Casualty Actuarial Society E-Forum, Spring 2011 1 International Evidence on Medical Spending

U.S. medical spending is high by measures including the level of spending, level of spending per capita, and level of spending as a share of GDP. U.S. medical spending growth is average by measures including the annual growth rate, annual growth rate per capita, and annual growth in spending as a percent of GDP. The volatility of U.S. medical spending growth is low by measures including the standard deviation, skew, and excess kurtosis. Foreign healthcare systems, with a much larger government involvement, have not been able to control medical spending growth better than the U.S. with its mixed system. Foreign cost curves start at a lower level, but increase as quickly or even faster. In many countries, the variance around the trend is high, or a single trend over time does not exist. The implication is that it is difficult to find a foreign solution to the U.S.’s problems with high medical spending, and that the U.S. may be a world leader in terms of minimizing medical spending volatility. If the U.S. healthcare cost curve comes to resemble that of other countries, the risk of long-tailed lines of insurance linked to the cost of medical care will increase. The healthcare cost curve is a macroeconomic process, so there may be no ways for insurers to bend their cost curve. Insurers may be able to use market solutions, such as prediction markets, inflation-indexed bonds, and futures contracts, to improve prediction and hedging of long-term medical spending growth. My recommendations for insurers are cognizance and caution when writing long-tailed lines of insurance linked to medical spending