FINANCING HEALTH CARE AND ECONOMIC ISSUES
Introduction
Health systems in the European
Union (EU) perform a vital social security function. They mitigate both health
and financial risks and make a major contribution to social and economic
welfare. In light of various cost pressures, the Council of the European Union
has articulated the challenge facing the Member States as the need to secure
the financial sustainability of their health systems without undermining the
values these share: universal coverage, solidarity in financing, equity of
access and the provision of high-quality health care (Council of the European
Union 2006).
Our aim in this report is to
contribute to addressing this challenge by examining how strengthening the
design of health care financing can help to secure health system
sustainability. The report begins by clarifying the nature of the
sustainability problem (Chapter 1). It then explores the adequacy of current
financing arrangements and recent financing reforms with respect to their
ability to secure sustainability (Chapters 2 and 3). Finally, it offers some
practical suggestions as to the best way forward (Chapter 4).
The problem of sustainability
The problem of sustainability
presents itself as an accounting problem, where health system revenue is
insufficient to meet health system obligations. Two notions are often confused:
economic sustainability and fiscal sustainability.
Economic sustainability
Economic sustainability refers to
growth in health spending as a proportion of gross domestic product (GDP).
Spending on health is economically sustainable up to the point at which the
social cost of health spending exceeds the value produced by that spending. If
health spending sufficiently threatens other valued areas of economic activity,
health spending may come to be seen as economically unsustainable.
Growth in health spending is more
likely to threaten other areas of economic activity in an economy that is
stagnant or shrinking than it is in an economy that is growing. The general
consensus, however, is that for the foreseeable future GDP will grow in the EU
at a rate high enough for health spending and other areas of the economy to
grow (Economic Policy Committee 2001; Economic Policy Committee and European
Commission 2006).
Fiscal sustainability
Concern regarding the fiscal
sustainability of a health system relates specifically to public expenditure on
health care. A health system may be economically sustainable and yet fiscally
unsustainable if public revenue is insufficient to meet public expenditure.
There are three broad approaches
to addressing the problem of fiscal sustainability: (1) increase public revenue
to the point at which health system obligations can be met; (2) lessen those
obligations to the point at which they can be met from existing (or projected)
revenue; (3) improve the capacity of the health system to convert resources
into value.
Efforts to increase public revenue
face technical obstacles, such as institutional capacity and concerns regarding
the threat such efforts may present to labour
markets, as well as political obstacles, such as the unwillingness of part of
the population to continue to subsidize equal access to health care for others.
Lessening health system obligations through coverage reduction (de-listing
benefits, expanding cost sharing, excluding population groups) may help to
secure fiscal sustainability, but will undermine the four values listed by the
Council of the European Union. Furthermore, encouraging private financing of
health care may exacerbate problems of economic sustainability due to the lower
value for money that private markets are able to achieve vis-à-vis public systems.
Improving the ability of health
systems to generate value can focus on the reform of service delivery or on the
reform of financing systems (although the two are related). Reform since the
late 1980s has focused on the former. In this report we focus on the latter
route to securing sustainability. We argue that improving value through health
financing system design should be at the forefront of efforts to secure health
system sustainability, but we also note that the problem of fiscal
sustainability is a political problem – one that pertains to what has been
called the “political economy of sharing” (Reinhardt, Hussey & Anderson
2004). Effort to secure population commitment to the four values must accompany
any attempt at technical reform to enhance value.
Health care financing in the
European Union
Health financing policy encompasses
a range of functions: collection of funds for health care, pooling funds (and
therefore risks) across time and across the population, and purchasing health
services (Kutzin 2001). It also encompasses policies
relating to coverage, benefits and cost sharing (user charges). The way in
which each of these functions and policies is carried out or applied can have a
significant bearing on policy goals such as financial protection, equity in
finance, equity of access, transparency and accountability, rewarding good
quality care, providing incentives for efficiency in service organization and
delivery, and promoting administrative efficiency.
Collecting funds
All Member States use a range of
contribution mechanisms to finance health care, including public (tax and
social insurance contributions) and private (private health insurance, medical
savings accounts (MSAs)2 and out-of-pocket (OOP)
payments in the form of direct payments for services not covered by the
statutory benefits package, cost sharing (user charges) for services covered by
the benefits package, and informal payments). A major change since the early
1990s has been the shift from tax to social insurance as the dominant
contribution mechanism in many of the newer Member States of central and Eastern
Europe.
Public expenditure on health
dominates in every country except Cyprus, although it has fallen, as a
proportion of total expenditure on health, in many Member States since 1996.
Private expenditure is largely generated by OOP payments, which have risen as a
proportion of total health care expenditure since 1996, but still account for
less than a third of total expenditure in most Member States. In 1996 private
health insurance was non-existent or made only a very small contribution to
total expenditure on health in most of the newer Member States and in several
of the older Member States. While it has grown as a proportion of total
expenditure on health in many Member States, in most it still accounts for well
under 5%. However, its effect on the wider health system may be significant,
even in Member States where it plays a minor role.
Pooling funds
Pooling (the accumulation of
prepaid funds on behalf of a population) allows the contributions of healthy
individuals to be used to cover the costs of those who need health care. It is
an essential means of ensuring equity of access to health care. In general terms, the larger the pool and the fewer in number, the
greater the potential for equity of access and administrative efficiency.
In most Member States, all publicly collected funds for health care are pooled
nationally, which means there is a single pool. The exceptions are Member
States in which local taxes are used to finance health care and those in which
individual health insurance funds are responsible for collecting their own
social insurance contributions. In both cases, systems are usually in place to
re-allocate resources to compensate poorer regions with smaller tax bases or to
compensate funds with poorer members and/or members at higher risk of ill
health. Competition among pooling agents (usually also purchasing agents) is
relatively rare in EU health systems (see later).
Purchasing health services
Purchasing refers to the transfer
of pooled funds to providers on behalf of a population. The way in which
services are purchased is central to ensuring efficiency in service delivery
and quality of care. It may also affect equity of access to health care and
administrative efficiency and is likely to have a major effect on ability to control
costs and financial sustainability. Key issues involve market structure and
purchasing mechanisms (for example, contracting, provider payment and
monitoring).
Where health care is financed
mainly through social insurance contributions, the relationship between
purchaser (health insurance fund) and provider has traditionally been
contractual. In Member States where health care is financed mainly through tax,
the purchasing function is usually devolved to territorial entities (regional
or local health authorities or specially created purchasing organization(s)
such as Primary Care Trusts (PCTs) in England). Purchaser– provider splits have
been introduced throughout England, Italy and Portugal and in some regions of
Spain and Sweden.
Competition among purchasers is
relatively rare in EU health systems. It exists in Belgium and during the 1990s
it was introduced in the Czech Republic and Slovakia and extended to the whole
population in Germany and the Netherlands. Allowing health insurance funds to
compete for members gives them incentives to attract favourable
“risks” (that is, people with a relatively low average risk of ill health) and
to avoid covering high-risk individuals, which may affect equity of access to
health care. Risk-adjustment mechanisms aim to address this by compensating
health insurance funds for high-risk members. However, risk adjustment is
technically and politically challenging and often incurs high transaction
costs. A recent review concluded that most risk adjustment mechanisms in Europe
fail to prevent risk selection, and that the benefits of competition are
therefore likely to be outweighed by the costs (van de Ven
et al. 2007).
In EU health systems, primary care
providers are most commonly paid through a combination of capitation and
fee-for-service (FFS) payments. Where health care is financed mainly through
social insurance contributions, specialists are more likely to be paid on a FFS
basis, whereas in predominantly tax-financed health systems, specialists are
often salaried employees. Hospitals are most commonly allocated budgets, but
case-based payment is increasingly used either to define budgets or as a
retrospective form of payment (with or without a cap on payments).
Coverage, benefits and cost
sharing
Residence in a country is the most
common basis for entitlement to health care in the EU, resulting in universal
or near universal (98–99%) population coverage in most Member States; the main
exception is Germany, where statutory coverage is approximately 88%. EU health
systems provide broadly comprehensive benefits, usually covering preventive and
public health services, primary care, ambulatory and inpatient specialist care,
prescription pharmaceuticals, mental health care, dental care, rehabilitation,
home care and nursing home care. Across Member States there is some variation
in the range of benefits covered and the extent of cost sharing required. In
some Member States there may be a gap between what is “officially” covered and
what is actually available in practice. All Member States impose cost sharing
for services covered by the benefits package, most commonly to outpatient
prescription pharmaceuticals and dental care. In some Member States, the
prevalence of informal payments to supplement or in lieu of formal cost sharing
has posed a challenge to health reforms (Balabanova
& McKee 2002; Lewis 2002a; Murthy & Mossialos
2003; Allin, Davaki & Mossialos 2006).
Which financing reforms are most
likely to enhance sustainability?
Many who draw attention to the gap
between what we currently spend on health care and other forms of social
security and what we may need to spend in future conclude that the only way of
bridging this gap is to increase reliance on private finance (Bramley-Harker et al. 2006). We question the validity of
this approach. Private financing undermines health system values and presents
poor value in comparison to publicly financed health care. In the paragraphs
that follow we summarize some of the key findings of Chapter 3.
Centralized systems of collecting
funds seem better able to enforce collection (in contexts where this is an
issue) and may therefore be better at generating revenue than systems in which
individual health insurance funds collect contributions. In part, however, this
reflects the nature of the collection agent – tax agencies may be more
difficult to evade (with impunity) than health insurance funds. Centralized
contribution rate setting may be resisted where funds have traditionally had
the right to set their own rates, but it is not impossible, as recent reforms
in Germany show. It is an important step towards ensuring equity and may lower
the transaction costs associated with risk adjustment, as the risk-adjustment
mechanism no longer has to compensate for different contribution rates. It may
also help to address resistance to risk adjustment on the part of health
insurance funds.
Some of the older Member States have taken
steps to boost public revenue by broadening revenue bases linked to
employment. Both France and Germany have increased their reliance on income not
related to earnings, through tax allocations – a move that is likely to
contribute to fiscal sustainability in the context of rising unemployment,
growing informal economies, growing self-employment, concerns about
international competitiveness and changing dependency ratios. In contrast,
during the 1990s, many of the newer
The clear trend towards creating a
national pool of publicly generated health care resources witnessed in
newer and older Member States is a welcome one. A single pool of health risks
is the basis for equity of access to health care. It also enhances efficiency
by counteracting uncertainty regarding the risk of ill health and its
associated financial burden. In addition, minimizing duplication of pooling may
improve administrative efficiency.
Another welcome trend related to
pooling is the move away from allocating pooled resources (to health insurance
funds or to territorial “purchasers”) based on historical precedent, political
negotiation or simple capitation towards strategic resource allocation based
on risk-adjusted capitation. This move can address some of the inequalities
associated with local taxation or collection by individual health insurance
funds and is a major step towards ensuring that resources match needs and that
access to health care is equitable.
Some Member States have introduced
competition among purchasers (health insurance funds). This may seem
like a good way to stimulate active purchasing. In practice, however, the costs
of this form of competition may outweigh the benefits due to the incentives to
select risks that it creates. Evidence from
The move away from passive
reimbursement of providers towards strategic purchasing of services also
represents a step towards matching resources to needs and ensuring value for
money. Health care providers are ultimately responsible for generating a large
proportion of health care expenditure, so ensuring that their services are
delivered equitably – at an appropriate level of quality and for an appropriate
cost – is central to securing both economic and fiscal sustainability. However,
in many Member States reform of purchasing has been underdeveloped. In some
cases, purchasing agents have not been given sufficient incentives or tools to
attempt strategic purchasing. With regard to provider payment, the move away
from pure FFS reimbursement towards more sophisticated, blended payment systems
that account for volume and quality is promising. However, again, reforms have
not always been implemented appropriately and more needs to be done,
particularly in terms of linking payment to performance in terms of quality and
health outcomes.
Several countries have made
efforts to expand population coverage. Consequently, most Member States
now provide universal coverage. However, the scope and depth of coverage are as
important as its universality, and the trend in some
countries to lower scope and depth undermines financial protection. Efforts to
define the scope and depth of coverage should be systematic and evidence based
to ensure value for money. Health technology assessment (HTA) is beginning to
be used more widely to assist in reimbursement decisions and defining benefits.
However, its application is still limited in many Member States. In some cases
this is due to financial and technical constraints. In others, implementation
is limited by political constraints such as opposition from patient groups,
providers and product (usually pharmaceutical) manufacturers.
Cost sharing has been introduced and expanded
in many Member States and reduced in others. Although it may be used to
encourage cost-effective patterns of use, overall there is little evidence of
efficiency gains and, where it is used to curb direct access to specialists,
there is some evidence of increased inequalities in access to specialist care
(as those who can afford the user charges have better access). There is no
evidence to show that cost sharing leads to long-term expenditure control in
the pharmaceutical or other health sectors. In addition, due to the information
asymmetry inherent in the doctor–patient relationship, patients may not be best
placed to “purchase” the most cost-effective care. Given that the bulk of
health care expenditure (including pharmaceutical expenditure) is generated by
providers, efforts should focus on encouraging rational prescribing and
cost-effective provision of treatment. One lesson from the reform experience is
that cost sharing policy should be carefully designed to minimize barriers to
access. In practice, this means providing exemptions for poorer people and
people suffering from chronic or life-threatening illnesses. With careful
design, cost sharing can also be used to ensure value for money.
Markets for private health
insurance in EU health systems generally serve richer and better educated
groups and present barriers to access for older and unhealthier people. They
are also often fragmented, resulting in weak purchasing power. Owing to the
fact that many of them exist to increase consumer choice (or to reimburse cost
sharing), insurers have limited incentives to engage in strategic purchasing
and to link provider pay to performance. Moreover, they may have strong
incentives to select risks, to the detriment of equity and efficiency. In
general, private systems incur substantially higher transaction costs than
public systems and may therefore be accused of lowering administrative
efficiency.
Overall, we identify two broad
reform trends. First, Member States have made significant attempts to
promote equity of access to health care – by expanding coverage, increasing
regulation of private health insurance, improving the design of cost sharing
and making the allocation of resources more strategic. Second, there is
a new emphasis on ensuring quality of care and value for money – for example,
through increased use of HTA, efforts to encourage strategic purchasing, as
well as provider payment reforms that link pay to performance. While
cost-containment remains an important issue, in many Member States
policy-makers are no longer willing to sacrifice equity, quality or efficiency
for the sake of curbing expenditure growth. Several of the reforms introduced more
recently are in part an attempt to undo the negative effects of prioritizing
cost containment over health financing policy goals.
Is there an optimal method of
financing health care?
We argue that public finance is
superior to private finance. This is not surprising given the need to secure
sustainability without undermining values such as equity in finance or equity
of access to health care. However, our argument is also based on efficiency
grounds. Publicly generated finance contributes to efficiency and equity by
providing protection from financial risk and by detaching payment from risk of
ill health. In contrast, private contribution mechanisms involve limited or no
pooling of risks and usually link payment to risk of ill health and benefits to
ability to pay. Public finance is also superior in its ability to ensure value
for money which, as we have argued, is central to securing both economic and
fiscal sustainability. Overall, the experience of the United States suggests
that increasing reliance on private finance may exacerbate health care
expenditure growth, perhaps due to the weak purchasing power of private
insurers and individuals against providers. Among the older Member States of
the EU, those that have relied more heavily on private finance – either through
private health insurance or through higher levels of cost sharing – are also
those that tend to spend more on health care as a proportion of GDP (notably
Of course, public finance is not
without its problems. Where social insurance contributions dominate, there are
likely to be concerns about the high cost of labour
and the difficulty of generating sufficient revenue as informal economies and
self-employment grow, and as population ageing leads to shifts in dependency
ratios. Concerns may also focus on generating sufficient revenue where capacity
to enforce tax and contribution collection is weak. The reluctance of certain
groups to pay collectively for social goods and to subsidize the costs of care
for others may exacerbate resistance to paying higher taxes or contributions.
However, these problems can be addressed, for example, by broadening the
revenue base to capture income not based on employment; by investing in efforts
to strengthen public sector capacity; and by making the social and economic
case for collective financing. Equity in finance may be compromised if health
systems become increasingly dependent on consumption taxes (value-added tax,
VAT), if ceilings on contributions are lowered, or if tax and contribution
evasion is rife. On balance, however, these concerns are outweighed by gains in
terms of equity of access to health care. In some countries, public sector
resource allocation has contributed to inequalities in access, while purchasing
has been non-existent or weak. Nevertheless, there are few cases in which
private health insurers have been able to demonstrate better purchasing skills
(in part due to their need to enhance consumer choice).
In determining an optimal method
of financing health care we might ask what type of financing system is best
placed to adjust to changing priorities. In recent years there has been
increased demand for some types of health services, notably mental health care,
long-term care and care for people with chronic illnesses. Demand for these
services, and for integrated forms of delivering care, is likely to grow as
populations age. The type of financing system best able to respond to shifts in
demand is one with the ability to enhance pooling, coordinate and direct
strategic resource allocation, match resources to need, shape the nature of
supply and create incentives to enhance provider responsiveness. We suggest
that systems based on public finance stand a much greater chance of rising to
this challenge than alternatives such as private health insurance.
Policy recommendations
Reforms that aim to secure the
economic and fiscal sustainability of health care financing in the context of
social security should focus on ensuring equity of access and value for money.
Our recommendations are based on the analysis of health financing arrangements
and reforms in Chapter 2 and Chapter 3 of this volume. We should point out that
evidence about the impact of some arrangements and reforms is lacking, so we
cannot be sure of all outcomes. Nor can we be sure whether a reform will have
the same effect in different countries. With this caveat in mind, we make the
following recommendations.
• The starting point for any
reform should be careful analysis of the existing health (financing) system to
identify weaknesses or problem areas, combined with understanding of the
contextual factors that may contribute to, or impede, successful reform.
• Policy-makers may find it
worthwhile to try to communicate the aims and underlying rationale for reforms
to the wider public.
• Policy-makers should consider
the whole range of health financing functions and policies, rather than
focusing on collection alone (contribution mechanisms).
• Find ways to enforce collection to
ensure sufficient revenue and to restore confidence in the health financing
system.
• Health systems predominantly
financed through employment-based social insurance contributions may benefit
from broadening the revenue base to include income not related to earnings.
• In addition to contributing to
efficiency and equity, enhancing pooling by lowering the number of pools or
(better still) creating a single, national pool can facilitate strategic
direction and coordination throughout the health system.
• Limit reliance on private
finance (private health insurance, MSAs, user charges) and ensure that there
are clear boundaries between public and private finance so that private finance
does not draw on public resources or distort public resource allocation and
priorities.
• If user charges are imposed, pay
careful attention to the design of cost sharing policy, which should be
systematic and evidence based. Avoid introducing MSAs as they do not involve
any pooling across groups of people. They also suffer from many of the
limitations of user charges.
• Tackling informal payments is
central to increasing public confidence in the health system. Informal payments
may present a major challenge to successful implementation of other reforms.
• Encourage strategic resource
allocation to ensure that health resources match health needs.
• Encourage greater use of HTA,
particularly in decisions about reimbursement and in defining the benefits
package, but also in improving clinical performance.
• Design purchasing and provider
payment systems to create incentives for efficiency, quality and productivity.
• Encourage administrative
efficiency by minimizing duplication of functions and tasks.
• Avoid confusing efficiency with
expenditure control. Spending on health care should not be unconditional –
rather, it should always demonstrate value for money.
Introduction
Health systems in the European
Union (EU) form an important component of the wider apparatus of social
security. By preventing and treating ill health and covering its associated –
and often catastrophic – costs, they mitigate both health risks and financial
risks and make a major contribution to social and economic welfare.
In June 2006 the Council of the
European Union issued a “Statement on Common Values and Principles” that set
out the values and principles underpinning all the health systems of the EU
(Council of the European Union 2006). The four values listed are universal
coverage, solidarity in financing, equity of access and the provision of high-quality
health care. The Council’s motivation in issuing this document was its concern
regarding the likelihood that these values will be preserved into the future.
The document identifies two threats.
The first threat relates to the uncertainty at the time
of writing regarding the full reach of the EU’s Internal Market rules. Recent
rulings from the European Court of Justice (ECJ) concerning the right to
receive treatment in other Member States, along with the attempt to include
health care in the proposed Services Directive (European Commission 2007a) and
the growing complexity of the public–private mix in health care (Thomson & Mossialos 2007b) have all contributed to making the
non-applicability of Internal Market rules to public health systems (as provided
for by the Treaty of the European Union) less clear cut. The concern here is
that the operation of the Internal Market may be inimical to the values
associated with health care, and that encroachment of the Internal Market into
health care might work to undermine those values (McKee, Mossialos
& Baeten 2002; Mossialos
and McKee 2002; Mossialos et al. 2002a; Hervey 2007).
The second threat – and the rationale for this
report – is that posed by two potential cost drivers: population ageing and
innovation in health technology. The threat is usually presented as follows.
• Older people account for a large
proportion of health care spending. As the share of older people in the
population grows (and the share comprising working-age people – whose financial
contributions fund the bulk of health care – diminishes), so the level of
demand for health care will come to exceed the capacity of health systems to
meet it.
• New technologies are
cost-increasing. This is because they allow things to be done that could not be
done before. Even where a new technology substitutes for an older, more
expensive one, the result is likely to be increased use, again leading to
higher costs.
• If older people are the
principal beneficiaries of innovation, the cost problem is compounded.
The Council of the European Union
states that in light of this latter threat, the challenge now facing the Member
States is to secure the “financial sustainability” of their health systems
without undermining the four values listed earlier. Our aim in this report is
to contribute to addressing this challenge by exploring how the design of
health care financing systems can help to secure health system sustainability.
In what follows, we suggest that
there is no “magic bullet” solution to the problem of health system
sustainability – at least, not if a key requirement is that the four values be
preserved. Although there are practical measures that the Member States can
take to help secure the financial sustainability of their health systems – and
it is those relating to financing system design which are the topic of this
report – the question of sustainability is, in the end, a social question
pertaining to the values we hold, rather than a technical question amenable to
a simple fi x. A key message of the report, therefore, is that whatever steps
Member States take to secure sustainability, it is important that they place
equal emphasis on securing population commitment to the four values. For in the
absence of such commitment, the governing force of these values will certainly
diminish, and with it the vital social security function that health systems
perform.
The report is organized as
follows. In Chapter 1 we clarify the nature of the sustainability problem and
describe and discuss the principal approaches that can be taken to address the
problem. This chapter also gives details of fiscal context and health-related
spending trends. In Chapter 2 we set out our conceptual framework for the
description and analysis of health care financing systems, and provide an
overview of how health care is financed in the EU. Chapter 3 describes
financing system reforms, and assesses their adequacy with respect to the
objective of securing sustainability without undermining the four values.
Finally, Chapter 4 brings out the main points of the analysis and offers some
policy recommendations. The Annex provides descriptions of the financing
systems of each of the 27 Member States.
The information and analysis
presented in this volume are based on a comprehensive review of the literature,
including a review of statistical data. Statistical data were obtained from the
WHO Health for All Database and National Health Accounts, and Organization for
Economic Co-operation and Development (OECD) Health Data 2007. Non-statistical
data were identified through Internet searches and through the following
sources and databases: Health Systems in Transition (HiT)
reports, produced by the European Observatory on Health Systems and Policies;
Health Policy Monitor; PubMed; Mutual Information System on Social Protection
in the Member States of the European Union (MISSOC); International Bibliography
of the Social Sciences; and EconLit.