The economics of health system change A public finance perspective

1. BHF Southern African Conference, 2009 The economics of health system change A public finance perspective Andrew Donaldson, National Treasury 31 August 2009

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

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

4. 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

5. Network industry non-cooperative game:Illustrative pay-off matrix Pay-off: (Player A, Player B) Consumer benefit (A,B) Player A: Non-sharing Sharing Player B: Non-sharing Sharing

6. 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

7. Towards cooperative system change • 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

8. 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 26 24 Gross fixed capital formation Gross saving 22 20 per cent of GDP 18 16 14 12 10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Budget balance & PSBR Savings and investment ratios

9. 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…

10. Health system is not an island economySpending on personal services cannot be de-linked from income Redistribution Pooling of funds Saving Out-of-pocket Government Retirement funds Household tax and spending Medical schemes spending Income pc (logscale) Risks mitigation: pooling & saving Contingent Risks Income (before tax) Lifetime vulnerability Pooling of funds Income (after redistribution) Households

11. “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

12. 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

13. 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

14. 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 Projected growth in ART patients – 80% target R Dorrington, Centre for Actuarial Research, UCT Towards R20 billion a year onHIV/Aids by 2020

15. 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

16. 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

17. 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