Spain: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix constructs an index of human capital for the Spanish labor force over 1977–97, and projects it over the next decade on the basis of likely demographic developments. The methodology by which the index is constructed considers both educational attainments resulting from formal schooling and improvements in workers’ productivity resulting from experience, or “learning by doing.” The results suggest that the gains from increases in formal schooling can be large, although they are translated into higher economic growth only gradually.

Abstract

This Selected Issues paper and Statistical Appendix constructs an index of human capital for the Spanish labor force over 1977–97, and projects it over the next decade on the basis of likely demographic developments. The methodology by which the index is constructed considers both educational attainments resulting from formal schooling and improvements in workers’ productivity resulting from experience, or “learning by doing.” The results suggest that the gains from increases in formal schooling can be large, although they are translated into higher economic growth only gradually.

III. Health Care Issues in Spain36

A. Introduction and Summary

1. This paper looks at the health care system in Spain and the evolution of health care expenditure in recent years. While health care expenditure represents a lower percentage of GDP in Spain than in most other EU countries, this largely reflects Spain’s lower per capita GDP. Controlling for income, health care spending in Spain is somewhat above average for an OECD country. In addition, the structure of health care spending in Spain is unusual in that pharmaceutical expenditures represent a significantly larger share of total health care costs than in other countries.

2. Health status indicators in Spain are at a very high level, and coverage of the system is virtually universal. Thus, the challenge for the future is less to improve the quality of health care than to limit the growth of its cost. As in other countries, pressures on health care costs are likely to arise from a number of factors, including technological change, income growth, and population aging. Simulations conducted in the paper suggest that the impact of population aging is likely to be managable, but that increases in real income will likely have a large impact on health care spending. In tandem, population aging and income growth could lead to a real increase in health care expenditure of more than 3 percent of GDP by the middle of the next century. Cost control is thus likely to remain a major issue in the future.

3. Many of the measures being introduced in other European countries to control health care costs have also been implemented in Spain. Future reforms should concentrate on creating internal markets for health care to encourage greater efficiency; on expanding the currently limited reliance on user fees, for example by introducing them on speciality care and pharmaceutical purchases by the elderly (perhaps subject to means testing), to reduce demand for non-essential health care services; and on devolving responsibility for health care financing to regional governments to match the devolution of responsibility for health care delivery that has already occured.

B. The Health Care System in Spain

4. Health care in Spain is provided by a mixed public-private system. Overall, the public sector accounted for 78 percent of health care spending in Spain in 1997, which is about average for a European country. Coverage of the public system is virtually universal (more than 99½ percent of the population). Services at hospitals, doctors’ offices and clinics are provided free. Nevertheless, the private system continues to exist because it offers amenities not available at public hospitals (for example, private rooms), because some services are not available under the public system, and because of waiting lists for some nonemergency procedures at public hospitals.37 In addition, a portion of private health expenditure represents copayments on pharmaceuticals, which are set (at the primary care level) at 40 percent (retirees have no copayment and the chronically ill have a copayment of only 10 percent). About 15 percent of the population has insurance to cover private health expenditure, a substantially lower share than in most other European countries.38 Nevertheless, out-of-pocket spending on health care accounts for a relatively small portion of family expenditure: according to the Encuesta Continua de Presupuestos Familiares, in 1996 spending on medical care represented 2.9 percent of total household expenditure (2.6 percent in 1992).

5. Up until 1989, the national health system was financed primarily by social security contributions from workers and employers (the so-called “Bismarck Model”). Since then the share of social security contributions in the financing of health care has gradually been decreased, and with effect from 1999 the health system has been financed entirely from general tax revenues (the “Beveridge Model”).39 These changes were motivated in part by a desire to ensure the financial sustainability of the pension system. They also reflect a philosophy that benefits available to the entire population—such as health care—are more appropriately financed from broadly-based sources like general tax revenues than from social contributions that fall on a more narrow segment of the population.

6. Spain is currently in the process of decentralizing the responsibility for health care and other categories of expenditure to regional governments. Public health responsibilities and services have thus far been devolved to seven autonomous communities,40 which account for more than 60 percent of the population. Health care for the balance of the population is provided by the central government through the National Health Institute, INSALUD. Health expenditures in regions where responsibilities have been devolved are financed via block transfers from INSALUD according to a formula that reflects regional population and other factors influencing expenditure (see Section E for a discussion of the formula used to calculate transfers)

7. Most of the population is now covered by primary care centers staffed by full-time physicians that provide integrated care. Physicians are compensated on a mixed salary and capitation basis.41 Hospitals are typically financed through global budgets distributed by INSALUD or one of the seven regional authorities to whom responsibility for health care delivery has been devolved, and all staff are normally salaried. The distribution of pharmaceuticals is highly regulated. Despite the fact that the government negotiates wholesale prices directly with manufacturers at levels that are about 20 percent lower than the average European wholesale price, consumer prices are substantially higher because of the large margin that the government allows pharmacies. Pharmacies are also given exclusive rights to sell a number of over-the-counter medications and nonmedical products such as baby formula, further increasing consumer prices. In 1993, retail margins accounted for 29 percent of final prices for retail pharmaceuticals in Spain, compared to 28 percent in France, 23 percent in Germany, 22 percent in Italy and 5 percent in the United Kingdom. Among all these countries, only in German did ex-factory prices represent a smaller share of final retail cost than in Spain.42 These large margins have led Spain to have one of the largest numbers of pharmacies per capita in the OECD.43 Restrictions also exist that limit the ownership of pharmacies to pharmacists, prevent individuals from owning more than one pharmacy, and restrict the geographical proximity of pharmacies. These regulations prohibit the entry of chain stores into the market, restraining competition.

8. Reflecting these facts, the structure of health care expenditure in Spain differs in some important respects from that prevailing in the average OECD or European country (see Table 1, below). Relative to GDP, Spain spends substantially less on ambulatory care than does the typical OECD or European country. It also spends slightly less on hospital care and slightly more on pharmaceuticals than average. Looking at spending on these different categories as percentages of total expenditure, the differences with other European countries are more pronounced: while hospitals account for about the same share of total health expenditure in Spain as in the average European country, spending on ambulatory care accounts for a significantly smaller share and spending on pharmaceuticals a significantly larger share than is the average in Europe. On the other hand, spending on pharmaceuticals in US dollar terms (PPP) is lower in Spain than in the average European country: in 1996, per capita expenditure on pharmaceuticals in Spain equaled $223, compared to an average in Europe of $237. Pensioners account for about 60 percent of prescriptions and 70 percent of public expenditure on pharmaceuticals in Spain. The low proportion of spending on ambulatory care in Spain may reflect the large share of wages and salaries in total costs for this type of care and the fact that physician salaries are lower in Spain than in other countries.

Table 1.

Spain: Structure of Health Care Expenditure

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Source: OECD Health Data 1998; and Fund staff calculations.

9. Over time, expenditure on pharmaceuticals has grown relatively faster than has spending on other categories, rising from 1.2 percent of GDP in 1980 to 1.4 percent of GDP in 1995. All of the increase in spending on drugs has come at the public sector level, as private expenditure on pharmaceuticals has declined slightly as a share of GDP since 1980. To a large extent, the patterns of expenditure over time reflect developments in other European countries as well. The most important difference is that while spending on ambulatory care has increased in other European countries over the last 15 years, in Spain it has remained about constant relative to GDP. Rates of increase of other categories of expenditure relative to GDP have not differed markedly in Spain compared to other European countries.

C. Health Spending and Outcomes: International Comparisons

10. Total health care expenditure (public and private) in Spain in 1997 was equivalent to 7.4 percent of GDP, about half a point below the simple averages both for the OECD and the EU.44 To a large extent, this reflects Spain’s lower-than-average per capita income: regressing health care spending as a percentage of GDP on per capita income for the OECD countries (Figure 1) suggests that the level of expenditure on health care in Spain is somewhat higher than average after controlling for per capita income.45 In absolute terms, per capita spending on health care in Spain is about one-third lower than the EU average (Table 2).

Figure 1.
Figure 1.

Health expenditure as percent GDP and per capita GDP

Citation: IMF Staff Country Reports 1999, 081; 10.5089/9781451812022.002.A003

Source: OECD Health Data 1998.
Table 2.

Selected Countries: Health Expenditure, 1997

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Source: OECD Health Data 1998.

11. Spending on health care as a percentage of GDP in Spain has grown dramatically in recent decades, starting from a level of about 1.5 percent of GDP in 1960 (Figure 2) to 7.4 percent at present. Since EU accession, expenditure as a percentage of GDP has grown by about one-third, from 5.6 percent of GDP in 1986 to 7.5 percent of GDP in 1993, at which level it has since more or less stabilized. Over the same period, average health care expenditure in the EU increased by about 0.9 percent of GDP, or about half the absolute increase experienced in Spain. Although some of the increase in expenditure as a share of GDP in Spain reflects income growth, it is clear that health expenditure in Spain has converged toward EU levels much more rapidly than has income: from 1986 to 1997 health expenditure in Spain rose from 78 percent of the simple EU average to 93 percent, while per capita GDP rose from 70 percent of the EU average to just 78 percent. Although the experience of Spain in stabilizing health care expenditure relative to GDP since 1993 is laudable, it does not differ from that of other EU countries: while health care expenditure rose by about three-quarters of a percent of GDP in the EU between 1986 and 1992, since then it has remained virtually constant at 8.0 percent of GDP.

Figure 2.
Figure 2.

Spain, OECD and EU: Health Care Expenditure as Percent of GDP

Citation: IMF Staff Country Reports 1999, 081; 10.5089/9781451812022.002.A003

Source: OECD Health Data 1998.

12. Health care outcomes in Spain have improved dramatically over the last 35 years. The infant mortality rate, which in 1960s was substantially higher than the average for the EU countries, declined rapidly through the 1960 and 1970s, and for the last decade has been about equal to the EU average (Figure 3). Male life expectancy at both age 40 and age 65 in Spain is higher than the average for the EU or the OECD (Table 3). However, potential life years lost (excluding suicides and road accidents)—which for the 1970s and most of the 1980s were lower in Spain than in the rest of the EU—have since 1986 actually exceeded the levels prevailing in the EU (Figure 4), with the figure for Spain in 1994 exceeding the EU average by about one standard deviation.46 Moreover, while potential life years lost have declined steadily in Europe since the mid-1980s, the improvement in this indicator in Spain has been quite limited over the last decade. Thus, while somewhat coarse indicators such as life expectancy and infant mortality rates suggest that the health status of the Spanish population is at least equal to the European norm, a somewhat finer indicator suggests that some room for improvement may exist.

Figure 3.
Figure 3.

Infant Mortality Rates, 1960-96

Citation: IMF Staff Country Reports 1999, 081; 10.5089/9781451812022.002.A003

Source: OECD Health Data, 1998.
Table 3.

Spain and Other Countries: Male Life Expectancy at Ages 40 and 65, 1996

(In average additional years of life)

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Source: OECD Health Data 1998.
Figure 4.
Figure 4.

Potential Life Years Lost, 1960-94

(per 100,000 males, excluding suicides and road accidents)

Citation: IMF Staff Country Reports 1999, 081; 10.5089/9781451812022.002.A003

Source: OECD Health Data, 1998.

D. Challenges to the Health Care System

13. The challenge facing the health care system is less to improve the health status of the general population—although such improvements would obviously be welcome—or to extend the coverage of the system, but rather to ensure that costs remain under control in the face of pressures arising from changes in relative prices, technological change, population aging, and rising real incomes.

14. As in other countries, relative prices for health care have risen in Spain. Between 1988 and 1997 consumer prices for health services and products rose by a cumulative 66 percent, compared to an increase of 55 percent in the general price index. After increasing by as much as 10 percent annually in the early 1990s, the growth of medical prices has slowed significantly in recent years. Nevertheless, it remains one of the fastest growing elements of the CPI.47 Figure 5 shows inflation in overall consumer prices and in the health care component of the CPI, as well as for the pharmaceutical and nonpharmaceutical elements of health prices. It indicates that the increase in health care prices primarily reflects the very rapid growth in prices of nonpharmaceutical inputs, while prices of pharmaceuticals have increased only moderately over the last decade. This reflects in part successful efforts by the government to reduce regulated wholesale margins on drugs. (Of course, pharmaceuticals included in the consumer price basket represent only a portion of all drugs consumed). López and Casado (1998) estimate that of the 13 percent annual increase in nominal health care expenditure in Spain between 1980 and 1995, more than half arose from increases in health care prices, rather than from increased coverage of the system, demographic factors, or greater real provision of services to the population.

Figure 5.
Figure 5.

Health Services Price Inflation and Consumer Price Inflation 1988-1998

Citation: IMF Staff Country Reports 1999, 081; 10.5089/9781451812022.002.A003

Source: Bank of Spain.

15. Technological change will likely continue to put pressure on medical costs in the years to come. For reasons of safety, efficiency, quality of care and professional prestige, as well as patient satisfaction, health care providers are often under pressure to adopt the most up-to-date techniques. While in most other markets new technologies are subject to household or firm-level budget constraints, the existence of third-party payers such as private or national health insurance programs creates well-known disincentives to ensure that all new technologies are cost effective. More generally, the existence of third-party payers creates “moral hazard” that can lead to excess demand for or supply of health care services. This increases the importance of the regulatory role of government, to ensure that new technologies that are adopted are cost-effective.48

16. In contrast to relative prices and technological change, the impact of rising incomes and of population aging on the cost of health care services is less amenable to government control. Numerous studies have examined the impact of income growth on health care spending, and most find elasticities of expenditure significantly greater than 1.49 Gerdtham et al. (1994) find that among OECD countries, GDP per capita is the single most important factor explaining differences in health care expenditure across countries. Although income elasticities of demand for health care must inevitably decline in the future, one implication is that as Spain’s per capita GDP converges with the European Union average, its expenditure on health care will increase. The results of the regression of health care expenditure as a percentage of GDP on per capita income reported in Section C suggest that simply closing the gap between per capita GDP in Spain and the current EU average will generate an increase in health care expenditure of about 1 percent of GDP.

17. Population aging will also have a impact on health care expenditures in the future, simply because per capita health expenditure increases dramatically with age. Data on health care expenditure by age group are not available for Spain, but data for all OECD countries with available figures from the 1990s are presented in Table 4, below. Although there is some variation across countries, the data reveal that on average, per capita spending on individuals aged 75 or more is about four times that on individuals aged 0–64, while per capita spending on individuals aged 65–74 is about 2½ times that on individuals aged 0–64. The much greater cost of providing health care to the elderly is important, because over the next century the population pyramid of Spain is expected to shift as the baby boom generation of the 1960s and 1970s ages.

Table 4.

Spending on Health Care by Age, Selected OECD Countries

(Spending on Age 0-64 = 1)

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Source: OECD Health Data 1998

18. Table 5, below, provides an illustration of the impact population aging could have on health care expenditure in Spain. Assuming that the ratio of per capita expenditure on health care by age in Spain is identical to the average presented in Table 4, it is possible to calculate that per capita expenditure on health care in Spain in 1997 equaled $920 for individuals aged up to 65; $2,115 for individuals aged 65–74; and $3,586 for individuals aged 75 and older. Holding these per capita expenditure levels constant while adjusting for demographic shifts based on population projections by the World Bank suggests that between 1997 and 2050 per capita expenditure on health care in 1997 U.S. dollars could increase by one-third, from $1,168 in 1997 to $1,560 in 2050, as the percentage of the population over the age of 65 more than doubles.50

Table 5.

Spain: Population Strucuture and Projected Per Capita Health Spending, 1997-2075

(In percent and 1997 US$)

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Sources: INE, World Bank, OECD Health Data, 1998; and Fund staff calculations.

19. The implied annual increase of about 0.6 percent in real spending on health care over the period 1997–2050 is well below the likely rate of real GDP growth in Spain. Thus, the impact on health care expenditure of population aging should be manageable.51 However, it is worth reemphasizing that demographic shifts are only one factor influencing health care costs. The calculations abstract from the impact of income growth, technological innovation, and changes in relative prices and disease patterns.

20. To obtain a more accurate picture of the pressures that will arise on health care costs in the long run, it may be useful to combine the impact of rising incomes and population aging. A regression of per capita health care expenditure on per capita GDP (both in PPP-adjusted U.S. dollars) using 1996 data for European countries estimates that the income elasticity of health care expenditure is 1.11.52 Assuming that per capita GDP in Spain grows at an average of 2.0 percent annually between 1997 and 2050, that the estimated elasticity of 1.11 applies over the entire period, and that population aging leads to an annual increase in health care expenditures of 0.6 percent over the period, total health care expenditure could increase by about one-half as a percentage of GDP, or from a current 7.4 percent of GDP to about 11 percent of GDP in 2050. If the public sector were to continue to account for about 78 percent of total health care expenditure, cuts of about 3 percent of GDP would be required elsewhere in the budget to hold primary expenditure constant. If such cuts were made, the share of health care in total general government primary expenditure would rise from about 15 percent in 1997 to about 22 percent in 2050.

E. Recent Reforms in Spain and Elsewhere

21. Over the last several years, many countries have introduced reforms aimed at controlling costs and improving the overall quality of public health care. In Spain, reforms have been concentrated in three areas: modifying the system by which resources are transferred to regional governments; increasing the accountability of hospitals and health centers and introducing to them a measure of self-governance; and limiting spending on pharmaceuticals. Some reforms have been introduced first at a regional level and have since spread to a national basis. Others began with INSALUD, or remain regional.

Regional funding

22. Among western European countries, Finland has perhaps gone furthest in devolving revenue and expenditure responsibilities to local governments. Municipalities have since 1972 been in charge of health care delivery, and have responsibility for raising taxes to pay for it. Denmark and Sweden have also achieved a significant degree of decentralization.53

23. Prior to 1994, transfers to Spanish regions that had assumed control of their own health spending were determined by annual bilateral negotiations between each region and the national government. This arrangement did not provide a stable basis for regional health authorities to project the resources that would be available to them and resulted in regional disparities in funding levels, with some regions receiving more than others on a per capita basis. In addition, the transferred amounts were generally insufficient to cover regional expenditures, which led to the accumulation of debts.

24. In 1994 a new system was introduced which increased the volume of transfers to a level consistent with actual (accrued) regional expenditures, and established that transfers to each region would be based on population. The new system also called for a stabilization of public health care spending as a percentage of GDP over the period 1994–97. In 1998 additional revisions were adopted that (i) increased the total volume of resources available to the health system (both to INSALUD and to regional governments where expenditure has been devolved), (ii) provided that any savings generated by the health care system through improved cost control would remain within the system rather than be returned to the national budget, and (iii) again called for a stabilization of public health care spending relative to GDP (although an additional increase of Ptas 25 billion—some 0.03 percent of GDP—was contemplated for 2000, subject to the health system meeting certain targets related to the quality of care).

25. Although these reforms have begun to address regional imbalances in funding by making per capita equity an explicit objective and have introduced incentives for regional governments and INSALUD to improve their efficiency—since they will retain any savings they generate—it remains the case that the basic responsibility for raising revenues for health care is divorced from the responsibility for spending these revenues. Such a system is inefficient in that regions are not free to vary the level of health care services they choose to provide, and do not bear the political costs of raising taxes (or, of not cutting them) to finance health care spending. Devolving to local governments a tax base adequate to finance their current health care spending, in concert with hard budget constraints, equalization mechanisms for poorer regions, and sufficient oversight facilities to ensure that minimum national standards were being observed, would help redress this inefficiency.

Financing of hospitals

26. Some European countries have made use of contracting between different elements of the public health care system in an effort to introduce greater competition and cost efficiency. For example, in Sweden and the United Kingdom some primary health care providers receive public funds that they use to purchase specialty and other types of care for their patients from other public health care providers.

27. In Spain, in an effort to improve the performance of hospitals, INSALUD in 1995 began negotiating service contracts (Contratos Programas) with each hospital specifying the level of hospital activity expected in the coming year and—based on theoretical prices—the budget allocation. The goal of the program is to link hospital resources to productivity, and to provide incentives for hospitals to improve their efficiency. Hospitals that contract to provide more services receive more funding, and those that do so most efficiently retain more of these funds. However, the impact of this measure is limited by the fact that there are at present no sanctions for failure to meet the specified activity goals.

28. Hospital funding in Spain is “prospective,” in the sense that payments are provided based on the services that a hospital is expected to provide in the future, rather than as reimbursement for services already rendered. Although this form of funding is relatively common in Europe, details differ by country. In Denmark, for example, prospective budgets for hospitals are determined on an historical basis, with adjustments for salary and price increases, service quality and planned efficiency improvements. While the Danish system has been effective in containing costs, it has not generated adequate incentives for improving efficiency or the quality of care. In response, some flexibility (as well as greater internal competition) has recently been introduced into the system by allowing patients free choice among hospitals for elective surgical procedures. When patients are treated outside their counties of residence, compensation is negotiated between county councils. Ireland, Italy and Norway also calculate hospital budgets prospectively, under a system more similar to Spain’s, with payments to individual hospitals reflecting the historical costs of the various types of services (categorized by diagnosis-related groups) the hospital is expected to provide. Such a system provides greater incentives for efficiency improvements, both because reductions in costs can result in surpluses for hospitals and because to the extent that payments are based on system-wide average costs, and to the extent that hospitals face hard budget constraints, less efficient hospitals will run deficits that will need to be financed by cutting spending in other areas.

29. Providing greater autonomy to hospitals is also expected to result in greater efficiency. This type of reform has been pushed furthest in the United Kingdom, where all National Health Service hospitals have been converted into independent trusts, selling their services to local health authorities. Hospital trusts in the United Kingdom have a statutory duty to operate within the income they obtain from contracts, to set contractual prices for their services that reflect average costs, and to ensure that there is no cross-subsidization across services. Trusts compete with other providers for contracts, across health authority borders. This reform introduces an important element of competition into a public health system.

30. In Spain, parliament approved a law in 1998 allowing public hospitals to be converted into “public health foundations,” which will enjoy considerably greater autonomy than regular public hospitals. In particular, foundations will be allowed to hire their own personnel and to set their own management objectives. In addition, they will be allowed to retain any operating surpluses they generate. Similar reforms have been introduced in a number of regions (particularly in Catalonia) in both hospitals and health centers. A more extreme reform of this type is now being developed in the region of Valencia, where public funds have been provided to build a hospital that will be managed by a private consortium. Depending on how efficiently the hospital is run, the management company will earn a profit.

Pharmaceutical cost control

31. Controlling pharmaceutical expenditure is a priority in all countries, and is complicated by the fact that demand for medications is typically determined not by the consumer but by his physician, while the costs are borne largely or entirely by a third party, the insurance or national health system.

32. The Spanish government has introduced a number of reforms in an attempt to reduce public expenditure on pharmaceuticals. The number of drugs eligible for reimbursement by the SNS was cut in half, to 1650, in 1993–1994. In 1998 it was cut in half again, denying public funding for an additional 834 drugs. Belgium, Denmark, France, Greece, Italy, the Netherlands, and Portugal also have “positive lists,” specifying the drugs whose consumption will be financed by the public system. “Negative lists,” indicating drugs whose purchase will not be financed, are used in Germany, Ireland, Luxembourg and the United Kingdom. The Spanish authorities have also announced an intention to increase the use of generic medications from the present level of about 1 percent of public sector prescriptions to some 10 percent, compared to 15 percent in the United Kingdom, 17 percent in Germany, and 50 percent in the United States. As of April 1999 some 248 generic drugs have been authorized for use compared to just 47 one year earlier. However, the use of generics is still constrained by floors that have been established on their prices and by approval periods of up to three years.

33. Most western European countries—except for Denmark, the Netherlands and Luxembourg—control either prices or profits of drug companies. In Belgium and France, officially-fixed prices for new pharmaceutical products are based in part on an assessment of the extent to which they constitute an improvement over existing medications. Other countries (for example, Greece, Ireland, and Portugal) base domestic prices on the average price prevailing in other European countries. Germany, Greece, Italy, and the United Kingdom have imposed unilateral price cuts or freezes on drug companies, and France has prevailed on drug companies to provide rebates for pharmaceutical expenditure. In Spain, on several occasions the authorities have reduced fixed retail and wholesale margins on drugs, and a number of agreements have been negotiated with drug companies to provide rebates to INSALUD for drug purchases. However, pharmacy margins remain significantly above the level prevailing in the United Kingdom, for example.

34. A number of countries (Denmark, Germany, the Netherlands, Norway and Sweden) have introduced reference pricing for some pharmaceuticals, and the Basque region in Spain has followed suit. Under such a system, the authorities establish the maximum reimbursement level for each drug (the reference price), with consumers liable for the difference between the reference and list prices. Typically, reference prices are equalized for similar types of drugs (for example, those with similar active ingedients). Consumers remain free to choose among products on the market, but they, rather than the health care system, are forced to bear the expense for consumption of relatively more expensive versions of nearly identical drugs. A draft law has been prepared in Spain to extend reference pricing to the regions whose health care is administered by INSALUD, which will go into effect in September. However, the reference system will apply to less than 10 percent of the market, compared to 90 percent in the Netherlands, 60 percent in Germany, and 30 percent in Denmark.54

35. As can be seen from the above, many of the reforms that have been applied in other European countries to try to control health care costs are also being introduced in Spain. Like many countries, Spain has attempted to link hospital budgets to the. mix of services provided; to introduce incentives for greater cost efficiency within hospitals; to reduce the number of drugs that the health care system will provide reimbursement for (via positive lists); and to limit pharmaceutical expenditure via direct negotiations with drug companies. Future reforms could introduce greater internal competition among health care providers along the lines of recent measures adopted in Denmark and the United Kingdom, for example; could extend reference pricing to a broader range of pharmaceuticals, and could calculate these prices based on the lowest-cost item in each reference group; could continue to reduce margins for pharmacies and liberalize the sale of nonprescription drugs; and could devolve financing as well as delivery of health care to regional governments.

36. One area that has been underutilized in Spain relative to other European countries is cost-sharing. As in virtually all European countries, Spain requires a copayment for pharmaceuticals purchases, at least for individuals under the age of 65. About half of western European countries apply cost sharing for visits to primary care physicians, and most also apply cost sharing to in-patient and specialty outpatient care. The most common form of cost sharing is copayments or coinsurance; only Switzerland uses deductibles. To guard against equity concerns, virtually all countries relying on cost-sharing use some form of out-of-pocket maximum to limit the amount that individuals or households are required to pay for health care costs, and none put caps on the services that will be provided to individuals. It is worth noting that while the introduction of cost-sharing mechanisms will likely have an impact on demand for health care services, the link between the introduction of cost sharing and lower health care expenditure has not been conclusively drawn.55 At a minimum, however, greater reliance on user fees will shift some of the burden for health care financing from the budget to households.

APPENDIX Evaluating the Efficiency of Health Care Expenditure in Spain

37. This Appendix draws inferences about the efficiency of health care spending in Spain through two techniques: regression analysis and free disposal hull (FDH) analysis. The results suggest that while health spending in Spain is relatively efficient, by some measures there exists room to improve outcomes.

38. A few notes of caution should be introduced at the outset. As no single indicator can capture the health status of a country’s entire population, three separate indicators of health status were examined to evaluate the efficiency of health care spending: (i) potential life years lost per 100,000 men (excluding suicides and road accidents); (ii) life expectancy for males aged 65; and (iii) infant mortality rates. However, these are relatively coarse indicators of health status that may not fully capture all the nuances of the health status of a country’s population. This may especially be the case for life expectancy and infant mortality, where all European countries have already achieved relatively strong outcomes. A related point is that evaluating the efficiency of health care expenditure using these indicators assumes that the goal of health care expenditure is solely to achieve improvements in these indicators. However, it is likely that in most countries improvements in these indicators may constitute only one of many competing priorities. Indeed, given the low levels of infant mortality that already apply in Europe, for example, further improvements in this indicator could possibly constitute a relatively low priority in some countries. Finally, using these indicators to evaluate the efficiency of health care expenditure suggests that they are largely a function of expenditure. Of course, life expectancy and infant mortality in particular are determined by a variety of factors, of which spending on health care is only one.56

Regression results

39. Data on the three indicators for a sample of 21–25 OECD countries were regressed on two different measures of health care expenditure: total spending on health care as a percentage of GDP, and per capita expenditure in PPP-adjusted U.S. dollars. The data were obtained from the OECD Health Data 1998 and cover 1996, in the case of infant mortality rates and life expectancy and 1994, in the case of PLYL. The sample includes all countries for which data were available, with the exception of the United States.57 In principle, efficiency should be measured relative to absolute expenditures, with per capita spending in PPP-adjusted dollars the explanatory variable, but this could introduce a bias in favor of low-income countries if the cost of a given health input (for example, doctor’s salaries) is lower in PPP terms in low income countries than in higher income countries. The use of health expenditure as a percentage of GDP as the independent variable may help address this concern.

40. All six regressions identified significant relationships between health outcomes and expenditure variables at a 90 percent or greater significance level. In fact, with the exception of the regression involving PLYL and expenditure as a share of GDP, all relationships were significant at levels of greater than 95 percent. The coefficient of determination (r-squared) varied from about 0.2 to more than 0.6. In addition, the signs of all the coefficients were consistent with the assumption that greater levels of expenditure are correlated with better health outcomes. Table A1, below, gives the estimated coefficients and t-statistics (calculated using heteroskedasticity-consistent standard errors) for each of the equations.

Table A1.

Regression Results

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Sources: OECD Health Data 1998; and Fund staff calculations.

41. To evaluate the efficiency of health care expenditure in Spain, we can examine the residuals from each of the six equations. Equations (1) and (2) generate predicted values of PLYL of 7,268 years and 6,446 years, respectively, compared to an actual value of 6,348 years. Equations (3) and (4) generate predicted values for life expectancy of 14.6 years and 15.0 years, respectively, compared to an actual value of 15.8 years. Finally, Equations (5) and (6) generate predicted infant mortality rates of 7.7 per 1,000 births and 6.6 per 1,000 live births, respectively, compared to an actual value of 5.0 per 1,000 births. As actual health status indicators are in all six cases better than their predicted values, we can conclude that the efficiency of health care expenditure in Spain is relatively high.

Free disposal hull analysis

42. FDH analysis is an intuitive tool that can be used to identify best practices in government spending and to assess how country governments are faring in comparison to these practices.58 The technique uses observations of combinations of inputs and outputs from a sample of countries to create a presumed production possibilities frontier, and then measures the extent to which each country is located within the frontier as an indication of that country’s relative efficiency in producing the output. The closer a country is to the frontier, the higher its efficiency score, with a maximum score of 1 for countries located along the frontier. A country is relatively efficient (with an efficiency score of 1) if there is no other country that produces as much output using fewer inputs. A country is relatively inefficient (with a score of less than 1) if there is at least one country that produces as much or more output using fewer inputs.

43. A major advantage of FDH analysis is that it imposes only weak restrictions on the production technology. In particular, there is no assumption that the technology is linear. The only assumption is that there is free disposal of inputs and outputs, so that if a producer can obtain a given level of output with a given level of inputs, it can always obtain at least as much output with a larger volume of inputs.59 In addition, the characterization of producers located below the production possibilities frontier as “inefficient” implicitly assumes that there are no omitted variables and that the PPF is therefore a function solely of the specified inputs.60 (If, for example, infant mortality depends not only on health care expenditure but also on access to clean water, the fact that country A spends less on health care and has the same infant mortality rate as country B would not necessarily imply that country B was less efficient than country A. The difference in health outcomes could instead reflect limited access to clean water in country B).

44. FDH analysis may be a particularly useful tool for studying health outcomes, as the assumption of a linear production function (as in the regression analysis above) may be inappropriate in the area of health care expenditure. From a technical point of view, most health indicators are bounded either above (for example, life expectancy) or below (infant mortality and PLYL). From a more practical view, it is unreasonable to expect that an additional dollar (or percentage point of GDP) in health expenditure will result in equivalent increases in health care indicators in countries where output indicators are relatively low, for example because access to health services is limited, and in countries where health care indicators are close to the theoretical maximum. Another important difference between regression and FDH analysis is that while regression analysis allows for a judgment about the efficiency of expenditure relative to sample averages, FDH analysis measures efficiency relative only to observed best practices.

45. FDH analysis allows the efficiency of producers to be measured in two directions, with respect to outputs and to inputs. If we imagine input and output combinations for various producers as being arrayed on a graph, with output on the Y-axis and inputs on the X-axis, the extent of a production unit’s output inefficiency is a function of its vertical distance from the PPF (how much additional output could it produce with its existing level of inputs?), while its input inefficiency is a function of its horizontal distance from the PPF (how much lower could its inputs be without reducing its present level of output?). The output efficiency score for a country is equal to its actual level of output divided by the feasible level of output (given the volume of inputs) as defined by the PPF. A country’s input efficiency score is equal to the minimum volume of inputs consistent with its current level of output (as determined by the PPF), divided by its actual volume of inputs. Thus, the output score measures the extent of underproduction for a given level of spending, while the input score measures the amount of overspending for a given level of output.

46. Rather than focusing on a single output variable, FDH analysis was conducted to measure the efficiency of production with respect to PLYL, infant mortality, and male life expectancy at age 65. As the analysis assumes that higher levels of output are preferable to lower ones, it was necessary to redefine PLYL per 100,000 males as the inverse of PLYL per capita,61 and the infant mortality rate as 1 minus the mortality rate. The input variable was defined as PPP-adjusted health care expenditure in U.S. dollars. All data came from the OECD Health Data 1998 and reflect the most recent year available. Tables A2A4 present the input and output efficiency scores for each country and indicator.

Table A2.

FDH Analysis Results, Dependent Variable PLYL

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Sources: OECD Health Data 1998; and Fund staff calculations.
Table A3.

FDH Analysis Results, Dependent Variable Infant Survival Rate

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Sources: OECD Health Data 1998; and Fund staff calculations.
Table A4.

FDH Analysis Results, Dependent Variable Male Life Expectancy at age 65

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Sources: OECD Health Data 1998; and Fund staff calculations.

47. Each of the tables presents both input and output scores and relative rankings for each country for which data are available. Countries that are independently efficient—that is, countries that neither dominate nor are dominated by other countries—are treated as outliers and omitted from the rankings. In practice, this affects only the results using the infant survival rate as the dependent variable, where three countries (Mexico, Poland, and Turkey) were found to be independently efficient.

48. The fact that output scores are in general much higher than input ones, especially for life expectancy and infant survival, means that there is much less variation in these variables than in expenditure. In other words, while most countries are achieving very similar rates of infant survival, and thus have output scores for this variable that are extremely close to 1.00 (the lowest is 0.96), there is considerably more variation in the amount of health expenditure per capita in the sample of countries. Nevertheless, there is little difference between the rankings obtained using input or output efficiency scores: the correlation between the two rankings is 0.84 in the case of PLYL, 0.83 in the case of infant survival, and 0.57 in the case of male life expectancy at age 65. In addition, countries that do well in one variable tend to do so in the others, as well: the correlation between input rankings for PLYL and life expectancy is 0.59; that for input rankings of infant survival and life expectancy is 0.46, and that for infant survival and PLYL 0.29.

49. Overall, the data suggest that the efficiency of health care expenditure in Spain is quite high when the output is defined as infant survival and life expectancy at age 65, although efficiency with respect to producing low levels of PLYL is less impressive. Spain is located on the PPF with respect to infant survival rates, meaning that there is no country that achieves a higher survival rate (lower mortality rate) while spending less than Spain. Although Spain is relatively inefficient with respect to life expectancy, the very high value of the efficiency score means that the country is only slightly inside the PPF.62 Although in principle Spain should be able to achieve a greater life expectancy given its level of expenditure, the overall increase based on best practices in the sample of OECD countries would likely be small. On the other hand, the input efficiency score with respect to life expectancy suggests that Spain could spend considerably less on health care—up to 20 percent– without necessarily reducing life expectancies. Data on PLYL are less positive: Spain ranks 17th out of 25 countries in output efficiency, and given its level of expenditure ought in principle to be able to reduce its PLYL by about 18 percent. Alternatively, best practices suggest Spain could—in principle—spend less than half of what it currently does on health care without necessarily increasing its PLYL. Of course, the caveats offered at the outset about the interpretation of these results continue to apply. Specifically, outcomes may depend on more than simply expenditure, and differences in outcomes across indicators may reflect varying priorities rather than efficiency levels.

References

  • Alonso, A. and A. Herce, 1998, “El Gasto Sanitario en España: Evolución Reciente y Perspectivas.” Fundación de Estudios de Economía Aplicado Textos Express 98-01. (Madrid: FEDEA).

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  • Gerdtham, U.G. and others, 1994, “A Pooled Cross-Sectional Analysis of the Health Care Expenditure of the OECD Countries” in Health Economics Worldwide, ed. by P. Zweifel and H. Freeh III. (Boston: Kluwer Academic Publishers).

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  • Gupta, S. and others, 1999, “Does Higher Government Spending Buy Better Results in Education and Health Care?” IMF Working Paper WP/99/21. (Washington: International Monetary Fund).

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  • Insalud, 1999,. INSALUD-Introducción. Available via the Internet: http://www.msc.es/insalud/introduccion/ingles.htm.

  • Lombardía, E.C., 1999, “Precios de Refencia Engañosos,” El Pais, May 24, p. 38.

  • López i Casanovas, G. and D. Casado, 1998, “La Financiacion de la Sanidad Pública Española: Aspectos Macroeconómicos e Incidencia en la Decentralización Fiscal,” in Presupuesto y Gasto Público,. (Madrid: Ministerio de Economía y Hacienda).

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  • World Health Organization, 1997, European Health Care Reform: Analysis of Current Strategies. (Copenhagen).

STATISTICAL APPENDIX

Table 1.

Spain: Demand and Output, 1993-98

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Source: Ministry of Economy and Finance.

Changes at constant prices in stockbuilding are expressed in percent of real GDP in the previous period.

Table 2.

Spain: Quarterly Evolution of GDP, 1996-98

(Year-on-year percentage change at constant prices)

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Source: Ministry of Economy and Finance.

Changes at constant prices in stockbuilding are expressed in percent of real GDP in the previous period.

Table 3.

Spain: Contribution to the Growth of Real Aggregate Demand, 1992-98

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Sources: Ministry of Economy and Finance; and staff calculations.
Table 4.

Spain: Factors Accounting for Growth in Private Consumption, 1992-97 1/

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Sources: Staff calculations on data from the Ministry of Economy and Finance; and Cuentas Financieras, Bank of Spain.

Income includes those of households and unincorporated business.

Direct taxes plus social security contribution minus transfers received.

Table 5.

Spain: Household Disposable Income, 1992-97

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Source: Ministry of Economy and Finance.

Gross savings in percent of disposable income.

Table 6.

Spain: GDP by Sectors, 1992-98

(In constant prices)

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Sources: INE; and Ministry of Economy and Finance.
Table 7.

Spain: Production Indicators, 1992-98

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Sources: Bank of Spain, Statistical Bulletin; and Ministry of Economy and Finance, Sintesis Mensual de Indicadores Economicos.

Industrial sector excluding construction.

Table 8.

Spain: Prices, 1992-98

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Source: Bank of Spain, Statistical Bulletin.

Inflation as calculated by Eurostat on a consistent basis across EU countries.

Excluding energy and unprocessed food from the total CPI.