1. New Approaches to Economic Thinking
Seminar on Project C3, 31 January 2014
CAN HEALTH BECOME AN
EVEN BIGGER PART OF THE
ECONOMY WITHOUT
UNDERMINING FISCAL
SUSTAINABILITY?
Mark Pearson
Deputy Director
Employment, Labour and Social Affairs

2. Key points
• Health spending is likely to continue to
grow as a share of the economy
• This will put great pressure on public
budgets unless:
– We improve value for money
– We reallocate public funds from other areas
– We raise the efficiency of public funding for health
– We get more private finance into the system
2

3. HEALTH AND THE
ECONOMY
3

4. Health spending outpaced economic growth
in the pre-crisis period
Annual growth rate of health spending per capita
and real GDP per capita, 2000-2009
12%
Average annual growth rate in real health
expenditure per capita
SVK
10%
KOR
8%
CZE
NLD
6%
PRT
GRC
GBR
NZL
ESP FIN
BEL
CAN
4%
USA
SWE
DENMEX
NOR
JPN
ITA2%
EST
POL
IRL
FRA DEU AUT
CHE
ISR
CHI
SVN
HUN
AUS
ISL
LUX
0%
-1%
0%
1%
2%
3%
4%
5%
6%
Average annual growth rate in real GDP per capita
Source: OECD Health Statistics 2013
4

5. -11.1
-10
-15
-6.6
1. CPI used as deflator.
Source: OECD Health Statistics 2013
-1.8
Denmark
0.6
0.7
0.7
0.8
0.8
1.0
1.2
Belgium
Mexico
France
Canada
New Zealand
Netherlands
Poland
1.3
3.4
2.8
2.8
6.3
5.5
4.9
7.5
7.1
9.3
10
Korea
Chile ¹
Japan
Israel
3.9
3.4
1.8
2.1
2.1
3.1
2.6
1.6
3.4
5.5
4.5
3.5
10.9
2009-2011
Slovak Republic
Hungary
Germany
Sweden
Finland
Switzerland
1.3
1.9
1.4
2.1
3.1
3.7
2.8
7.2
7.0
5.9
5.3
5.3
2000-2009
United States
0.5
Norway
4.1
3.0
4.1
3.8
3.3
2.2
0.2
Austria
1.6
0.2
-0.4
Italy
OECD32
-0.5
Spain
0
Australia
-0.8
Czech Republic
-1.2
-1.8
United Kingdom
1.8
1.6
5
Slovenia
-2.2
-3.0
Portugal
Estonia
-3.8
-5
Iceland
Ireland
0.0
Greece
Annual average growth rate (%)
The crisis has moderated rapid growth in
health spending
Annual average growth rate in per capita health expenditure, real terms,
2000 to 2011 (or nearest year)
15
5

6. But even still, health has been a major
contributor to growth over the last decade
Contribution of health to growth in GDP per capita (%), 2000 to 2011
6

7. Health and social care is a fast growing
source of employment in many countries
Change in employment between 2000 and 2011, various industries
All activities
Agriculture
Industry
Services
Canada
United
Kingdom
Human health and social work activities
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
Ireland
Spain
Australia
Austria
France
Source: OECD Database on Labour Force Statistics, countries selected reflect the availability of data
Finland
Czech
Republic
7

8. Poor physical and mental health hits the labour market
Employment
Obesity
Wages
Absenteeism
Lower probability of
employment (causal)
Larger wage penalties
(causal)
More sickness absences,
especially for women
(causal)
(Lundborg et al. 2010, Sweden)
Moderate drinking
positively associated with
wages
(Jarl et al 2012, Sweden)
Alcohol
Use
Long-term light
drinkers have better
employment
opportunities
(Hamilton and Hamilton 1997,
Canada)
Heavy smokers more
likely to be unemployed
Smoking
(Jusot et al. 2008, France)
(possible causality)
Smokers earn 4-8% less
than non-smokers
(causal)
(Levine et al. 1997, USA)
Absences 20% higher
among abstainers,
former and heavy
drinkers (causal)
(Vahtera et al 2002, Finland)
Smokers 33% more likely
to be absent from work
than non-smokers
(causal)
(Weng et al. 2012, meta-analysis)
8

9. Productivity losses through mental-ill health are
large
Sickness absence (% and duration) and productivity losses at work (%)
Sickness absence incidence
Presenteeism incidence
8
42
35
90
7
45
40
Average absence duration
80
7.3
70
6
5.2
30
5
21
69
60
5.6
28
25
88
4.8
4
50
40
20
19
15
3
35
30
2
20
5
1
10
0
0
0
10
Severe
disorder
Moderate
disorder
No
disorder
Severe
disorder
Moderate No disorder
disorder
Source: OECD (Sick on the Job:? Myths and Realities about Mental Health and Work).
26
Severe
disorder
Moderate
disorder
No
disorder

10. HEALTH AND PUBLIC
FINANCES
10

11. Health care is predominately publicly funded
General Government
100
2
6
0
3
13
15
6
80
12
10
12
5
11
2
15
1
17
4
5
14
18
18
18
10
17
3
6
2
Private insurance
6
1
13
12
20
24
21
19
20
20
5
9
12
24
12
31
29
18
26
Other
4
6
3
10
17
35
27
25
37
49
5
1
15
30
8
16
14
20
8
8
Private out-of-pocket
70
1
38
60
45
12
37
50
46
74
73
83
69
82
78
75
73
73
70
42
65
46
67
65
71
69
68
30
7
45
56
68
67
43
51
20
38
35
27
24
19
1.
Data refer to total health expenditure.
Source: OECD Health Statistics 2013
Switzerland
Portugal
Greece
Ireland ¹
Australia
Canada
OECD34
Turkey
Spain
Slovenia
Slovak Republic
Finland
11
8
6
2
22
17
Hungary
7
Poland
7
10
Belgium
France
Austria
Italy ¹
Estonia
Iceland
Sweden
Japan
New Zealand
4
Germany
9
9
United Kingdom ¹
Denmark
Norway
Czech Republic
5
Luxembourg
8
11
6
Korea
10
Israel
32
0
25
46
64
60
Chile
79
Mexico ¹
85
40
United States
77
Netherlands
% of current expenditure
90
15
Social Security
11

12. This will make health a major pressure on public budgets
across all OECD countries
Average public spending 2006-2010
Increase of public spending 2010-2030
Increase of public spending 2030-2060
12%
% GDP
10%
8%
6%
4%
2%
0%
Source: OECD Economic Policy Paper n°06, 2013
12

13. Ageing is not the key driver of health spending
growth
Drivers of healthcare expenditure growth between 1995 and 2009
in OECD countries
Healthcare expenditure growth
(100%)
Demography
(12%)
Income
(42%)
Age
structure
Health by
age
Source: OECD Economic Policy Paper n°06, 2013
Residual
(46%)
Relative
prices
Technology
Institutions
and policies
13

14. What do we mean by fiscal
sustainability?
IMF: The capacity of a
government, at least in the
future, to finance its desired
expenditure programs, to
service any debt obligations
[…] and to ensure its solvency.
EU: This considers the ability of the
government to meet the costs of its current
and future debt through future revenues
(Indicator S1). The finite version of the budget
constraint is assessed with reference to a
target date of 2030 and a target level of debt
of 60 % of GDP (Indicator S2)
• Implications:
– Intergenerational transfer
– As ageing is not the driver we cannot ‘ride out’ health
spending by letting budgets run into deficit
– The policy challenges are productivity, relative budget
priority and the boundaries of financing
14

15. OPTIONS
1. EFFICIENCY
15

16. Improving health sector productivity can
dramatically change the fiscal outlook
Sensitivity of public sector net debt
projections to interest rates
Sensitivity of public sector net debt
projections to health productivity
Source: Fiscal Sustainability Report, UK Office for Budget Responsibility, July 2013
16

17. The target areas for expenditure control are
well known among Finance Ministries
Self-reported priorities for expenditure control, 22 OECD countries
Hospital expenditure
Pharmaceutical costs
Long term care spending
Spending on prevention programs
Primary health care services
Outpatient care spending
0
5
10
15
20
Number of countries
Source: OECD Survey on Budget Practices and Procedures, 2013
17

18. The crisis has been used to slow growth in desirable
areas, but we have fallen short on prevention
Average annual growth rates of spending for selected functions,
OECD average, in real terms
2007/08
2008/09
2009/10
2010/11
8%
6.9%
6.4%
7%
6.2%
5.9%
6%
5.3%
5%
4.8%
4.8%
4.6%
4%
3.5%
3.2%
2.9%
2.8%
3%
1.7%
2%
1%
1.0%
0.7%
2.5%
1.7%
1.6%
0.9%
0.2%
0%
-1%
-0.9%
-2%
-1.7%
-1.5%
-1.7%
-3%
Inpatient care
Outpatient care
Long-term care
Pharmaceuticals
Prevention
Administration
Source: OECD Health Statistics 2013
18

19. There are pervasive under-treatment issues in
mental health
Treatment rate (in %)
Proportion of people being treated by a specialist or non-specialist, by severity of their mental disorder
80
Non-specialist
Specialist
70
60
50
40
30
20
Austria
Belgium
Denmark
Netherlands
Sweden
Source: OECD (Sick on the Job:? Myths and Realities about Mental Health and Work).
United Kingdom
OECD-21
None
Moderate
Severe
None
Moderate
Severe
None
Moderate
Severe
None
Moderate
Severe
None
Moderate
Severe
None
Moderate
Severe
None
Moderate
0
Severe
10

20. Worthwhile processes are not being
undertaken with consistency
Distribution of French GPs: % of diabetic patients having 3 or more HBA1C
tests during the year in the last 12 months (2009)
Average=40%
Target=65%
10
20
30
40
50
60
70
80
90

21. Considerable medical practice variations
within and between countries
Rates of PTCA (standardised for age and sex)
per 100,000 population, 2011 (or earliest
available)
Rates of Coronary Artery Bypass Grafting
(standardised for age and sex) per 100,000
population, 2011 (or earliest available)
Note: Rates are standardised using OECD’s population structure. Missing country data will be added once available.
Source: National reports submitted for the OECD project on Medical Practice Variations.
21

22. OPTIONS:
2. REALLOCATE PUBLIC
SPENDING TOWARDS HEALTH
22

23. Countries have allowed health to become a
bigger share of their budget
Change in the structure of general government expenditures on average in OECD
countries by function (2001 to 2011)
2%
2%
1%
1%
0%
-1%
-1%
-2%
Social protection
Health
Recreation,
culture and
religion
Environmental Public order and
protection
safety
Education
Housing and
community
amenities
Source: OECD National Accounts Statistics (database). Data for Australia are based on
Government Finance Statistics provided by the Australian Bureau of Statistics.
Defence
Economic affairs General public
services
23

24. OPTIONS:
3. GET A MORE SUSTAINABLE
WAY OF FINANCING PUBLIC
EXPENDITURE ON HEALTH
24

25. Our models incorporate estimates of how an ageing
population will increase utilisation of health services…
Old age (+65) dependency ratio (20-64), OECD
50%
45%
40%
35%
30%
32% 32%
30% 31%
29% 29%
28% 28%
26% 27%
33%
34%
35%
35%
36%
37%
38%
45%
44% 44%
43% 43%
41% 42%
40% 41%
39% 39%
25%
20%
15%
10%
5%
0%
2040
2039
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
25

26. … but they do not account for shortfalls in revenues
for countries that rely heavily on payroll taxes
Average share of different sources of revenues for funding health care
expenditure, selected OECD countries
100%
90%
Other
80%
70%
60%
Sin taxes
Taxes on (company) profits
50%
40%
Taxes on goods and services
30%
20%
10%
0%
Income taxes
Mandatory health insurance
premium
Payroll contributions
Other general taxation

27. Some new taxes could be effective in improving
health, but will not be major sources of revenue
• ‘Sin taxes’ are increasingly being used by OECD countries
– These taxes target lifestyle choices that can affect
productivity and employment outcomes.
– The arguments for using taxes to attain public health
objectives are strong for tobacco products and alcohol.
– The poor are likely to pay more but have greater health
benefits.
27

28. OPTIONS:
4. LET PRIVATE SPENDING RISE
28

29. Boundaries between public and private
need to be debated
Source: Paris et al.,
Measuring coverage
(Forthcoming)
29

30. It is unlikely that countries will want to step back from
covering 100% of their population
Total public coverage
Australia
Canada
Czech Rep.
Denmark
Finland
Greece
Hungary
Iceland
Ireland
Israel
Italy
Japan
Korea
New Zealand
Norway
Portugal
Slovenia
Sweden
Switzerland
United Kingdom
Austria
France
Germany
Netherlands
Spain
Turkey
Belgium
Luxembourg
Chile
Poland
Slovak Rep.
Estonia
Mexico
United States
Primary private health coverage
100.0
100.0
100.0
100.0
100.0
100.0
100.0
99.8
0.2
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
99.9
99.9
88.9
11.0
99.9
0.9
99.0
99.5
98.8
97.2
79.8
17.0
96.6
95.2
92.9
86.7
31.8
0
53.1
20
40
60
80
100
Percentage of total population
Source: OECD health data, 2013
30

31. Some shift to private financing
2007/08
2008/09
2009/10
2010/11
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
0.5%
0.1%
0.0%
-0.4%
General
Govt./SHI
Source: OECD Health Statistics 2013
Private Health
Ins.
Out-of-Pocket
Total Health Exp.

32. Private health insurance markets are not
necessarily cost reducing
• The ‘theoretical’ advantages of private health insurance:
– Expanding individual choice
– Spur innovation and flexibility
– Reduce public cost pressure
• The practical risks associated with private health
insurance:
– higher administrative costs
– less bargaining power for insurers
– risk selection
– Pressure for tax incentives
32

33. A better way to cost share…
• Be more specific and selective in defining the
range of services covered
• Health systems have become better at assessing
new activities, but this misses most spending:
– Cost effectiveness analysis studies are used to assess
whether a new service or drug should be funded
– A more systematic assessment of therapeutic strategies by
disease should be conducted
33

34. Key points
• Health spending is likely to continue to
grow as a share of the economy
• This will put great pressure on public
budgets unless:
– We improve value for money
– We reallocate public funds from other areas
– We raise the efficiency of public funding for health
– We get more private finance into the system
34

35. CAN HEALTH BECOME AN EVEN
BIGGER PART OF THE ECONOMY
WITHOUT UNDERMINING FISCAL
SUSTAINABILITY?
31st January 2014
Mark Pearson
Deputy Director
Employment, Labour and Social Affairs