The health sector relative to the economy

Health prices

It can be useful to understand how much changes in health spending are related to price changes (e.g. inflation) rather than the volume or nature of services being purchased and how this compares with the general economy. Between 2019–20 to 2020–21, health prices grew by 1.96% on average. This is broadly consistent with yearly health inflation over the past decade, which has fluctuated between 1.6% and 2.2%. General inflation, measures using the implicit price deflator (IPD) for gross national expenditure (GNE), was 0.8%. As such, ‘excess health inflation’ was 1.16%, indicating that prices of health goods and services rose slightly faster than prices in the general economy (Figure 5).

Over the decade to 2020–21, prices in the health sector were relatively stable compared with prices in the broader economy. This resulted in varying levels of excess health inflation, ranging from –0.3% in 2013–14 to 1.27% in 2016–17.

Figure 5: Annual health inflation(a) and general inflation(b) rates, 2010–11 to 2020–21

The line graph shows that annual health inflation rates were more stable than annual general inflation rates from 2010–11 to 2020–21. Annual health inflation rates ranged from 1.60 and 2.23 per cent while annual general inflation rates using the GNE IPD varied from 0.8 per cent and 2.24 per cent during this period. Annual health inflation decreased overall from 2.18 per cent in 2019–20 to 1.96 per cent in 2020–21. Meanwhile, annual general inflation rate using the GNE IPD decreased overall from 1.63 per cent to 0.8 per cent over the same period.

Inflation and deflators

Inflation refers to changes in prices over time. It can be positive (prices are rising over time and the same volume of goods cost more, so money is losing value) or negative (the same volume of goods is costing less).

Inflation in the broader economy is measured using price indexes, also known as deflators. These show the amount a price has changed over time relative to a base year. The reference year, or base year, for the deflators used in this report is 2020–21.

Health inflation

Health inflation is a measure of the average rate of change in prices within the health goods and services sector of the economy.

More information on health deflators and industry-wide deflators can be found in the Concepts and definitions section of this report.

General inflation

General inflation refers to the average rate of change in prices throughout the economy over time. There are different ways to measure the economy, and many methods for deriving deflators. The specific deflator can affect whether prices in the health sector appear to have risen slower or faster than the general inflation rate (excess health inflation).

In this report, the measure used for this is the IPD for GNE. GNE is a measure of the value of final expenditures on the goods and services purchased in the economy, including imports but excluding exports. IPD is an indicator of changes in the purchase price of these goods.

Excess health inflation

Excess health inflation is the amount by which the rate of health inflation exceeds general inflation. Excess health inflation will be positive when health prices are rising more rapidly than prices generally throughout the economy. It will be negative when the general level of prices throughout the broader economy are rising more rapidly than health prices.

Health spending and gross domestic product

The ratio of health spending to GDP, showing the proportion of total economic activity represented by the health sector, is an indicator of the contribution of health spending to the overall economy.

In 2020–21, health spending accounted for 10.7% of GDP in Australia, 0.5 percentage points higher than in 2019–20 (Figure 6). The ratio of total health spending to GDP increased gradually during the first half of the decade (2010–11 to 2015–16), then flattened out. It has increased in the past 2 years though, suggesting that activity in the health sector has been growing faster than the rest of the economy.

Figure 6: Ratio of total health expenditure to GDP, and annual growth rate, current prices, 2010–11 to 2020–21

The line graph shows that annual growth rates in Gross Domestic Product is more volatile compared to the annual growth rates in total health spending from 2010–11 to 2020–21. Annual growth rates in total health spending ranged from 3.0 per cent to 9.2 per cent. Meanwhile, annual growth rates in Gross Domestic Product ranged from 1.5 per cent to 6.1 per cent and with an average growth rate over the decade up to 2020–21 of 3.8 per cent. In this 10-year period, the ratio of health spending to Gross Domestic Product was relatively consistent and increased overall from 9.2 per cent in 2010–11 to 10.7 per cent in 2020–21.