the economics of health system change a public finance perspective andrew donaldson, national...
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![Page 1: The economics of health system change A public finance perspective Andrew Donaldson, National Treasury 31 August 2009 BHF Southern African Conference,](https://reader035.vdocuments.mx/reader035/viewer/2022070407/56649e4a5503460f94b3ebb1/html5/thumbnails/1.jpg)
The economics of health system change
A public finance perspective
Andrew Donaldson, National Treasury
31 August 2009
BHF Southern African Conference, 2009
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National Treasury
Then and now… A Tale of Two DepressionsBarry Eichengreen and Kevin H O’Rourke, www.voxeu.org, 4 June 2009
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National Treasury
Then and now… A Tale of Two DepressionsBarry Eichengreen and Kevin H O’Rourke, www.voxeu.org, 4 June 2009
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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