Fiscal Sustainability of Health Systems: Bridging Health and Finance Perspectives

OECD, September 2015

From the Forward

This book provides a synthesis of the work developed by the OECD Senior Budget and Health Officials Joint Network. Over the past four years, this joint network has been an important forum to promote the dialogue and mutual comprehension between Health and Finance Ministries. It has provided a platform for budget and health officials to discuss together possible solutions to fiscal sustainability challenges in health care. It describes a wide range of responses by countries to the crisis – some clearly beneficial, achieving better value for money, others less so, reducing services across-the-board and potentially leading to poorer health outcomes and financial hardship from increasing costs borne by patients. This book presents a strong case for timely reforms of health care systems, based on close collaboration between budget and health officials.

From Chapter 1: Fiscal sustainability of health systems – Why is it an issue, what can be done?

The main messages from this chapter are summarised below:

 

  • Fiscal sustainability requires governments to mange public finances credibly. Health systems are a key challenge to fiscal sustainability, since rising costs, new treatment possibilities and demand for continued improvements to the quality of care will exert pressure on public finances.
  • Health expenditure has typically outpaced economies growth. Whilst the global economic crisis moderated rapid growth in health spending, this is expected to be temporary. Indeed, projections forecast health expenditures to rise as a share of GDP.
  • Spending on health has been largely driven by new technologies and rising incomes, with demographic change and institutional characteristics of health systems relevant but less important factors in most countries.
  • The implications of rising costs are particularly important for public finances, since health care is predominantly funded from public sources. Moreover, aging may lead to shortfalls in payroll taxes to finance health.
  • Policy makers have three broad ways to ensure fiscal sustainability of health systems: raise more money for health, improve the efficiency of government health spending, and reassess the boundaries between public and private spending. Simpler blanket spending cuts can also evidently address fiscal constraints, but are more likely to have adverse effects.
  • Health care is highly valued by populations and is a major contributor to countries’ economies. Therefore spending more on health care is not automatically a problem, particularly if citizens are willing to pay for this through higher taxes or cuts in other areas of government spending. The challenge is to ensure any increase in spending respects fiscal sustainability constraints, and delivers good value for money.

 

Do not reduce population coverage, avoid across-the-board increases in cost sharing

Looking first at population coverage, leaving certain population groups to be voluntarily covered by private health insurance appears to be a logical policy option from a fiscal perspective. Indeed, the theoretical advantages of private health insurance are an expansion of individual choice, greater innovation and flexibility, as well as reduced public cost pressures. However, in practice the risks associated with private health insurance are numerous, including higher administrative costs, less bargaining power for insurers, pressure for tax incentives, and risk selection leading to inequitable coverage gaps.

Given these issues, and coupled with strong social justice arguments, universality of population coverage should be maintained. In terms of cost coverage, blanket increases in cost-sharing and other forms of out-of-pocket payments is also undesirable, since they can deter health-seeking behaviour and can lead to people facing financial hardship. Small, targeted co-payments that include exemptions could be considered, but are unlikely to generate substantial revenues.

From the Conclusion of Chapter 1

Finally, it is also important to remember that more health spending is not automatically a problem. Good health remains a critical part of human development and an important contributor to economic growth. Health care is also highly valued by society. Accommodating greater health spending as a share of government budgets is therefore not automatically a problem. The challenge is to ensure that any increase in spending respects fiscal sustainability constraints, and that money is effectively spent.

From Chapter 2: The challenge of budgeting for health care programmes

Meanings of “sustainability”

The United States currently spends a share of its GDP on health care which would seem unthinkable and horrifying to policy makers in any other country. It seems unnecessary and wasteful to many Americans. Yet the US economy certainly has survived that level of spending. If the United States can survive its much higher spending, why would that level be “unsustainable” for other countries?

The most plausible way in which spending could be “unsustainable” would be if political support for the expense could not be sustained. Fundamentally, this means political support for redistribution. In all modern economies, the average cost of medical care is now unaffordable for a significant proportion of the population. All health care finance systems accordingly redistribute not just from the healthy to the sick, but from those with higher incomes to those with lower incomes. Systems are funded roughly in proportion to ability to pay; if they are not, then some people are likely to receive much less care. Therefore the capacity to spend on health care for all citizens depends on the ability to collect the necessary funds from the higher income strata within the country.

As the United States is an extreme case that suggests doubts about economic unsustainability arguments, it provides the clearest evidence of the political sustainability problem. The United States faces the most extreme redistribution challenge both because spending is so high, making costs less affordable for individuals, and because incomes are especially unequal, making average costs even more daunting for the lower-income groups. In the United States, limits on redistribution work not to make national health insurance unsustainable, but to prevent its creation.

http://www.oecd-ilibrary.org/social-issues-migration-health/fiscal-susta…

Because of ever-increasing health care costs, all nations are concerned about the fiscal sustainability of their health care systems. The United States has the highest costs – theoretically the least sustainable system – thus this report should be useful for our policymakers since it describes various approaches to sustainability by economically-developed member nations of OECD, informing us on both beneficial and detrimental policies.

This 264 page report is accessible, without charge, for reading – in sections or in its entirety – at the link above. Be sure to keep the link for future review or reference.

A major theme throughout this report is that sustainability is achieved by close cooperation between Ministries of Health and Ministries of Finance, that is, collaboration between government health and budget officials. In one word: government.

Because of our high health care costs and our inordinate levels of income inequality, we have a greater need for redistribution, yet, compared to other economically-developed nations, our government policies are relatively weak. As this report states, in the United States, “limits on redistribution work not to make national health insurance unsustainable, but to prevent its creation.”