Financial sustainability and affordability of health-care systems

Lessons from OECD countries

On average, OECD countries are currently spending almost 10 per cent of the gross domestic product (GDP) on health. In the future, health spending will be a greater part of the economy than it is now, for reasons including technological change, consumer preferences, relative productivity growth and (though to a surprisingly small extent) population ageing. Health will therefore be one of the major drivers of economic growth.


There is scarcely a week that goes by without some European country or  another reporting that it is cutting spending on health, as part of the attempt to get public spending back in line with tax receipts. This is hardly surprising given pictures such as the one in Figure 1 below: growth in virtually every part of government is minimal – or is negative  – in order to be able to pay for the big growth in health spending in the Netherlands in the next few years. The Dutch pattern may be relatively extreme (health spending has been going up particularly rapidly recently) but would be recognized by ministries of finance in many other countries.

Figure 1

Yet there is an apparent paradox here. In the future, health spending will be a greater part of the economy than it is now, for reasons including technological change, consumer preferences, relative productivity growth and population ageing. Health will therefore be one of the major drivers of economic growth. Health spending which seems unsustainable given the state of public budgets cannot also be the driver of economic prosperity in the future, can it?

The problem facing many European health systems is one of fiscal  unsustainability. Claims that health spending is good value for money  compared to many other things that people purchase are beside the point. Fiscal sustainability needs to be restored in the short term and once this is done, there will still remain the longer term challenge of ensuring economic sustainability, which requires a different agenda of policies – to ensure value for money.

What do we currently spend?

On average, OECD countries are currently spending almost 10 per cent of the gross domestic product (GDP) on health. However, there is almost a three-fold variation between the largest and smallest spenders with Turkey spending approximately 6 per cent of GDP on health and the United  tates (US) over 17 per cent (Figure 2).

Figure 1

The public sector is the main source of health financing in OECD countries, and has consistently accounted for 72 per cent of health expenditure over the past twenty years. In 2009, governments accounted  for 80 per cent or more of health expenditure in one-third of OECD countries (OECD, 2011a).

Some non-OECD countries such as Brazil and South Africa have levels of health expenditure on a par with OECD countries, both spending around 9 per cent of GDP. Others such as China and Russia spend about half the OECD average while lower-income economies such as India and Indonesia  spend substantially less (4 per cent and 2.4 per cent respectively). These expenditure patterns can be partly explained by the observation that as countries grow richer, they tend to spend more on health.

Health spending increased faster than GDP in almost all OECD countries during the past 15 years. However, we can distinguish different patterns among countries. Some countries with low initial levels of funding deliberately increased spending on health in order to bring their health systems up to OECD standards of care and access, thus creating a "catch up effect". The Republic of Korea and Turkey, for example, saw significant reforms to increase the health-care coverage of the population. There were also rapid increases in health spending in some of the eastern European countries. On the contrary several other countries (e.g. Germany, France and Switzerland), implemented cost-containment measures and more or less succeeded in maintaining health spending growth at the same pace of GDP growth.

What will happen to health spending in the future?

For something so important, surprisingly little is known about the underlying causes of the rapid rise in health spending, other than factors affecting both the supply and demand of health are important.

The demand-side variable  that uninformed people expect to have most impact on spending is ageing, but evidence is almost conclusive that this is a minor factor – though it is an important factor in spending on long-term care. The effect of income growth on health spending remains controversial in part due to the lack of consensus around the size of income elasticity i.e. is health care a luxury good with an income elasticity >1 or a necessity with an income elasticity <1? Many expenditure forecasting models make an  assumption around the value of unity. Public health, consumers' health seeking behaviour and underlying societal norms about health and illness have a significant impact on the demand for health services.

Supply-side variables  that affect spending include new technologies and labour productivity. Innovation can include new treatments, new modes of service delivery and new financing alternatives, and influence the intensity of care provided to patients, as well as health-care prices. Similarly, treatment practices, such as changes in the intensity of care, are a form of "technological change". Approximately half of all long-term growth in health-care spending has been associated with technological advances (Congressional Budget  Office, 2008). RAND (2011) found that effective new technologies, even those that are inexpensive on their own (such as cancer vaccines), tend to increase health spending. This is particularly the case when a large share of the population will be treated. In the past, rising health  prices have also accounted for a significant amount of health spending. The price of health care is increasing relative to the productivity of  the health sector which tends to be low relative to other sectors because health services are highly customized and labour intensive.

What has been the impact of the economic crisis on health spending?

A survey conducted in 2010 revealed that consolidation measures affected  the health sector in half of OECD countries (OECD, 2011b). In Greece and Ireland, fiscal consolidation measures affecting the health sector accounted for more than 0.7 per cent of GDP. The policies that have achieved this can be divided into those that have targeted the price of health goods and services (particularly pharmaceuticals and wages); those that have tried to reduce demand for health services (co-payments); and those that try to promote structural reform to provide services at lower average cost. In addition, some countries have sought to find new revenue sources to finance health spending.

Measures to increase efficiency

In order to increase efficiency of health spending, countries have adopted a number of strategies including merging hospitals and other institutions; increasing out-patient appointments and day-surgery as well as centralizing purchasing and procurement of services.

Can governments raise additional revenues for health?

In social health insurance systems, contributions raised for health should in principle determine what will be spent on health (though it is possible to override this through deficits), while in tax-funded systems funds are allocated to health each year on the basis of the available budget and other needs for public funding. In several countries, the economic crisis has aggravated pre-existing imbalances between the level of revenue collected for health (or allocated to health in the budgetary process) and the level of spending, especially in countries with social health insurance (e.g. Estonia). Although  "health deficits" are not always easy to isolate from general government  deficits, we can probably say that most OECD countries already had a  "health deficit" and increasing debt before the 2009 recession. The economic crisis added to the problem by severely affecting revenue in  the form of taxes and social insurance contributions. Therefore, some of  the problems currently facing countries are not because the health system is not spending money wisely, but rather that they simply cannot raise enough money because of current economic conditions.

Policy implications

Countries have sought to restore fiscal sustainability by spending less on health (either by increasing efficiency or cutting services) or by shifting spending from the public to the private sector and, to a lesser extent, by raising revenues from "sin taxes". Countries' responses to the short-term problems of fiscal sustainability of health spending, caused by the intense pressure to reduce budget deficits quickly were, generally, quite rational. In order to limit the effect on front-line services, countries focused on reducing the price  of services. Wages were cut, and prices paid for pharmaceutical products reduced. These reduced spending – significantly, given the importance of wages in total health spending (accounting for approximately of 70 per cent of spending in a typical country), and given the size of the reductions in  pharmaceutical prices. In contrast to previous rounds of public health  expenditure cuts, items such as public health spending – which have high rates of return in improving the health of the population, but which take much time to be realized – were largely protected. Moreover, a number of countries including Iceland, Ireland and Portugal introduced various measures to protect vulnerable groups including children, older people and those with serious illness and/or disability.

However, of course even price cuts have negative effects – in causing emigration and early retirement of key professionals, and (potentially) reducing innovative efforts by the pharmaceutical industry and  aggravating the trend of lower market growth already observed in many  OECD countries. Furthermore, price cuts were insufficient to achieve the  desired level of cuts. Some reductions in staff occurred in many countries, and there has been increased use of co-payments.

Through the optic of economic sustainability, price cuts reduce the unit cost of health outputs and thereby increase the attractiveness of health spending relative to other spending. If cuts in the number of staff are accompanied by increased productivity, the same conclusion can  be drawn. However, it is less easy to be sanguine about the increase in co-payments. These have often been used to attempt to reduce the demand for health services. The word "attempt" is important here – there is significant evidence that while increased co-payments might reduce demand for the particular health good or service in question, they may shift costs elsewhere, and indeed potentially can even increase total spending (if, for example, they result in decreased compliance with drug plans by patients, or delay consultation with primary carers, leading  to more complex problems when they finally do present).

Over the longer term, many of the same comments apply as in the short term. It makes little sense to try to restrict demand for health care  (with the vital exceptions of investment in preventing poor lifestyles and early diagnosis of problems) – if people want health care, and are willing to pay for it, then it can be an important contributor to economic growth. Instead, attention should focus on supply side issues – payment systems, co-ordination of care, encouraging greater health labour market productivity. However, fiscal sustainability looks every bit as a big problem for health systems in the long run as it does in the short term. While it is possible to finance 70–80 per cent of health spending publicly when health accounts for 10 per cent of GDP, it is harder to believe that this is the case if health spending accounts for  20 per cent of GDP – the pressure on tax systems would be too great to bear. Hence either public health spending will have to decline as a  proportion of total health spending, or else total health spending will have to be limited. The former looks a more desirable approach, suggesting that governments need to consider how to manage the boundaries between what is provided through public or collective social health programmes, and what is left to private individuals. Few countries are yet having that debate.

Extracts of a report presented at the 17th ISSA International Conference of Social Security Actuaries and Statisticians, Berlin, Germany, 30 May to 1 June 2012.

Authors: Valérie Moran, Valérie Paris and Mark Pearson, all of the OECD, Paris. Corresponding author is . The opinions expressed in this article are those of the authors alone, not of the OECD nor of its member countries. Any errors are the  responsibility of the authors.


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