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The Economics of Public Health Care Reform in Advanced and Emerging Economies
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CHAPTER 6: Containing Public Health Spending: Lessons from Experiences of Advanced Economies

Author(s):
David Coady, Benedict Clements, and Sanjeev Gupta
Published Date:
June 2012
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Author(s)
Justin Tyson, Kenichiro Kashiwase, Mauricio Soto and Benedict Clements 

Public health spending in advanced economies is projected to rise by an average of 3 percentage points of GDP over the next 20 years and by 6½ percentage points of GDP in the next 40 years. These increases will occur at a time when countries need to undertake large fiscal adjustments to reduce public debt ratios in the wake of the global financial crisis, and they present a daunting fiscal challenge for many of these countries (IMF, 2010). Health care reforms to contain public health spending growth are needed, as part of the fiscal adjustments, to stabilize age-related-spending-to-GDP ratios. This chapter examines the health care reform experiences in advanced economies and identifies the most promising strategies to contain public health spending growth.

OVERVIEW

Country case studies, event study analysis, and econometric analysis are used here to gain insights into the policy options available to contain the growth of public health spending.1 Data limitations and the fact that various policy reforms are often implemented together and in response to spending pressures make the identification of reform impacts difficult. Therefore, this chapter uses three complementary methodologies:

  • Case studies: Eight episodes of successful containment of health expenditure in advanced economies are examined. In each of these episodes, countries achieved a sustained reduction in the ratio of public health spending to GDP and a moderation in real spending growth rates. The advanced economies and time periods covered are Canada (late 1970s and 1990s); Finland (1990s); Germany (2000–07); Italy (1990s); the Netherlands (early 1980s and 1990s); Sweden (1980s and early 1990s); the United Kingdom (1980s); and the United States (1990s) (see chapters 10 and 13 for detailed case studies).
  • Event analysis: The event analysis focuses on the impact of reforms in 24 countries. It assesses developments in public health spending before and after specific reforms. Thus, unlike the case studies, this analysis is not confined to reforms that were successful in reducing spending as a share of GDP. Spending trends of nonreforming countries during the same period are also used as a basis of comparison.
  • Econometric analysis: The econometric analysis uses recently compiled OECD data on key indicators of health care systems (Joumard, Andre, and Nicq, 2010) to evaluate the relationship between these characteristics (such as the extent of private health care provision, degree of regulation, patient choice, and stringency of budget constraints) and the growth of public health spending. The impact of particular reforms on the growth rate of public health expenditure is then simulated by changing a country’s rating on these indices.

Reforms are grouped into three categories: macro constraints on available resources, micro reforms to improve efficiency, and demand-side reforms (Box 6.1). Many governments have experimented with macro-level controls (e.g., budget caps, volume controls on inputs and outputs, and price controls on inputs and health services) to restrain public health spending, often as part of broader fiscal consolidation efforts. While these reforms were initially effective at reducing costs, they sometimes shifted spending to areas not covered by the controls or led to undesired side effects (e.g., waiting lists for essential procedures). To reduce the resulting pressures on cost containment, many countries turned to micro-level reforms that targeted not only cost containment, but also higher efficiency and continued high-quality provision of health care. These reforms included improving the organizational arrangements between different parts of the health care system, reimbursing providers through contracts specifying services and prices, and greater reliance on market mechanisms that increase the choices available to purchasers and patients. On the demand side, the most prominent reform has been to increase cost sharing.

The econometric results suggest that a range of options has proven effective in reducing the growth of public health expenditures. Table 6.1 shows the estimated impact on excess cost growth of a country moving up one unit in any given Organization for Economic Cooperation and Development (OECD) index, keeping all other indices fixed. Scores on the OECD indices range from 0 to 6, with a mean score for the different indices of 2.6 (see Appendix Table 6.1). The results suggest that substantial reductions in excess cost growth (ECG) could be obtained from extending market mechanisms (−0.50), improving public sector management and coordination (−0.30), and strengthening budget caps (−0.24)—relative to the 1.0 average ECG under the baseline. Some measures appear ineffective in controlling health spending; price controls, for example, are associated with higher excess cost growth (+0.11). In what follows, the effects of specific reforms on health spending are described in greater detail, drawing also on the complementary findings provided by the case studies and event study analysis.

TABLE 6.1Relationship between System Characteristics and Excess Cost Growth
Reform areas and indicesImpact of a one-

unit change in

index on excess

cost growtha
Budget caps−0.24
Of which:
Budget constraint: rules and/or targets to fix the health budget and its allocation across subsectors and/or regions−0.03
Central government oversight: number of key decisions overseen by central government−0.22
Supply constraints−0.06
Of which:
Regulation of workforce and equipment: degree of regulation on the number and distribution of health care workforce and hospital high-tech equipment and activities, and control of recruitment and remuneration of hospital staff−0.05
Priority setting: definition of health benefit basket, effective use of health technology assessment, and definition and monitoring of public health objectives−0.01
Price controls0.11
Of which:
Regulation of providers’ prices: regulation of drug prices and of prices billed by physicians and hospitals0.05
Regulation of prices paid by third-party payers: regulation of prices paid by third-party payers for primary care physicians, specialists, hospital services, and drugs0.06
Public management and coordination−0.30
Of which:
Gatekeeping: obligation or incentive to register with a general practitioner and/or to get referrals to access secondary care−0.04
Subnational government involvement: number of key decisions made at the subnational level−0.36
Delegation: number of key decisions made at the insurer level0.10
Contracting methods0.09
Of which:
Volume incentives: degree of payment modes to incentivize less services0.09
Market mechanisms−0.50
Of which:
Choice of insurers: ability of people to choose their insurer for basic coverage−0.22
Insurer levers: ability of insurers to compete and availability of insurer information for consumers−0.17
User information: availability of information on quality and prices of health care services0.11
Private provision: degree of private provision of physician and hospital services−0.14
Choice among providers: degree of freedom in choosing among primary care physicians, specialists, and hospitals−0.08
Demand-side reforms−0.09
Of which:
Over-the-basic coverage: share of the population covered by nonprimary insurance, share of health care expenditures financed out of private insurance, and degree of market concentration−0.10
Price signals on users: extent to which patients face out-of-pocket expenses0.01
Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.

Impact on excess cost growth of public health spending due to one-unit change in each OECD index. OECD indicators range between 0 and 6. In the regression analysis, the effect of each individual reform option is estimated keeping all other indices fixed. In practice, some reforms may require offsetting changes in other indices. In addition, simultaneous reforms across different health system characteristics may be undesirable.

Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.

Impact on excess cost growth of public health spending due to one-unit change in each OECD index. OECD indicators range between 0 and 6. In the regression analysis, the effect of each individual reform option is estimated keeping all other indices fixed. In practice, some reforms may require offsetting changes in other indices. In addition, simultaneous reforms across different health system characteristics may be undesirable.

BOX 6.1Reforms in Advanced Economies: A Typology

Reforms implemented in advanced countries over the past three decades can be grouped into three categories (Oxley and MacFarlan, 1995):

Macro-level controls

  • Budget caps: These are the bluntest instrument for restraining resources allocated to the public health sector. They can be expressed as limits on overall health care spending or on subsectors, such as hospitals or pharmaceuticals. Examples include global budgets for hospitals and expenditure ceilings for general practitioners.
  • Supply constraints: Here the focus is on regulating the volume of either inputs into or outputs from the health care system. Input controls include limits on admittance to physician training colleges, defining positive lists for drugs, or rationing of high-tech capital equipment. Output controls include delisting of certain treatments, such as eye tests and dental treatment.
  • Price controls: Price controls regulate prices of inputs or outputs. They include wage controls for health care professionals, reference pricing for pharmaceutical products, and price controls on specific treatments.

Micro-level reforms

  • Public management and coordination: These reforms seek to alter the organizational arrangements between different parts of the health care system in order to reduce costs through improved coordination, alignment of responsibility and accountability, better incentive structures, and/or reduction in overlap or redundancy. Examples of such changes include abolition of managerial levels, decentralization of health care functions, and introduction of gatekeeping arrangements (i.e., a physician who manages a patient’s health care services, coordinates referrals to secondary and tertiary levels, and helps control health care costs by screening out unnecessary services).
  • Contracting: How providers are reimbursed is one of the most important factors affecting the micro-level efficiency of health spending. There are many different ways to pay physicians, hospitals, and other providers, but three of the most general methods are (1) salaries or budgets, (2) case-based payment such as capitation or diagnosis-related groups, and (3) fee for service.
  • Market mechanisms: These reforms seek to improve micro-level efficiency and/or control costs by introducing varying degrees of market mechanisms into the health sector. These reforms operate not so much on the supply side as on the nexus between supply and demand. Examples include creating internal markets (e.g., where primary care physicians purchase services from hospitals), separating the purchase of health services from provision (thus allowing competition among providers), and promoting patient choice (e.g., where patients can choose among primary care providers and hospitals).

Demand-side reforms

These reforms include policies intended to increase the share of health care costs borne by patients, often with the objective of avoiding excessive consumption of specific health services. The two important issues on the demand side are the level of patient cost sharing (this can take the form of lump sum or percentage copayments) and the tax treatment of private health insurance.

COUNTRY EXPERIENCE WITH DIFFERENT REFORM INSTRUMENTS

Macro-Level Controls

Budget Caps

Budget caps and central oversight have been effective in reducing spending growth. According to the econometric analysis, the combined effect of a one-unit improvement in the budget constraint index and central government oversight of key decisions, such as the total health care budget or the financing of high-cost equipment, reduces excess cost growth by ¼ percentage point.2 Event studies confirm the potential of budget caps to contribute to cost containment: in the 19 episodes (in 13 countries) in which a budget cap was implemented, increases in spending-to-GDP ratios slowed substantially, while spending ratios continued to rise in countries without caps (Figure 6.1). In six out of the eight successful reform episodes covered by the case studies, budget caps were used to contain cost increases. Budget caps were also typically employed before or during periods of broader fiscal consolidation.

Figure 6.1Reform Episodes of Budget Caps or Constraints

Sources: Organization for Economic Cooperation and Development, OECD Health Data; and IMF staff calculations.

Nevertheless, even effective budget caps may suffer from some drawbacks: they can limit access to health care, as evidenced by growing waiting times for elective surgery in Canada, Sweden, and the United Kingdom during the period of expenditure consolidation. They may also be inequitable, as rich households can often circumvent waiting lists by purchasing private health care. Furthermore, budget caps alone are unlikely to incentivize greater efficiency, as they are most often based on historical costs.

Budget caps are most effective when applied to broad health expenditure aggregates. Budget constraints that are applied partially (e.g., only to inpatient care spending) can lead to expenditure increases in areas that are not controlled. In the Netherlands, the partial budget cap on inpatient care was unwound by subsequent reform efforts to introduce a managed-care model, and in Italy partial caps on capital investment proved ineffective. In Finland, the introduction of fixed transfers to municipalities to finance health care, alongside other constraints, was successful in containing the costs of inpatient care; however, it was offset by higher pharmaceutical expenditure, much of which was financed through a different source and not subject to the cap on transfers.

Supply and Price Controls

Supply and price controls appear to have only modest effects on the growth of public health spending. According to the econometric analysis, limiting the supply of health services—for example, by imposing regulatory controls on the health workforce and equipment—lowered excess cost growth only slightly (by less than 0.1 percentage point). Event studies also reinforce this finding (Figure 6.2). In practice, supply constraints are often combined with budget caps as a way of targeting cost containment measures. Restrictions on supply were used in Canada (hospital closures, mergers, and reduction in the number of beds), Finland (reduction in the number of hospital beds), Germany (delisting ineffective treatments and positive drug lists), Italy (positive list for pharmaceuticals), and the Netherlands (delisting certain treatments). Price controls, on the other hand, have been ineffective (see below), and the econometric results suggest that increased reliance on these measures actually increases excess cost growth. Price controls were implemented mainly in those countries where the public sector contracts with the private sector to provide services: Canada (with regulated fees for physicians), and Germany and the Netherlands (both with reference pricing for pharmaceuticals).

Figure 6.2Reform Episodes of Supply and Price Controls

Sources: Organization for Economic Cooperation and Development, OECD Health Data; and IMF staff calculations.

The mixed success of price and volume controls is due to supplier responses that have circumvented or offset the effect of controls. For example, the impact of price controls can be eroded by supplier responses such as increasing volumes or directing patients to higher-cost services (Docteur and Oxley, 2003). Country case studies also find variable levels of effectiveness. In Germany, the reduction in pharmaceutical expenditure was short-lived, as drug companies were successful in working around the controls so that pharmaceutical spending did not decrease over the longer term. In contrast, in the Netherlands real per capita expenditure on pharmaceuticals declined over five years.

Cost-Effectiveness Evaluations to Control Supply

More recently, governments have sought to use cost-effectiveness evaluations to determine what treatments should be financed from public funds. Many countries (such as Australia, Finland, the Netherlands, Sweden, and the United Kingdom) have established government bodies that assess the cost-effectiveness of new and existing technologies. In some countries, such as the United States, formal cost-effectiveness analysis is not used to make public reimbursement decisions. However, the United States is moving in this direction by supporting comparative effectiveness research in its 2010 health care reform. Similarly, more effective and cheaper health care can be achieved through greater efforts to define and promote “best practice” medicine and updating this in line with technology advancements. This approach can also provide greater incentives for the private sector to develop technologies that are cost-effective and cost-reducing.

Micro-Level Reforms

Strengthened Public Management and Contracting Methods

Greater involvement of subnational governments in key health care decisions can reduce expenditure growth if central oversight is maintained. According to the econometric analysis, a one-unit increase in the index measuring involvement of local and regional governments in key health care decisions reduces excess cost growth by about 0.30 percentage point. This impact, however, would be smaller if oversight were loosened—a one-unit reduction in the central oversight index would offset the majority of the impact—suggesting that checks and balances are necessary to control spending growth in decentralized systems. Health systems that score high on subnational involvement and central government oversight (Canada, Sweden) tend to have lower excess cost growth than those with relatively weak oversight (Spain).3 As indicated in the case studies of Canada and Sweden, the decentralization of additional responsibilities to lower levels of government was accompanied by measures to enhance accountability for respecting resource ceilings, contributing to success in containing spending growth.

The econometric evidence on other public management and contracting reforms is mixed. Changes in the gatekeeping index have a small effect on excess cost growth. However, incentives to reduce volumes (such as reduced reliance on fee-for-service payments) and increased delegation to insurers are associated with higher excess cost growth. The event and case studies provide more resounding evidence in favor of these contracting reforms that improve incentives to provide cost-effective care. The event studies show that in the aggregate, management and contracting reforms have helped slow the growth of spending (Figure 6.3). In many cases, this has reflected innovations in contracting.

Figure 6.3Reform Episodes of Public Management and Contracting

Sources: Organization for Economic Cooperation and Development, OECD Health Data; and IMF staff calculations.

In the United States, the major change in this area was the adoption of managed care.4 Cost containment approaches used by managed care include requiring preauthorization for services (a type of gatekeeping) and selective contracting with providers who are willing to accept a particular plan’s payment arrangements and utilization reviews. Additionally, in many countries there are now explicit contracts that target cost control, efficiency, and quality of care (Docteur and Oxley, 2003). To contain spending, payment methods have shifted from traditional fee-for-service methods to case-based payments, such as the diagnosis-related groups (DRGs) used in Finland, Germany, Italy, and the United Kingdom.5 Case-based payment methods, however, can be less effective if providers affect quantities by increasing admissions.6 Other countries have moved from paying the provider on the basis of costs toward prospective or forward-looking budgets, often as part of aggregate budget control (Finland and Sweden). Forward-looking budgets constrain spending by providing a hard budget constraint based on projected demand and average cost per patient or per case.

Market Mechanisms

Market mechanisms can also slow the growth of health expenditures. The econometric analysis shows that a one-unit increase in the indices for choice of providers and insurers, private provision, and the ability of insurers to compete would altogether reduce excess cost growth by about ½ percentage point.7 Event studies also find that the growth in public health spending as a share of GDP slowed after reforms that increased the use of market mechanisms, especially relative to countries not adopting them (Figure 6.4).

Figure 6.4Reform Episodes of Market Mechanisms

Sources: Organization for Economic Cooperation and Development, OECD Health Data; and IMF staff calculations.

Market-oriented reforms have to be carefully designed if cost containment is to be achieved. Italy, Sweden, and the United Kingdom separated the roles, within government, of purchasing and providing health care services. These arrangements allow for more active contracting for health care services from primary care providers. The United Kingdom and Sweden also allowed greater competition among hospitals in order to improve responsiveness and efficiency, but evidence from these two experiments is mixed. In the United Kingdom there are some indications that primary care physicians who contracted health services from competing NHS Trusts (hospitals) were more successful in controlling costs, but there is little evidence of improved hospital outcomes. Introducing competition in Sweden, alongside the introduction of case-based (DRG) payment methods, initially increased the volume of hospital care and raised expenditure (Docteur and Oxley, 2003). To address these effects, DRG rates were reduced, and penalties imposed on providers. Sweden also introduced charges for municipalities that were not ready to receive discharged hospital patients (e.g., if a nursing home was not available) and this has been effective in reducing the number of long-term care patients treated in hospitals, as opposed to nursing homes.

Demand-Side Reforms

Demand-side reforms can also help curtail spending growth. The econometric results indicate that extending the use of supplementary and complementary private insurance has a dampening effect on excess cost growth (−0.10 percentage point). The evidence on the effects of raising copayments is mixed, although this reflects the small share of spending covered by copayments (such as pharmaceuticals) to date. Event studies of 17 reforms in which cost sharing was increased show that they were successful in slowing the growth of health spending relative to GDP for about a year after the reform, but this decline was reversed by subsequent increases (Figure 6.5). The potential for reducing costs from higher copayments is potentially large, given the substantial share of outpatient spending (30 percent). Other demand-side reforms include abolishing tax deductions for medical expenses, as in Finland. The size of these tax expenditures can be large and often benefit the rich the most. The issue is often discussed in the context of the United States, where these benefits amount to 2 percent of GDP. Tax subsidies for private insurance also exist in a number of countries, although the size of these subsidies is small owing to the predominant role of the public sector in health care financing in most countries.

Figure 6.5Reform Episodes of Demand-Side Measures (Patient Cost Sharing)

Sources: Organization for Economic Cooperation and Development, OECD Health Data; and IMF staff calculations.

Demand-side policies can raise equity and access concerns. Sweden and Finland helped increase the political acceptability of these reforms by allowing lower levels of government greater discretion on copayments for health services along with increased responsibility for health care provision. While patient cost sharing may discourage moral hazard, it can raise concerns about equity and access for poor households. To address this concern, cost sharing can be linked to income. Similarly, to avoid adverse health consequences, chronic medical conditions are also often exempted from cost sharing (Newhouse and the Insurance Experiment Group, 1993; Gruber, 2006; Chernew, Rosen, and Fendrick, 2007). Cost sharing can also be allowed to vary according to the cost-effectiveness of services or treatments, through so-called value-based benefit design (Chernew, Rosen, and Fendrick, 2007). Although the financial contribution of these changes is often small, when appropriately directed they can decrease cost pressures.

Other Lessons

Continued monitoring and refinement of health reforms, based on real-time data on the behavior of providers and patients, is required to contain cost pressures over the long term. Success appears to be linked to a continuous tweaking and reformulation of reform initiatives as players adapt to the rules of the game and find ways around them. The effectiveness of reforms needs to be continuously monitored to ensure that providers, insurers, and patients are responding to incentives as expected.

Better use of health information technology can help improve efficiency by increasing adherence to clinical guidelines, enhancing disease surveillance, decreasing medication errors, and reducing service duplication (OECD, 2009). However, the benefits have yet to be fully exploited, as the use of health information technology varies widely across advanced economies.

Raising the emphasis on preventive care could also contribute to decreasing health spending. Health outcomes are driven by factors other than public health spending, including income and the behavior of individuals. While governments can play an important role in promoting behaviors conducive to improved health outcomes (e.g., smoking cessation, drinking less alcohol, improving diet, exercising more, and driving more safely), market mechanisms can also play a crucial role. For example, linking cost sharing or insurance premiums to having regular checkups can reinforce a preventive approach to health care.

Access to a basket of basic health care services by the poor should be maintained during health reforms as part of advanced economies’ social safety nets. Countries with less dispersion in health outcomes tend to have better aggregate outcomes (Joumard, Andre, and Nicq, 2010), suggesting that improving the health care outcomes of the most disadvantaged may be an efficient way to improve overall population health. Thus, cost containment reforms need to be carefully formulated to minimize any potential adverse effects on the poor by maintaining means-tested programs during and after reforms. Most advanced economies have achieved universal access to basic health services. Health reforms should seek to maintain this pillar of the safety net.

Key Conclusions

  • Effective reforms combine a mix of macro-level instruments to contain costs and micro-level reforms to improve the efficiency of spending.
  • Among macro instruments, budget caps and central oversight are powerful tools for reducing spending growth.
  • Among micro-level reforms, strengthening market mechanisms—increasing patient choice of insurers, allowing greater competition between insurers, relying on a greater degree of private provision, and allowing more competition between providers—is particularly important to contain costs. Management and contracting reforms, such as extending the use of managed care or shifting toward case-based payments, are central to improving the efficiency of spending.
  • Although used less extensively, demand-side reforms—such as expanding private insurance and increasing the level of cost sharing—have also been successful in containing the growth of spending. However, demand-side policies can raise equity and access concerns.
  • Price controls appear to be among the less successful approaches for containing health care costs. These controls are often eroded by supplier responses, such as increasing volumes or directing patients to higher-cost services. Furthermore, some types of public management and contracting reforms, as well as reforms to market mechanisms, do not appear effective. In particular, increasing the extent to which key decisions are made at the insurer level, providing greater user information on the quality and price of health care services, and creating incentives to reduce the volume of services are all associated with higher excess cost growth. These reforms may nevertheless be desirable from the perspective of increasing the quality of health care.

These conclusions help explain the varying success of countries in containing the growth of public health spending in recent decades.

  • Italy, Japan, and Sweden, with above-average scores in the indices related to budget caps and central oversight, are among the countries projected to experience the lowest excess cost growth. Macro instruments also played key roles in the successful containment episodes in Canada, Sweden, and the United Kingdom.
  • The use of market mechanisms in Germany and Japan is an important factor in explaining the low excess cost growth observed in these countries—both of which score relatively high in the indices for choice of insurer, choice of provider, and private provision.
  • Countries that have been less successful at controlling the growth of spending tend to use macro- and micro-level instruments less extensively. These countries score low in several health system indices, implying that room for reform exists. Luxembourg and Greece, for example, score below average in the majority of the indices evaluated; Switzerland and the United States score low on the budget caps; and Portugal and the United Kingdom score below average on market mechanisms.

IMPACT OF FURTHER REFORMS

Health reforms could help slow the growth of spending over the next 20 years. The focus in this analysis has been on reforms that are effective in containing the growth of spending based on the analysis presented in Table 6.1. As an illustration, Figure 6.6 shows the average impact of reforms on public-health-spending-to-GDP ratios in 2030, grouped in the following five categories:

  • budget caps—including budget constraints and central oversight;
  • public management and coordination—including gatekeeping and greater subnational government involvement;
  • market mechanisms—including choice of insurers and providers, the degree of private provision, and the ability of insurers to compete;
  • demand-side reforms—including expansion of private insurance and cost-sharing; and
  • supply controls—including regulation of the health care workforce and the use of a well-defined health basket.

Figure 6.6Average Impact of Reform Components on Health Spending, 2030

(Decrease relative to the baseline, percent of GDP)

Sources: Organization for Economic Cooperation and Development, OECD Health Data; and IMF staff estimates.

Note: Unweighted averages of the impact of reforms.

The figure shows the combined effect of raising countries to the mean score in each of these indices.8 The results suggest that reforms of market mechanisms can be powerful, yielding a reduction in spending of 0.5 percentage point of GDP.9 This exercise also underscores the importance of budget caps, which can reduce spending by 0.25 percentage point. Finally, the simulated impacts of demand-side reforms (−0.10) and supply constraints (−0.05) are small, but not negligible.

The possible savings under reforms are subject to uncertainty. Simultaneous reforms across different aspects of the health system may be undesirable or counterproductive. For example, efforts to increase central government oversight could be inconsistent with attempts to promote greater subnational involvement. Thus, the effect of the reforms across the categories described in Figure 6.6 cannot necessarily be aggregated. Some reforms, however, could be complementary, implying that the estimates of savings under a particular individual reform are understated.

Reform options and the appropriate mix of reforms will depend on a country’s characteristics and the projected outlook for the growth of public health spending. The reform impacts simulated above focus on strengthening health system characteristics and policies where countries score below the OECD mean (Appendix Table 6.3). Of course, not all of the identified reforms using this methodology necessarily apply to every country. Nevertheless, this approach provides a systematic way to identify potential reforms that could have a significant payoff in their effect on the growth of public health care spending. The recommendations under this approach are broadly consistent with a recent OECD assessment on health systems. The OECD study, using a different methodology, focuses on priorities for improving the efficiency of health systems (Joumard, Andre, and Nicq, 2010), and covers both the private and public sectors.10

Among the group of countries that rely more heavily on market mechanisms:

  • Canada, the Czech Republic, France, Germany, Japan, and the Slovak Republic are projected to have relatively low excess cost growth. For these countries, staying the course with marginal reforms would be enough to keep ECG low, although bolder reforms might still be needed to offset the effects of demographics on health spending. The Slovak Republic’s relatively low efficiency ranking also suggests that room for reform exists there.
  • In Australia, Austria, Belgium, and the Netherlands, the projected ECG is moderate (¾ to 1 percentage point). These countries tend to combine macro-level components (some central oversight and tight regulations for work force and equipment) and micro-level components (extensive private provision and over-the-basic insurance). Possible strategies to curb the growth of spending in these countries include tightening budget constraints, strengthening gatekeeping, and increasing cost sharing.
  • Greece, the Republic of Korea, Luxembourg, Switzerland, and the United States are projected to have relatively high ECG, indicating the need for future reforms, especially in those countries that score low on efficiency measures (Greece and Luxembourg).11 These five countries score relatively low on macro-level instruments—they tend to have less stringent budget constraints, minimal central oversight (especially Korea and Luxembourg), lax regulations of the workforce and equipment, and little gatekeeping. Future efforts to contain spending growth in these countries should address these weaknesses.

Among the group of countries that rely more heavily on public insurance and provision:

  • Denmark, Ireland, Italy, and Sweden are projected to have a relatively low ECG. Of these countries, Denmark and Ireland could focus on efficiency-enhancing reforms to reduce ECG further. Denmark could also consider using budget caps to reduce its growth in spending. Italy and Sweden, both of which score high on efficiency and have low ECG, could improve their score on priority setting (for example, by better monitoring public health objectives and the composition of the public health package).
  • Norway and Spain are projected to have a moderate growth in health spending—with ECG of 0.6 and 0.7 percentage point, respectively. In these countries, containing the future growth of spending could require tightening macro controls (including increasing central oversight), broadening insurance for over-the-basic care (Norway), and improving priority setting (Spain).
  • Iceland, Finland, New Zealand, Portugal, and the United Kingdom have the highest ECG in this group—all above 1 percentage point. This group of countries could also strengthen supply constraints on workforce and equipment. In addition, these countries could benefit from extending the role of private health insurance for over-the-basic health care and increasing choice among providers (especially in Finland, New Zealand, and the United Kingdom).

The impact of the simulated reforms is substantial, but may still fall short of what would be needed in some countries to stabilize public-spending-to-GDP ratios at current levels. Therefore, additional efforts may be needed to achieve that target. If this is not sufficient, fiscal adjustment may need to rely more on cuts in other areas or on further increases in revenue.12

  • A successful implementation of reforms might not yield enough savings to offset projected increases in public health spending in some countries of advanced Europe. This is especially important in countries with relatively high projected growth in public health spending, such as Austria, Portugal, Switzerland, and the United Kingdom.
  • In the United States, the challenge would be even larger. The illustrative savings from an assumed increase to the mean in the category of budget caps would yield savings of about 1 percentage point of GDP, which is consistent with recent reform proposals.13 Other options for reducing spending, beyond those captured in the econometric analysis, include the extension of health information technology, which would yield savings of 0.2 percent of GDP (Hillestad and others, 2005; CBO, 2008). Curtailing the favorable tax treatment of health insurance contributions (these tax expenditures are about 2 percent of GDP) could potentially yield large savings, and recent proposals in this area would yield an additional 0.5 percentage point of GDP on an annual basis.14 All told, these reforms, including those simulated in the econometric analysis, would reduce spending (including tax expenditures) by about 2 percentage points of GDP. This would still leave health spending rising by 3 percentage points of GDP.

These reform scenarios raise two important questions: first, whether the impact of cost-reducing reforms on health outcomes will be adverse; second, whether they imply a fundamental change in the role of the state in the provision of health care services.

The relationship between cost containment and the provision of high-quality health services varies by reform. For example, there is strong evidence that the expansion of managed care in the United States in the 1990s, while reducing spending growth, did not have large deleterious impacts on health outcomes, compared to fee for services (Cutler, 2004). The general practitioner fund-holding scheme in the United Kingdom, whereby general practitioners receive a fixed and predetermined amount to provide or purchase care for their patients and keep any surplus that they generate, reduced patient waiting times, but the evidence on costs, referral rates, patient satisfaction, and inequality is mixed (Brereton and Vasoodaven, 2010). While a few studies show that the introduction of DRGs has led to higher readmission rates or slower quality gains (Forgione and others, 2004; Busato and von Below, 2010), most studies find no evidence of the adverse effects of DRGs on health outcomes (Or and Hakkinen, 2010). Greater cost sharing, on the other hand, reduces both essential and nonessential health services and is found to be associated with worse health outcomes for individuals in poor health (Newhouse and the Insurance Experiment Group, 1993; Gruber, 2006).

More generally, continued high levels of inefficiency in health spending suggest ample opportunities to improve health outcomes without raising spending. Research on spending efficiency implies that the potential gains from improving efficiency are very large (see Chapter 2 and Appendix 2.2). Most micro-level efficiency reforms, such as the introduction of competition, can improve the responsiveness of the health system to patient needs and also reduce excess cost growth. It is thus possible to control costs without adverse effects on health outcomes with an appropriate mix of reforms. This said, because of the limited research to date, it will be necessary to closely monitor the impact of cost containment reforms on health outcomes during the course of implementation. Reform measures may need to be fine-tuned to prevent adverse effects on health outcomes.

The above reforms have implications for the range of services or products financed by the public sector. If containing increases in public spending is a key feature of consolidation efforts, countries may need to eliminate some health services or products that are currently part of the public benefit package (e.g., dental services, nongeneric pharmaceuticals) or rely more heavily on the private sector for their financing. For predominately public sector systems, this could be achieved through much greater reliance on cost sharing than has typically been the case in many countries.

Alternatively, these countries could increase the role of private insurance. For example, private health insurance could be available to cover health services not covered by the public package, as is already the case in Australia, Canada, France, Ireland, Italy, Spain, and the United Kingdom. As indicated earlier, the econometric evidence suggests that greater shares of private insurance are associated with lower excess cost growth. However, there are considerable market failures associated with private insurance markets, such as adverse selection15 and risk selection.16 The expansion of private insurance thus needs to be accompanied by appropriate regulations to ensure access, equity, and efficiency. For example, health insurers should be required to offer coverage to all individuals, regardless of their health status or claims history, and insurance premiums should be allowed to vary only in relation to certain demographic characteristics—such as age—but not in relation to health status. Regulators also need to ensure adequate competition in the private insurance market.

CONCLUSION

Effective reforms combine a mix of both macro-level instruments to contain costs and more micro-level reforms to improve the efficiency of spending. Reform options and the appropriate mix of reforms will depend on country characteristics and the projected outlook for the growth of public health spending.

Health reforms could help slow the growth of spending over the next 20 years. The simulation results reported in this chapter suggest that reforms of market mechanisms can be especially powerful and that budget caps are an important tool for containing spending growth. The simulated impacts of demand-side reforms and supply constraints are small, but not negligible.

While the impact of the simulated reforms is substantial, it may still fall short of what would be needed in some countries to stabilize age-related-spending-to-GDP ratios at current levels. Therefore, additional efforts would be needed to achieve that target. If this is not sufficient, fiscal adjustment may need to rely more on cuts in other areas or on revenue increases.

APPENDIX 6.1. ESTIMATION OF REFORM IMPACTS IN ADVANCED ECONOMIES

This appendix describes measures of health institutions and policies, econometric estimates of the impacts of these measures on excess cost growth, and the simulated impacts of potential reforms based on these measures.

OECD Indicators on Health Institutions and Policies

A recent OECD report provides comprehensive and systematic measures of health institutions and policies in advanced economies. Joumard, Andre, and Nicq (2010) collected information on 269 key qualitative characteristics of health institutions and policies, and transformed these characteristics into 20 indicators related to market signals and regulations affecting users, providers, and insurers; the extent of insurance coverage; budget and management approaches affecting the level of available resources; and the degree of delegation of decision making. All advanced economies (except the United States, for which data were not provided) were scored according to these indicators on a scale of 0 to 6. Of the 20 indicators, 17 were used in the principal component analyses in the OECD report to create four composite indices that capture most of the variation across countries—“reliance on market mechanisms,” “intensity of regulation,” “intensity of budget constraint,” and “degree of decentralization”—and three were not mapped because of lack of variation across countries.17 In Appendix Table 6.1, the first column shows the mapping of the 17 characteristics to the reforms identified in Box 6.1. Columns 2 and 3 show the mean and standard deviations of the 17 indicators, and columns 4–7 show the principal component analysis weights of the 17 indicators in constructing the four composite indices.

APPENDIX TABLE 6.1Description of OECD Indicators on Health Institutions and Policies
Reform areas/OECD indicatorsDescriptive statisticsPrincipal component analysis weights
AverageStandard deviationIntensity of

regulation
Reliance on

market mechanism
Stringency of

budget constraint
Degree of

centralization
Budget caps
Budget constraint2.902.060.750.55
Consistencya4.621.51−0.410.29
Price controls
Regulation of providers’ prices4.261.050.04−0.12
Regulation of prices paid by third-party payers4.550.750.000.19
Supply constraints
Regulation of workforce and equipment2.921.320.230.030.17−0.09
Priority setting3.021.16
Public management and coordination
Gatekeeping3.072.400.680.480.060.02
Decentralization1.921.720.36−0.75
Delegation0.890.98−0.320.03
Contracting methods
Volume incentives3.141.13−0.180.19
Market mechanisms
Choice of insurers1.311.77−0.240.53
Insurer levers0.741.44−0.220.40
User information1.081.28−0.050.31
Private provision2.771.34−0.280.28
Choice among providers4.432.05−0.51−0.02
Demand-side reforms
Over-the-basic coverage1.511.580.010.31
Price signals on users1.160.590.03−0.02
Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.

This is referred to as central government oversight in Table 6.1.

Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.

This is referred to as central government oversight in Table 6.1.

Econometric Estimation of Reform Impacts

The econometric analysis estimates the effects of each of the four composite indices on public health spending growth. It includes the four composite indices as explanatory variables (along with additional variables for GDP and demographic composition) in the regression model:

Here Ii,j denotes the score of country i on composite indices j. Since these indices are time invariant, it is not possible to also include country fixed effects. Excess cost growth can thus be calculated as the following:

Country observations with structural breaks in the data have been excluded from the econometric analysis. Given that the indicators and composite indices provide a snapshot of health institutions and policies in 2009, more recent years (1995–2008) are used to estimate the impact of health reforms on public health spending growth. The coefficients should be interpreted as indicating the relationship between health system characteristics in 2009 and spending growth in 1995–2008. The exercise thus assumes that the 2009 snapshot provides an accurate characterization of the health care system over 1995–2008. The results indicate that reliance on market mechanisms and the stringency of budget constraints are negatively related to public health spending growth, while intensity of regulations and degree of centralization are positively related to public health spending growth (Appendix Table 6.2).

APPENDIX TABLE 6.2Impact Estimates of Health Institutions and Policies
Dependent variable: log of real per capita public health spending
1995–2008
Log of GDP per capitaa0.2954**(0.1124)
Log of age 14 and undera0.1953(0.1953)
Log of age 65 plusa0.6766***(0.2424)
Intensity of regulations0.0017(0.0011)
Reliance on market mechanisms−0.0033**(0.0013)
Stringency of budget constraint−0.0029*(0.0017)
Degree of centralization0.0034*(0.0017)
R20.135
N345
Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.Note: Standard errors in parentheses.

All variables are expressed as first-differences. The coefficients are robust to different specifications. The relatively low R2 reflects the large variability in the annual changes observed in the data. Using a model with five-year differences produces similar results but increases R2 from 0.13 to 0.40.

*p < .1; **p < .05; ***p < .01.
Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.Note: Standard errors in parentheses.

All variables are expressed as first-differences. The coefficients are robust to different specifications. The relatively low R2 reflects the large variability in the annual changes observed in the data. Using a model with five-year differences produces similar results but increases R2 from 0.13 to 0.40.

*p < .1; **p < .05; ***p < .01.
APPENDIX TABLE 6.3Potential Reform Strategies for Different Country Groupings
Countries scoring below meanPotential reform strategies
Budget caps: budget constraint

Australia, Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Japan, Korea, Luxembourg, Netherlands, Slovak Republic, Spain, Switzerland, United States
Make health sector budgets more stringent. Introduce prospective budget caps for the most critical health services where there are none, reduce flexibility on overruns for existing caps, or target caps at the entire health sector.
Budget caps: central oversight of key decisions

Belgium, Czech Republic, Finland, France, Germany, Greece, Iceland, Ireland, Korea, Luxembourg, Netherlands, New Zealand, Norway, Slovak Republic, Spain, Switzerland, United States
Increase the role of the center in oversight of macro-level decisions related to resource allocation—for example, the total budget dedicated to health care and level of social contributions. Although consistency declines when several levels of government are involved in key decisions, this is correlated with low cost growth.
Supply constraints: regulation of workforce and equipment

Czech Republic, Finland, Germany, Greece, Iceland, Japan, Korea, Luxembourg, Netherlands, New Zealand, Sweden, Switzerland, United Kingdom, United States
Exert greater central control over physician numbers and hospital activities and staff. For example, move from hospitals with full autonomy toward negotiating capacity and staffing levels with government.
Supply constraints: priority setting

Austria, Canada, Czech Republic, Finland, Germany, Greece, Iceland, Italy, Luxembourg, Portugal, Spain, Sweden, United States
Put more emphasis on affordability in terms of deciding the publicly funded benefit package. For example, complement cost-effectiveness evaluation with a consideration of budget impact, use positive lists, and regulate the coverage of new procedures by the state via guidelines.
Public management: subnational government involvement

Belgium, Czech Republic, France, Germany, Greece, Iceland, Ireland, Korea, Luxembourg, Netherlands, Portugal, Slovak Republic
Increase the number of health policy decisions made at a subnational level, such as decisions on remuneration methods and financing new facilities. For example, involve lower levels of government in health policy decisions alongside central government or delegate policy responsibility to regions/states.
Public management: gatekeeping

Australia, Austria, Belgium, Czech Republic, Greece, Ireland, Japan, Korea, Luxembourg, Sweden, Switzerland
Create incentives to steer demand to more appropriate resources. For example, encourage patients to register with a primary care physician, or require a compulsory referral to access secondary care.
Market mechanisms: user choice of insurers

Australia, Belgium, Canada, Denmark, Finland, Iceland, Ireland, Italy, Korea, Luxembourg, New Zealand, Norway, Portugal, Spain, Sweden, United Kingdom
Increase the degree of user choice over insurers (including not-for-profit public insurers)—for example, by increasing the number of insurers. Most relevant for public contract health care systems.
Market mechanisms: insurance levers

Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovak Republic
Allow greater freedom to insurers to vary the scope, premium, etc., for basic insurance packages and more freedom in negotiating with health providers. Most relevant for public contract and private insurance health care systems.
Market mechanisms: private provision

Czech Republic, Finland, Iceland, Ireland, Italy, New Zealand, Portugal, Spain, Sweden, United Kingdom
Foster contestability by allowing/encouraging greater private provision of both primary and acute care (regardless of financing source).
Market mechanisms: choice among providers

Austria, Denmark, Finland, Greece, New Zealand, Portugal, Spain
Allow greater patient choice over primary care physicians, specialists, and hospitals, even if some limitations remain.
Demand-side reforms: over-the-basic coverage

Austria, Czech Republic, Denmark, Finland, Greece, Iceland, Italy, Japan, Korea, Luxembourg, Norway, Portugal, Slovak Republic, Sweden, United Kingdom
Encourage insurers to offer complementary (e.g., reimbursing patients for cost sharing required by the public system) and supplementary (e.g., filling gaps not covered by the public system) insurance over the basic packages.
Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.Note: The policy reform strategies indicate the characteristics of countries that score highly in each index. Hence, not all of the identified reforms may necessarily apply to every country scoring below the mean. For Greece, the assessment does not take into account the effect of recent reforms.
Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.Note: The policy reform strategies indicate the characteristics of countries that score highly in each index. Hence, not all of the identified reforms may necessarily apply to every country scoring below the mean. For Greece, the assessment does not take into account the effect of recent reforms.

Simulations of Reform Impacts

To estimate the impacts of these reforms on excess cost growth, a one-unit increase is applied to each of the 17 variables underlying the four composite indices; the resulting changes in the four composite indices are calculated based on the principal component analysis weights in Appendix Table 6.1. These changes are then multiplied by the coefficients from the regression analysis (Appendix Table 6.2) to get the impacts on ECG, with a negative sign indicating a decrease in ECG (Table 6.1).

To further illustrate the potential impacts of these reforms on public health spending growth in each country, in all of the variables that are shown to reduce ECG, country scores are raised to the mean if their scores are below the mean. This provides the basis of the estimates of the savings under each of the categories in Figure 6.6. Appendix Table 6.3 provides a list of countries scoring below the mean in different categories and the types of reform strategies that would help them improve performance in these areas.

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1

Detailed results are provided in Appendix 6.1 (econometric analysis) and chapters covering case studies.

2

“Central government oversight” is based on the OECD’s “consistency” index, with a low score for consistency implying a high score for central government oversight. In the econometric estimates, increasing a country’s score on the consistency index increases excess cost growth. This owes to the construction of the OECD index on consistency, which gives countries a low rating on consistency if several levels of government are involved in decisions, which is interpreted here as a type of budget constraint imposed under decentralized systems. According to the OECD indices, highly decentralized systems with low consistency generally reflect the involvement of the central government in key health decisions.

3

Thornton and Mati (2008) also emphasize the role of institutional arrangements, such as administrative controls and fiscal rules, in ensuring good performance under decentralization. Recent work on decentralization and health spending underscores the detrimental effect of soft budget constraints (Crivelli, Leive, and Stratmann, 2010).

4

“Managed care” is a general term for health plans that are proactive in seeking to affect the type or amount of care their enrollees receive. Unlike traditional insurance-based plans, they tend to have detailed contractual or employment relationships with health care providers.

5

DRGs specify treatment protocols for medical conditions and provide an associated price schedule.

6

Changes in payment methods can be combined with budget ceilings to help address these concerns. For example, in some Canadian provinces, individual physicians are reimbursed according to a fee-for-service schedule. However, once certain billing thresholds are reached, a declining fraction of the negotiated fees are reimbursed.

7

Providing greater information on the quality and prices of health care services appears to be associated with higher excess cost growth. In theory, more information should help users choose the most effective providers. However, research indicates the difficulty health consumers have in understanding this information, as medical treatments are often very complex and consumers rely more on health professionals for advice. More importantly, this information may not provide incentives to reduce costs, because patients could choose high-quality (high-cost) services over low-quality (low-cost) services, especially as they do not bear the full costs of treatment.

8

For the United States, the simulations show only the impact of an increase in this index for a strengthening of budget constraints and supply constraints. The United States was not included in the OECD study of health institutions, as it did not respond to the OECD questionnaire. For this exercise, the value of the budget caps and supply constraints indices for the United States is set equal to the average for countries that are below the sample average in each of these indices.

9

In the regression analysis, the effect of each individual reform is estimated keeping all other indices fixed.

10

For one variable, the focus of the OECD study (on efficiency)—compared with the focus in this chapter on reducing expenditure growth—produces different results. In the OECD study, a high degree of central government oversight of spending in decentralized systems (a high score on consistency) is considered to be positive from the standpoint of efficiency. In our study, the empirical results indicate that this oversight helps reduce excess cost growth. This points to a potential trade-off between cost containment and efficiency in this area.

11

The assessment does not take into account reforms in Greece as part of its fiscal adjustment program initiated in 2010.

12

As discussed in the first section of this chapter, in order to lower the general-government-debt-to-GDP ratio to 60 percent by 2030, advanced economies would have to increase their cyclically adjusted primary balance by some 8 percentage points of GDP, on average, during 2011—30. To the extent that some spending is allowed to increase as a ratio of GDP, other spending would have to be cut correspondingly, or revenues would have to increase more.

13

A recent reform proposal, sometimes referred to as the Rivlin-Ryan proposal, is based on a voucher system for Medicare (which is similar to a stringent budget cap with some market mechanism reforms) and an increase in the age of eligibility for Medicare. This reform is estimated to save up to 1¼ percentage points of GDP by 2030 (CBO, 2010). See also Committee for a Responsible Federal Budget (2010).

14

See U.S. Senate, Joint Committee on Taxation (2008). It is estimated that a recent proposal to replace the employer-sponsored health insurance tax exclusion in the United States with a credit indexed to the CPI would save a little over 5 percent of GDP cumulatively over the next 10 years (Committee for a Responsible Federal Budget, 2010).

15

High-risk individuals drive up insurance premiums to such an extent that low-risk individuals leave the market, which may result in limited risk pooling and, at the extreme, the collapse of the insurance market.

16

Health insurers selectively offer insurance coverage only to those with favorable risks, which may result in no market for those with less favorable risks.

17

Principal component analysis condenses the information contained in a set of indicators into a smaller number of uncorrelated principal components, which are linear combinations of the original indicators. The first principal component accounts for as much of the variability in the data as possible, and each succeeding component accounts for as much of the remaining variability as possible. In the OECD study, two principal component analyses were performed, and only the top two components were selected for subsequent analysis. “Reliance on market mechanisms” and “intensity of regulation” are the two principal components from the first principal component analysis, and input variables are “choice of insurers,” “insurer levers,” “over-the-basic coverage,” “private provision,” “volume incentives,” “regulation of provider prices,” “user information,” “regulation of the workforce and equipment,” “choice among providers,” “gatekeeping,” and “price signal on users.” “Intensity of budget constraint” and “degree of decentralization” are the two principal components from the second principal component analysis, and input variables are “priority setting,” “budget constraint,” “regulation of workforce and equipment,” “regulation of prices paid by third-party payers,” “decentralization,” “delegation,” and “consistency.”

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