The Future Of Healthcare
What roles must governments, organisations, and individuals play to ensure healthcare can be provided universally at a low cost to the individual?
Why and how individual healthcare spending is an issue
Observation from developing and developed countries
Globally, the escalation of healthcare cost for individuals has become a challenge. A report produced by the World Bank and the World Health Organisation has indicated that individual out-of-pocket (OOP) health expenditures have pushed about 100 million population per year into “extreme poverty”, living on $1.90 or less a day (Exhibit 1); and about 180 million per year into poverty using a $3.10 per day threshold.
Out-of-pocket health expenditures placed a significant burden to over 100 million population
Source: The World Bank1
From Exhibit 1 it seems that the majority of regions suffering significantly from these issues, are developing countries. The truth is, that healthcare cost are also a burden for developed countries. Taking the United States as an example, the per capita OOP healthcare spending was US $1082 in 2016, with an average number of people per household of 2.53 at that time. The average OOP payment per household was US $2,737 per year in 2016 which equals almost 40% of average household food expenditure . The situation is more difficult for the elderly population. A research has shown that in the US the average expenditure of an elder individual is US $6,328 in the last year of life, while there are 5 percent of the surveyed who have spent more than US $62,040. 43.1% of the American households has less than $50,000 income in 2016 , therefore the OOP payment burden for families with elder members is heavy.
Problem analysis and drivers
To validate the assumption that healthcare burden on individuals is an increasing issue, and to uncover the reasons behind, the author has prepared a quantitative analysis on OOP healthcare spending in different countries. The analysis is based on data sets during 1995-2014, sourced from World Bank . To ensure the validity of the analysis, 15 developed and developing countries in different regions were selected, with a total population of 4.34 billion, covering 60% of global population6. The detail of the analysis is available in Exhibit 1.
The underlying logic of the analysis is to use datasets, including GDP, health expenditure % on GDP, out of pocket % on total health expenditure and population to calculate and compare the out-of-pocket healthcare expenditure spent by the individual in selected countries in 1995-2004. Then, the result is compared with the net income per capita in the same period to reflect the percentage of OOP health spending on individuals’ income. The outcome is displayed in Exhibit 2.
Out-of-pocket health expenditure per capita (% on net income per capita)
Country % (OOP health expenditure per capita/ net income per capita)
Source: Calculation in Appendix 1
As shown in Exhibit 2, in 10 out of 15 selected countries, the amount of OOP expenditure in relation to net income per capita is increasing. To discover the reason, further data analysis is carried out as below.
Reason 1: Increase total expenditure on health.
As illustrated in Exhibit 3, in most of the countries, for example, China, Brazil, India, USA, and UK, the % of out-of-pocket health expenditure over total expenditure on health is decreasing during 1995-2004.
Out-of-pocket health expenditure (% of total expenditure on health)
Country % (Out-of-pocket health expenditure/ total expenditure on health)
Source: The World Bank. 2018.
This seems to represent the joint efforts from government and organisations to lower the burden of healthcare cost on individuals. However, as can be seen from Exhibit 4, the overall health expenditure per capita increased significantly during 1995-2004.
Health expenditure per capita (in $USD)
Country $USD Health expenditure per capita
Source: Calculation in Appendix
Consequently, as indicated in Exhibit 5, the overall amount of OOP payment on health in all selected countries have increased from 1995-2014. Therefore, the increase in overall health expenditure is one of the key reasons for healthcare cost becoming a burden for individuals. This can also be explained by below formula.
OOP health spending per capita (in $USD)
Country $USD OOP health spending per capita
Source: Calculation in Appendix 1
Reason 2: Increased % of out-of-pocket health expenditure in certain countries.
In some countries, like Russia, Egypt, Germany, and Australia, as indicated in Exhibit 3, the percentage of out-of-pocket healthcare expenditure on total health expenditure is increasing. As explained by below formula, this also contributes to the increase of OOP health expenditure and places a heavier burden on individuals.
To summarise, the individual health spending is a critical, global challenge, consisting of two parts. One is to control the increasing overall health expenditure, and another is to control the percentage of the individual spending in the total health expenditure (Exhibit 6).
Methods to control OOP health expenditure
Cutting costs: how to lower individuals’ healthcare cost burden
Reduction of the overall health cost
The overall health cost problem can be seen from 2 points, demand and supply.
The increasing healthcare demand seems to be the result of sociological factors, like longer life expectancy or the increased global population. While on the other hand an individual’s life style and sanitation practice can decrease the healthcare demand. Therefore, it is important to encourage individuals to build up a healthy lifestyle and educate in sanitary behavior. This can be achieved via investment and policymaking in health education, environmental sanitation, and sport facilities
Also, infections can rapidly expand the demand for healthcare service. For example, from November 2002 to July 2003, a total of 8,098 patients worldwide contracted SARS, a viral respiratory disease. To take preventive measures against such diseases health organisations worldwide should establish effective approaches breakouts and exchanges the infection information.
It is important to consider only cases which actually require financial resources. In the United States, research has indicated that in 2011, a third of the healthcare spending is the “unnecessary healthcare” . This refers to healthcare provided at higher volume or cost than it would be appropriate. Healthcare provider and individuals should put a joint effort to avoid waste of financial resources.
On the supply side, the key assets are medicines, healthcare professions, medical devices and facilities (for example beds and hospital buildings). In general, the improvement opportunities of these healthcare resources target effectiveness and efficiency.
The cost of medicines is a significant component of the overall health spending. For example medication amounts to 10-30% of the pharmaceutical spending in most of the OCED member countries’ (Exhibit 7)
National Pharmaceutical spending, % of health spending in 2014
Country % (Pharmaceutical Spending/ National Health Spending)
Source: OECD DATA. 2017. Pharmaceutical spending total,
% of health spending, 2015
A new U.S. regulation on new drugs requires that new drugs should be safer and more effective than those which already exist . This approach should be applied by more countries to ensure the whole industry is driven to provide increased benefits to patients. The expected result of such measures is the transformation of the global pharmaceutical value chain and the enhancement effective medicine.
Also, more advanced medical apparatus, diagnostic approaches (e.g., genetic diagnosis) and increasing number of well-trained healthcare works – including physicians, nurses, technicians, surgeons, etc., will contribute to an increased effectiveness of healthcare services. Investments made in these areas are expected to reduce the waste for example in form of reducing repeated consultation caused by due to invalid treatments.
Two types of efficiency describe the supply side: Efficiency in resource planning and utility, and efficiency in resource acquisition and development.
Planning and utility targets the reduction of waste as a resulting from an imbalanced supply. A common approach to allocate physical resources and workforce is linked to an incentive system, not based on actual need (for example education and condition of the workforce), or other approaches (e.g., regional planning) . Therefore, resources are not allocated efficiently or according to the demand leading to unnecessary costs. To solve this problem, a joint effort from regulators, healthcare and innovative organisations is required.
Regulators can design policies to drive equal/fair supply of healthcare resources to reflect a good coverage of the demand. Healthcare provider can use highly standardised operating procedures to minimise waste and improve the efficiency of resources. Narayana Hrudayalaya hospital in India for instance offers high-quality cardiac care at dramatically lower prices by employing a high-volume, highly standardised model to provide healthcare service .
Technology can play a critical role in enhancing the efficiency of health resource utilisation. By using existing technologies, MedicalHome in Mexico offers its over one million subscribers access to professional healthcare service at lower costs than physician’s visit . Additionally, the utilisation of digital tools in form of remote healthcare services has proven huge potential. A study from Bain has shown that by using this tool, the healthcare spending in Athe US can be flattened and potentially hold at 18.5% of GDP by 2020 .
The efficiency of acquiring and developing healthcare resources is also an issue. The cost of healthcare resources is made up of development and production cost plus the profit margin placed on top.
The cost to develop a prescription drug in the U.S. is estimated between US $1.4bn to $2.56bn . The key drivers of the high cost are the increase in complex clinical trials and the decline of approval rate . To solve this problem, the pharmaceutical industry is advised to establish a more predictive model to reduce the dropout rate during clinical trials and increases the probability for FDA approval.
The profit margin, which is expected to cover the high cost that pharmaceutical companies are paying upfront for R&D, is manipulated as a tool to achieve wealth in some cases . Therefore, regulators are suggested to monitor the profit margin of drugs, to avoid the manipulation of medicine prices, especially medicines developed for rare diseases.
Reduction of the portion of out-of-pocket healthcare payment
As shown in Exhibit 6, another key approach to reduce OOP health expenditure is to lower the percentage it takes among the overall health expenditure. Specifically, it is about increasing the expenditures covered by other payers.
Although the list of payers for healthcare system might vary from countries, the major payers generally are individuals, governments, insurance companies, and other third-parties (mostly employers).
Common examples of government health paymentouts come from NHS in the UK and the Medicaid program in the U.S. To increase the payment ability of the government, one alternative is to establish a higher tax rate on products that are related to an unhealthy lifestyle. According to the calculation in Appendix 1, the UK’s OOP health expenditure over income per capita ratio is only 1.05 %, one of the lowest in selected countries. The NHS system in UK is almost fully funded by taxation. The total tax on cigarettes as a proportion of price is more than 80% in 2012 in the UK , one of the highest rates among the EU countries. The basic rate is 16.5% of the retail price plus £4.34 on a packet of 20, while in some other countries, like China, the rate is significantly lower . The high tax rate can be placed on similar products like alcohol, fine cut tobacco, and cigars. On the one hand, it controls the healthcare demand by lowering individuals’ chance to get diseases related to smoking or drinking. On the other hand, it contributes to taxation and therefore strengthens the governments’ ability to pay for healthcare services.
There are three key types of health insurance, national insurance, private insurance and insurance paid by employers. Private insurances are generally paid out of individuals’ pocket, so the suggestions on this part might conflict with the purpose of lowering individuals’ spending. National insurance is a more complex.
The argument around Obamacare has reflected that the idea to increase the ratio of insured citizen seems promising. But reducing the insurance payment for low-income individuals and ensure the effectiveness of the policy is even more important. Therefore, the design of such policy will need to be very careful.
Employer payment, either directly on health expenses or through purchasing insurance, has taken a relatively small portion of total health expenditure . For bottom-income employees, whose OOP payment ability is significant lower, the employers are less likely to pay for their health, comparing with middle or high-income employees . As higher income groups seems to create more value for the company, and the cost of their absence is higher. The author still suggests that organisations consider the hidden cost caused by health problems from lower income employers’ and to design appropriate medical insurance or reimbursement plans to reflect the best interest for both, the company and employees.
Solution: The role of governments, organisations and individuals
To summarise the solution, all ideas discussed in the previous chapter will be categorised formulated as suggestions to governments, organisations, and individuals.
The suggestions to governments for lowering individuals’ OOP health expenditure can be classified into two types: investment and policymaking.
- Governments should continue to invest into health education. The goal is to encourage students to build up healthy lifestyle and sanitary behavior.
- Investment into medical training and education is also essential. The goal is to enhance the skills and proficiency of healthcare worker, and consequently to increase the volume and effectiveness of the supplies.
- Formulate or strengthen policies on sanitation (e.g., standards for restaurants, swimming pools, residence area, etc.) and environment protection.
- Increase requirements for new drugs safety and effectiveness. The target is to transform the value chain of the pharmaceutical industry towards producing “better” medicines.
- Plan and drive the supply of healthcare resources through policymaking. Ensure the healthcare resources are efficiently covering demand and avoid idle times.
- Formulate policy to avoid manipulation of medicine prices, especially for rare diseases. But the policymaking also needs to consider the substantial cost that pharmaceutical companies have paid out for research and production, and avoid placing a negative influence on their motivation to invent new or better medicines.
- Increase tax rates for unhealthy products, for example, cigarettes, alcohol, fine cut tobacco, and cigars.
- Carefully define national policy insurance. The goal is to increase the base of insured individuals, to control the insurance cost burden for low-income groups and to ensure the overall health payment for the individual is effectively reduced.
Healthcare related organisations
- Prompt information sharing and cooperation between health organisations globally, especially for infections and new diseases.
- Encourage doctors and patients to discuss the issue of unnecessary healthcare, also known as “overuse”. One specific example is the “choosing wise” campaign launched by American Board of Internal Medicine Foundation.
- Improve operations model to enhance efficiency, for example, using standardised operations procedures.
- Use technology to increase efficiency of healthcare service. Examples including using current technologies (internet, mobilephone) and digital tools.
- Develop predictive system or model in order to reduce the failure rate in clinical trials. The goal is to control the overall R&D cost for medicines.
- Leverage advanced methodologies or develop innovative solutions to support healthcare industry in achieving higher efficiency.
- Evaluate the potential cost of sick employees (e.g., temporary loss in capacity, recruitment and training cost for new employees, etc). Based on evaluated cost organizations should plan to cover more health expenses (direct reimbursement or insurance) for employees.
- Individuals should build a healthy lifestyle, try to avoid harmful products like cigarettes, and build up good hygiene practice.
- Individuals need to be aware of “abuse” or “overuse” of healthcare service. Avoid wasting healthcare resources, for example, placing unnecessary requests for diagnostic imaging such as T-rays and CT scans. while considering the suggestions from healthcare professionals.
Part A: OOP expenditure analysis in 2014 for selected countries
|2014||Population||Health expenditure (% of GDP)||GDP (USD$)||Health expenditure (USD$)||OOP health expenditure (% of total health expenditure)||OOP Expenditure||OOP Expenditure per capita||Net Income Per Capita||OOP per capita/ Net Income Per Capita|
Part B: OOP expenditure analysis in 2014 for selected countries
|1995||Population||Health expenditure (% of GDP)||GDP (USD$)||Health expenditure (USD$)||OOP health expenditure (% of total health expenditure)||National OOP Expenditure||OOP Expenditure per capita||Net Income Per Capita||OOP per capita/ Net Income Per Capita|