Cures for health costs

Health Division, OECD Directorate for Employment, Labour and Social Affairs

Click to enlarge

The cost of healthcare is on the rise, and with budgets tight, governments are anxious to contain expenditures. There is ample room for getting better value for money.

Health spending currently accounts for 9% of GDP on average in OECD countries. It exceeds 10% in several of them. In fact, the growth in health spending has outpaced economic growth in almost all OECD countries in the past 15 years. Over three-quarters of health spending is funded by public budgets, and with the economic crisis and ballooning fiscal constraints, as well as population ageing, pressure on health systems to control costs and improve efficiency is intensifying. Public health spending could increase by between 50% and 90% by 2050.

Today, people in OECD countries are healthier and living longer lives than ever before. Premature deaths have been cut in half since 1970, and life expectancy at birth has increased by 10 years since 1960. When the OECD started up 50 years ago, 80 was a grand old age. Most baby girls born today and many baby boys can look forward to living that long, and in relatively robust health too. Certainly, this good news owes a great deal to economic growth and education, which have led to healthier lifestyles and boosted awareness about dangers such as smoking, and alcohol and drug abuse.

But progress in medical science and improved health systems deserve much of the credit too. Recent OECD estimates suggest that bigger and better health spending may account for up to 40% of the increase in life expectancy since the early 1990s. Could the economic crisis threaten those gains by squeezing the public purse?

Most governments are now under severe pressure to save money. In healthcare, at the very least this means having to find value for money, if not cutting spending altogether. What can they do?

Some governments have scored quick results in dealing with their budgetary problems by simply controlling healthcare expenditure directly, setting caps on health budgets, freezing prices or controlling inputs. Payments for pharmaceuticals are being reduced. Capping wages of health workers has also brought some relief to some countries. In previous times of fiscal restraint, countries have also resorted to reducing the number of nurses and doctors being trained as a way of saving money.

The trouble is, such short-term measures may help control costs quickly, but they do nothing to address the underlying pressures, from ageing to technological factors, that push health spending up. And the benefits of these savings are often shortlived. Wages of health workers cannot be held down relative to other sectors for long; the next generation of doctors and nurses needs to be trained; and public opinion is intolerant of lengthening waiting lists for treatment. Excessive “short-termism” in health policymaking can result in reduced or less equitable access to care, and even poorer quality of services and delayed access to new health technologies, leading to worse health and higher demand for health spending in the future.

Many policies have been sought to change behaviour over the long term, and the most successful ones have two things in common: first, they focus on the causes and transmission of disease, and on the rise of chronic diseases; second, they try to reward providers for quality and efficiency of healthcare.

The best patient is an informed patient. Given today’s general levels of education, patients who understand the risks or possible side-effects of treatment are often able to make their own decisions about undergoing intensive or invasive treatment. One Canadian study, for example, found that patients interviewed about preferences for knee-pain treatment overwhelmingly chose to forgo surgery, opting for more conservative (and, incidentally, less expensive) procedures instead.

Improving care co-ordination among hospitals and community health services can both boost the quality of healthcare and reduce costs. Improving co-ordination between healthcare providers, helping patients navigate complicated systems, monitoring their progress from diagnosis through treatment to cure amid different providers, preventing unnecessary and expensive hospitalisation and premature use of specialists: all this can lead to efficiency gains. Co-ordination itself can be expensive, and may require major investments in management and information systems. In Norway, for example, one healthcare programme was able to achieve cost savings, in part, by improving the transition from hospitalisation to community care services, although this transition did require an up-front investment in the number of nursing staff.

For many illnesses and health conditions, prevention is probably the best medicine. Yet, despite the proven cost-effectiveness of preventive measures such as vaccinations and campaigns to reduce obesity and smoking, prevention receives a low portion of total government resources. In fact, under one in every 20 dollars spent in health systems goes to prevent disease and promote better health. This is hardly a healthy policy, particularly as so many costly illnesses, from diabetes to some cancers, can be prevented (see article by Franco Sassi).

There are other fronts to tackle for longterm cost savings. Take the hospital sector, which accounts for around 40% of total health spending. Despite attempts to reduce costs in recent years, ample scope for savings remains through improved hospital management or by reducing the use of acute-care beds for rehabilitation treatments. Also, the growing prevalence of chronic diseases means that care for such patients should be shifted out of hospitals and into ambulatory or outpatient settings.

Better allocation of resources will also play an important role in reducing healthcare costs in the long term. This may require some difficult decisions, such as whether to invest less in costly technologies that help only a few people, while shifting spending towards cheaper treatments that benefit larger groups. Improving the sharing of information can also help allocate resources more efficiently by avoiding duplication or treatments with little evidence of success, or focusing on those that have been tried and tested. This sounds simpler than it is and may require organisational change as well as investment in information technology (see article by Nicole Denjoy).

Reforming health systems so that they reward performance, rather than the volume of activity, is a policy that is gaining traction in many countries because it can save money and improve health outcomes at the same time. Using financial incentives for hospitals, doctors and nurses, backed up by the likes of “league tables”, can encourage primary care providers to promote prevention and engage more with their patients in better treating chronic conditions.

Performance requirements can apply to pharmaceuticals too. This is especially important because pharmaceutical spending still accounts for 17% of total health spending on average across OECD countries. Generic market shares range from 15% in Ireland to 75% in Poland, so some OECD countries could save a lot of funds quickly by encouraging greater use of generics, without harming access to or the quality of care.

In the longer term, policymakers need to use reimbursement and pharmaceutical pricing policies to make sure that public money is spent wisely. There are great potential benefits for setting prices to reflect the benefits they deliver. In parallel, doctors need to be better informed about the relative costs and benefits of different therapeutic alternatives.

In short, improving efficiency is more about improving management and investment policies than about cutting spending. In many cases, policymakers could get more for less from their health systems, but first they must heed a serious health warning: ill-informed cuts or heavy-handed management can waste public money and worsen performance.

Thankfully, there are plenty of good practices in OECD countries which governments can learn from to get their reforms right. The message is that, even in these tough times, cutting health spending can be a false economy, though there is plenty that needs to be done to ensure that health policies do not cost the earth either.


©OECD Observer No 281, October 2010

Economic data

GDP growth: -1.8% Q1 2020/Q4 2019
Consumer price inflation: 0.9% Apr 2020 annual
Trade (G20): -4.3% exp, -3.9% imp, Q1 2020/Q4 2019
Unemployment: 8.4% Apr 2020
Last update: 9 July 2020

OECD Observer Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Digital Editions

Don't miss

Most Popular Articles

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2020