core sector communique

FAD/EUO Joint Conference on Public Health Care Reforms: Challenges and Lessons for Advanced and Emerging Europe

 

Keynote Address by Mr. Naoyuki Shinohara, Deputy Managing Director, IMF 
June 21, 2011

Ladies and gentlemen, I am delighted to be here and to participate in this important conference on public health care reform in Europe. This morning’s discussion has already been extremely enlightening and productive, and I look forward to learning more this afternoon.

Despite a temporary slowing of economic activity, we expect the global recovery to continue, with world GDP growth projected at 4.3 percent this year and 4.6 percent in 2012. Downside risks, however, have increased again, and the global expansion remains unbalanced. Growth in many advanced economies is still weak, while growth in most emerging and developing economies continues to be strong. Greater-than-anticipated weakness in U.S. activity and renewed financial volatility from concerns about the fiscal challenges in the euro area periphery pose greater downside risks. There are also risks from persistent fiscal and financial sector imbalances in many advanced economies, while signs of overheating are becoming increasingly apparent in many emerging and developing economies. Against this background, my remarks today will concentrate on the fiscal policy challenges facing our member countries, and the potential role of public health care reform in helping countries meet these fiscal challenges.

The Fiscal Situation

In advanced economies, fiscal deficits remain very large, and the average public debt ratio by end-year will breach 100 percent of GDP for the first time since the aftermath of World War II. These fiscal trends are clearly not sustainable. Although countercyclical fiscal policy helped to save the global economy from a far deeper downturn, the fiscal fallout of the crisis now needs to be addressed if the recovery is to be sustained. The central challenge is to avert potential future fiscal crises, while at the same time maintaining social cohesion.

Fiscal consolidation is proceeding at a broadly appropriate pace in many advanced economies, notably in most of Europe and in Canada. Fiscal adjustment in Europe is also being accompanied by a strengthening of institutions and rules. In the United States, strong revenue growth and a slower pacae of spending mean that the 2011 budget deficit is now expected to be similar to 2010 in cyclically-adjusted terms, rather than expansionary as originally expected. This will make the planned adjustment in 2012 less abrupt, reducing the risk that it could negatively affect growth prospects. Nevertheless, consensus on a credible medium-term adjustment plan is still urgently needed. Similarly, a detailed medium-term adjustment plan is still missing in Japan, where the humanitarian costs of the recent natural disaster has led to a significant weakening of the fiscal accounts.

In some prominent adjustment cases in Europe, mostly notably Greece, Ireland, and Portugal, risk perceptions are rising, as reflected in sharp increases in bond spreads. This underscores the need for the European countries to work cooperatively to develop a comprehensive and consistent approach to crisis management in the euro area.

Against the backdrop of this historic fiscal challenge in the advanced economies, spending pressures from health care have been rising steadily. Since 1970, total health spending as a share of GDP has nearly doubled in the advanced economies, to almost 12 percent of GDP. Two-thirds of this increase was due to higher public health spending. As we heard this morning, prospects going forward are worrisome: with unchanged policies, IMF staff expects annual spending on public health in the advanced economies to increase by an average of 3 percentage points of GDP over the next 20 years, and by 6½ percentage points of GDP over the next 40 years.

These baseline projections assume no changes in the present roles of the public and private sector in financing and providing health care. Of course, these roles vary widely across countries, reflecting differences in country preferences and constraints. Indeed, there is no optimal level of public health spending that can provide a benchmark for comparing countries. Nevertheless, there is a need to ensure that whatever model a country adopts, public health care services are provided in an efficient way.

In this context, the projected increase in public health spending is also a concern because in most countries, this spending is not very efficient. This can be illustrated by examining the gains countries could achieve by getting rid of these “efficiency gaps” in health spending. This efficiency gap provides an estimate of the difference between the life expectancy countries currently achieve and the best performing countries at similar levels of spending. Based on the recent work by the OECD, cutting the efficiency gap in half could increase life expectancy by over one year. Achieving this through higher spending, in contrast, would require an increase in spending of 30 percent.

Turning to the emerging economies, the overall fiscal outlook appears more favorable, although this in part reflects the tail winds of high asset and commodity prices, low interest rates, and strong capital inflows. Their reversal could leave fiscal positions exposed in many cases. Further, some of these economies may be overheating, and need to make faster progress in reducing deficits to help offset pressures from rising domestic demand. For many emerging economies, the adverse fiscal impact of high fuel and food prices is also a major challenge.

Of course, in many emerging economies, including in emerging Europe, fiscal consolidation is also proceeding at an appropriate pace, and financial markets have recognized this. Further fiscal consolidation will nevertheless be needed in the years to come. Emerging Europe also faces long-term pressures on public health care and pension spending. This spending is projected to rise by an average of 4 percentage points of GDP over the next 20 years, compared with 2 percentage points of GDP in the emerging economies as a whole. In Russia, Turkey, and Ukraine, for example, this spending would rise by 4½ percentage points of GDP or more over the next 20 years, adding substantially to the burden of fiscal adjustment.

A Fiscal Strategy for Advanced Economies

What is needed to address the fiscal problems of advanced economies? First, I believe it is important to be clear about the final goal of any fiscal adjustment strategy. In my mind, there is no doubt that it should be to lower public debt ratios to more prudent levels, not just to stabilize them at post-crisis levels. The April Fiscal Monitor underscores that the magnitude of the adjustment needed to lower debt ratios is daunting. But the task is not impossible. The necessary ingredients include the right combination of expenditure cuts and revenue increases and reforms of age-related spending, including health.

Expenditure cuts will need to dominate the required adjustment process, but some revenue increases are likely to be necessary in several countries, given the magnitude of the necessary adjustment. This is especially true in countries with relatively low spending ratios. Consumption taxes may prove to be an important source of potential revenues. More generally, classic tax reforms—encompassing broadening tax bases while simplifying rules and rates—would be appropriate in many advanced economies. A key goal should be rolling back tax expenditures, as this would bring in substantial revenue while also improving both the efficiency and fairness of tax systems.

Expenditure reform should be guided by the desire to improve the efficiency of spending while ensuring equity. Cutting spending across the board has not proven to be very effective in the past, except in the very short run. A more strategic approach is needed when the adjustment effort is large and expected to be sustained over time. In many countries, better targeting of social welfare spending could provide substantial fiscal savings. There is also scope to reduce spending on subsidies, including agricultural subsidies, which are still large in some advanced economies. An effort is also needed to lower military spending over the medium term.

As part of the adjustment strategy, fiscal consolidations must also deal with the long-term spending pressures from age-related spending. Given the projected increases in both pensions and health spending, an ambitious goal for countries would be to stabilize this spending as a ratio of GDP. On pensions, many countries have already undertaken reforms, such as raising retirement ages. Pension spending is projected to rise by 1 percentage point of GDP over the next 20 years. This increase will need to be offset through further reforms.

Challenges are even more daunting in the health care area. Providing access to affordable health care is of paramount importance. At the same time, spending on health care is putting enormous pressure on public budgets. Most countries have yet to commit to deep reforms that promise long-lasting effects on spending. Still, it is important to recognize that some countries have been successful in containing the growth of health spending in the past, and for others this success is expected to continue. For example, Germany, Japan, and Sweden have managed to control spending increases over the longer term. As we heard this morning, we know from the experience of these and other countries that reforms can help slow the growth of health care spending while preserving equity and efficiency. The most promising strategies involve a mix of both macro-level instruments to contain costs and more micro-level reforms to improve the efficiency of spending. Among macro instruments, budget caps can be a powerful tool for reducing spending growth. Among micro reforms, strengthening market mechanisms by increasing patient choice, allowing greater competition between insurers and providers, and relying on a greater degree of private provision can help contain costs. Public management and contracting reforms, such as extending the use of managed care or shifting toward case-based payments, are also central to improving the efficiency of spending. Demand-side reforms, such as greater reliance on private financing and increased cost-sharing, can also be effective. A greater role for the private sector, however, should be accompanied by measures to ensure that the poor and chronically ill retain access to basic health services. Finally, supply constraints, such as those that ration high-technology equipment, can help reduce the growth of public health spending. The appropriate mix of these reforms options, of course, will vary by country and depend on the projected outlook for public health spending.

Health care reform has important implications for the range of services or products financed by the public sector. If containing public health spending growth is a priority, countries may face difficult choices regarding which services will be covered by the public benefit package and the role of the private sector in financing these services, including through private insurance. However, there are considerable market failures associated with private insurance markets. Thus, an expansion of private insurance would need to be accompanied by appropriate regulations to ensure access, equity, and efficiency.

In sum, containing health care spending will be an essential ingredient for successful fiscal adjustment in the advanced economies. However, even with extensive reforms, some countries may not be able to prevent an increase in health spending as a share of GDP, given the strong pressures from aging and the continued effects of technological improvements on health care costs. For these countries, even more ambitious cuts in other programs may be necessary to achieve their goals for fiscal adjustment.

Fiscal Adjustments in Emerging Economies

Turning to the emerging economies, a tighter fiscal stance than currently envisaged will be needed in the near term in many cases. Emerging economy deficits are falling, but in some countries the fiscal buffers eroded by the crisis need to be rebuilt to protect against sudden reversals in recent capital flows. At a minimum, the temptation should be resisted to use the current favorable tailwinds to boost spending.

Over the medium term, for many emerging markets a general increase in government spending is likely and is often even desirable. But the budgetary needs differ across countries: some will need reforms to help boost consumption; others need greater investment in infrastructure and other growth-enhancing spending.

In this context, health care reform is a critical issue, although the current challenges are a bit different from the ones facing advanced economies. Increases in health spending have been moderate over the past decades, and spending pressures are expected to be less severe than in advanced economies. At the same time, many countries need to further expand access to high quality health care. For the most part, health outcomes such as life expectancy and infant mortality continue to lag behind the advanced economies, and significant parts of the population are still uninsured and do not have access to adequate medical care.

Emerging Europe forms a special group, of course: spending is relatively high by emerging economy standards and coverage is nearly universal, but the challenge here remains to enhance the efficiency of spending to improve lagging health outcomes and the quality of service delivery. Like in the advanced economies, fiscal space is also limited in much of emerging Europe, placing a premium on reforms that improve health outcomes without raising public spending.

Conclusion

In conclusion, containing the growth of public health spending in an equitable and efficient manner will be a key ingredient for successful fiscal consolidation in advanced economies. There will thus be strong pressure on health systems to improve their efficiency to continue delivering improvements in health outcomes. Emerging Europe, which also has limited fiscal space, faces a similar situation. Despite this daunting challenge, there are grounds for optimism, given the successful reform experience of many countries. I hope and expect that today’s conference will provide a fruitful opportunity to exchange views on these experiences, to draw lessons from them, and to advance our knowledge on how best to approach the remaining challenges in health care reform in this region and beyond. I wish you a very productive and interesting remainder of the conference. Thank you very much.