Cost Pressures and Cost Control in Health Systems: International Experience

Magnus LindelowEast Asia & Pacific Region, World Bank

ILO-WB-Thai Joint Workshop on Model Development of Sustainable Health Care Financing

Bangkok, June 2007

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Source: 2006 OECD Health Data

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Why are health care costs rising in most countries? Income growth and high income elasticity of health care Expansion in availability and coverage of health care

services Ageing population expanding and changing needs for

health care Changing epidemiological profile larger share of

burden of disease from chronic conditions Low productivity gains in health sector relative to other

sectors rising relative price of health care

All these factors are likely to play a relatively small role in cost escalation. The missing element? Technology…

The role of technology

What do we mean by technology? Pharmaceuticals, medical devices, diagnostic techniques,

surgical procedures, etc. What do we mean by technological change?

Innovation—arrival of new products and techniques Utilization—how new and old technologies are used in the health

system What determines the availability, utilization, and price of

technologies? Needs and expectations (create incentives for development and

promotion) Scientific capabilities (in recent decades, advances in genetics,

account for fundamental change) Features of the health system

Why should we be concerned about rising costs? Fiscal constraints and distortionary effects of taxation

Equity concerns limits on scope for pushing expenditures to private sector government finance plays important role in most health systems

Market ‘fails’ in important way in health sector—some health expenditures may be wasteful Health insurance may make individuals demand ‘too much’

health care (moral hazard) Physicians may exploit their information advantage to over-

provide services (supplier-induced demand) These problems also have ‘dynamic’ effects—stimulate the

development and use of technology

Approaches to controlling costs

Direct approach to managing fiscal pressures Budget caps and input controls

Reducing ‘waste’ in the health system Patient cost sharing (exclusions, deductible and coinsurance,

benefit ceilings, etc.) Making patients more informed consumers of health care Controlling prices and changing provider payment methods Managing introduction and use of technology

How should we evaluate cost control measures?Not enough to focus on costs—must also pay attention to impact on other health system goals: equity, efficiency, quality

Budget caps and input controls Most countries have relied on a mix of approaches

Budget caps for sector as a whole or expenditure components (e.g. pharmaceuticals)

Budget caps for hospital sector or individual hospitals Caps on wages or prices of other inputs Restrictions on entry to medical and nursing training

Some evidence that approaches have helped control costs But, budget caps and direct controls have limitations

Caps have proven easier to implement in public integrated systems than in systems with multiple payers

Caps are politically unpopular, and in most countries they have not been respected

Provider responses (e.g. increase volume in response to price reduction) often undermine impact

Caps and controls may result in cuts in the ‘wrong’ areas

Direct controls have role to play, but won’t do much to reduce waste in health system—may even worsen the problem

Cost sharing to control demand-side ‘moral hazard’ Cost-sharing introduced or increased in many OECD

countries during 1980s and 1990s Cost-sharing typically remained low and with exemption policies Took different forms

Co-payment for services Treatment restrictions through negative or positive lists, in particular

pharmaceuticals and dental care (e.g. moving drugs to OTC status) Some countries—e.g. Singapore, China, South Africa, US—

have experimented with Medical Savings Accounts Aim has been to shift costs to private sector and reduce

‘frivolous’ use of services (waste). Has it worked?

The impact of cost sharing: key findings from experiences to date Rigorous evidence remains limited, but clear that higher prices reduce

the use of services and pharmaceuticals RAND study estimated a price elasticity of around -0.2 Use of services for the poor is more sensitive to price increases Price increases lead to reductions in use of both unnecessary and effective

care/drugs Impact of exclusions / treatment restrictions often limited due to substitution In some cases, reduction in service use may contribute to cost increases

due to delay or under-use of services The bottom line

Cost sharing is unlikely to be significant source of revenues Can be useful in steering patients to the right level of the health system May be able to reduce utilization without adverse health consequences, but

needs to be carefully monitored Equity implications need to be managed

Making patients more informed

‘Consumer driven health care’—a force for quality and efficiency? Promoted in some health systems as means of improving quality and

controlling costs Consumers provided with information about health plans and

providers Idea is that this will create competitive pressure to improve efficiency

and reduce waste Evidence suggests that consumers do not understand much of what is

included in report cards, and that information is not important factor in choices

Consumers in the driver seat—potential for worsening demand-side moral hazard Direct marketing of pharmaceuticals and new technologies is

becoming more important in many countries

Is ‘supplier induced demand’ a real problem? Difficult to assess—studies rely on different approaches Supply of physicians increased supply of services

E.g. in Australia, 10% increase in doctors resulted in 5-10% increase in service volume

Impact of changes in remuneration Shift from fee-for-service to capitation results in reduction in

number of tests and procedures Reduction in doctors’ fees increase in service volume (~0.4

elasticity) Small-area variation in clinical practice

Consensus that supplier induced demand is a real issue, but scale and scope of the problem depends on incentives in the health system

Provider payment reforms to control costs Extensive experimentation with provider payment reform in recent

decades Capitation-based payment (fixed payment per patient on provider list) for

ambulatory care Fixed payment per case (e.g. Diagnostic Related Group system in US

Medicare program) or global budgets for hospital care Often mixed system—e.g. capitation combined with fee-for-service for

preventive services The logic of payment reforms

Move away from reimbursement of costs (e.g. through fee-for-service) towards paying for ‘bundle’ of services

Provided clinics and hospital can benefit from savings, this rewards efficiency and cost consciousness

But may also reward quality skimping, patient dumping, gaming of classification system, etc.

Impact of provider payment reforms and considerations for Thailand Some key lessons from experiences to date

In many cases, reforms have resulted in savings due to shorter length of stay and/or reduction intensity of care (diagnostic procedures, drug use, etc.)

Evidence on impact of quality often limited—represents important risk

Case-based payment for hospital services has often resulted in rapid increases in volume

Provider payment reform has come a long way in Thailand, but… Fee-for-service remains in Civil Service Scheme Lack of coordination across schemes creates mixed incentives

for providers—cost shifting, patient preference, etc. Too much reliance on supply-side cost sharing in UC & SSO? Adequate incentives for quality and prevention?

Managing introduction and use of technology Many countries regulate investment in technology

E.g. permission—certificate of need—required for large investments in US in 1970s/80s

Mixed evidence—decisions about what services and procedures will be covered may be more effective

Growing trend toward ‘Health Technology Assessments’ Use of clinical evidence and economic evaluation to approve use / cover—does

technology represent ‘value for money’? Economic evaluation is often difficult—reliable evidence on effectiveness may

take years to emerge Yes/no decisions on technology often contested—effectiveness / efficiency

often conditional on patient or circumstance Managing use of technology equally important

Different approaches: clinical guidelines, utilization reviews, second opinions, profiling of clinical practice, etc.

Scope for both improving quality and controlling costs, but evidence on impact still limited

Summing up Cost pressures are going to persist

Risk of waste, but also opportunities to improve welfare—should Thailand be spending more on health care?

Growth in health expenditures will result in sustained fiscal pressure Direct expenditure controls may have role to play in managing cost pressures, but has

important limitations Need to keep eye on efficiency and equity issues in financing of government spending

Fiscal pressures raise difficult questions that do not have simple answers Boundary be between public and private finance? Distribution of financing burden for

health care? How much inequity in access to services and technologies is acceptable?—largely political, not technical issues

There is a need to avoid waste in the health system Limited cost sharing may have role to play There will have to be some exclusions—need for effective process for rationing Need for systems and incentives to ensure appropriate use of technologies Effective methods for paying providers part of the solution, but other elements also

needed Multiple payer system presents particular challenges—need for coordination

Thank you!