Health Insurance and Productivity

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May 21, 1999 - Institute for Advanced Studies IHS-HealthEcon, Vienna, Austria ... The institutions and the provision of social health insurance are particularly .... Social security contributions have been highest in Slovenia and in the Czech ...

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March 1999 (Volume 40, Number 2)

Health Insurance and Productivity Maria M. Hofmarcher Institute for Advanced Studies IHS-HealthEcon, Vienna, Austria Aim. To provide a conceptual understanding of the basic relationship between health insurance and overall economic productivity, and to look at the human development index as a proxy for the quality of human capital. Methods. Economic data and data related to human development in Central and Eastern European (CEE) countries, including Croatia, were compared to the European Union (EU) average. Data were selected out of databases provided by the International Monetary Fund, the Organization for Economic Cooperation and Development, and the United Nations. Income and growth rates were related to the EU averages. The human development index was used to compare the level of the average achievements in the longevity of life, knowledge, and quality of living in CEE countries. Results. Relative to the EU-average, human development is lagging behind in CEE countries. Considering the world as a benchmark regarding human development, 8 out of 13 CEE countries exceed the world. However, all CEE countries have 3-28% lower human development than the industrialized countries. Conclusions. The specific challenge for transition countries is how to adopt strategies to translate economic progress into health and social gains through reliable institutions, among them social health insurance bodies. The institutions and the provision of social health insurance are particularly challenged at a turning point when transition in terms of macroeconomic stabilization, along with the consolidated organization and financing of social and health insurance schemes, is accommodated to a business cycle–driven market economy Key words: health care; health expenditures; health insurance; health plan implementation; hospital costs; insurance, health; planning, health and welfare; resource allocation reform Basic Relationship Between Overall Productivity and Health Insurance In considering and comparing productivity, gross domestic product (GDP) per person hour is the best measure. However, a frequently used and widely accepted proxy for growth is output per capita. Output per capita is certainly influenced by the quantity and thus by the quality of human capital. Figure 1 shows that, via health insurance, the quality of human capital and therefore the health of the labor force acts as a trigger for changes in the productive capacity of an economy. Although conceptually quite straightforward, the mutual dependence of economic development, health status, and insurance is difficult to capture and even more difficult to measure. All elements of Figure 1, which are very tightly combined, indicate strong associations. The three basic dimensions of human development – longevity, knowledge, and a decent standard of living – represent a composite index to approximate the quality of human capital. Figure 1. Relationship between productivity and health insurance. Changes in productive capacity, i.e., potential output, can have an ambiguous effect on health insurance expenditures. Indeed, as a consequence of capacity growth, health insurance expenditures and health expenditures increase. This increase occurs due to the expansion of production possibilities of an economy. In addition, medical technical advances add to growth, which is itself responsible for further development. As a consequence, further change in mortality, lifestyle pattern, and consumer behavior is stimulated by health insurance. Likewise, the expansion of health insurance coverage is causally linked to enhanced productivity. In general, national income level is a crude benchmark for the level of health expenditure an economy can afford. Health insurance expenditures increase with increasing national income. Within the European Union (EU), public expenditures on health, which are mainly health insurance expenditures financed by either contributions or taxes, amount to 10%-20% of general government expenditures (1). Compulsory or public health insurance expenditure itself increases national income by stimulating overall demand. In contrast to the contribution to wealth gained by the production of other highly

advanced services and products such as computers and software, health outcomes are difficult to measure. In addition, prices are distorted due to insurance and subsidies (2-4) but mainly due to the lack of appropriate methods to estimate health gains and to integrate them into the calculation of the medical price index (5-7). Nevertheless, the outcomes of medical interventions should be presumed to enhance productivity via a healthy stock of human capital. As a result, potential output increases (8,9). Looking at Growth and Income As depicted in Figure 2, positive annual percentage change of the real GDP by the end of 1994 initiates a period of positive growth rates in Central and Eastern Europe (CEE). Growth rates were particularly high for Croatia. According to the very recent economic and political crisis in Russia, the slightly positive development from 1997 will be not sustainable. Actually, it has dramatically diminished in 1998. Figure 2. Annual change (%) of real gross domestic product (10). Rhombs, Central and Eastern Europe; crosses, Croatia; rectangles, EU-15; triangles, Russia. Figure 3. Income in 1995 and income growth projection in EU and CEE countries (11). Bars (left ordinate), per capita income in US$, based on purchasing power parities; line (right ordinate), long term projected per capita growth rate. The causes for the pace of growth rates in the CEE countries have been investment needs and enhanced efficient allocation, along with the potential to gain comparative advantages in the world market. Figure 3 shows 1995 income levels, as well as predicted real per capita growth rates for selected countries in transition. Relative to the real per capita growth rates in transition countries, the growth rate in the EU-15 was considerably lower. The industrialized world has experienced fully utilized capacities. Therefore, growth rates have achieved lower levels. The income elasticity of health expenditures, i.e., the growth of health expenditures per capita relative to the GDP per capita growth, has recently slowed down but it still exceeds the overall growth dynamic, indicating the importance of the ”commodity” health care. On the contrary, in transition countries that aspire for EU membership, the relative growth of health expenditures per capita has been lagging behind (12,13). The projected real per capita growth rate in CEE countries is on average two times higher compared to the EU-15. On the other hand, GDP per capita is about four times higher in the EU then in CEE-12. Whereas the per capita income in the EU-15 was 2.4 times higher than the per capita income in the Czech Republic and 12 times higher compared to FYR Macedonia, the Czech Republic and the Slovak Republic growth rate is projected to be two times higher than the projected EU-15 growth rate. Moreover, as indicated in Figure 4, the growth rate for FYR Macedonia is projected to exceed the EU15 growth rate more than two times. Figure 4. Ratios of income and growth rate in EU and CEE countries in 1995 (11). GDP per capita, US$ purchasing power parities, ranking by per capita income ratio. Closed bars, ratio growth rate to EU-15; gray bars, ratio to EU-15 per capita income. CEE-12, average for 12 CEE countries. Human Development is a Key Factor for Growth However, growth is not the whole story. Taking into account the quality of human capital, which is, according to the new growth theories, essential for economic development, productivity increases with investment in human capital. Health status and life expectancy are important mediators for enhanced growth via the quality of human capital. Whereas the traditional growth theory had focused on declining marginal productivity of investment in human capital, the recent understanding shed light on economies of scale due to enhanced investment in human capital. Namely, investing in education and/or health will expand the capacity of the people involved in the program and it is believed that they are able to sell their labor at high price. Economies of scale means therefore, that investing in human capital decreases average costs while the earnings do not fall when the number of skilled and/or healthy people increases. As people acquire expertise and know how, and/or good health, costs tend to fall. If costs fall as output increases, world output is greater due to trade and gains of comparative advantages. Figure 5 shows Human Development Index (HDI) in CEE countries relative to the industrial countries and the whole world (14). HDI measures the average achievements in a country in three dimensions of human development – longevity of life, knowledge, and a decent standard of living.

Figure 5. Ratio of the Human Development Index (HDI) (percentage above and below the industrial countries and to the world) in CEE countries (14). Closed bars, ratio HDI to world; gray bars, ratio HDI to industrial countries; CEE-12, average for 12 CEE countries. Figure 6. Human Development Index (y-axis: EU-15=100) and long-term projected per capita growth rates (x-axis: EU-15=100) in selected transition countries, 1996 (11,14). Figure 5 shows that, on average, HDI in the CEE countries has been 15% lower than HDI in the industrialized countries but similar to the worlds's average. Considering the world as a benchmark regarding human development, 8 out of 13 CEE countries exceed the world, but all CEE countries have 3-28% lower human development than the industrialized countries. Plotting HDI against long-term projected per capita growth rate (Fig. 6) illustrates that lower the achievements in human development higher the growth rate, indicating that growth is linked to the level of development. According to a recent estimate, the number of years for CEE countries to converge to low income EU level is about 30 years. Among CEE countries, the Czech Republic (11 years), Slovak Republic (15 years), and Estonia (16 years) are projected to take the shortest time to converge (11). However, in our context, the critical issue is how and to what extent growth gains can add to fair contributions to and substantial investments in public and in semi-public institutions and to accelerate the formation of the human capital stock needed to sustain economic development. A part of the human capital stock consists of health capital, which has recently been estimated to amount to US$3 million for a newborn in 1990 and for the elderly about US$1 million. Further, the comparison of the changes in health capital with the increase in medical spending revealed that increased medical technology has been worth its costs. As a consequence, only about 30% of the improvement in health capital in the past 40 years would need to result from medical care advances for the improvement of medical technology to justify its costs (15). The intrinsic policy question therefore concerns not the limiting of medical spending but rather prudent and efficient allocation of government expenditures. Social Security in Fiscal Policy of Transition Countries According to the International Monetary Fund (IMF), it is now well established that countries that implemented tight fiscal policy early in the transition resumed growth sooner and experienced more rapid subsequent growth than countries that maintained large budget deficits and the associated high levels of government expenditures. In Figures 7 and 8 government revenues and expenditures are decomposed according to their main items. In the countries more advanced in transition, the GDP share of government expenditures has remained above 40% following an initial decline. The share of social expenditures has risen in most countries since the start of the transition process. Figure 7. Main items in the general government revenue structure (% GDP) in CEE countries in 1996 – ranking by social security contributions (8). Closed bars, social security contributions; gray bars, tax revenues; open bars, total revenues. Figure 8. Main items in the general government expenditure structure in CEE countries, 1996 (% GDP) – ranking by social security transfers (8). Closed bars, subsidies; gray bars, social security transfers; open bars, total expenditures. Figure 9. Social security share in CEE countries, 1996 (% general government expenditures) (16). Social security contributions have been highest in Slovenia and in the Czech Republic, followed by Croatia and the Slovak Republic. Social security transfers have been the highest in Poland. The share of government expenditures in the EU has exceeded 50% for a long period of time. In Austria, 45% of the GDP share of total government expenditures is consumed by social security, 10.5% by health expenditures, and 8.5% by education expenditures. Figure 9 shows social security expenditures as a share of the general government expenditures for selected countries (16). Slovenia, Poland, and the Czech Republic yield a similar portion of total government expenditures compared to Austria. However, social safety net, including health insurance, is very tight in Austria, with comparatively favorable health outcomes (17). Overall government spending will be a further and even more important target for future fiscal consolidation for countries in transition. Fiscal reforms are particularly hard to achieve if there is a big disproportion between levels of spending and health outcomes and sustained poverty. Assuming perfect targeting, i.e., that transfers are received only by the poor, would require 2.8% of GDP on

average to abolish poverty in countries in transition. In addition, there is a wide dispersion between countries more advanced in transition and countries of the former Soviet Union (18). The central issue is how to balance streamlining of social spending with improving the quality and scope of government product and service provision. A recent study examined the efficiency of government expenditures relative to the services delivered by the government; a country would be inefficient if there were other countries that provide more output across all categories of government services but at lower levels of government expenditures. Among other output indicators, infant mortality, life expectancy, and old age demographic dependency ratio were used. In a test covering four countries in transition and a number of the countries from the organization for Economic Cooperation and Development (OECD) for each of the transition countries, between 7-15 OECD countries spent less and reached better results on all output indicators (19). These findings indicate an efficiency problem of the countries in transition because adjusting government spending would not necessarily result in the reduction of the range, quantity, or quality of the government services. In the search for improved overall economic efficiency, it is as important to look at various incentives due to insurance as to consider the reallocation of resources. In many transition countries, the shares of public health employment, which, together with the share of educational employment, has been the largest share of government employment, increased during transition, even when expenditures on wages, supplies and materials, and maintenance and capital programs fell in real terms (20). Dilemma Between Expenditure Reform and Improving Welfare Increasing productive capacities, i.e., when growth is sustained to increase the level of wealth, change the occupational structure, distribution between work and leisure, reproductive behavior, age distribution, life and health expectancy, and mortality pattern. Even a moderate dissemination of these changes is a subtle and diverse process depending on the very nature of social and individual interactions in the respective country. Thus, the successful transformation has consequences on the structure of the provision of social health insurance. The stipulated anticipation of the shift in the burden of diseases along with the persistent lag in human development, indicated by the level of the human development index, is a particular challenge for the health system for countries in transition. The wide variety of health priorities to be covered by a solid health insurance model will cause that the level health insurance expenditures may not change. Moreover, it has to be increased. The allocation of resources due to contemporary health transition and the flexible adaptation of resources for new and old health priorities will be binding (21). The specific challenge for the countries in transition is how they are able to adopt strategies to translate economic progress into health and social gains through reliable institutions, among them social health insurance bodies. The institutions and provision of social health insurance are particularly challenged at a turning point when transition is accommodated to a business cycle-driven market economy in terms of macroeconomic stabilization along with the consolidated organization and financing of social and health insurance schemes. As the countries more advanced in transition aspire to EU membership, comparison with the advanced western European economies are requested. Trade-off Between Efficiency, Market Failure, and Health Insurance In the area of health care financing, most transition countries have moved toward a mixed system of financing based on public health insurance and funded largely through a combination of payroll taxes and transfers from the government. The main function of an insurance contract is to reduce risk faced by the person who buys it. Risk and uncertainty are significant elements in medical care. A persistent prevalence of uncertainty in the medical care field is considered to cause virtually all special features of this sector (2-4). If overall welfare is to improve interactions between health insurance and productivity, any efficiency enhancing concept that is proved or believed to improve the performance of the health sector has to be examined carefully, taking also into account the specific features of the institutions designed to bridge the lack of market capabilities due to the prevailing uncertainty in the health care sector. Since there is no country in the world which does not provide some type of health insurance, it is difficult to unambiguously quantify the impact of health insurance on overall productivity and growth. New growth theories state that the quality of human capital consist essentially of educational and health levels to be achieved. A new body of theory and evidence shows that the organization, financing, and delivering of services should be through a mix of government and private sector activities on the national and sub-national levels, respectively. As long as the human development in transition countries is considerably lower than in the industrialized world, economic prosperity is a necessary condition for improving overall productivity. But as important as growth rates are the accumulation of a healthy and wealthy stock of people capable to sustain and to improve welfare. Therefore, the increase in the economic capacity of the countries in transition requires a health

insurance policy based mainly on non-market principles and on the fundamental understanding of the interaction between growth and human development. References 1 Organization for Economic Cooperation and Development. OECD Health Data 1998. Paris: OECD; 1998. 2 Pauly MV. Taxation, health insurance, and market failure in the medical economy. Journal of Economic Literature 1986;24:629-75. 3 Arrow KJ. Uncertainty and the welfare economics of medical care. The American Economic Review 1963;53:942-73. 4 Besley T. The demand for health care and health insurance. Oxford Review of Economic Policy 1991; 5:21-33. 5 Newhouse JP. Medical care costs: how much welfare loss? The Journal of Economic Perspectives 1992; 6:3-21. 6 Cutler DM, McClellan M, Newhouse JP, Remler D. Are medical prices declining? Cambridge (MA): National Bureau of Economic Research; 1996 Working Paper No. 5750. 7 Shapiro I, Shapiro MD, Wilcox DW. Quality improvement in health care: a framework for price and output measurement. Cambridge (MA): National Bureau of Economic Research; February 1999 Working Paper No. 6971. 8 Romer PM The origin of endogenous growth. The Journal of Economic Perspectives 1994;8:3-22. 9 Grossman GM, Helpman E. Endogenous innovation in the theory of growth. The Journal of Economic Perspectives 1994;8:23-44. 10 International Monetary Fund. World economic outlook. Washington (DC): IMF; 1998. 11 Fisher S, Sahay R, Vegh CA. How far is Eastern Europe from Brussels? Washington (DC): International Monetary Fund; 1998 Working Paper WP/98/53. 12 The World Bank: World development indicators. Washington (DC): World Bank; 1998. p. 91. 13 Hofmarcher MM. Gesundheitsausgaben im inter- nationalen Vergleich mit Schwerpunkt Österreich. Health System Watch No. 1. Beilage zur Fachzeitschrift Soziale Sicherheit. Vienna: Hauptverband der öster- reichischen Sozialversicherungsträger; 1999. 14 Human Development Index. Available from http://www.undp.org/undphdro/hdi1.htm; 1998. 15 Cutler DM, Richardson E. Your money and your life: the value of health and what affects it. Cambridge (MA): National Bureau of Economic Research; January 1999 Working Paper 6895. 16 OECD. OECD economic survey. Paris: OECD; 1997. 17 Hofmarcher MM. Das Gesundheitswesen in Österreich: Neue Fakten und neue Trends. Vienna: Institut für Höhere Studien; 1997 Working Paper No. 19. 18 Milanovic B. Income, inequality and poverty during the transition from planned to market economy. Quoted in: International Monetary Fund. World economic outlook. Washington (DC): IMF; 1998. p. 110, Table 23. 19 Fakin, B, Cormbrugghe D. Fiscal adjustment in transition economies: social transfers and the efficiency of public spending –a comparison with OECD Countries. Washington (DC): World Bank; July 1997 Policy Research Working Paper 1803. 20 International Monetary Fund. World economic outlook. Washington (DC): 1998. p. 117, Table 26. 21 Hofmarcher MM. Is public health between East and West? Analysis of wealth, health and mortality in Austria, Central and Eastern European countries, and Croatia relative to the European Union. Croatian Med J 1998;39:241-8. Received: March 27, 1999 Accepted: April 23, 1999 Correspondence to: Maria M. Hofmarcher Institute for Advanced Studies, IHS - HealthEcon Department of Economics and Finance Stumpergasse 56 A-1060 Vienna, Austria [email protected]

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