Healing Health Care Finances
All countries should ensure equitable access to basic health care
services and spend more efficiently
on public health
Health care reform is tricky. Access to affordable health
care is of paramount importance, but paying for it can put enormous pressure
on government budgets. Fortunately, a number of reform options are available
to countries that face those pressures or seek to avoid them in the future.
Experience in advanced economies shows that a combination
of tighter budget controls and efficiency-enhancing reforms of health care
systems can help preserve access to high-quality health care while keeping
public spending in check. In emerging economies, improving efficiency is
also important, but some can afford further increases in public spending.
All countries should ensure equitable access to basic health care services
and spend more efficiently on public health.
Sharp increases in the past:
Total health care spending in advanced and emerging
economies rose markedly in recent decades, largely because of aging
populations and technological advances. Real per capita health spending has
quadrupled in advanced economies since 1970, with two-thirds of this
increase a result of public spending. Public health spending rose by 4
percent of gross domestic product (GDP), accounting for half the rise in
total government spending. In emerging economies, total health spending over
the same period rose, but more moderately—from less than 3 percent of GDP to
about 5 percent—with about half the increase attributable to public outlays.
The lower ratios in the emerging economies reflect a combination of
competing expenditure needs and constrained revenue-raising capacity. Public
spending ratios were lower in emerging Asia than in emerging Europe and
Latin America, because public insurance coverage and benefit packages are
less extensive in Asia.
The increase in public
health spending over recent decades varied substantially across countries.
Among the 21 advanced economies for which data were available, between 1980
and 2008 public health spending increases exceeded 2.5 percent of GDP in 6
countries and were less than 1.5 percent of GDP in another 6. Among the 23
emerging economies, the public health spending ratio increased by more than
1 percent in 4 countries between 1995 and 2007 and actually fell in 6.
Stressing the system:
Public health spending ratios are projected to increase
over the next two decades. For the advanced economies, our projections are
based on analysis of country spending trends between 1980 and 2008; for
emerging economies, we assumed costs would grow as they had on average
between 1995 and 2007. We also incorporated the effect of demographic
changes on future health care spending in the projections for both advanced
and emerging economies.
Public health spending
ratios in advanced economies are projected to continue climbing, rising on
average by 3 percent of GDP over the next 20 years. Spending is projected to
increase by more than 2 percent of GDP in 14 of the 27 advanced economies,
at a time when countries will need to reduce budget deficits and public debt
ratios in the wake of the global financial crisis. The outlook is
particularly grim in the United States, where public health spending is
projected to rise by about 5 percent of GDP over the next 20 years, the
highest among advanced economies. And in Europe, public health spending is
expected to rise by 2 percent of GDP on average—and more than 3 percent in
In emerging economies,
public health spending is projected to rise by 1 percent of GDP over the
next 20 years, one-third of advanced economies' projected increase.
Consistent with past trends, spending is projected to rise by 1½ percent of
GDP in both emerging Europe and Latin America; in emerging Asia, increases
are expected to be about half that amount, reflecting in part low initial
levels of spending in these countries.
Public health spending ratios are projected to increase over the
next two decades.
Containing public spending:
Recent health care reforms in advanced economies are
unlikely to alter long-term public health spending trends. In the United
States, the Patient Protection and Affordable Care Act of 2010 introduces a
sweeping reform that will expand health insurance coverage but is expected
to reduce the budget deficit, primarily through increased payroll taxes on
individuals and families with relatively high incomes and an excise tax on
generous health care plans. While these reforms can expand access, the
envisaged savings on health care spending are small and remain highly
uncertain. In Europe, plans to cut government employment and compensation
could reduce health care spending in the short term, but their long-term
effect is uncertain.
The most promising strategies to contain spending in
advanced economies involve a mix of instruments to contain costs and reforms
to improve spending efficiency:
•Budget caps with central
oversight are a powerful tool for
restraining expenditures. Among the countries with the lowest public
spending increases in the past, Italy, Japan, and Sweden rely more on budget
caps. Setting budgets for hospitals and other health care institutions based
on reasonable and objective expenditure projections, as opposed to simply
reimbursing all spending, can help contain spending growth. Such targets are
most effective when applied broadly: partial constraints encourage
expenditure increases in areas without caps. For example, if only inpatient
hospital spending is limited, expenditures on outpatient clinics may
•Public management and
coordination of health care services help
control health care costs by screening out unnecessary services. For
example, gatekeeping, through which a primary care physician manages a
patient's health care services and coordinates referrals to specialists, is
widely considered crucial to constraining the growth of costly hospital
treatment. Countries with low spending growth that make extensive use of
gatekeeping include Denmark and Italy.
•Local and state government
involvement in key health resource decisions
can help tailor services to local conditions, increasing spending
efficiency. It can also help control growth in expenditures when coupled
with increased responsibility, so that local governments bear the cost of
health care inefficiencies or overruns. Canada and Sweden have combined
extensive local government involvement with low-cost growth.
•The use of market mechanisms
in the health care system—increasing patient choice of insurers, allowing
greater competition between insurers and providers, and relying on more
private services—can help reduce costs by improving the efficiency of the
health care system. Germany and Japan score relatively high in this area and
have enjoyed low spending growth in the past. Moving away from simple
reimbursement of provider costs toward more sophisticated management and
contracting systems that include built-in incentives for providers to
minimize waste and improve services also enhances spending efficiency.
Examples of such contracting reforms include payment for health services
based on “diagnostic related groups,” which specify treatment protocols for
a given set of medical conditions and provide an associated price schedule.
These have been used with relative success in Germany and Italy.
•Reforms that increase the
share of costs borne by patients, through
either higher copayments or expanded private insurance, have also been
successful in containing the growth of public health spending. Australia,
Canada, and France rely heavily on private insurance for services not
covered by the public package. In all countries, cost-sharing policies raise
concerns about fairness and must be accompanied by measures to ensure that
the poor and chronically ill retain access to basic health services.
•Restricting the supply of health inputs or outputs—for
example, by rationing high-technology equipment—can, to some extent, reduce
the growth of public health spending. Canada and France rely on such
controls and are among the countries with low spending growth. But supplier
responses can erode direct price controls on medical inputs or outputs (such
as drugs or wages of health care providers): for example, primary care
providers may direct patients to more expensive hospital care in response to
price or quantity controls. In practice, therefore, price controls have
often proved ineffective in containing health care costs. And while giving
users more information about the quality and price of particular health care
services may increase the quality of medical services, it has not helped
We used various techniques, including case studies and
regression analysis, to examine the potential for health care reforms to
contain rising costs. The case studies provide country-specific examples of
successful reforms, and regression analysis helped quantify the impact.
Our analysis shows that such reforms could significantly
reduce the fiscal burden of health care over the next 20 years. We assume
countries that now score below the mean on the health system characteristics
that reduce spending—such as the use of budget caps—are raised to the mean.
The results suggest that the introduction of market mechanisms can be
powerful, yielding savings of about ½ percent of GDP. Improving public
management and coordination can reduce spending by only a slightly lower
amount. The analysis also underscores the importance of tighter budget
controls and greater central oversight, which can reduce spending by ¼
percent of GDP. Finally, the simulated impacts of demand-side reforms, such
as the use of cost sharing, are small but not negligible. The relative
importance and desirability of each of these reforms will vary across
countries, depending on their current health care system.
The impact on people's
health will of course be an important consideration as policymakers grapple
with the challenges of health care reform. Fortunately, most of the
promising strategies we describe above can increase the health care system's
responsiveness to patients' needs while taming spending. The large
inefficiencies in spending in many countries suggest there is much room to
contain cost increases without compromising health.
Health care reform requires continuous monitoring and
refinement based on current data about the behavior of providers and
patients, if costs are to be contained over the long term. Successful
cost-cutting calls for continuous tweaking and reformulation of reform
initiatives as players adapt to the new rules of the game and find ways
around them. Reforms' effectiveness must be watched carefully to ensure that
providers, insurers, and patients are responding as expected to cost-cutting
Greater emphasis on preventive care could also help slow
the growth of health care spending. Health is affected by factors other than
public health spending, including individuals' income and personal habits.
Governments can play an important role in promoting good health habits by
encouraging people to stop smoking, use alcohol in moderation, eat better,
exercise more, and drive carefully. Market mechanisms can also have an
impact. For example, linking cost sharing or insurance premiums to
obligatory regular checkups can reinforce preventive care and help contain
While the estimated impact of the proposed reforms is
substantial, it may not be enough to stabilize ratios of public spending to
GDP, especially in countries where large spending increases are projected.
In that case, additional efforts (beyond a movement to the mean performance
on these health system characteristics) would be needed to stabilize public
spending ratios, including spending cuts in other, non-health-care, areas or
increases in revenue.
Diverse challenges in emerging
economies: Emerging economies, where average
life expectancy is lower and infant mortality higher, face different public
health spending challenges than advanced economies. Emerging economies can
learn valuable lessons from the experience of advanced economies, and should
aim to expand their health care systems while avoiding the inefficiencies
and resulting high costs that plague many advanced economies.
In emerging Europe, spending is relatively high by
emerging economy standards, because of nearly universal coverage and, as in
advanced economies, a pattern of diseases that is expensive to treat (such
as diabetes and heart disease). In most countries in emerging Europe,
overall health is relatively poor compared with advanced economies, and
funds to improve health are limited. These countries will need to rely more
on efficiency-enhancing reforms to improve health outcomes.
Emerging economies in Asia and Latin America have
less-extensive health coverage than emerging Europe, but more scope to
expand spending. To ensure coverage for as many people as possible, at an
affordable cost, public health systems should focus first on providing the
most essential health services. There should be greater emphasis on
preventive and primary care, which will require a change in financial
incentives for health care providers. And governments should allocate a
larger share of their health care spending to infectious disease control and
better care in poor rural areas.
Some of the experiences of the advanced economies as they
expanded health care coverage offer important lessons for emerging
economies. In particular, Taiwan Province of China and Korea undertook
important reforms to better align incentives for health providers, promote
primary and preventive care, and improve public management and coordination.
Taiwan Province of China, for example, introduced a fee-for-outcome program,
with physicians receiving bonus payments based on clinical outcomes.
Social insurance systems can
help contain the fiscal burden of health spending by linking eligibility for
health benefits with contributions. But in many emerging economies there is
a large informal labor market whose workers may not be making social
insurance contributions. So if the goal is to expand coverage in emerging
economies, tax-financed provision of universal basic health care (such as in
Thailand) may be the best starting point.
Social insurance-based systems could be expanded in
countries where the informal labor market figures less prominently and
revenue administration is of high quality. Chile's experience suggests that
health care financing can be sustained by a combination of mandatory
contributions in the formal labor market, individual cost-sharing through
copayments, and supplementary government budget financing (especially when
subsidies are necessary and in the public interest).
Health care reform will continue to be a key fiscal
policy challenge for policymakers in advanced and emerging economies alike.
The lessons of the past suggest that a judicious mix of reforms can help
contain spending growth in advanced economies while preserving equity and
efficiency. In emerging economies, expanding basic services to a broader
segment of the population is the best recipe for improving health in a
fiscally sustainable manner.