The level of health spending in a country, covering both individual needs and population health as a whole, and how this changes over time is dependent on a wide range of demographic, social and economic factors, as well as the financing and organisational arrangements of the health system.

The ratio of spending on health care goods and services compared to total spending in the economy can vary over time due to differences in the growth of health spending compared to overall economic growth. During the 1990s and early 2000s, health spending in OECD countries was generally growing at a faster pace than the rest of the economy, leading to an almost continual rise in the health expenditure to GDP ratio. After a period of volatility during the economic crisis, the average share has remained relatively stable in recent years, as growth in health spending across the OECD has broadly matched overall economic growth.

Variations in per capita health spending can be the result of differences in prices for health care goods and services, and in the quantity of care that individuals are using (“volume”). Breaking down health spending into these two components gives policymakers a better understanding of what is driving the differences, and therefore guides them to what responses can be put in place to increase value for money. Depending on what explains high spending, the options can differ.

A variety of financing arrangements, broadly classified according to their compulsory or voluntary nature, provide coverage against the cost of health care by purchasing health care services. Government financing schemes, organised at a national or regional level or for specific population groups, automatically entitle individuals to care based on residency, and form the principle mechanism by which health care expenses are covered in a number of OECD countries. The main alternative is for residents to be enrolled in a compulsory health insurance scheme (through public or private entities) which then covers the bulk of their health care use. Despite near universal health care coverage in many OECD countries, direct expenditure by households (out-of-pocket spending) in the form of standalone payments or as part of some co-payment arrangement remain an important element of health financing but the extent can vary considerably. Finally, among the other types of discretionary health care financing, voluntary health insurance, in its various forms, can play an important funding role in some countries.

While health care goods and services are purchased through different financing schemes (see indicator “Health expenditure by financing scheme”), these in turn need to mobilise revenues to fund the spending, often relying on a number of different sources. Analysing the financial flows from sources through to the schemes gives a more comprehensive understanding of how health services are ultimately funded and the overall burden on different sectors of the economy.

Factors such as how care is organised and prioritised across providers, input costs and population needs all affect the level of spending across different services. Inpatient and outpatient services comprise the greatest share – typically accounting for around 60% of all health spending across OECD countries (). Medical goods (mostly pharmaceuticals) take up a further 20%, followed by a growing share on long-term care, which in 2017 averaged around 14% of health spending. Administration and overall governance of the health system, together with preventive care covered the remainder.

How and where health care is delivered can have a significant impact on spending for different goods and services. Health care can be provided in many different organisational settings, ranging from hospitals and medical practices to pharmacies and even private households caring for family members. Analysing health spending by provider can be particularly useful when considered alongside the functional breakdown of health expenditure, giving a fuller picture of the organisation of health systems (see indicator “Health expenditure by type of service”).

The health and long-term care sectors remain highly dependent on labour inputs, but capital is also a key factor in the production of health services. How much a country invests in new health facilities, the latest diagnostic and therapeutic equipment and information and communications technology (ICT) can have an important impact on the capacity of a health system to meet the health needs of the population and thus contribute to better outcomes. For example, a low level of MRI and CT scanners (see indicator “Medical technologies” in Chapter 5) can have consequences on the ability to detect diseases at an early stage. However, the level of capital expenditure tends to fluctuate more from year to year than current spending on health services, as investment decisions can be much more dependent on economic circumstances and political or business choices as well as reflecting future needs and past levels of investment. In making such decisions, policy-makers and providers need to weigh up not only the short-term costs, but also the potential benefits in the short, medium and longer-term. As with any industry, a lack of investment spending in the present can lead to an accumulation of problems and bigger costs in the future as current equipment and facilities deteriorate.

Health expenditure has outpaced economic growth across OECD countries over most of the past half century. This additional spending has contributed to improvements in health outcomes and been an important source of economic growth and jobs. Nevertheless, financial sustainability is becoming an increasing concern, as most countries draw their funding largely from public sources (OECD, 2015[1]). Projections of health expenditure growth can give countries a perspective regarding how quickly, and by how much, health expenditure could rise compared to general economic growth, or with respect to a country’s population (Lorenzoni et al., 2019[2]).