects on other spending decisions, both by households and governments. In other words, if you want to raise investment in health spending, you may need to find cuts elsewhere in the economic system.

As policymakers with public responsibilities, we must never forget that decisions taken in one sphere affect conditions, stakeholders and policies in another. We all want better health systems, but the impact of health on the economy should not be underestimated. Our challenge is to harmonise health and economic policies to improve health outcomes, of course, but also to minimise any negative impacts while promoting synergies wherever possible. We cannot do this alone and need the international evidence and shared learning that organisations like the OECD can provide.

©OECD Observer No 243 May 2004

A strong relationship Interactions between health and economy Government of Mexico




Economic data

GDP : +0.5%, Q4 2014
Employment rate: 65.9%, Q4 2014
Annual inflation : 0.60% Mar 2015
Trade : -3.0% exp, -3.7 imp, Q4 2014
Unemployment : 6.993% Feb 2015
More moderate expansion ahead? Composite leading indicators
Updated: 12 May 2015

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