Chapter

Appendix 1. Recent Developments in Public Health Spending and Outlook for the Future

Author(s):
International Monetary Fund. Fiscal Affairs Dept.
Published Date:
October 2013
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The growth of public health spending has slowed significantly in advanced economies over the past three years. Nearly all advanced economies, except Israel and Japan, recorded a slowdown in real health spending growth in 2010 and 2011, compared with the period 2000—09 (Figure A.1.1, panel 1; Morgan and Astolfi, 2013). The economies experiencing the largest declines have also seen sharp drops in output and undertaken large fiscal adjustments in this period (Greece, Iceland, Ireland, Portugal, and Spain). Available data for eight economies indicate continued slow growth of public health spending in 2012. Public health spending has also dropped as a share of actual and potential GDP, after rapid growth in 2007–09 (Figure A.1.1., panel 2). The slowdown has touched nearly all categories of health spending, including inpatient, outpatient, pharmaceutical, and even prevention and public health (Morgan and Astolfi, 2013).

Figure A.1.1.Evolution of Public Health Spending in Advanced Economies

(Percent)

Sources: Organisation for Economic Co-operation and Development; and IMF staff estimates.

These spending decreases appear largely to reflect policies that reduce the level of spending in the short term, but there is little evidence that they will have an impact on long-term spending growth. Reforms introduced in many countries were mainly focused on generating immediate savings rather than on improving the efficiency and quality of health spending (European Commission, 2013). Many reforms have focused on cuts in national health budgets (Greece, Ireland, Italy, Portugal, and Spain), cuts in prices for pharmaceuticals and other medical goods (Austria, Belgium, Greece, Ireland, the Netherlands, Portugal, and Spain), reduced payments to providers (the Czech Republic, Estonia, Ireland, and Spain), and containing wages and salaries (the Czech Republic, Denmark, Greece, Ireland, Portugal, Slovenia, Spain, and the United Kingdom) (Mladovsky and others, 2012; Morgan and Astolfi, 2013). While these macro-level instruments could help reduce the level of spending in the short term, they are typically less effective in containing spending growth in the long term without accompanying micro-level reforms to enhance efficiency (Clements, Coady, and Gupta, 2012). Although some countries raised user charges (the Czech Republic, Denmark, Estonia, France, Greece, Ireland, Italy, the Netherlands, Portugal, and Switzerland),63 these increases were relatively small and unlikely to alter the long-term growth of health spending significantly. In most cases, only marginal changes were made to benefit packages and the breadth of population coverage. Some measures attempted to improve efficiency, such as efforts to reduce administrative costs and restructure the hospital sector (Mladovsky and others, 2012). Their impact on long-term spending growth, however, is less clear. On the other hand, although they generated short-term savings, some of these measures could in fact raise public health spending in the long term because of deterioration in population health as essential health care services, such as health promotion and disease prevention, were cut (European Commission, 2013). Thus, there is a high degree of uncertainty regarding the impact of these reforms on the growth of public health spending in the long term.

Econometric analysis confirms that much of the recent slowdown in spending can be explained by deteriorating macroeconomic conditions and fiscal pressures. Such analysis also indicates that macroeconomic and fiscal indicators (including economic growth, unemployment, and gross government debt) are significant determinants of the growth in public health care spending.64 Nearly the entire decline in the growth of spending between 2008 and 2010 can be explained by these factors (Figure A.1.2.) Although the model does not predict the continued decline in spending growth in 2011 as well, half of the gap between the actual and predicted growth rate in 2011 can be attributed to four countries that have made large fiscal adjustments: Greece, Ireland, Portugal, and Spain.65 Though far from conclusive, the findings suggest caution in assuming that the recent slowdown will translate into permanently lower long-term growth rates in the projections of future health care spending.

Figure A.1.2.Per Capita Public Health Spending, 1981-2011: Actual, Predicted, and Simulated Growth Rates

(Percent)

Sources: Organisation for Economic Co-operation and Development; and IMF staff estimates.

Note: “Predicted” denotes the predicted growth rates from an econometric model based on actual macroeconomic indicators. “Simulated” denotes the spending increase that would occur if health spending between 2008 and 2011 grew at rates that would be predicted using averages of macroeconomic indicators between 2000 and 2007.

The slowdown could still have a persistent impact on public health spending in some countries over the medium term. This reflects two factors. First, when the historical growth rate of public health spending (in excess of GDP growth) resumes, the growth would apply to a lower base of public health spending as a percentage of GDP (because of the recent slowdown). Second, some of the macroeconomic and fiscal factors that dampen spending growth, such as high public debt ratios, may not return to precrisis levels in the near future and thus would put continued pressure on the growth of public health spending. IMF staff projections fully incorporate the lower spending levels due to recent reforms and assume that growth rates will only gradually return to their historical levels as economies recover.66

Rising public health spending–to–GDP ratios will, however, remain a key fiscal challenge in many advanced economies. On average (unweighted basis), public health spending is projected to increase by 1½ percentage points of GDP in 2013–30 (Figure A.1.3). This compares with earlier IMF staff projections of an increase of 2¼ percentage points of GDP in 2011–30 (Clements, Coady, and Gupta, 2012). The weighted averages are 2¾ and 3 percentage points, respectively. In the United States, public health spending is projected to increase by 4¾ percentage points of GDP, which is in line with the current projections of the U.S. Congressional Budget Office (2012, 2013) under the assumption that subnational spending grows at a similar rate as federal health spending.67 Public health spending in economies hit hard by the Great Recession (Greece, Iceland, Ireland, Portugal, and Spain) is projected to increase, on average, by only ¾ percent of GDP, about half the advanced economy average, reflecting likely continued fiscal pressure and weak macroeconomic conditions over the medium term in these economies.

Figure A.1.3.Projected Increase in Public Health Spending, 2013-30

(Percentage points of GDP)

Sources: Organisation for Economic Co-operation and Development; and IMF staff estimates.

Note: Excess cost growth is defined as the growth of public health spending in excess of GDP growth after aging is controlled for.

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