COMPARATIVE HEALTH CARE FINANCING SYSTEMS, WITH SPECIAL REFERENCE TO EAST ASIAN COUNTRIES.

ABSTRACT

Both the national health service and insurance approaches have come under increased scrutiny in recent years. Decisions about the types of care to offer, the technology to acquire, and the reimbursement of physicians, hospitals, and pharmaceutical companies become political decisions under a national health service or insurance system. A decision to limit the availability of expensive health care, such as heroic operations, organ transplants, and intensive chemotherapy, often provokes public outcry over rationing. The government therefore bears responsibility for denying care. Yet the government also bears responsibility for any rise in costs, and the necessary tax increases, that will result if it fails to limit the health services it provides or finances.

In this context, the emphasis on achieving universal coverage and access must also be consistent with other objectives of seeking efficiency, cost-savings and investments (as opposed to consumption), wage and labor competitiveness in many East Asian economies. Equity concerns should be a priority for any government, but this has to be considered with other implications, along with their longer-term effects on the rest of society and the economy. At increasingly high levels of personal health care consumption that may be of marginal value, governments must rethink how much should be paid out of the public purse, and whether principles of equity should be redefined in society's best interests.

The current systems of government-provided and financed health care are based mainly on the national health service or national health insurance models. This approach has taken many specific forms throughout the world. The essential characteristics of such systems include tax-based financing (which may be supplemented with small user fees), universal coverage, and budgetary controls. A national health insurance system can help to ensure that every citizen has access to health care (universal access) and that all are able to receive similar types and levels of medical care for similar health conditions (equity). Public provision of health care also gives the government control over the delivery of health services and the costs of care.

Both national health service and insurance approaches, however, have come under increased scrutiny in recent years. Decisions about the types of care to offer, the technology to acquire, and the reimbursement of physicians, hospitals, and pharmaceutical companies become political decisions under a national health service or insurance system. A decision to limit the availability of expensive health care, such as heroic operations, organ transplants, and intensive chemotherapy, often provokes public outcry over rationing. The government therefore bears responsibility for denying care. Yet the government also bears responsibility for any rise in costs, and the necessary tax increases, that will result if it fails to limit the health services it provides or finances.

These pressures are likely to intensify as the economy continues to grow in the newly industrializing countries of East Asia. An increasingly well-educated and wealthy population is demanding greater access to high-quality, state-of-the-art health care. As they live longer, they will demand more, and frequently more expensive, care for chronic diseases. If expanded to meet the demands of a wealthier population, the current tax-based system of governmental health care financing and delivery will require increased taxes, diminished access, or lowered provider prices. The ability to lower provider prices, however, is limited, since many physicians are already leaving for the private sector in many East Asian countries with national health services because they believe that the conditions of employment in the government health care delivery system are insufficiently rewarding. Although a substantial number of the population receive care from private providers, many of them do so without insurance coverage.

Continuation of the current financing system, therefore, is likely either to result in public dissatisfaction with available health services, or to increase government expenditures for health care. National health service or insurance systems rely heavily on supply side incentives to control costs, using such tools as fixed budgets for hospitals and salaries for physicians and nurses to limit expenditures. The tension between costs and access to care arises because there is usually little or no incentive for patients to limit the amount of care they receive. Because they do not bear the cost of treatment, they often desire the best or highest cost service, even when there is little prospect of benefit.

In contrast, traditional private insurance systems, usually taking the form of indemnity insurance, include demand-side incentives to limit the costs of care. Indemnity insurance in health care pays a fee for covered health care services, usually amounting to a high percentage of the amount charged by the hospital, physician, or other health care provider. Demand incentives under traditional indemnity insurance usually include charges to patients, which may take the form of deductibles (the amount an individual must pay before insurance begins to pay for part of the costs of care) and copayments. Current private insurance usually includes supply incentives as well. Cost containment provisions include review and management of utilization, giving incentives to physicians who are parsimonious in their use of laboratory services, referrals, and other factors that contribute to the costs of care, and discounted fees for patients who seek care from such physicians.

The indemnity insurance approach has the advantage of flexibility, supporting the rapid introduction and diffusion of health care technology. However, because providers increase revenues by delivering more services, traditional indemnity insurance promoted excessive utilization of health services. Copayments and deductibles are intended to apply pressure on the demand side to limit consumption of health services, but they have not been sufficient to control health care expenditures effectively, nor has the private indemnity insurance approach assured that all citizens would have access to adequate health care. In the US and elsewhere, the introduction of managed care has provided some control over expenditure but has also frequently introduced incentives toward under-utilization. In Canada and elsewhere, single-payer systems combined with global budgets have helped to promote equity and the controlled introduction of new technologies, but they have not curtailed expenditure growth. National health service systems in the British tradition have promoted equity and helped to control costs, but are less attractive as models for growing economies. They are often slow to adopt and disseminate new technologies while placing a large burden directly on government. Many new reforms have been introduced to inject innovative modifications to address these shortcomings. Among them are the concepts of internal markets and fund-holding within the British National Health Service. Recent savings-based approaches have been implemented in Singapore and, to a limited extent, in China to respond to changing pressures on their existing tax-based national health services.

National health financing systems have many objectives to fulfil, some of which may even appear to be conflicting. These usually include the following: universal and equitable access to health care, encouragement of self-reliance and community development, sustainability and continued growth, cost-containment or utilization of cost-effective health care, choice and quality of care, introduction of new technology and innovations in health care, and care of the indigent. Some systems also cover or subsidize essential care for people who cannot afford to purchase privately provided services.

The savings-based approach attempts to balance these goals in several ways. It can limit the governmental liability for health care while promoting individual responsibility in the use of health care. It has the flexibility to support a range of health care delivery systems. When combined with universal catastrophic insurance and health insurance for the indigent, a savings-based approach can meet these objectives for health care financing reform in many fast-growing economies (Phua 1997).

COMPARATIVE HEALTH CARE FINANCING

A review of the literature on health care financing, with special reference to the developing countries of Asia, generally point to the publications linked to international agencies like the Asian Development Bank (ADB), the International Labour Office (ILO), the World Health Organization (WHO) and the World Bank. (Akin 1987; ADB 1987; de Ferranti 1987; Dunlop & Martins 1995; Griffin 1990; Prescott 1998; Ron et al. 1990; Schieber & Maeda 1997; Schieber 1997; World Bank 1987; WHO 1978; WHO 1993). Despite the great diversity of health care systems, certain characteristics are common in the methods by which different populations pay for health care.

In every country with a market for health services, it has always been possible to pay for some health care directly, with private, out-of-pocket funds. Specific health care financing systems developed as an alternative to out-of-pocket payments in order to serve two overriding functions. The first is risk reduction. Although individuals often know that they are at unusually high risk of falling ill or suffering an injury, they do not know how much health care they will need in the future, nor do they know when they will need it. Because the onset of disease and the occurrence of injury are largely unpredictable events, individuals face the prospect of being unable to pay for care when unexpected accident or illness occurs. By itself, health insurance cannot make an ill person well, yet it can protect against some of the financial risk of illness and injury. The desire for such protection seems to be universal; health insurance, or direct guaranteed health care provision, are ubiquitous in every wealthy nation.

The second reason is the social interest in health care financing. Health care is widely viewed as an essential service and even a right of all members of society. In nations that treat health care as a societal obligation, health care financing has deep roots in the social insurance, as distinct from the private insurance approach. From the social insurance perspective, health insurance and health care provision are mechanisms for redistributing wealth and well-being. This motivation implies that all individuals should have access to health care, regardless of their economic circumstances.

Although nations vary greatly in the importance they attach to these two reasons, both motivations are universal. Government is responsible for a major fraction of health care financing in nearly every nation. In the US, whose health care system is often portrayed as highly market-driven and dominated by private interests, the federal government finances health care for many population groups, including all citizens 65 years of age and older. The governments of Canada and much of Western Europe are responsible for financing at least a portion of health care for all of their citizens. In many nations, the government provides as well as finances health care for some or all of its citizens. Government financing does not always imply government provision, as the Canadian and German health systems illustrate. But even when the government doesn't finance care directly, it can have the same effect by applying legislative mandates and regulations. Government financing and provision does not preclude the development of an independent private sector, whose size can vary from a small share of the nation's health care system (UK) to the predominant sector (US). Thus the health care systems of every nation consist of both publicly and privately funded health care, which may be provided publicly or privately.

Universal access to health care requires either government financing or mandates to ensure that funds are available to pay for the health care of those citizens who will not or cannot pay for health care by themselves. There is little debate about whether the government should have a role, but there is substantial controversy about the size of that role and about the specific features the financing system should have (Musgrove 1996). We now discuss examples of five general approaches to health care financing related to insurance that are candidates for serious consideration.

NATIONAL HEALTH SERVICE

The UK is the best-studied example of having a system of universal, government-funded health care provision. Similar systems provide care for much of the population in former British colonies like Hong Kong, Singapore and Malaysia. In a national health system, health care is funded through general taxation and provided in government-owned or funded hospitals, clinics, and in the UK, privately-owned but government-supported physicians' offices. Physicians and other health care workers are salaried. Health care organizations such as hospital trusts and district health authorities receive fixed budgets from the government. National health services make health expenditures highly predictable and offer the promise of equality of services, universal access and are generally considered to promote social solidarity and equity.

A national health service can be either expensive or inexpensive, depending on the budget that the nation is willing to allocate to it. Compared to other developed countries, the UK spends a low fraction of its GNP on health care. Compared to the US and Germany, it has relatively long queues for surgery and is slow to adopt and disseminate new technologies, even when those technologies are cost-saving. This may reflect the specific approaches that the British NHS traditionally used to limit expenditures, such as government approval of all major capital acquisitions by local hospitals.

The national health service approach places a very large responsibility on the government, which finances and delivers most health care. Thus, the government may be held accountable for the quality of health care, and for real or perceived shortages of care. Political intervention in health care tends to be more direct and extensive than in any of the other financing approaches. Attempts to adhere to a fixed budget often mean that new medical technologies are adopted at a slower rate than under other financing schemes, and the choice of provider is usually limited.

GLOBAL BUDGET

Canada is an often-cited example of fee-for-service reimbursement within a government program of health care financing. All Canadians are eligible to receive care under the system. This system is also known as single payer since the (provincial) government is the sole insurer for health care. The global budget refers to government's ability to set an overall budget for government-financed health care, using a fee schedule and other features to limit health expenditures. Many nations use a variant of this arrangement for financing some or all health care.

Responsibility for Canadian health care financing is divided between the provinces and the federal government. Funds come from tax revenues. Because health care is essentially free of charge, there is little or no direct control on the demand for care. There are limited disincentives to using care, such as the long wait for some operations and other expensive forms of care, and the restricted availability of major capital intensive resources, like CT and MRI scans. Although Canada's health care system is renowned for its high quality and equity, it is much more expensive than any other system in the world, except that of the United States.

Medicare, the federally sponsored health care financing system for the elderly in the US, is also a single-payer system with a global budget. Most health care is reimbursed on a fee-for-service basis, with fees set by the federal government. Medicare recipients can opt to enroll in Medicare risk plans rather than the conventional Medicare fee-for-service arrangement. Risk plans are a form of managed care in which providers agree to deliver all health care needed for a Medicare recipient in exchange for a fixed annual payment.

Compared to the multiple private payer system in the US, the single payer system may have lower administrative costs. Furthermore, in both Canada and Japan, the government can reduce the fees paid for each unit of service if the volume of use grows too rapidly. Nevertheless, these systems can easily lead to heavy and rapidly rising utilization because their are few limitations on demand for health services and few direct controls on providers.

INDEMNITY INSURANCE

The indemnity insurance model dominated health care financing in the US for many years. In this approach, the onset of illness is treated as a random mishap, much like an auto accident or fire. A payment or reimbursement for "medically necessary" health services is made when a person becomes ill or injured. Instead of paying a fixed amount, this form of insurance, which is also called fee-for-service, reimbursed the cost of health care received. Because full indemnity insurance paid for essentially unlimited quantities of health care, it led to overuse of health services, or moral hazard; physicians earned more when they provided more care, while patients had no incentive to limit how much care they received, until the care became clearly harmful. To limit moral hazard, indemnity insurers incorporated mechanisms to force patients to share some of the costs of the care they received. The most important of these cost-sharing mechanisms are deductibles (also known as excesses) and copayments. Deductibles are features of all forms of indemnity insurance, not only health insurance. The deductible or excess is the amount the patient must pay directly before insurance begins to pay for some of the cost of care. A typical annual deductible or excess for an indemnity insurance plan in the US today might be about $500 per insured person, with a larger aggregate deductible or excess for the family, such as $1,000 or $1,500. In addition, insurers imposed copayments, which refers to the portion of health expenses that patients had to pay directly. A 20% copayment would mean that the patient would pay for 20% of the allowed charges for health care that exceeded the deductible or excess, with the insurer paying the remaining 80%. With a $500 deductible or excess and a 20% copayment, a patient with $2000 in allowed medical expenses in a year would pay the first $500 and 20% of the remaining $1500, or $800 total. Insured patients might actually pay more than this, because some physicians or hospitals might charge more than the fees allowed by the insurer, and because some medical services might not be allowed by the insurer.

The deductible or excess and copayment represent a tradeoff between risk-protection and efficiency in the use of health care. When the patient bears more of the cost of care, he or she is less likely to use too much of it, but also has less protection against the financial consequences of ill health. In the US, prevailing deductibles and copayments for indemnity insurance have typically been too low to prevent the overuse of health care. Indeed, the most common explanation for the rapid rise of health care costs in the US is the predominance of fee-for-service insurance. Favorable tax treatment of spending on health insurance and health care helped promote the adoption of insurance. However, other nations like Japan and Canada reimburse physicians on a fee-for-service basis, with small or no copayments and deductibles. In these countries, other features of the financing systems, such as limited or global budgets at the hospital and regional level, along with fixed fees, have helped to limit expenditures.

The moral hazard associated with indemnity insurance can lead to the underuse of services that insurance does not reimburse. For example, many insurers do not cover all forms of preventive care. This imbalance in coverage may mean that an elderly man will forgo an influenza vaccination, which insurance will not pay for, in part because the insurer will pay for the cost of his medical care if he falls ill with influenza.

A combination of employer and employee contributions pays for most indemnity insurance in the US. These payments are not subject to income taxation. Large employers often self-insure so that the employer is responsible for all costs of the health insurance plan, but may retain an independent insurer to administer the insurance. Individuals can also purchase indemnity insurance on their own.

The indemnity insurance model offers the flexibility of working with nearly any arrangement for health care delivery. It permits patients to choose freely from a variety of health care providers. It creates the financial conditions necessary to support the rapid adoption of new health care technology. It usually provides excellent protection against risk. However, without other constraints on the amount and range of services provided, indemnity insurance tends to promote overuse of services, unless very high levels of cost sharing are imposed on patients. Thus the greatest weakness of typical indemnity insurance approaches is their failure to control costs, which in turn makes it difficult to extend coverage to the entire population.

MANAGED CARE

Managed care is a widely used and loosely defined term, but it ordinarily refers to a set of arrangements for health care financing and provision that became prominent in the US in the 1990s. Most managed care arrangements share a common feature: they give hospitals, physicians, and other health care providers incentives to limit the cost of the care they provide. The most advanced plans provide a balance of incentives between achieving low costs and high quality. One of the most important provisions of managed care is capitation. Under capitation a health care provider is paid a fixed amount of money to provide some or all of the health services to each member assigned to them each year. Health Maintenance Organizations (HMOs) typically provide all hospital and physicians services for enrollees who pay an annual premium, but in the 1990s more limited forms of capitation became common. For example, groups of physicians would be paid fixed fees for providing all, or most, physician services for enrollees in a health ]plan. But these physicians would receive no payments, nor bear costs, for hospital services. To be effective in controlling costs, managed care usually requires explicit incentives and the assumption of some financial risk by physicians and hospitals. Managed care often includes features to discourage overuse of services such as utilization review or utilization management, which refers to a range of strategies to deny payments for unnecessary hospitalizations or to make hospitalization unnecessary by facilitating access to appropriate outpatient services.

Managed care is usually considered an American phenomenon, where it is funded in the same ways that indemnity insurance is funded, but its features have been present in other systems and some of its features are being adopted elsewhere. Recent reforms of the British National Health Service increased the role of capitation as a payment mechanism by making general practitioners financially responsible for some of the costs of health care for patients under their care. Other nations are also experimenting with managed care.

Managed care is often criticized because it is designed to limit the use of health services, which can lead to under-provision of health care. Most managed care plans seek to align the financial interests of the health care provider with the financial interests of the insurer so that less care means more money in the short term. Indemnity insurance has incentives to provide too much care, while managed care has incentives to provide too little. Both present moral hazard situations. News media in the US have reported many complaints about the denial of care in managed care plans, but well-designed studies suggest that traditional HMO care has mixed effects on health outcomes and is less expensive than fee-for-service care. However, these studies were conducted using large, traditional, not-for-profit HMOs, not modern managed care organizations. Thus there is substantial uncertainty about the effects of managed care on health outcomes. Nevertheless, managed care usually provides access to health services, although provider choice is usually more limited than under indemnity insurance.

MEDICAL SAVINGS

Savings approaches for health care financing require savings accounts attached to individuals or households to pay for some or all health care consumption. Although illness and the need for health care occur unexpectedly, the need for health care is not purely a matter of chance. The time, place, and kind of health care that a person may need in the future is largely unknown, but a healthy young person can anticipate that chronic disease will become much more likely when he or she grows old, or engages in an unhealthy lifestyle. The changing needs for health care over the course of a life imply that health care may be funded, at least in part, by savings. Savings approaches to financing health care have an important advantage. If people pay for health care with their own savings rather than insurance coverage, it should be possible to avoid the moral hazard that is typical of indemnity insurance. Savings alone will be insufficient to fund all health care for most people, since few people will be able to save enough to pay for the care needed to treat the most expensive illnesses. People would under-save for health care whenever they have inadequate insurance and if they can obtain care for free, also called free-riding. Furthermore, low-income men and women may be unable to save very much money during their working years for any purpose, including savings for health care that they would need in old age. Thus, there has been little interest in adopting pure savings approaches to health care financing. Instead, most savings approaches also incorporate some form of high deductible or high excess catastrophic insurance as well. This approach is best developed in plans that include medical savings accounts (MSAs), which are described in greater detail below.

HEALTH FINANCING THROUGH SAVINGS AND INSURANCE

A health care financing system must provide adequate protection against risk, yet nearly every mechanism for risk reduction promotes over-utilization of health services. If personal savings were the sole source of funding for health care, there would be no moral hazard. Saving-based health care financing is equivalent to insurance with an extremely high deductible or excess. As long an individual's own savings are used to pay health costs, they will be reluctant to overspend on health care consumption. Medical savings accounts (MSAs) represent a specific implementation of savings for health care.

Savings accumulations can represent a form of self-insurance, but even with very high savings rates, it would be difficult or impossible to save adequate amounts to pay for the care required for some catastrophic illnesses or injuries. Thus, savings approaches to financing health care are usually coupled to catastrophic insurance, or insurance with an extremely high deductible or excess (Nichols et al. 1997).

Modern savings-based approaches to financing health care are synonymous with MSAs. Such approaches have been adopted by some corporations in the US and by a handful of countries or regions, including Singapore and parts of China. Although specific features vary, financing systems built upon MSAs share the following characteristics:

   A Tax Advantaged Savings Scheme: A medical savings account is a mechanism
   to accumulate money to be used solely for the purpose of paying for
   approved health services. Its financial structure is similar to that of a
   defined contribution retirement plan; savings accumulate during working
   years, and withdrawals occur any time when health care is necessary.
   Because the fundamental purpose of the MSA is to encourage parsimony in the
   expenditure of funds in the accounts, the money accumulating in the funds
   must be of real value to participants. Since the funds can only be used for
   health care, they are inherently less valuable than, say, retirement funds.
   Offsetting this drawback are several strategies designed to increase their
   value. For example, funds in an MSA may be bequeathable, or they may be
   used to pay for allowable health expenses of family members.

   Universal Catastrophic Insurance: The MSA funds must be matched with a
   mandatory catastrophic insurance plan. Catastrophic insurance is defined
   primarily by the size of the deductible or excess, which needs to be high
   enough to be a significant fraction of the average person's annual income.
   With lower deductibles or excesses the system would closely resemble the
   traditional indemnity insurance model of the US In that situation, most
   people who have any claims at all will use more than the deductible or
   excess amount, and will have little incentive to restrain their use of
   health care. The purpose of the catastrophic insurance is to cover the
   costs of health care that would exceed what most people would have
   available within their MSAs. Unless participation in the catastrophic
   insurance plan is universal, adverse selection may seriously impair the
   functioning of the program. These issues were raised repeatedly during
   discussions of a plan put forward by the US Congress to allow elderly
   Medicare recipients to participate in MSAs. Since participation is
   voluntary rather than mandatory and because people could switch between an
   MSA-based plan and traditional fee-for-service insurance, it is likely that
   individuals who expect to have few claims would opt for the MSAs. While
   those who have serious chronic diseases or otherwise are likely to need
   substantial care would remain in the traditional Medicare financing plan.
   This could mean that changes in the population covered by insurance would
   drive up the costs of the traditional plan. Furthermore, it would be
   relatively easy to abuse the Medicare plan, because certain operations and
   many other expenses could be readily anticipated and deferred until after a
   switch from the MSA into the traditional plan. Problems of adverse
   selection cannot arise in a plan with universal participation.

Collection of funds for the MSA is most readily done by the employer, either through a payroll tax or some combination of employer and employee contributions to a central fund. Most health insurance, if not financed by general tax revenues, is funded this way. Special issues arise for the participation of the self-employed and the unemployed, yet the issues are essentially the same as collection of income taxes or contributions to any public retirement or pension plan. Funds management for medical savings accounts can parallel funds management for pensions. These funds could be managed either privately or publicly, just as there are usually combinations of private pensions and government retirement programs to fund retirement income. There may be unique reserve requirements for funds to be used to finance health care, but flexibility in the way that the funds are invested and distributed would seem to be advantageous, and could readily build upon successful models used for retirement financing.

Allowable health expenditures must be carefully defined. MSA funds can only be used for health care. Otherwise, MSAs serve as a general tax shelter rather than a vehicle to encourage responsible spending on health services. An excessively narrow definition of allowable medical care expenses would leave people with inadequate funds for health care, while an excessively broad definition would be equivalent to subsidizing non-health consumption, or consumption of nonessential services such as cosmetic surgery. Almost any insurance plan, whether public or private, guards against the consumption of such medically unnecessary services.

Private insurers could offer insurance policies that would pay for the deductibles or excesses for catastrophic insurance. If they were permitted to do so, however, it would defeat the major purpose of MSAs, which is to place individuals in the position of spending their own funds for routine health care. Supplementary insurance became available for the deductibles and copayments of the US Medicare program, in which private insurers offered products that complemented Medicare. This increased Medicare program expenditures by making it more likely that individuals would have claims against Medicare (Prescott & Nichols 1998).

SINGAPORE

Singapore has the first and most developed system of MSAs. MSAs are supported by a range of government initiatives to improve efficiency in the public and private sectors of the health care system and to ensure equitable access to necessary medical care regardless of income. There is continuing debate over the effects of MSAs on total health care spending and on health care cost inflation. Singapore has enjoyed a lower rate of growth in health care spending than other East Asian countries and spends a lower percentage of GNP on health care than other countries with comparable levels of economic and health system development. There is also general belief that MSAs have contributed to more effective health care spending by reducing wasteful and unnecessary spending (Phua 1997).

Singapore's current health care financing reforms developed in three stages. Medisave, the MSA component of the system, was introduced in 1984. Medisave represents a form of compulsory saving. Employees and employers each contribute 20% of the employee's wages to the Central Provident Fund (CPF), which serves as a national social security and pension fund based on savings. From this fund, a total of 6% of wages is deposited each year into the employee's Medisave account until age 34. The percent deposited increases to 7% between ages 35 and 44, rising to 8% at age 45 and continues until retirement or the ceiling of S$20,000 (1998 SS) is reached. The MSAs may be used to purchase inpatient care and a limited range of expensive outpatient services. After a minimum account balance has been reached, additional funds in the MSAs are transferred automatically to the owner's normal account in the Central Provident Fund. Because the contribution is based on wages, the very old and the very young frequently do not have Medisave accounts. However, Medisave funds now support over 80% of inpatient expenditures since these can be used to pay the medical bills of family members.

Medisave funds are never adequate to cover all or most high-cost health expenditures, so there would be significant demand for health insurance. Medishield was introduced as a catastrophic insurance plan in 1990. Medishield premiums are automatically deducted from the Medisave, unless account holders request otherwise. To reach the threshold for catastrophic coverage, it is usually necessary to have had a very long hospital stay or one of several costly, ongoing outpatient treatments such as chemotherapy for cancer. Three different Medishield programs offer different levels of coverage based on deductible or excess per policy year, claim limits per policy year, and claim limits per lifetime.

Medifund, a third financing component, was established by government endowment in 1993 to support health care for the poor. Government budget surpluses are used to fund additional contributions to Medifund. Requests for assistance are considered on a case by case basis with preference given to "low-wage Medisave/Medishield contributors and elderly persons whose accounts are not adequate to cover expenses."

Singapore's experience represents a natural experiment in the development of MSAs. While costs and demand continue to rise in Singapore, it is widely believed that unnecessary expenditures for inpatient care have been reduced without dramatic limits on physicians' incomes or the availability of high-technology treatment. However, it is important to emphasize that Singapore uses a fairly narrow definition of services eligible for MSA expenditures (e.g. excluding most outpatient care), has a fixed fee schedule for medical services, and does not have comprehensive insurance. But universal access to public healthcare is guaranteed through a system of targeted subsidies and subventions from tax-based sources, as well as a last-resort Medifund endowment for the indigent. It does not use MSAs as the sole mechanism for financing care, nor does it treat MSAs as a single solution to all health policy problems.

CHINA

Some of the best-publicized examples of MSAs in China do not represent a full implementation of the MSA concept; the savings components are attenuated, and the accounts may not earn any interest even for the years in which deposits are held. Health care financing arrangements in China labeled as MSAs sometimes are limited to little more than a payroll tax for health care. Enrollees are unable to make voluntary contributions to their own accounts and low deductibles or excesses on health insurance provide little incentive for careful consumption of health care. While two Chinese cities with MSA style arrangements have been able to control costs fairly effectively, evaluation of the effects of MSAs is difficult because some of the benefits might stem from other simultaneous reforms.

Four Chinese cities have implemented, or are in the process of implementing, health financing reforms that include an MSA-style component. Two of these cities, Jiujiang and Zhenjiang, have developed a three-tier system of health financing in which the first tier is a system of individual accounts supported by a 6% employer contribution. Shenzen has attempted to implement a two-tier system, which includes individual accounts that are also supported by employer contributions. The employer contributions vary with the age of the employee, amounting to between 6 and 10% of the wage rate. Shanghai has proposed but not implemented a system of individual MSAs supported by an employer contribution of 4% of wages. The experience of these cities highlights some of the broader implications of a transition from government provision and financing to MSA-style arrangements.

In Jiujiang and Zhenjiang, employers and employees contribute 11% and 1% respectively of wages to newly organized insurance centers. These centers split the money into two funds. Individual MSAs receive the equivalent of 6% of wages with some variation by age of the individual. Individuals pay for all medical expenses up to the balance of their account. The Social Coordinating Fund receives the remaining 5% of wages and pays for individual's medical expenses once they have depleted the balance in the MSA and paid a deductible or excess of 5% of the previous year's income. Individuals do not directly contribute to the accounts nor can they spend the money on services outside of health care. All remaining funds in the MSA are carried over from year to year although they do not earn any interest.

Individual MSAs in Shenzen receive, a contribution of 6-8% of wages annually from employers based on the age of the individual account holder. If medical expenses in one year exhaust the account, the individual is responsible for a 10% copayment for remaining costs up to a ceiling of 8% of the previous year's income. The social risk-pooling fund pays for the remainder of medical care expenses above the copayment ceiling. Of the remaining balance at the end of the year, 20% is carried over in the same account and 80% is transferred to the social risk-pooling fund. The Shanghai system of MSAs is supposed to be part of a similar two-tier system with the majority of contributions from employers. However, the balance would be tipped towards the social risk-pooling fund, which would receive 15% of wages while the MSA would receive only 4%.

It is difficult to evaluate the performance of the MSAs in China. The development of MSAs was accompanied in Jiujiang and Zhenjiang by a range of health financing reforms including a prospective payment system and a drug formulary with fixed pricing. Changes in admission rates and health expenditure growth cannot be attributed exclusively to the MSA component of the reforms. Despite the lack of detailed evaluation of the initial experiments, the decision has been made to expand the pilot program to over 50 cities throughout China.

HEALTH CARE FINANCING REFORMS IN EAST ASIA

Many challenges and opportunities have already begun to reshape the role of East Asian governments in striving to achieve the health policy goals of improving access, raising quality and containing costs. Managing these health sector reforms calls for a sharper policy focus on three main elements of the role of government--mobilizing resources, improving efficiency and promoting equity. This section sketches East Asia's changing situation and considers the implications for the role of government in the future health care financing reform agenda.

RESOURCE MOBILIZATION 

A high priority on the health reform agenda is mobilizing enough resources to finance efficient and equitable provision of more health care per capita. This is likely to require an increasing diversification of financing instruments so as to develop a broad and sustainable revenue base to cope with rising health care costs. East Asia's overall resource mobilization effort from all sources is reflected in the ratio of total health spending to Gross Domestic Product (GDP).

Low spenders include Indonesia at only 1.7% of GDP, followed by the Philippines (2.4%) and Singapore (3.1%). China lies in the middle of the range with a ratio of about 4.2% of GDP. High spenders include Korea with a health-GDP ratio of 6.0%, followed by Thailand (5.4%), Vietnam (5.1%) and Taiwan (5.0%). These ratios remain generally well below the levels reached in the high-income Organization for Economic Cooperation and Development (OECD) countries, suggesting that there is considerable room for expansion in resource mobilization before cost containment becomes a major policy concern. The OECD average health-GDP ratio was 8.1% in 1992 - two times higher than the average for East Asian countries. Individual health-to-GDP ratios among the OECD countries range as high as the extraordinary ratio of 13.6% in the United States (Prescott 1997).

The mixture of financing instruments used to mobilize these resources for health is already diversified between public and private sector sources. Most striking is the common tendency for private sector sources of finance to predominate--averaging more than half (60%) of total health spending--with the majority of private expenditures being paid out-of-pocket (56%).

Private spending ranges as high as three-quarters of total health spending in countries such as Vietnam (78%) and Thailand (74%)--but falls below one-half of total outlays only in China (42%) and the Philippines (38%). Several factors explain why out-of pocket expenditures tend to be so high in East Asia. One is that nontrivial user charges are a standard feature of public sector pricing policy in most countries. In Indonesia nearly one-quarter of all household expenditures on health consists of user charges paid to public providers (over half of which goes to public hospitals). A second factor in some countries is the copayment structure built into some health insurance schemes. Third is the widespread availability and use of private sector alternatives to public delivery systems---options which include not only formal service providers such as private hospitals and clinics, but also self-medication with drugs purchased from pharmacies.

Public sector financing, broadly defined to include government budgets plus off budget financing, tends to play a subordinate role in East Asia--mobilizing on average only 40% of aggregate health expenditure. Among the public sector instruments, government budgets finance only one-quarter (27%) of total health spending. Especially low budget shares are seen in the Korea (10%) and Taiwan (15%). Several countries are clustered around the middle of the range, including Vietnam (22%), China (23%), Thailand (24%) and Singapore (25%). Even the countries with relatively high budget shares such as Hong Kong and the Philippines (both at 44%) and Indonesia (39%) still mobilize less than one-half of all health spending from the government budget (Prescott 1997).

Governments in the region are increasingly attempting to diversify public sector funding by mobilizing extra-budgetary resources from compulsory social insurance schemes. These instruments are helping governments to tap the expanding payroll tax base generated by the shift toward urban industrial employment. While off-budget social insurance still plays a smaller role in total financing than budget expenditure, these roles have already been reversed in some countries.

Notable examples of the recent expansion in social insurance financing are Korea and Taiwan, which achieved universal population coverage with national health insurance in 1988 and 1995 respectively. Thailand, in 1990, and then Indonesia in 1992, are following in their footsteps with the recent introduction of social security legislation which aims to extend insurance coverage beyond existing schemes for civil servants to private sector industrial workers. Vietnam began to follow the same path to social insurance with introduction of a mandatory health insurance program for civil servants and state enterprise employees in 1993. Singapore has also diversified into extra-budgetary financing but in a radically different direction with the introduction in 1984 of an important instrument based on mandatory individual medical savings accounts. China is experimenting with medical savings accounts in major cities, and Malaysia is contemplating introduction of a large-scale health financing reform based on a national savings fund.

The recent wave of social insurance reform is having an important impact on the structure of public finance for health in East Asia. By the early 1990s Taiwan was generating twice as many resources from social insurance than from the government budget, thus achieving a higher share of extra-budgetary spending in total health expenditure (39%) than any other country in East Asia. China (26%) and Korea (19%) also mobilize more through social insurance than the government budget. The penetration of social insurance in the Philippines (12%) and Indonesia (10%) lags behind but is likely to increase in future (Prescott 1997). Meanwhile the role of medical savings accounts is likely to rise considerably in Singapore. Today the proportion of all health expenditures financed by Medisave disbursements is only 7%--but the total amount of assets accumulated in members' savings accounts is already equivalent to four year's worth of Singapore's national health expenditure.

EFFICIENCY

A second priority for the future health reform agenda is improving efficiency by focusing government involvement in areas where private markets fail--and limiting intervention where markets can perform as well or better. Two key areas of market failure demand better government intervention--subsidizing provision of preventive health services, and helping to improve insurance against the catastrophic financial risks due to costly curative care.

PUBLIC HEALTH SUBSIDIES

Market failures due to externalities and public goods drive a wedge between private and social costs that causes private markets to under-provide preventive health services. One test of the efficiency of government intervention, therefore, is whether government budgets give adequate priority to subsidizing provision of public health programs so as to induce desirable levels of utilization. Recent trends in a number of countries highlight the future scope for improving government funding of public health. In Korea, the proportion of the Ministry of Health and Social Affairs (MOHSA) budget allocated to primary health care programs dropped by two-thirds since the mid-1980s--from 33% in 1984 to 11% in 1993. Fiscal resources released by this compression in public health spending were reallocated to finance the increase in subsidies for Korea's expanding compulsory health insurance program. Government spending on health insurance subsidies more than tripled, rising from 13% of the MOHSA budget in 1984 to 44% in 1993 (Prescott 1997).

Declines in the share of spending allocated to preventive health have also taken place in China. Looking at the narrowly defined health budget, the share claimed by the Epidemic Prevention Service decreased from 15% in 1981 to 12% in 1993. But, expressed as a proportion of the government's overall budgetary expenditure on health---defined more broadly to include government outlays on the Government Insurance Scheme for civil servants--the decline was much larger, falling from 12% to 6%. As in Korea, this reduction was forced by a reallocation of budgetary priorities from subsidizing prevention to health insurance--in China's case to accommodate the rapid increase in spending for civil servants (Prescott 1997).

The declining priority attached to public spending on prevention was exacerbated by the collapse in extra-budgetary funding mobilized by rural collectives before China's transition to a market economy in the early 1980s. Before the economic reforms barefoot doctors working in brigade health stations played an important role in delivering preventive health services. Barefoot doctors were paid on the basis of workpoint claims on collectives' distributed income. After the reforms, village doctors had to rely on fee-for-service payments and tended to neglect preventive health work. In effect, therefore, China shifted financing of this key part of the preventive health system out of the public sector into the hands of the private sector, instead of shifting it back onto the state budget (Prescott 1997).

HEALTH INSURANCE MARKETS

Another essential role of government in promoting economic efficiency is to correct failures in the health insurance market. Because the distribution of health care expenditures is highly skewed, health insurance can improve social welfare by reducing the individual financial risks associated with illness (Nichols et al. 1997).

The magnitude of the welfare gain from health insurance increases with the size and unpredictability of financial risks and hence, efficient insurance programs should focus on high-cost and low-probability events. But the gain from better insurance coverage may be offset by the moral hazard problem that the lower net price of insured health services may encourage patients to use more services. Government policy must, therefore, strive to find a balance between creating better insurance against costly financial risks, while at the same time trying to limit the moral hazard problem. Achieving this balance requires limiting coverage by targeting insurance on the infrequent but costly financial risks usually associated with hospital inpatient care, combined with demand management through some form of nontrivial cost-sharing by patients. East Asia's aging population will require more efficient government intervention to manage these financial risks.

CATASTROPHIC RISKS

Few countries explicitly target costly financial risks in the design of their social insurance programs. In exception, Singapore's Medisave scheme generally excludes coverage of outpatient services, so that Medisave balances are reserved to pay for infrequent but high-cost inpatient care. However, because they depend on intertemporal pooling over the individual's lifecycle, it is not actuarially feasible for Medisave balances to insure against truly catastrophic contingencies. To solve this problem Singapore introduced Medishield--a backup health insurance program based on cross-sectional risk pooling--designed to finance the extreme catastrophic part of the risk distribution (Phua 1997).

In contrast countries which have opted for comprehensive coverage instead of focusing on inpatient care spend a large fraction of their insurance pool on financing outpatient services. In Taiwan, for example, the National Health Insurance Program spends around two-thirds of its total outlays on reimbursing ambulatory care--with insured outpatient utilization averaging a truly staggering 14 visits per capita per year. Government policies that fail to limit outpatient coverage, where insurance is not really needed, spread the fixed pool of insurance funds more thinly over the whole risk distribution, and raise the portion of the pool absorbed in administrative costs for claims processing. Such untargeted health insurance programs might end up failing to provide adequate coverage for the really costly health risks that should be insured.

COST-SHARING

Government policies on cost sharing to help control moral hazard and contain costs in social insurance programs vary greatly. Health policy in Singapore combines nontrivial coinsurance rates with explicit targeting of costly risks (Nichols et al. 1997). On average about 60% of hospitalization costs in public hospitals are subsidized by the government. The residual 40% charged to patients is covered between Medisave and out-of-pocket payments. Thus patients feel a double bite of individual responsibility--not only in the form of 20% coinsurance paid out of their Medisave account, but also another 20% paid directly out of pocket. Claims for backup Medishield coverage of catastrophic expenses are subject to 20% coinsurance on top of a high annual deductible.

Some countries have implemented cost-sharing policies with untargeted health insurance coverage. The Korean social insurance program has official coinsurance rates ranging from 55% for outpatient care to 20% for inpatient care, but actual coinsurance rates for inpatient care could be much higher. In contrast, Taiwan's new National Health Insurance Program has set very low cost-sharing ratios--a fixed deductible equivalent to 9% of the cost of ambulatory visits, and coinsurance averaging 8% of total expenses for hospitalization (Prescott 1997).

Other governments manage health insurance programs with neither cost-sharing nor targeting of costly risks, and have experienced rapid cost escalation as a result. Notable examples are the health insurance schemes for civil servants in Thailand and China. In Thailand the Civil Servants Medical Benefit Scheme provides first-dollar coverage for all outpatient care and inpatient care provided by public hospitals. This generous insurance coverage has accommodated a rapid increase in total expenditures. China has also experienced rapid cost escalation in its Government Insurance Scheme, which also provides first-dollar coverage of outpatient and inpatient care for civil servants (Prescott 1997).

EQUITY

Improving equity is a third priority on East Asia's future health reform agenda. Rising per capita incomes will lift more of the region's population out of poverty, requiring governments to do a better job of targeting their interventions selectively to help the poor. Monitoring and improving the distributive consequences of government policy for the poor are therefore, of special interest to policymakers. Several comparisons of targeting efficiency highlight the scope for improving the poverty-consciousness of health policy in East Asia.

Most public expenditure on health in China consists of health insurance outlays on the better off--government employees and industrial workers. As a result there are wide disparities in per capita expenditure between the urban insured and the rural uninsured. Comparisons for 1993 suggest that public spending was highest of all on civil servants. Budget expenditures averaged 379 yuan per member of the Government Insurance Scheme, while off-budget public expenditures by the compulsory Labor Insurance Scheme for enterprise employees averaged 281 yuan per member. These figures compare to the national average health subsidy of 9 yuan per capita accruing to those without insurance (Prescott 1997).

Changing pricing policy for publicly-provided services is likely to be an important instrument to improve equity in the incidence of public spending. Out-of-pocket costs facing users of publicly provided health services are often nontrivial, especially for hospital inpatient care, and can be a barrier to access by the poor. Improving access may require selective price reductions, compensated by increased subsidies from the budget. Implementing this strategy calls for a pricing policy that consciously differentiates prices by the income class of users. In this way, public subsidies can be better targeted instead of distributed indiscriminately. One targeting mechanism is self-selection--charging lower prices for services more likely to be used by the poor. Alternatively subsidies can be targeted directly by mean-testing individual users. Singapore's recent health reforms demonstrate both of these approaches to promoting equity (Nichols et al. 1997).

Budget subsidies continue to play a major backup role in financing hospital inpatient care and are targeted to poorer users by self-selection using public sector pricing policy. Explicit price discrimination in Singapore is built around four different classes of hospital ward in public sector hospitals--ranging in ascending order of comfort from Classes C, through B2 and B1 to A. Class A consists of single rooms with attached bathrooms and other private amenities. Classes B 1 and B2 range from four-bedded to six-bedded wards with shared facilities. Class C is made up of open wards with very basic amenities. The subsidy ratios are highly differentiated--ranging from 84% of hospital costs in the lowest Class C, to 71% in Class B2, 36% in Class B1 to 13% in Class A. Public hospitals provide financial counseling to help inpatients select an affordable ward class. These differential subsidies are intended to help equalize the affordability of the class-specific prices relative to the income levels of patients who select them.

As a last resort patients unable to pay their subsidized hospital bills can apply for a means-tested grant from their Hospital Medifund Committee. This safety net is targeted directly at households in the lower one-third of the income distribution. During its first three years of operation, Medifund paid the entire medical bill in 87% of requests for assistance which amounted to around 5% of hospital admissions at the lower Class B2/C levels--3.3% in 1993, 4.2% in 1994 and 5.8% in 1995.

CONCLUSION

Some East Asian countries have adopted pay-as-you-go social security and health insurance schemes, which without reform will be unaffordable and unsustainable against the fastest population aging rates in the world. Their growth rates will inevitably slow down and yet they have to maintain higher spending with a shrinking tax base. The World Bank has sounded the alarm about the potential crisis facing old age security systems. As life expectancies increase and birth rates decline, the proportion of the elderly is expanding to threaten the financial security systems supported by the young. In the industrialized countries, escalating costs in public pension plans impede economic growth and such formal systems appear to be both unsustainable and difficult to reform. In developing countries, urbanization and increased mobility are eroding extended family networks and traditional means of support. The newly industrializing countries that are developing old age security systems risk repeating the costly mistakes of the older economies. Thus, it is recommended to have a mix of three systems or "pillars" to support the basic functions of old age security systems--redistribution, savings and insurance. The first is a mandatory publicly managed and tax-financed system, the second a mandatory privately managed and fully funded savings system, and supplemented by a third voluntary system of occupational or personal saving plans. Together, these three pillars co-insure against the risks of old age while not impeding growth in aging societies (World Bank 1994).

Considering that health care needs are expected to be greater in old age, should not the same requirements be met for health care financing systems? The three basic functions of redistribution, savings and insurance are just as applicable for financing health care as for old age security. Even though the relative risks and uncertainties may be different for health care needs, a similar mix of financing methods can still be recommended to offer more protection while promoting growth in countries with fast aging populations. These considerations have formed the basis for the existing integrated systems of old age security and health care financing in Singapore, which are fully-funded savings schemes that would avoid the inter-generational transfer problems of pay-as-you-go systems financed from taxation.

The Singaporean system has shifted away from a tax-based national health service model to a mixed system that has retained the dominant role of the public sector in providing essential medical services through a combination of taxation and savings, with limited insurance only for catastrophic illness. It is purposely designed to move away from the comprehensive and overly generous insurance models that may be unsustainable. The declared objectives are different from those of other models having universal coverage, by limiting insurance only for "insurable" expenditure (i.e. highcost events of low probability and not low-cost events of high probability for which other types of financing would be more efficient and effective). Thus, the role of the state is as a last resort to support the truly needy, while average individuals and families are expected to contribute towards greater cost-sharing of increasingly expensive health care, so as to encourage self-reliance (Phua & Yap 1998).

In this context, the emphasis on achieving universal coverage and access must also be consistent with other objectives of seeking efficiency, cost-savings and investments (as opposed to consumption), wage and labor competitiveness, in many East Asian economies. Equity concerns should be a priority for any government, but this has to be considered with other implications, along with their longer-term effects on the rest of society and the economy. At increasingly high levels of personal health care consumption that may be of marginal value, governments must rethink how much should be paid out of the public purse, and whether principles of equity should be redefined in society's best interests. The debate concerning the trade-off between equity and efficiency can also be re-cast into that of striking the right balance of quantity and quality while achieving universal coverage for health care. Can the countries of Asia afford the comprehensive health financing systems imported from elsewhere? Should they not learn from the mistakes of those who have gone before them, and be able to pick and choose the best of all possible worlds? Innovative health care financing systems are only transferable to function smoothly when inherent values are acceptable within the local cultural context. As the region undergoes rapid transition and structural adjustments while recovering from the recent financial crisis, it would be wise and prudent to maintain a harmonious balance of appropriate health care financing methods to meet the social objectives of health care reforms.

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Kai-Hong Phua National University of Singapore (Singapore)

Address for correspondence: Kai-Hong Phua, Department of Community, Occupational and Family Medicine, National University of Singapore, Kent Ridge, Singapore 119260, [e-mail].