The economics of health system change

A public finance perspective

Andrew Donaldson, National Treasury

31 August 2009

BHF Southern African Conference, 2009

National Treasury

Then and now… A Tale of Two DepressionsBarry Eichengreen and Kevin H O’Rourke, www.voxeu.org, 4 June 2009

National Treasury

Then and now… A Tale of Two DepressionsBarry Eichengreen and Kevin H O’Rourke, www.voxeu.org, 4 June 2009

National Treasury

Coordination failure and system decline

• 1930s: Trade protectionism– Smoot-Hawley Act, 1930: record high tariffs on 20,000 US imports– Cycle of retaliatory tariff increases contributed to 60% decline in

world trade– Non-cooperative outcome of strategic self-interest in a many-

country game

• 1970-2009: South Africa’s health system development– Widening divergence between public and private financing of

health care– Retreat of fee-paying patients from public facilities: congestion in

public facilities; rapid investment in private hospitals and technology

– Breakdown of cost-containment measures in third-party payer arrangements – public & private sector

– Non-cooperative outcome of institutional competition for resources in an asymmetric many-player game

National Treasury

Network industry non-cooperative game:Illustrative pay-off matrix

(5,5)(5,5)

(3,8)(4,6)

(8,3)(6,4)

(6,6)(8,8)

Pay-off: (Player A, Player B)

Consumer benefit (A,B)

Player A:

Non-sharing Sharing

Player B:

Non-sharing

Sharing

(5,5) (3,8)

(8,3) (6,6)

National Treasury

Health system change: non-cooperative development path

1960s

Shared Hospital & consultant network

1970s & 80s

Growth of medical schemes & household affordability

Specialists move into private practice

Emergence of private hospitals

1990s

Cost-raising pte hospital model shaped by prohibition on employing doctors

Public hospitals lose fee-paying patients & consultant networks weaken

Rising pricingpower of private

hospitals &specialists

Segmentation betw public &

private sectorsreinforced

Congested public hospitals& deteriorating

care

National Treasury

Non-cooperative health system change is costly, contested and divisive

Finding cooperative solutions means confronting economic and institutional coordination failures

•Fiscal illusion – resource constraints are real

•Tunnel vision – health services are not only determinant of health outcomes

•Income inequality: health system is not an island

•Complexity of planning & decentralised decision-making

•Cost-raising technological progress

•Comprehensive care is expensive

•Upward demand for health services

•Difficult principal-agent problems

•Personnel planning and pricing must be managed sector-wide

•Cooperative solutions need to be carefully planned and sequenced

Towards cooperative system change

National Treasury

Fiscal illusion…health services are not free

• An expanded, improved health system has to be part of a growing, more productive economy

• Income per capita (US$ 2007):– USA 46,000– UK 43,000– S Korea 19,700– Mexico 8,300– South Africa 5,800– Thailand 3,400

• Fiscal capacity is under strain worldwide – behind financial crisis long-term fiscal over-commitment

• Health systems face both financial and real resource constraints

• Single and multiple payer systems face the same fiscal limits

-2

-1

0

1

2

3

4

5

6

7

8

Per c

ent o

f GDP

Non-financial public enterprisesGeneral government

10

12

14

16

18

20

22

24

26

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

per

cent

of G

DP

Gross fixed capital formation Gross saving

Savings and investment ratios

Budget balance & PSBR

National Treasury

Tunnel vision…Health services are not the only determinant of health outcomes

• Public expenditure –– Health services complement

household income support, nutrition, housing and sanitation, education, welfare services…

• Household spending & lifestyle –– Health outcomes depend on food

security, shelter, personal care and protection, behaviour choices…

0

20

40

60

80

100

120R billion

Housing Watersupply

Schoolnutrition

Welfareservices

Healthservices

Government expenditure - health & related programmes

2009/ 10

2010/ 11

2011/ 12

National Treasury

Redistribution Pooling of funds Saving Out-of-pocket

Government Retirement funds Household tax and spending Medical schemes spending

Income pc

(logscale)

Households

Income (before tax)

Income (after redistribution)

Pooling of funds

Contingent Risks

Lifetime vulnerability

Risks mitigation: pooling & saving

Health system is not an island economySpending on personal services cannot be de-linked from income

National Treasury

“Planning” and “market” processes are increasingly interconnected

• World economy does not divide into planned and market economies any more

• Public and private sector split cuts across industry lines– Market structure is in part a policy construct– Governments produce “mixed” goods in addition to “pure” public

goods– Public goods and services are produced in market contexts

• Regulation extends over both public and private provision

• Health sector characterised by pervasive regulatory intervention– Accreditation and regulation of service providers– Norms and standards & reporting requirements– Tariff determination – process and/or price controls– Professional training and qualifications– Technology and medicine registration and control– Funding of research and development– Prescribed and minimum benefits– Ethical standards, protection of patients’ rights

National Treasury

Technological change

• Technological change is rapid and brings substantial benefits• But frequently raises costs…

– Diagnostic capabilities, together with risk-averse case management– Patented medicine and devices, priced to finance R&D expenditure– Demand driven by spending power of aging first world population

• Purchasers pay for health care inputs, not outcomes– And so “final goods” market is missing– Information is incomplete and asymmetric

• Budget constraints can assist in disciplining technology choice– But product evaluation and assessment will often be controversial

• Technology investment and R&D spending have large fixed costs– Cost-sharing and price discrimination can improve allocative efficiency

• Treatment protocols have to combine science, value for money and affordability considerations

– Management of product competition likely to involve both centralised and decentralised decision-making

National Treasury

Comprehensive care is expensivein both prepayment and fee-for-service arrangements

• Managed care and pre-funding models simplify budgeting and lower transaction costs

– But upward referral and administrative systems tend to raise costs

• Fee-for-service allows for competition and choice, but requires control of over-servicing (pre-approval) and tariff negotiations

– Savings accounts shift burden of choice, but limited contribution to containing costs

• Health insurance unavoidably contributes to rising demand for health services and expansion/broadening of supply

• Patient or client choice subject to affordability constraints is always required at the health service delivery margin

– Either part of the structure of health services and pricing, or in the shadow system that arises alongside rationing of services

National Treasury

South Africa faces substantial upward demand for health care

• Increased access to clinics & GP services

• Rising awareness of modern health service opportunities

• HIV and TB trends• Motor vehicle accidents: injury &

trauma care• Ageing population • Diabetes, cardiovascular disease,

lifestyle risks

• Health service demand is income elastic, and strongly associated with urbanisation and education

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

3 500 000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Projected growth in ART patients – 80% target

R Dorrington, Centre for Actuarial Research, UCT

Towards R20 billion a year on HIV/Aids by 2020

National Treasury

Health systems confront formidable agency problems

• Public sector:– Bureaucratic failures in centralised control of hospitals & clinics– Information and costing systems inadequate– Procurement systems inflexible & unresponsive to need– High transaction costs of information-intensive decision systems

• Private sector:– Independent medical schemes governance hard to achieve– Administrators have significant information advantage– Cost negotiations with service providers are difficult to manage

• Complexity and diversity of needs, services, technology, quality of care

– Value for money considerations are difficult to quantify and especially difficult to communicate

National Treasury

Personnel issues

• Public and private sectors have shared interests:

– in professional training and development

– in remuneration determination– in professional registration and

regulation

• Long-term personnel planning needs to be undertaken sector-wide and transparently managed

– Limited private practice and sessional employment arrangements need to be better priced and managed

– Prohibition of private hospital employment of doctors creates perverse cost-raising incentives

– Specialist consultant capacity needs to be recognised as a shared network

Public sector medical practitioners by province

Health Systems Trust: SA Health Review, 2008

National Treasury

Cooperative solutions to health coordination problems

• Established models:– SA Blood Transfusion Service– Hospital co-location projects– Hospital revitalisation: long-term construction & equipment concession

agreements• Medical scheme reform:

– Prescribed minimum benefits– Risk-pool reinsurance funding– Independent governance & competitive contracting: GEMS

• Trauma and emergency care– Co-financing: RAF, Compensation Funds, Medical Schemes, Public sector

• Laboratory and radiography services: shared cost-recovery• Professional training of nurses and hospital staff• GP and specialist clinicians: sessional work in public facilities• Information systems and DRG funding framework• Standardisation of basic health insurance: default LIMS

Reform options are complex and transaction costs are high: progress needs to be carefully planned and sequenced