APPENDIX 1 Tacklinǵ the Challenǵe of Health Care Reform in Advanced Economies

International Monetary Fund. Fiscal Affairs Dept.
Published Date:
April 2011
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This appendix (drawing from IMF, 2010a) discusses approaches to contain “excess cost growth”: the rise in public health spending over GDP in excess of what is due to population aging.

The Potential Impact of Health Reforms in Advanced Economies

Econometric analysis suggests that several policy options are available to help contain the growth of public health spending. The analysis presented here uses recently compiled Organization for Economic Cooperation and Development (OECD) data (Joumard, Andre, and Nicq, 2010) on key characteristics of health care systems (such as the extent of private health care provision, degree of regulation, availability of patient choice, and stringency of budget constraints) to evaluate the relationship between indices of these characteristics and the growth of public health spending. The impact of particular reforms on the growth rate of public health expenditure is then simulated by looking at the impact of hypothetical changes to a country’s rating on these indices. Table A1.1 shows the estimated impact on excess cost growth (ECG) of a country’s moving up one unit in any given OECD index, keeping all other indices fixed. The results suggest that substantial reductions in ECG could be obtained through extending market mechanisms (—0.50), improving public sector management and coordination (—0.30), and strengthening budget caps (—0.24). This compares with the average ECG, based on IMF staff econometric work, of about 1.0, which is incorporated into the staff s baseline projections.

Table A1.1.Relationship between Key Characteristics of Health Care Systems and Excess Cost Growth
Impact of a
Change in
Index on
Excess Cost
Reform Areas and IndicesGrowth 1
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,-0.08
specialists, and hospitals
Public Management and Coordination-0.30
Of which:
Gatekeeping: Obligation or incentive to register with a general practitioner and/or to get referrals to-0.04
access secondary care
Subnational government involvement: Number of key decisions taken at the subnational level-0.36
Delegation: Number of key decisions taken at the insurer level0.10
Budget Caps-0.24
Of which:
Budget constraint: Rules and/or targets to fix the health budget and its allocation across subsectors-0.03
and/or regions
Central government oversight: Number of key decisions overseen by central government-0.22
Demand-Side Reforms-0.09
Of which:
Over-the-basic coverage: Share of the population covered by nonprimary insurance, share of health-0.10
care expenditures financed out of private insurance and degree of market concentration
Price signals on users: Extent to which patients face out-of-pocket expenses0.01
Supply Controls-0.06
Of which:
Regulation of workforce and equipment: Degree of regulation on the number and distribution of health-0.05
care workforce and hospital high-tech equipment and activities, and control of recruitment and
remuneration of hospital staff
Priority setting: Definition of health benefit basket, effective use of health technology assessment, and-0.01
definition and monitoring of public health objectives
Contracting Methods0.09
Of which:
Volume incentives: Degree of payment modes to incentivize fewer services0.09
Price Controls0.11
Of which:
Regulation of providers’ prices: Regulation of drug prices and of prices billed by physicians and0.05
Regulation of prices paid by third-party payers: Regulation of prices paid by third-party payers for0.06
primary care physicians, specialists, hospital services, and drugs
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 indices have been mapped to reform categories, although some overlap remains. In simulating the potential impacts of further reforms, only reforms that the econometric analysis shows to be effective in reducing excess cost growth are included.

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 indices have been mapped to reform categories, although some overlap remains. In simulating the potential impacts of further reforms, only reforms that the econometric analysis shows to be effective in reducing excess cost growth are included.

Health care reforms could help slow the growth of spending in this area over the next 20 years. Figure A1.1 shows the average impact of reforms on public health spending-to-GDP ratios in 2030, grouped in five categories: budget caps (including budget constraints and central government oversight), public management and coordination (including “gatekeeping” processes that require referrals for accessing specialized care and subnational government involvement), market mechanisms (including choice of insurers and providers, 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). The figure shows the combined effect of raising countries to the OECD mean score on each of these indices, based on the impact of improvements reported in Table A1.1.22

Figure A1.1.Average Impact of Reform Components on Health Spending, 2030

(Decrease relative to the baseline; percent of GDP)

Sources: OECD Health Database; and IMF staff estimates.

Note: Unweighted averages of the impact of reforms.

The results suggest that reforms of market mechanisms can be powerful, yielding a reduction in spending of about ½ percentage point of GDP. The exercise also underscores the importance of budget caps, which can reduce spending by ¼ percentage point of GDP. The simulated impacts of demand-side reforms and supply constraints are small, but not negligible. The variation in the impact on spending across categories, as shown in the figure, largely reflects differences in the size of the impact coefficients in Table A1.1, rather than substantial differences in the dispersion of index scores across categories.

It is important to note that the possible savings under reforms are subject to uncertainty. Simultaneous reforms across different aspects of the health system may be undesirable or counterproductive. Thus, the effect of the reforms across categories depicted in Figure A1.1 cannot necessarily be aggregated. Some reforms, however, could be complementary, implying that the savings under any particular reform may be understated.

The impact of the simulated reforms might still fall short of what would be needed in some countries to stabilize public health care spending-to-GDP ratios at current levels. Thus, additional efforts would be needed to achieve this target, or fiscal adjustment might need to rely more on cuts in other areas or additional revenue increases.

  • This is especially important in some advanced European economies 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. Other options to reduce spending, beyond those captured in the econometric analysis, include the extension of health information technology, which would yield savings of ¼ percent of GDP.23 Curtailing the favorable tax treatment of health insurance contributions (which involve tax expenditures—see Appendix 5—amounting to about 2 percent of GDP) could potentially yield large savings, and recent proposals in this area would yield savings of an additional ½ percentage point of GDP on an annual basis.24 All told, these reforms, including those simulated in the econometric analysis, would reduce spending (including tax expenditures) by about 2 percentage points of GDP. Even with the reforms, however, health spending would still be rising by 3 percentage points of GDP.

Reform options and the appropriate mix of reforms will depend on country characteristics and the projected outlook for the growth of public health spending. The reform impacts simulated above focus on strengthening cost-containing characteristics of health systems on which countries score below the OECD mean. Of course, all of the identified reforms using this methodology may not necessarily apply to every country. Nevertheless, this approach provides a systematic way to identify potential reforms. Box A1.1 provides an assessment of options using this approach.

Health reform proposals raise two important questions. First, will cost-reducing reforms adversely affect health outcomes? Second, will reforms 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 (Brereton and Vasoodaven, 2010; Cutler, 2004; Or and Hakkinen, 2010). Most micro-level efficiency reforms, such as the introduction of competition, can improve the responsiveness of the health system to patients but also reduce the growth of spending. It is thus possible, with an appropriate mix of reforms, to control spending without adversely affecting outcomes.

  • Reforms have implications for the range of services or products financed by the public sector. As part of reforms to contain the growth of spending, countries may need to reduce the scope of the public benefits package. For predominately public sector systems, this could be achieved through greater reliance on cost sharing and private insurance. The expansion of the role of the private sector, however, needs to be accompanied by appropriate measures to ensure access, equity, and efficiency. Regulators also need to ensure adequate competition in the private insurance market.

Box A1.1.Potential Reform Strategies to Contain the Growth of Public Health Spending

Countries relying on market mechanisms

  • In Canada, the Czech Republic, France, Germany, Japan, and the Slovak Republic, staying the course with marginal reforms would be enough to contain excess cost growth, although bolder reforms could still be needed to offset the effects of demographics on health spending.

  • In Australia, Austria, Belgium, and the Netherlands, possible strategies include tightening budget constraints, strengthening gatekeeping (such as by requiring referrals to access secondary care), and increasing cost-sharing.

  • Greece, Korea, Luxembourg, Switzerland, and the United States are projected to have relatively high spending growth, indicating the need for future reforms, especially for Greece and Luxembourg, which score low on efficiency measures.1 These countries tend to have less stringent budget constraints, minimal central oversight (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.

Countries that rely more heavily on public insurance and provision

  • Denmark and Ireland could focus on efficiency-enhancing reforms to reduce spending growth. Italy and Sweden, both of which score high in efficiency, could improve priority setting in the area of health (for example, by better monitoring public health objectives and the composition of the public health package).

  • In Norway and Spain, containing the growth of spending could require tightening macro controls (including central oversight), broadening private insurance for care beyond the basic health package (Norway), and improving priority setting (Spain).

  • Finland, Iceland, New Zealand, Portugal, and the United Kingdom have relatively high projected spending growth. Countries in this group could strengthen supply constraints on the workforce and equipment (for example, by rationing high-technology equipment). In addition, these countries could benefit from extending the role of private health insurance for over-the-basic care and increasing choice among providers (especially in Finland, New Zealand, and the United Kingdom).

Source: IMF (2010a).1 The assessment does not take into account reforms in Greece as part of its fiscal adjustment program initiated in 2010.

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