Research Synthesis on Cost Drivers in the Health Sector and Proposed Policy Options. CHSRF Series of Reports on Cost Drivers and Health System Efficiency: Paper 1
(2011; 36 pages)


This report synthesizes the current body of knowledge on cost drivers in Canadian healthcare. Cost drivers are factors that bring about increased spending on healthcare. Thus, a comprehensive understanding of cost drivers is essential to a productive debate on the sustainability of Canada’s publicly funded healthcare systems.

In Canada, health spending is rising faster than the economy is growing (Section 2). Over the 1999–2009 period, expenditure growth within the health sector was fastest for capital (e.g. construction of hospitals, medical equipment or software for healthcare facilities), drugs and public health (e.g. food and drug safety, health promotion, community mental health programs, and prevention of communicable diseases). While reimbursements for hospital and physician services comprise the bulk of public sector healthcare spending, growth in these areas was comparatively small.

Current research has identified many drivers of healthcare costs, and some has attempted to estimate the degree to which they cause expenditures to rise (Section 3). Unfortunately, information on cost drivers is limited, allowing researchers to directly measure only a handful: population growth, population aging, income growth and inflation in the health sector. Armed with information on these factors, researchers have estimated the effect they have on observed healthcare expenditure growth. However, a substantial proportion of observed growth remains unmeasured. The economic literature refers to this unmeasured growth as the enrichment factor (Section 3.4). The enrichment factor is generally thought to represent advances in medical science and technological innovation, but has also been attributed to patterns of disease (more chronic diseases, mental illnesses), patient behaviours and preferences, and physical environments. Broadly speaking, advancements in medical science and technological innovation affect healthcare systems in two ways. First, new technologies replace older, less efficient or more costly technologies. Treatment substitution can be a cost driver or a cost saver, since new technologies may be more or less expensive than older ones. Second, new technologies can lead to new disease treatments or a wider consumption of existing treatments. When treatment is effective, giving access to more people is beneficial, and doing so increases both demand for and expenditures on healthcare. Evidence suggests that 71% of the annual growth of drug expenditures in Canada between 1998 and 2004 was due to volume increases. The average number of prescriptions filled per capita rose from 7.8 to 12.0 between 1995 and 2005.(1) In addition, new drugs are often more costly than older drugs. Compounding volume and price increases, total spending on drugs has grown year on year by 6.3% over the last 10 years...

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