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Brief analytical summaries or syntheses #46

Financial sustainability and affordability of health care systems.

Lessons from OECD countries

Summary

This presentation by Mark Pearson, head of the Health Division at the OECD, reviews how health spending has been affected during the economic crisis in various countries. the author makes some recommendations on how policy should react. The presentation was delivered at the International Conference of Social Security Actuaries and Statisticians that took place in Berlin from May 30 to June 1, 2012.

Background

The problem facing many European health systems is one of fiscal unsustainability. Claims that health spending is good value for money compared to many other things that people purchase are beside the point. Fiscal sustainability needs to be restored in the short term and once this is done, there will still remain the longer-term challenge of ensuring economic sustainability, which requires a different agenda of policies – to ensure value for money.

Analysis and results

The problem facing many European health systems is one of fiscal unsustainability. Claims that health spending is good value for money compared to many other things that people purchase are beside the point. Fiscal sustainability needs to be restored in the short term and once this is done, there will still remain the longer-term challenge of ensuring economic sustainability, which requires a different agenda of policies – to ensure value for moneyOn average, OECD countries are currently spending almost 10% of GDP on health. However, there is almost a three-fold variation between the largest and smallest spenders with Turkey spending approximately 6% of GDP on health and the United States (US) over 17%

The public sector is the main source of health financing in OECD countries, and has consistently accounted for 72% of health expenditure over the past 20 years. In 2009, governments accounted for 80% or more of health expenditure in one-third of OECD countries

A survey conducted in 2010 revealed that consolidation measures affected the health sector in half of OECD countries. In Greece and Ireland, fiscal consolidation measures affecting the health sector accounted for more than 0.7% of GDP. The policies that have achieved this can be divided into those that have targeted the price of health goods and services (particularly pharmaceuticals and wages); those that have tried to reduce demand for health services (co-payments); and those that try to promote structural reform to provide services at lower average cost. In addition, some countries have sought to find new revenu sources to finance health spending.

Many countries have reacted to the crisis by negotiating or more or less imposing price reductions on medicines sold in outpatient care.

A number of countries have frozen or cut public (including health) sector wages and employment in order to consolidate public spending.

In order to increase the efficiency of health spending, countries have adopted a number of strategies including merging hospitals and other institutions; increasing out-patient appointments and day-surgery as well as centralizing purchasing and procurement of services.

While sin taxes can encourage individuals to reduce consumption of products damaging to health and to lead healthier lifestyles, they also have drawbacks including: high administration costs; increase in consumption of contraband goods; and they can be regressive in nature.

Conclusion

Fiscal sustainability looks every bit as a big problem for health systems in the long run as it does in the short term. While it is possible to finance 70% to 80% of health spending publicly when health accounts for 10% of GDP, it is harder to believe that this is the case if health spending accounts for 20% of GDP – the pressure on tax systems would be too great to bear. Hence either public health spending will have to decline as a proportion of total health spending, or else total health spending will have to be limited. The former looks a more desirable approach, suggesting that governments need to consider how to manage the boundaries between what is provided through public or collective social health programmes, and what is left to private individuals. Few countries are yet having that debate.

Implications and recommendations

Countries have sought to restore fiscal sustainability by spending less on health (either by increasing efficiency or cutting services) or by shifting spending from the public to the private sector and, to a lesser extent, by raising revenues from “sin taxes”. Countries’ responses to the short-term problems of fiscal sustainability of health spending, caused by the intense pressure to reduce budget deficits quickly were, generally, quite rational. In order to limit the effect on front-line services, countries focused on reducing the price of services. Wages were cut, and prices paid for pharmaceutical products reduced. These reduced spending significantly, given the importance of wages in total health spending (accounting for approximately of 70% of spending in a typical country), and given the size of the reductions in pharmaceutical prices. In contrast to previous rounds of public health expenditure cuts, items such as public health spending – which have high rates of return in improving the health of the population, but which take much time to be realized – were largely protected. Moreover, a number of countries including Iceland, Ireland and Portugal introduced various measures to protect vulnerable groups including children, older people and those with serious illness and/or disability.

However, of course even price cuts have negative effects – in causing emigration and early retirement of key professionals, and (potentially) reducing innovative efforts by the pharmaceutical industry and aggravating the trend of lower market growth already observed in many OECD countries. Furthermore, price cuts were insufficient to achieve the desired level of cuts. Some reductions in staff occurred in many countries, and there has been increased use of co-payments.

Many of the same comments apply in the longer terms as well as the short term. It makes little sense to try to restrict demand for health care (with the vital exceptions of investment in preventing poor lifestyles and early diagnosis of problems) – if people want health care, and are willing to pay for it, then it can be an important contributor to economic growth. Instead, attention should focus on supply side issues – payment systems, co-ordination of care, encouraging greater health labour market productivity.

Source

Financial sustainability and affordability of health care systems. Lessons from OECD countries