Healing Public Health Care Finances: Budget Reforms That Work

By Benedict Clements

(Versions in 日本語, 中文Español)

Health care reform is tricky. On the one hand, providing access to affordable health care is of paramount importance. But spending on health care is putting enormous pressure on public purses all over the world, and it’s only getting worse. How can we fix this? How can governments keep their health care promises to citizens without busting the budget?

A recent paper by the IMF’s Fiscal Affairs Department tries to help with these choices, presenting public health spending projections for fifty advanced and emerging countries, and posing reform options.

Advanced economies

Let’s start with the basics. In advanced economies, health care spending alone accounted for about half of the rise in government budgets in the past 40 years. If we do nothing, these costs will continue to soar. Public health spending is projected to climb by 3 percentage points of GDP over the next 20 years in the advanced economies. The increases in health spending are driven by population aging but more importantly by technical progress and the availability of better and more expensive technologies. This is simply not affordable.

Reforms are needed to control spending, but these reforms must also be equitable, protecting access to basic health care for all who need it, especially the poor. The situation appears dire, but there are options. Past experience suggests that reforms can help slow the growth of spending in an efficient and equitable manner.

We find that the most promising reform strategies combine top-down budget control and bottom-up reforms to improve efficiency.

Budget systems that cap total health expenditures and impose a high degree of central oversight can provide powerful incentives for expenditure restraint. Among the countries with a history of the lowest increases public spending, Italy, Japan, and Sweden have a greater reliance on budget caps.

Bottom-up reforms help control costs by enhancing efficiency. This allows more and better service delivery to patients for a given amount of resources. Some examples include:

  • Strengthening market mechanisms: increasing patient choice of insurers, allowing greater competition between insurers and providers, and relying on a greater degree of private sector provision (e.g. Germany and Japan).
  • Changing the way doctors and hospitals are paid: moving away from reimbursement to providers after services are rendered (fee for service) towards more sophisticated management and contracting systems.  These systems include built-in incentives for providers to minimize waste and improve services (e.g. Germany and Italy).
  • Greater reliance on private insurance can also help slow down the growth of public health spending (e.g. Australia, Canada, and France).

Let’s not forget the equity angle. Cost containment reforms should minimize any potential adverse effects on the poor. Most advanced economies have achieved universal access to basic health services, and health reforms should respect this safety net.

Despite the promise of these reforms, it’s important to recognize that they may still not be sufficient to keep public health spending from rising, as a share of GDP, in some countries. If so, even deeper cuts in other spending areas or additional revenue increases may be needed to support fiscal adjustment.

Emerging economies

The challenges are a bit different in emerging economies. Here, public health spending is expected to increase by only about 1 percentage point of GDP over the next 20 years. A key challenge here is to improve the health safety net, as health indicators—such as life expectancy and infant mortality—are substantially lower. Preventive and primary care should be given greater emphasis, which will require a change in the financial incentives facing health care providers, as should fighting infectious diseases and enhancing care in poorer rural areas.

For many emerging markets, the key challenge is to expand basic health care. In these countries, especially in Asia and Latin America, there is scope to boost spending. To cover as many people as possible at an affordable cost, the public health system should focus on first providing the most essential health services. Thailand and Chile have successfully expanded basic coverage at a low fiscal cost and provide valuable lessons for other countries.

But in countries where access to health is already extensive, the challenge is to make public spending more efficient to prevent it spinning out of control in the future. This is especially true in Eastern Europe where budgets are under pressure.

Despite the obvious differences, advanced and emerging markets share something very basic in common—they all need to get “more bang for their buck” when it comes to public health care spending.

12 Responses

  1. I am sure that healthcare will always be an issue because it involves a huge amount of money.

  2. I couldn’t agree with you more. You have pointed some excellent points and suggestions that is certainly worth considering. At this day and time where our economy is still recovering it is important to find the best solution to our ballooning budget problem. Hopefully though, the solution won’t be at the expense of the poor, the seniors and the disabled.

  3. “Reforms are needed to control spending, but these reforms must also be equitable, protecting access to basic health care for all who need it, especially the poor. The situation appears dire, but there are options. Past experience suggests that reforms can help slow the growth of spending in an efficient and equitable manner.” I sure hope so. Everyone needs access to health care at an affordable price.

  4. [...] should take account of the future impact of pension reforms, or other public programs such as health care, when we analyze fiscal [...]

  5. [...] should take account of the future impact of pension reforms, or other public programs such as health care, when we analyze fiscal [...]

  6. [...] should take account of the future impact of pension reforms, or other public programs such as health care, when we analyze fiscal [...]

  7. Isn’t it amazing that Benedict Clements, the Division Chief for the Expenditure Policy Division of the IMF’s Fiscal Affairs Department, has absolutely no comprehension of Monetary Sovereignty?

    The basis of his article is his statement, “Reforms are needed to control spending . . .”, but nowhere in the article does he provide any evidence that spending must be controlled. All he does, again and again, is tell us how much is or will be spent, but never provides proof this is a bad thing.

    He seems to assume that if spending is large, or is a certain percentage of GDP, we don’t need to know anything more. “Big is bad, and don’t ask me why.”

    The IMF proves again and again, it does not recognize the difference between Monetary Sovereignty and monetary non-sovereignty, which is particularly shocking, because Monetary Sovereignty has been the basis for all economics since 1971.

    Rodger Malcolm Mitchell

  8. As aging occurs, on average individuals face an increasing number of simultaneous and intensifying medical issues and disabilities, and correspondingly higher medical expenditure. Surely this is the main reason that medical costs to a society will increase at an increasing rate over time, more than can be projected ahead of time.
    Part of the solution could be allowing and expecting insured persons to work longer–even if for fewer hours per week and in less demanding capacities, and in line with declining abilities. (In the U.S., average life expectancy was 65 years when Social Security benefits began to be paid out, while persons were expected to work till age 65.) To achieve this qualified increase in working years would require a major reduction in employers’ anti-aging bias, to which lower pay to “post-65-years” individuals, in line with their decreasing productivity, could make a contribution.
    Another part of a solution could be much higher medical insurance tax rates beginning at the outset of an individual’s working career. Such a high-rate tax, say 15 percent of total income, should be seen as a kind of savings account for old age, in tandem with old-age and disability taxes. Such taxes should be expressed as a share of income, but not made additionally progressive, to preserve the “savings-account” resemblance. To balance books, the higher tax rate for medical care premiums, plus continued working years reduced as appropriate for differential and changing individual productivities and capacities, must for society must be maintained in a kind of equality with its capacity to extend the average lifespan through increasing medical knowledge and technology, with an accompanying increase in the need for medical services per individual taxpayer. Taxpayers would have to learn that such a high tax rate throughout their working careers was the unavoidable cost of medical care extended through a lengthening post-65-year stage of life. In return, taxpayers would deserve entirely convincing evidence from government that funding would, with no uncertainty, be available to fully meet covered portions of their medical service needs.

    • “Taxpayers would have to learn that such a high tax rate throughout their working careers was the unavoidable cost of medical care extended through a lengthening post-65-year stage of life.”

      Sadly, the author has no concept of Monetary Sovereignty, else he would know that taxes do not support Social Security or Medicare. FICA could be reduced to $0, and this would not reduce the federal government’s ability to support full benefits by even one penny.

      In fact, in a Monetarily Sovereign nation, taxes do not support any federal spending. There is zero relationship between federal taxes and federal spending.

      The U.S. became Monetarily Sovereign in 1971, and Mr. Hemphill has not yet caught up.

      Rodger Malcolm Mitchell

  9. I think the best way to control government health spending is to ensure that the citizens are healthy. One way is by guiding them to make wise health decisions on diet, nutrition, exercise, lifestyle and many more. The government should not only allot budget for hospitals or hospitalization but also on food safety, health standards and research. When the people are healthy, the government will have to spend less on sick people.

  10. A major comparison to notice is that you mentioned that health care spending in advanced economies is driven in part by population aging. In emerging markets, however, the issue at hand is more related to growing populations. In his article “The Health Challenge in Emerging-Market Cities” Shaukat Aziz brings up the issue of growing populations leading to an increase in poverty and greater need for health care. Thus, it becomes imperative for the government to take action. To read more about the steps that can be taken, take a look at this article: http://www.project-syndicate.org/commentary/aziz1/English

  11. Thank you for this summary. It is certainly intriguing to me.

    You wrote “The increases in health spending are driven by population aging but more importantly by technical progress and the availability of better and more expensive technologies.”

    I think it worth adding that “technology” need not mean “fixing/curing” technology which works to suppress symptoms. Truly valuable health care expertise, which may involve almost zero of what what most people think technology means (i.e. the latest pills and machines), creates an environment in which the clients of the practitioner heal by virtue of their own efforts in learning and putting into practice what information, relevant to the symptoms presented, their practitioners share in response to their questions. The 1997 book “Molecules of Emotion”, by Candace Pert, then a Research Professor at Georgetown University, makes this clear by reference to empirically clear scientific research.

    In my opinion, lack of understanding and clarity in this area is a major factor in current disappointments by both “orthodox medical professionals” and “typical patients” in their national health “systems”. I base this opinion on experience with McKinsey & Company, management consultants, after a project researching just the questions your paper appears to have recently researched.

    If, therefore, the IMF were able to get this point across to national health authorities, who generally are in the dark on this particular point, the world would soon experience a surge in well-being. That the IMF culture might well hold that such an activity would go beyond its mandate would no doubt be logical but it would also be a tragedy — one that I would, however, understand any IMFer’s predicament in considering the import of this suggestion. Being logical is not the same as being rational!

    http://www.authentixcoaches.com/images/VLRR_Distinctions_090529.jpg

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