Health Care Costs and Financing
Health Policies and Trends in OECD Countries
A Conversation with Peter Scherer / Event
March 2006
AARP Global Aging Program Idea Exchange Series
Washington, D.C.
On February 9, 2006,
Peter Scherer, Head of the Health Division in the Employment and Social Affairs Directorate at the OECD, spoke at AARP’s Idea Exchange on health policies and trends in OECD countries with a particular focus on the role of out-of-pocket expenditure as a portion of total health care spending.
The United States spends more on health care than any other OECD country with current total health care expenditures accounting for roughly 15 to16 percent of the U.S. GDP. The public portion of expenditure accounts for about 7 percent of GDP. Although the public component covers a much smaller portion of the total population, spending as a percentage of GDP is roughly equal to what the UK, Canada, and Japan spend on health care that covers their entire populations. Mr. Scherer explained that these figures can help explain why gaining coverage for the uninsured in the U.S. is so challenging—with health care costs already so high, advocating for universal coverage can be politically difficult.
Although the private sector plays a much greater role in health financing in the U.S. compared to other OECD countries, Americans cover very little of their costs through out-of-pocket expenditure by international comparison. However, out-of-pocket expenditure, as defined by this study, does not include insurance premiums. Most people in the U.S. receive health insurance through employers creating a situation where the bulk of U.S. out-of-pocket expenditures stem from premiums paid before service is received. For households that can make payments, out-of-pocket expenditure as a portion of overall household expenditure in the United States is at 3 percent--about the OECD average. Although this suggests that U.S. citizens are at an advantage, we must remember that this percentage captures only those who can afford to make payments.
According to Mr. Scherer, out-of-pocket spending has three components:
- Cost Sharing in Private Insurance
- Out of Pocket Expenses for Public Programs (flat fees paid each time an individual sees a doctor)
- Cost-Sharing in Public Programs (individual pays a percentage of bill for services or medication)
Each component has different implications and includes varying incentives and disincentives to the end-user. The type of Out-of-Pocket Expenditure (OPE) also plays a very important role in how individuals choose providers. For example, most patients tend to utilize those services that involve the least out-of-pocket expenditure. Typically, OPEs for hospital care are low; OPEs for ambulatory care are slightly higher; and OPEs for pharmaceuticals are the highest. As a result, there’s an implicit incentive for patients to use more hospital care than pharmaceuticals since hospital care receives a greater subsidy.
Mr. Scherer explained that a common market mechanism for health care financing is to increase co-payments. Yet even a minor adjustment to co-pays can have a profound impact on health care usage. For example, when one Germany introduced a co-pay of 10 Euros, visits to doctors decreased by 10 to 20 percent. Many nations are following the Swiss example where health insurance is compulsory in the same way that car insurance is compulsory; all citizens must purchase health insurance from some provider. The country has mechanisms in place to ensure this takes place and that premiums are paid. The Netherlands has instituted a similar program that is regulated by the government. Regulations include:
- open-entry
- community rating
- forbidden age-discrimination
- risk-adjustment for companies with high-risk employees.
Germany considered a similar plan, but decided to hold off at the present time.
Discussion
Participants asked questions about specification about the study and the data used in the analysis. Mr. Scherer noted that the data assumed that private insurance premiums had been paid and only accounted for actual expenditure to providers. Questions also arose on impact of price differences and negotiation as a factor in health care expenditure. More research into that topic must occur in order to realize the effects of it.
Peter Scherer is Head of the Health Division in the Employment and Social Affairs Directorate at the OECD in Paris. He manages the organization’s work regarding health data and health accounts, quality of health care, as well as other health policy issues. He has published in the fields of labor economics, industrial relations, comparative social expenditures, and social policy trends.