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February 09, 2011

Healing Public Health Care Finances: Budget Reforms That Work

By Benedict Clements

Health care reform is tricky. On the one hand, providing access to affordable health care is of paramount importance. But spending on health care is putting enormous pressure on public purses all over the world, and it’s only getting worse.

How can we fix this? How can governments keep their health care promises to citizens without busting the budget?

A recent paper by the IMF’s Fiscal Affairs Department tries to help with these choices, presenting public health spending projections for fifty advanced and emerging countries, and posing reform options.

Advanced economies

Let’s start with the basics. In advanced economies, health care spending alone accounted for about half of the rise in government budgets in the past 40 years. If we do nothing, these costs will continue to soar. Public health spending is projected to climb by 3 percentage points of GDP over the next 20 years in the advanced economies. The increases in health spending are driven by population aging but more importantly by technical progress and the availability of better and more expensive technologies. This is simply not affordable.

Reforms are needed to control spending, but these reforms must also be equitable, protecting access to basic health care for all who need it, especially the poor. The situation appears dire, but there are options. Past experience suggests that reforms can help slow the growth of spending in an efficient and equitable manner. 

We find that the most promising reform strategies combine top-down budget control and bottom-up reforms to improve efficiency.

Budget systems that cap total health expenditures and impose a high degree of central oversight can provide powerful incentives for expenditure restraint. Among the countries with a history of the lowest increases public spending, Italy, Japan, and Sweden have a greater reliance on budget caps.

Bottom-up reforms help control costs by enhancing efficiency. This allows more and better service delivery to patients for a given amount of resources. Some examples include:

  • Strengthening market mechanisms: increasing patient choice of insurers, allowing greater competition between insurers and providers, and relying on a greater degree of private sector provision (e.g. Germany and Japan).
  • Changing the way doctors and hospitals are paid: moving away from reimbursement to providers after services are rendered (fee for service) towards more sophisticated management and contracting systems.  These systems include built-in incentives for providers to minimize waste and improve services (e.g. Germany and Italy).
  • Greater reliance on private insurance can also help slow down the growth of public health spending (e.g. Australia, Canada, and France).

Let’s not forget the equity angle. Cost containment reforms should minimize any potential adverse effects on the poor. Most advanced economies have achieved universal access to basic health services, and health reforms should respect this safety net.

Despite the promise of these reforms, it’s important to recognize that they may still not be sufficient to keep public health spending from rising, as a share of GDP, in some countries. If so, even deeper cuts in other spending areas or additional revenue increases may be needed to support fiscal adjustment.

Emerging economies

The challenges are a bit different in emerging economies. Here, public health spending is expected to increase by only about 1 percentage point of GDP over the next 20 years. A key challenge here is to improve the health safety net, as health indicators—such as life expectancy and infant mortality—are substantially lower. Preventive and primary care should be given greater emphasis, which will require a change in the financial incentives facing health care providers, as should fighting infectious diseases and enhancing care in poorer rural areas.

For many emerging markets, the key challenge is to expand basic health care. In these countries, especially in Asia and Latin America, there is scope to boost spending. To cover as many people as possible at an affordable cost, the public health system should focus on first providing the most essential health services. Thailand and Chile have successfully expanded basic coverage at a low fiscal cost and provide valuable lessons for other countries.

But in countries where access to health is already extensive, the challenge is to make public spending more efficient to prevent it spinning out of control in the future. This is especially true in Eastern Europe where budgets are under pressure.

Despite the obvious differences, advanced and emerging markets share something very basic in common—they all need to get “more bang for their buck” when it comes to public health care spending.

Note: This post was previously published on iMFdirect.

The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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Dear Ben
After your brilliant work on education spending it’s a pleasure to hear you about the other big problem in public finances (health care spending). Should we review?
• What are the basic health services the public system can afford?
o Should the health public system support expensive treatments of diseases related with conscious unhealthy habits?
• The strengthening of market mechanisms?
o Should we rethink the role of taxes to correct the pricing mechanism in order to favor healthy habits, food, …


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