Coping with Rising Health Costs

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Coping with Rising Health Costs

• The Organization for Economic Cooperation and
  Development

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Health Spending Trends

• The OECD countries face rising health
  costs 1970 5.4 GDP 2000 8.4 GDP
• United States 1970 6.9 GDP 2000 13.0
  GDP

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Health Spending Trends

• Germany 1970 6.3 GDP 2000 10.6 GDP
• Switzerland 1970 5.6 GDP 2000 10.7
  GDP

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Health Spending Growth

• Per capita health spending is linked to per
  capita growth in GDP
• Income affects both volume and price of services
• Variation across countries reflects policy
  decisions regarding appropriate spending levels
  and value of additional spending on health
  relative to other goods and services

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Medical Technology

• Technology is the greatest factor driving health
  care growth
• Recent developments in imaging, biotechnology and
  pharmacology

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Population Aging

• Health care costs increase sharply with age
  beginning at age 45. Total health care spending
  is estimated to increase by an average of 2 of
  GDP over the period 2000-2050 as a result of
  population ageing

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Public Sector Spending

• In most OECD countries there is publicly financed
  health insurance or direct financing of care
• The public sector accounts for the greatest part
  of health spending in all countries except Korea,
  Mexico and the U.S.

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Approaches to Health Cost-Containment

• Regulation of prices, input resources and health
  care service volumes
• Caps on health spending, either overall or by
  sector
• Shifts of costs onto the private sector

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Administered Pricing and Controls

• Wage controls are prevalent in countries where
  health care workers are public employees - Nordic
  countries, Greece, Italy and Portugal
• Prices for medical services, supplies and
  institutional care are set administratively
  U.S. Medicare program

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Administered Pricing and Controls

• Most countries influence service volumes (e.g.,
  controls over medical school admissions) and
  control hospital sector capacity

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Limitations

• Providers may increase volume or change the mix
  of services offered
• Care may be shifted from one sector to another to
  avoid price controls( e.g., inpatient to
  outpatient care)
• Diagnoses may be up-coded (e.g., DRGs)
• Wage/price controls may limit ability to attract
  qualified personnel

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Budget Caps

• Initially used to control hospital expenditures
• Extended to other providers, supplies and
  equipment

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Limitations

• Budget caps are most successful in countries
  where health care delivery is provided by the
  public sector Denmark, Ireland, New Zealand,
  Canada
• Budget caps do not provide incentives for
  providers to improve efficiency or increase
  productivity
• Budget caps reward inefficient providers and
  penalize efficient ones

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Cost Shifting to Patients

• Mainly affects pharmaceuticals
• The number of drugs not reimbursed has increased
• Tiered reimbursement for pharmaceuticals is being
  used in more countries

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Effects of Cost-Control Initiatives

• Cost containment has had an impact on the share
  of public spending.
• Between 1990 and 2000 the average share of total
  health spending by the public sector has declined
  from 72.5 to 71.5
• There has been a decrease in the rate of growth
  in health spending from 6 in 1970s to 3 in 1990s

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Effects of Cost-Control Initiatives

• Nonetheless, health spending continues to grow at
  rates exceeding overall economic growth
• There is a problem in judging the appropriate
  level of health spending

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New Directions for Reform

• Large difference in inputs, practice patterns and
  outcomes exist among OECD countries
• Large differences exist in spending on ambulatory
  and inpatient care, specialist care and
  pharmaceuticals
• Improved efficiency is a major focus of current
  health reform efforts

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New Directions for Reform

• In countries with health systems with integrated
  financing and delivery through the public sector,
  reforms have included - Greater separation
  between health care purchasing and the provision
  of care - Better alignment between payment
  incentives and the objectives for provider
  performance - Decentralized decision
  making - Introducing competition among
  providers

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New Directions for Reform

• Reform has focused on modifying payment
  arrangements to better align incentives of health
  care providers
• There is increased interest in introducing market
  competition among providers

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Successful Reforms

• Prospective payment systems for hospitals that
  assign a payment rate based on diagnosis rather
  than length of stay encourage providers to
  minimize costs U.S. Medicare system

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Mixed Reforms

• Increased competition among insurers may have
  some positive effect by narrowing premiums,
  encouraging better service and instituting cost
  reduction
• In the U.S. competition has resulted in market
  segmentation where insurers benefit by enrolling
  low risk patients

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Mixed Reforms

• Managed care as practiced in the U.S. has had
  some initial success in containing costs.
  However, currently costs are rising and patients
  and providers are demanding more choice.
• A number of countries are introducing incentives
  for patients to make economical choices among
  drugs and alternative services

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Limitations

• The impact of these policies have been limited by
  tight spending limits
• Attempts to foster competition among providers in
  single-payer systems have been largely
  unsuccessful and have been reversed in Sweden,
  UK, and New Zealand
• Failures reflect monopoly positions of providers

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Looking Ahead

• There are trade-offs among policy goals e.g.,
  containing costs vs. improving access and health
  system responsiveness
• Future growth in health care costs in all
  countries is likely reflecting, rising incomes,
  demand for care, technological improvements, and
  aging of the population