CHAPTER 4: Health Policy Challenges and Issues Confronting Nations

Peter Heller, and William Hsiao
Published Date:
April 2007
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Although specific issues confront nations at different stages of development, several issues confront all nations throughout the world. We first present the universal issues, then the ones for each stage.

A. Major Issues Confronting All Nations

Most nations, rich or poor, face the problem of per capita health care costs rising faster than per capita GDP. Consequently, health care outlays are absorbing an increasing share of government, employer, and household incomes. This constant fiscal pressure forces nations to confront two basic questions: how to finance this rising burden and how to contain the pressures for health expenditure growth.

Several common factors on the demand and supply sides have caused the rapid rise in health care costs globally. On the demand side, the HIV/AIDS pandemic and people’s heightened expectations and demands are the principal causes. Influenced by worldwide distribution of medical news, sensational headlines on medical breakthroughs, and aggressive drug advertisements by pharmaceutical companies, people are bombarded with new information about diseases and their treatments. We have become much more conscientious about our health and illnesses, and expectations are raised about medicine’s ability to treat and cure. Some new expensive technologies may yield only marginal benefits, but news of their discovery distorts consumer perceptions. On the supply side, medicine and the medical profession itself have become more commercialized. Profit has also become a strong motivating force in biomedical research. Driven by the profit motive and protected by patent laws, new medical science and technology produce mostly cost-increasing new treatments. Concomitantly, hospitals and physicians who adopt new sophisticated medical technologies gain in both reputation and profit.

Another driver increasing costs involves the socialization of medical practices throughout the world. The United States has become the dominant force in medical education and research. Its emphasis on specialty medicine and expensive high-technology treatments has profoundly influenced global medical practices, and this is reinforced by regular education and continuing education programs, role models, and tele-medicine. In effect, foreign physicians have been socialized to adopt the “American practice standard,” regardless of whether their country has the resources to pay for it.

The need to balance demand and supply for health services and drugs is another critical issue confronting all nations. Few nations have the resources to satisfy people’s needs and wants in health care. Consequently, health care has to be rationed. Instinctively, economists would argue for a rationing by price. However, reasonable health care is a necessity of life, so that equity concerns must also be a key factor in policy decisions. Also, illnesses are uncertain and income is inequitably distributed in most countries. Thus, price rationing favors the affluent, whereas lack of insurance impoverishes most families that have large medical expenses. For these reasons, most nations provide nearly free basic health services or cover their citizens under social health insurance programs. As a result, price is not used as the primary rationing tool. Long lines, waiting time, travel distance, lower quality service, and outright unavailability frequently serve as effective rationing tools. But when carried too far, rationing can generate public dissatisfaction and political whiplash. This was the experience in the United Kingdom and Canada and, more recently, in the United States with respect to managed care. Bedside counseling by physicians to induce patients to demand fewer services has been used successfully in many advanced nations, but the Internet and the popularization of medical information have weakened this constraining influence. Most recently, the followers of free market ideology have continued their push to ration by price, labeling this as “consumer-driven” health plans. This approach is not likely to work, because the asymmetry of information places providers in a dominant market position and individual patients’ choice is not likely to exert much competitive force. Rapid health cost inflation is unlikely to be contained under this strategy. How to ration scarce health resources will thus remain a critical issue.

Finally, a health system is a dynamic organism. All nations confront the medium-term challenge of adjusting their health systems to meet changing epidemiological and demographic conditions. Disease patterns do change with socioeconomic development, with demographic change (for example, with aging, the prevalence of chronic diseases such as Alzheimer’s will increase), and, in the future, possibly with climate change. New infectious diseases can emerge, as illustrated by the recent outbreaks of SARS (severe acute respiratory syndrome) and avian flu. The prevention and health service delivery systems will thus have to change accordingly. New, more effective technologies and drugs, typically more costly, present a continuing challenge to governments and insurance companies forced to decide whether to sanction (and finance) their use.

Are these insoluble problems? To deal with health cost inflation, authorities may consider the following: (1) setting an effective global budget for the health service sector so providers have to lower costs and compete for patients, including by adopting new cost-reducing technologies and new management tools, and reforming their organizational structure for efficiency gains; (2) mandating that households save a portion of their wages annually in order to prefund the high costs of health care that will be incurred later in life; (3) offering incentives with public funding to develop cost-reducing technologies; (4) altering payment systems to promote cost-reducing technologies; (5) evaluating new drugs and technologies in terms of their cost-effectiveness, including compared to established technologies and drugs; and (6) establishing an effective long-term budget for the prevention of HIV/AIDS, and allocating a specific portion of the budget for this goal.

To control the pressures of new technologies, medical education programs of advanced economies should seek to take into account the differences in the economic status of countries by (1) developing medical standards varying by nations’ economic status and introducing these different standards into the medical curriculum, and (2) identifying role models who practice appropriate medicine for different stages of socioeconomic development and promoting them to the public.

Authorities may seek to influence the expectations of and demand for health care by (1) promoting truth in advertising for drugs and medical devices; (2) providing government funding for social marketing programs to balance the role of private advertising; (3) establishing standard protocols of treatment that take into account resource constraints; (4) capping medical insurance benefits to exclude coverage for “heroic” and experimental medical services; (5) establishing mandatory medical saving accounts (MSAs) for long-term care and catastrophic medical expenses after a given age (such MSAs could be used to purchase insurance in order to pool the risk); and (6) establishing reverse-mortgage and low-interest loan programs for catastrophic medical expenses.

B. Challenges Facing Advanced Economies

Advanced industrial countries also face several issues of their own. First, most high-income countries confront the prospect of an aging population. People are living longer and fertility rates are declining. The elderly dependency ratio is projected to increase rapidly in the next two decades. Under a PAYG system for health insurance, population aging will have profound implications for the fiscal burden placed on future generations of workers, labor market conditions, and saving and consumption patterns.

Table 3 shows how the population shares of the elderly and support ratios will evolve through 2050 for selected advanced and middle-income economies.

Table 3.Selected Countries: Projected Shares of Elderly People and the Support Ratio, 2006–50
Percentage of Total Population over Age 60Percentage 80 Years or OlderPotential Support Ratio
Republic of Korea1441103172
United Kingdom2129213043
North America and Pacific
United States1726212853
New Zealand1730203153
Source: United Nations, Department of Economic and Social Affairs, Population Division (2006).Note: The support ratio is defined as the ratio of the population aged 15–64 to the population aged 65 and over.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2006).Note: The support ratio is defined as the ratio of the population aged 15–64 to the population aged 65 and over.

Population aging, combined with a changing epidemiological pattern, will pose two other challenges: pressures for a change in the health care delivery system and the likelihood of a more rapid rise in health care costs. Chronic diseases have increased dramatically and these particularly afflict the elderly. The elderly also require different kinds of health services, especially for those who suffer from functional disability, dementia, or Alzheimer’s disease. The organization of health care delivery will inevitably have to be reformed. Housing, social services, and nursing home care will need to be integrated with medical services. Also, as noted above, the growing share of the population that is elderly may lead to a more rapid increase in health expenditure, because health spending rises with age.

A new pattern of medical expenditure has also emerged from changes in the prevalence of chronic illnesses and their treatments. Medical expenditure is becoming less concentrated on a small number of acutely ill patients (Figure 5). Previously, researchers found, the last episode of illness consumed a huge share of an individual’s lifetime health expenditure, because costly medical technologies were used to prolong lives (though for only a short time). As a result, aging may have had only a modest effect on the rapid rise in health care costs. Recent trends now suggest that the concentration of medical expenditure on a minuscule group of the population has been reduced, perhaps because new, though costly, medical technologies have been developed that prolong lives rather than rescue patients from immediate death.

Figure 5.United States: Concentration of Health Care Expenditure over Time

Sources: Berk and Monheit (2001) and Yu and Ezzati-Rice (2005).

Moreover, affluence has changed diets and lifestyles. As a result, obesity has emerged as a serious health problem and may prove to be a factor leading to widespread and serious long-term chronic medical problems, such as diabetes, high blood pressure, and cardiovascular illness (see Olshansky and others, 2005; Olshansky, 2005; Daviglus, 2005; and Lakdawalla, Goldman, and Shang, 2005).

C. Challenges Facing Middle-Income Countries

Most middle-income countries are faced with a “double-disease” burden. As a nation’s economy develops and matures, it has more knowledge and resources to address clean water, sanitation, malnutrition, communicable diseases, and basic health care. As infectious diseases and infant and maternal mortality decrease in a nation, middle- and higher-income urban households suffer more from chronic illnesses, while lower-income households and the rural population continue to suffer primarily from infectious diseases. Moreover, as a nation’s economy grows, policymakers and the public become more aware of the disparity in the availability of health care and the reality that the burden of unforeseen health expenditure is a critical factor leading to impoverishment.

Middle-income countries thus increasingly recognize that they have to confront this double-disease burden. They must transform their preventive and curative care delivery systems to deal with chronic diseases, while at the same time maintaining vigorous efforts to address the burden of infectious diseases. The double-disease burden has serious implications for resource allocation, health costs, medical education, and the organization of health care delivery.

Also characterizing developments in middle-income countries is the increasing demand by formal sector workers and upper-middle-class citizens for health insurance. There is growing pressure to rationalize and reform the fragmented health financing schemes that normally characterize low-income countries. There is a demand for the elaboration of a more universal system under which all citizens can have access to basic health care and equitable risk protection. To meet these demands, middle-income countries will have to increase their investments in health care. Tax revenue can be a source of financing. However, most nations will probably look to social health insurance as a potentially more desirable and politically viable approach. Either approach will have macroeconomic implications.

Another critical issue confronting middle-income countries is that public health facilities are increasingly seen as inadequate, as a consequence of the emergence of for-profit private sector providers. Public health service providers tend to be slow in responding to socioeconomic change and in raising the quality of health services to meet the demands of a rapidly emerging middle class. Typically, such facilities are underfunded, with resources allocated more on the basis of planning formulas than demand factors. Management operates under outdated bureaucratic rules, and health workers are often organized in strong public service unions (for example, in Latin America). Consequently, a quality-of-service gap develops between supply and demand.

For-profit private providers move in to deliver services that meet the demands of the middle class. Besides high returns to investor-owned private facilities, physicians in private practice can earn much higher incomes from fee-for-service payment paid by upper-income and middle-class patients. As a result, many public-sector-employed physicians set up a dual practice, operating private clinics during off-duty hours. This can lead to a further decline in the quality of the public health service as physicians’ absenteeism rises to a high level and many highly qualified senior physicians leave for full-time private practice. Health care becomes a markedly two-tiered system, with public health services losing the political support of the upper and middle classes. The inequity in the health system becomes apparent, creating social and political unrest.

Aging is also likely to pose a problem for some middle-income countries in Asia, particularly China. The demographic transition—longer life expectancy and a lower fertility rate—would eventually create an aging problem for any nation in the long term. When a nation goes through an accelerated demographic transition, the time horizon of the aging process becomes considerably shortened. By adopting a one-child policy, China created an aging problem, which should intensify by 2030. China and other accelerated-aging Asian middle-income countries now have to begin planning for how to finance the future high costs of long-term care and transform their health care delivery systems to meet the needs of the elderly (see Heller, 2006a).

D. Challenges Facing Low-Income Countries

Low-income countries are not progressing very well in the health area. Prospects are poor for meeting the MDGs. To meet the MDG of reducing under-age-five mortality would require mortality rates to fall on average by 4.3 percent a year, in contrast with the recent experience of annual reductions of 2.3 percent. The maternal mortality rate in low-income countries is falling by only 2.4 percent a year compared with the 5.4 percent annual reduction that would be required to achieve the MDG target.8 In sub-Saharan Africa, no country appears on track to attain the MDG targets for under-age-five mortality or maternal mortality. Low-income countries face several common problems. Among them are HIV/AIDS, inadequate “fiscal space,” and limited human resources for health.

Many low-income countries have been particularly affected by HIV/AIDS, with profound macroeconomic effects on labor supply, human capital, foreign investment, and economic growth. Currently, African nations suffer the most from HIV/AIDS (Haacker, 2004; and UNAIDS, 2005,2006). A human tragedy, the HIV/AIDS pandemic has created havoc in the health system of many nations, particularly in Africa. Financial and human resources have been drawn away to treat and prevent this disease, and the emphasis on the illness has in some cases severely diminished countries’ capacity to provide basic health care services to their populations. A summary of studies describing the macroeconomic impact of HIV/AIDS is provided in Table 4.

Table 4.Summary of Studies of the Macroeconomic Impact of HIV/AIDS in Africa
StudyCountries and Period of Economic DataPeriod of Most Recently Used HIV/AIDS DataResults (Compared with Non-HIV/AIDS Scenario)
Growth of GDPGrowth of GDP per capita
Dixon, McDonald, and Roberts (2001)41 countries (1960–98)Late 1990sGDP growth rates reduced by 2–4% per year; large variation across countries, in line with prevalence of HIV
World Bank (2001b)SwazilandEarly 1990sAverage annual growth rate of GDP during 1991–2015 will be 1.3% lowerAverage annual growth rate of GDP per capita during 1991–2015 will be 0.2% higher
World Bank (2001a)NamibiaEarly 1990sAverage annual growth rate of GDP in 1991–2015 will be 0.8% lowerAverage annual growth rate of GDP per capita during 1999–2015 will be 0.1% higher
World Bank (2000)LesothoEarly 1990sAverage annual growth rate of GDP during 1999–2015 will be 1.4% lowerAverage annual growth rate of GDP per capita during 1999–2015 will be 0.3% lower
Bonnel (2000)About 50 countries (1990–97)Mid-1990sRate of growth of GDP per capita in Africa reduced by 0.7% per year in the 1990s (1.2% for a country with HIV prevalence of 20%)
Quattek and Fourie (2000)South AfricaMid-1990sAverage rate of GDP growth over next 15 years will be 0.3–0.4% lower per year
Arndt and Lewis (2000)South AfricaAnnual growth rate of GDP is lowered by about 0.5% in the late 1990s, rising to 2.5–2.6% during 2008–2010GDP per capita will be 8% lower in 2010 than in the absence of AIDS; implies that AIDS lowers average annual growth rate of GDP per capita by 0.7% during 1997–2010
Greener, Jefferis, and Sifambe (2001)BotswanaLate 1990sDuring 1996–2021, annual growth rate of GDP reduced by 1.1–2.1%; 1.5% in the scenario considered most likelyLittle effect—annual per capita GDP growth rate between 0.6% lower and 0.4% higher owing to AIDS; 0.1% lower in the scenario considered most likely
BIDPA (2000)BotswanaLate 1990sAverage rate of growth of GDP in 2000–2010 reduced by 1.5% per year
Cuddington and Hancock (1994)MalawiEarly 1990sAverage rate of growth of GDP in 1985–2010 reduced by up to 1.5% per yearAverage growth of per capita GDP reduced by up to 0.3% per year1
Cuddington (1993a, 1993b)TanzaniaEarly 1990sAverage annual rate of growth of GDP in 1985–2010 reduced by up to 1.1%Average annual growth reduced by up to 0.5%
Kambou, Devarajan, and Over (1992)CameroonGDP growth rate over 1986–91 reduced by 1.9% per year
Over (1992)30 sub-Saharan countriesEarly 1990sAverage annual growth rate of GDP during 1990–2025 reduced by 0.9% on average (up to 1.5% in 10 worst affected countries)Average annual growth rate of GDP per capita reduced by 0.15% per year (up to 0.6% in 10 worst-affected countries)
Source: UN Economic and Social Affairs Department, Population Division (2004).Note: References to effect on GDP growth or per capita GDP growth rates refer to average annual growth rates for the period mentioned, expressed as percentage-point differences from a “no-AIDS” scenario.

For “extreme” assumption about future AIDS prevalence.

Source: UN Economic and Social Affairs Department, Population Division (2004).Note: References to effect on GDP growth or per capita GDP growth rates refer to average annual growth rates for the period mentioned, expressed as percentage-point differences from a “no-AIDS” scenario.

For “extreme” assumption about future AIDS prevalence.

Because of low per capita incomes, low-income country governments lack the financial resources to provide a minimal package of health care services. The CMH report (WHO, 2001) sought to establish a reasonable estimate for the minimum amount of spending required to provide basic preventive and curative services and came up with an estimate of roughly $30 per capita; however, few low-income countries spend even half this amount annually on health on a per capita basis, and most governments spend only $6–$10 per capita annually. Although there may be some room for additional government spending on health—by rationalizing unproductive expenditure, commercializing some government services, raising the government revenue share to at least 15–18 percent of GDP, and undertaking some additional borrowing—the amount of effective fiscal space for health created by such measures is limited because of competition with other pressing priorities in other sectors (Foster, 2005; and Heller, 2006b).

The stark reality is that to provide minimal basic health services, most low-income countries will need external assistance for some time (preferably through long-term sectoral budget support in the form of grants). Recent years have seen a dramatic increase in funding for health by the donor community, but much of these resources have been targeted to vertical disease programs—through the efforts of bilateral donors to finance the Global Fund to Fight HIV/AIDS, Malaria, and Tuberculosis as well as from recent U.S. government initiatives with respect to HIV/AIDS and malaria. As noted above, these vertical initiatives have, if anything, actually reduced the available fiscal space for spending on other preventive and basic curative services.

The recent surge in funding for HIV/AIDS has also highlighted the severe limitations of low-income countries in terms of available human resources for health. The recent report of the Joint Learning Initiative (2004) suggested that sub-Saharan Africa is short approximately 1 million health workers (largely doctors, nurses, and midwives, but also laboratory workers, pharmacists, and trained community health workers) to provide basic health services. Low-income countries are bedeviled by limits in their capacity to train doctors and nurses as well as by poor conditions of services—low salaries, poor opportunities for medical training, severe and risky working conditions in health clinics (in part because of the AIDS epidemic), and difficult living conditions for doctors and nurses posted with their families to rural health clinics. In addition, many of the doctors they have trained emigrate either to industrial countries or to externally funded clinics in other low-income countries (to work at higher than public service salaries in AIDS clinics).

Besides these common issues, there are many fragile states among the low-income countries. The World Bank identifies 34 such countries as “Low Income Countries Under Stress” (LICUS), representing 418 million people. The populations of these countries suffer from poor health, and the failed health systems of these countries typically result in households that, when struck by serious illness, are forced into impoverishment as they deplete their meager resources in seeking health care. The causes for their health problems and policy remedies defy generalization, but include the following:

(1) countries in armed conflict or in the early stages of a peace process; (2) countries with a history of political instability and military coups; (3) new or emerging states; (4) countries under international sanctions; or (5) countries with closed political systems.

Not only are these countries failing to meet MDG targets but, as conveyed in Table 5 (see p. 35), they are about 25–35 percent worse off than low-income countries in terms of per capita income, per capita total expenditure on health, infant and maternal mortality rates, and the incidence of tuberculosis.

Table 5.Progress on Millennium Development Goals in Fragile States Compared with Other Poor Countries, 2000
Low-Income Fragile StatesOther Low- and Middle-Income States
Population (in millions)8714361
MDG1: Number living on less than $1 a day (in millions)343821
MDG2: Primary education enrollment33%15%
MDG3 Primary education: female-to-male enrollment ratio84%92%
MDG4: Child mortality rate per 1,000 (2002)13856
MDG5: Maternal mortality rate per 100,000734270
MDG6: Number of people living with HIV/AIDS (in millions)17.121.4
Malaria death rate per 100,000907
MDG7: Percent of population without access to safe water38%18%
MDG8: Telephone and cell phone subscriptions per 100 people4.518.8
Source: United Kingdom, DFID (2005).Note: DFID’s definition of fragile status covers those countries where the government cannot or will not deliver core functions to the majority of its people, including the poor.
Source: United Kingdom, DFID (2005).Note: DFID’s definition of fragile status covers those countries where the government cannot or will not deliver core functions to the majority of its people, including the poor.

The targets of reducing under-age-five mortality and maternal mortality rates by 4.3 and 5.4 percent annually, respectively, are equivalent to the annual rates of reduction that need to take place to achieve the MDG of reducing under-age-five mortality by two-thirds between 1990 and 2015, and reducing maternal mortality by three-fourths between 1990 and 2015. See Wagstaff and Claeson (2004).

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