Health care: A quest for better value*

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OECD societies are healthier than ever, and yet spend more on health care. To some, this appears as a paradox, in that the fitter you become, the less you should need to invest in getting better. To others, we are healthier because we spend more. For policymakers, the question is simple: is the rise in costs affordable and are health care systems becoming more efficient, delivering more value for money?

In 2001, health expenditure represented an average of 8.4% of GDP in the OECD area, up more than a full percentage point since 1990. The United States, spending 13.9% of GDP on health in 2001, devotes a greater share of resources to health than any other OECD country. The next highest-spending nations, Switzerland and Germany, came in at 10.9% and 10.7% respectively. Yet, these countries do not necessarily deliver better health services than other countries. France is just one example of a country that devotes less of its GDP to health than the biggest spenders, yet achieves at least as good, if not better, results than most other health systems.

Health care is costly for several basic reasons. It deploys expensive technology; indeed, the more advanced a system is in terms of early adoption and quick diffusion of new innovations, the higher the costs tend to be. And with ongoing developments in areas like imaging, pharmacology and biotechnology, pressures to spend more are likely to continue.

Health care is also labour intensive, meaning large costs for highly-trained doctors, nurses, support staff and, increasingly, management and administration. These labour costs tend to rise with GDP.

Although its role has been fairly modest until now, population ageing is set to play an important role in driving future health spending growth. Health care costs tend to increase sharply from age 45, falling off again for the oldest of the old. Assuming that today’s age-related cost patterns and influences hold over time, the OECD projects that population ageing will cause total health care spending to increase by an average of nearly 2% of GDP by 2050.

In general, OECD countries with higher per capita GDP tend to spend more per capita on health, though there is significant variation across countries. These may partly reflect policy decisions to control health spending, as well as preferences for health care relative to other goods and services. With some exceptions, countries that finance and deliver health services through the public sector tend to have had an easier time controlling the rate of growth in costs. In insurance-based systems, countries where governments are the only source of basic coverage tend to spend less than those with multiple insurers.

Public problem

Governments worry about health spending increases because of the pressure such growth places on their budgets. The public sector accounts for the greatest part of health spending in all but three OECD countries, given the prevalence of publicly funded health insurance and direct public financing of health care. Even in the United States, where public spending represents just under half of total health expenditure, spending growth is an issue, as only a few other countries (Iceland, Luxembourg, and Norway) have higher per capita public spending on health care.

For several years governments have been stepping up their efforts to limit health spending, and with some effect. In fact, the rate of growth in health expenditures has halved across OECD countries over the past three decades, from an average annual rate of 6.2% in the 1970s, to 3.1% in the 1980s and 3.3% in the 1990s. Cost-containment efforts have coincided with this slower rate of spending growth.

Three types of policies have helped: first, controls on prices, wages, and inputs to health care services, such as numbers of hospital beds and the size of the health care workforce; second, caps on health spending, across the board and by service sector; and third, shifting costs to the private sector, particularly to the patients who use health care services through cost-sharing arrangements.

Most countries regulate health-sector prices and service volumes in one way or another. Government regulators may impose wage controls, as is common in systems where most of the health care workers are public-sector employees, like the Nordic countries, Greece, Italy, and Portugal. In other systems, prices for medical services, supplies and institutional care are usually set administratively, or with government oversight, when prices are agreed between health care purchasers and providers. Most countries take measures to influence the system’s capacity to furnish services by controlling medical school admissions and the provision of equipment for high-tech care, and so on.

While such controls can curb spending growth, the responses of health care providers can confound some initiatives. Practitioners may try to compensate for price limitations by increasing the volume of services they provide, say, by taking on more patients or providing more services to existing patients, or by changing the mix of services to include more consultations paid at a higher rate. Some services may even be shifted into sectors or systems where there are no price controls, something that has occurred in some countries where public and private programmes operate side-by-side, as in Ireland. And patients may be up-coded to higher level payment classifications, where such differentiation is built into payment systems, such as for increased severity of illness or length of visit.

In other words, the effectiveness of price controls as a cost-containment tool depends on the extent to which loopholes can be found and payment systems manipulated. Administrative costs associated with this approach can be high too.

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Budgetary caps and controls have become a widely used instrument for containing overall public expenditure on health. Initially, spending caps were directed at the hospital sector, which is the most costly pillar of the health system. They were subsequently extended to other providers and suppliers, so that now spending controls often include global budgets spanning all components of public spending on health and supplementary spending caps on ambulatory care and pharmaceuticals.

Capping budgets appears to have been most successful in countries where health care delivery is mainly a public-sector responsibility, as in Denmark, Ireland and New Zealand, and in single-payer countries, like Canada. However, capping may fail to provide health care providers with the incentives they need to improve efficiency and productivity. Rather, providers tend to spend up to their given ceiling. And setting budgets based on historical costs may favour inefficient providers and penalise efficient ones. Downsides like these have prompted OECD countries to combine budget caps with measures that take account of output performance and relative efficiency across hospitals.

Shifting costs to patients – sometimes referred to as cost-sharing – has increased to varying degrees in OECD countries since the 1980s. Cost-sharing is most commonly used in the case of pharmaceuticals, where prices influence patient choices, rather than for hospital care, for instance, which is much more driven by doctors' decisions. Some drugs are no longer reimbursed – mainly “comfort” drugs or medicines without proven therapeutic value. The degree of cost-sharing or partial reimbursement has been stepped up for many others. In a number of cases, flat-rate payments per prescription are now the norm. So-called reference price systems have also been introduced in a number of countries, whereby patients are less generously covered for using pricier drug brands and are encouraged to use less costly generic drugs.

Although their impact is limited by protection for the poor and high users of health services, cost-sharing measures appear to have had a modest impact on the share of public spending in total spending. In fact, the increase in the public share of total health spending slowed markedly in the 1980s, and between 1990 and 2000, the average share of total health spending represented by the public sector actually declined, from 74% to 72%. This may be a small decline, though it halted the large increases relating to the expansion of public health insurance programmes that marked the 1970s.

Towards cost-efficiency

Despite these curbs and controls, health spending growth, while slower than before, still outstrips overall economic growth in many OECD countries. This is not necessarily problematic from a policy perspective. After all, people’s welfare may well be improved by increased government spending on health, particularly if the cost of technology and other inputs is outweighed by improvements in the quality of care and resulting outcomes. However, budget realities have forced governments to assess whether equivalent, if not better, health outcomes can be attained at lower cost. A few, following a period of successful cost control, now ask whether increased spending in the health sector is necessary to boost results.

Although the efficiency of health care systems is very hard to measure with today’s data and indicators, there appear to be large differences across the OECD area in what is produced, the way it is produced, and the resulting impacts on health outcomes. The level of capital and human resources employed in the health sector varies widely, for a start. In addition, there are as many different combinations of spending on ambulatory and inpatient care as there are countries, and there are also very different levels of specialist care and use of pharmaceuticals. For any given health condition, important differences also exist in the treatment and in the intensity of care, with practice patterns varying both within and between countries.

So governments strive to ensure their system achieves the best possible results for the amount spent. Perhaps the most clearly successful reforms to date have focused on modifying hospital payment arrangements so as to reflect activity and volume of services. Instead of these payments being set solely according to incurred costs, under this new approach, hospitals are paid fixed amounts per admission, which are adjusted to take account of the type of diagnosis, treatment and so on. Such systems reward efficiency and have contributed greatly to the reduction in the average length of hospital stays throughout the OECD. It is a system that has to be monitored and audited, however, which can lead to management and administration costs. Also, rewarding productivity in the various activities a hospital is engaged in can put upward pressure on costs, as hospitals seek more admissions, more volume and so, higher costs.

There have also been increased efforts to introduce more of the characteristics of normal markets, such as competition among health care providers and greater use of price signals. In many countries characterised by public financing and delivery of health care, for example, there is now often a greater separation of hospital functions so as to infuse a more business-like approach in management, with greater use of internal markets and accounting between units for instance.

Experience with efforts to increase competition among insurers, the most salient feature of reforms in multiple-payer systems, has been mixed. In the few countries where such reforms have been introduced – Belgium, the Czech Republic, the Netherlands, and Germany – there is some evidence that increased insurance market competition may have narrowed the premia across insurers, encouraging better service and instituting incentives for cost cutting in administration. However, as the experience of the United States shows, market segmentation by risk can be a problem, especially where insurers can benefit financially from enrolling healthier people because of payment methods that fail to adjust adequately for differences in underlying health risks.

On the other hand, experience in the United States also suggests that managed-care arrangements, under which patients accept some limitations on choice of providers and services, may help to raise efficiency by constraining costs without harming health outcomes. However, such approaches have not been adopted by private insurers in other countries, where governments often greatly limit their scope to contract selectively and influence health care delivery. And following a backlash in the late 1990s, insurers in the United States have begun to increase, rather than decrease, patient choice of provider and treatment.

When it comes to controlling health care costs and pursuing better value for money, there is no one-size-fits-all solution. There are trade-offs at several levels, as priorities such as improving health system responsiveness, promoting adequate and equitable access, and ensuring safe and effective care, also come into play.

Improving the value of health spending may also require additional investments, at least in the short term. The United Kingdom, which has long been successful at cost control, has found that a renewed increase in funding will be necessary to improve the health system’s effectiveness and productivity. Across the OECD, a big part of the way forward is to build better health information systems and develop improved measures of health system performance so that we know when we are on the right track.

No single health system has fully met its performance goals and all face challenges, whether in cost overruns, access, or deepening deficits. But one objective remains the same for all: how to deliver the health services that the public needs and wants, efficiently and in economically affordable ways. It is a challenge that is likely to grow, rather than subside, in the years ahead.


OECD (2003), OECD Health Data 2003, CD-ROM.

OECD (2003), A Disease-Based Comparison of Health Systems: What is Best and at What Cost?, Paris (see link below).

OECD (2002), Measuring Up: Improving the Performance of Health Systems in OECD Countries, Paris.

*This article is based on “Health Care Systems: Lessons from the Reform Experience”, a forthcoming OECD Economics Department Working Paper by Elizabeth Docteur and Howard Oxley. It is an adapted extract from the written testimony of John Martin, OECD Director for Employment, Labour and Social Affairs to the Joint Economic Committee of the US Congress at a hearing held on April 10, 2003.

©OECD Observer No 238, July 2003

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