Costs and qualty of health care

Por Edwin van Gameren

Health, health care, and reforms in the health care sector are hot issues. In the USA, President Obama has declared a health insurance reform to be a major goal. An increasingly large fraction of the US population does not have health insurance while the costs of health care increase. Also in Mexico progress towards universal health insurance coverage is being made with the introduction of Seguro Popular. Obviously, financial resources are lower than in the USA. Right before moving to Mexico I experienced a large health insurance reorganization in the Netherlands. Also many other countries enact bigger or smaller reforms aimed at providing better health care services at affordable costs. An interesting question is, if there is a relation between costs and quality of health care. I will use the OECD Health Data 2009 to say something about that relation.

I start with a look at the costs. Figure 1 shows the expenditures on health care in 2007 as a percentage of the GDP in 30 OECD-countries. On the lower end we find Turkey, Mexico, Korea, and Poland, with health expenditures around 6% of GDP, while the USA is an outlier with its 16% of GDP spent on health care. The (unweighted) average is 8.9%. Note that a rich and advanced country like Finland spends only 8.2% of its GDP on health care. Also the UK with its 8.4% has a relatively cheap health sector: in many aspects the economy of the UK reflects the USA, but the expenditures on health are completely different. Figure 2 shows the increase in the costs in the last 50 years in the USA: in 1960 only 5.2% of the GDP was spent on health, similar to the level that Mexico observes nowadays. Since then, the costs in the USA increased a lot. Also in the UK and the Netherlands expenditure growth is observed, but at a much slower pace in the USA. Note that GDP itself has grown a lot during this period, but that health expenditures grew faster. For Mexico the times series is much shorter and growth is not very pronounced.

Figure 1 Total expenditure on health, % gross domestic product, 2007 (Note: Japan, Luxembourg, Portugal: 2006; Turkey: 2005)

Figure 2 Total expenditure on health, % gross domestic product, 1960-2007

The organization of the health care sector is probably a relevant factor in the level and the growth of the health expenditures. An indicator for organizational differences is the share of total health expenditure drawn from public and private sources. (Public expenditure on health care: State, regional and local government bodies and social security schemes; publicly financed investment in health facilities plus capital transfers to the private sector for hospital construction and equipment. Private expenditure on health care: Out-of-pocket payments, both over-the-counter and cost-sharing, private insurance programs, charities and occupational health care).

The two extremes from figure 1 come together in figure 3: the public share is smallest in the USA and Mexico; both report just over 45%. Most OECD-countries have a much higher public expenditure share, the average is 70%. On the high end we find the Nordic countries (which are typically known for the role assigned to the state), but also the UK and Japan, with public expenditures of over 80% of total health expenditures. The remainder, private expenditures, can be divided in out-of-pocket payments, that is, costs that patients pay directly to care providers, and costs covered by private insurance bodies. The latter are particularly high in the USA (42%) and in the Netherlands. In the USA, health insurance for working-age people is (still) dominated by private insurance companies with relatively little government regulation. In the Netherlands a similar (but more regulated) market used to be relevant for people who earned more than a threshold salary, while for below-threshold earners the government facilitated the insurance. Now the insurance system has been reorganized and everyone is obliged to obtain at least a (legally imposed) basic insurance with a private insurance company: the division in public and private expenditures has become quite arbitrary. Notice that the out-of-pocket payments in the Netherlands are extremely low and amount no more than 5.5% of total health expenditures: almost everything is covered by the publicly imposed basic insurance or through supplementary insurance, with very low co-payments and deductibles. In Mexico on the other hand, more than 50% of health care expenditures are out-of-pocket, insurance coverage is limited. Within the OECD we see huge differences in the out-of-pocket payments. Rather rich countries like Korea and Switzerland are second to Mexico with more than 30% of out-of-pocket payments while equally rich countries like USA and UK are below average with about 12%.

Figure 3 Public expenditure, Out-of-pocket payments, Other private expenditure, as % of total expenditure on health, 2007 (Note: Japan, Luxembourg, Portugal: 2006; Turkey: 2005; Netherlands: 2002; Greece: no info on OOP; Belgium: NA)

Do the reported differences in total, public, and private expenditures imply something about the quality of the health care that is delivered? Of course, quality is not an easily defined concept. I will look at the ultimate health outcome: the mortality rate; in particular I report the life expectancy at birth (figure 4) and the number of deaths among children under one year of age per 1000 live births (figure 5). Life expectancy in Mexico is at the low end (75.0 years), while with a similar expenditure level Turkey does worse (73.5), the Czech Republic does better (77.0) and Korea performs much better (79.4). In fact, Koreans have a longer expected life than people in the USA (78.1) where expenditure is much higher. The OECD-average is 79.1 years, while the maximum is achieved in Japan (82.6 years) despite a relatively low share of GDP spent on health (8.1%). Health expenditure does not seem to have a straightforward relation with life expectancy. Similarly, levels of public expenditure or out-of-pocket payments do not explain a lot. For example, the rather high out-of-pocket payments in Switzerland go together with a long expected life of 81.9 years. With regard to infant mortality, Turkey and Mexico are outliers (20 and 15 deaths per thousand), but next comes the USA (6.7) despite a very high expenditure level. Korea and the Czech Republic report 4.1 and 3.1, respectively, with low health expenditures, while similar rates are found in Switzerland (3.9) and Finland (2.7) with much higher expenditures.

Figure 5 Infant mortality, Deaths of children under one year of age per 1 000 live births, 2007 (Note: Canada, France, Korea, USA: 2006)

Simple calculations of the correlations give the expected signs –expenditure (weakly) correlates positively with life expectancy and negatively with child mortality. The closer look at the available information, above, suggests that there is much more going on between health expenditures and health outcomes. The same holds for the source of the money: public expenditure correlates positively, out-of-pocket payment correlates negatively with life expectancy, but the presented data suggest that there are other relevant factors that determine the relation between expenditures and health care quality. Organizational details including incentives for governments, care providers, users of care, and vested interests of the various players (who might be unwilling to give up their positions), historically grown expectations and traditions including lifestyle and environmental circumstances: all of it together determines the way in which expenditures affect health outcomes.

Edwin van Gameren es Doctor en Economía por la Vrije Universiteit Amsterdam (Holanda). Actualmente labora como profesor – investigador en El Colegio de México.


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