Global Budgets For Health Research Paper

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Introducing global budgets for health, i.e., setting prospective limits to expenditure on health care, is by definition the most effective means of controlling spending. If expenditure levels are fixed for the coming year or years, and if the limit is made to stick, then tautologically the rise in spending on health will be contained within the planned total. Not surprisingly, therefore, an increasing number of governments adopted this strategy in the 1980s, as a reaction to the largely unplanned and unanticipated rise in health care spending throughout the 1960s and much of the 1970s: what came to be known as the health care cost explosion. This research paper examines, first, the feasibility, form and effectiveness of this strategy in different health care systems; second, the conceptual and practical issues involved in fixing the global budget and then allocating it to populations or health care sectors.

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1. Strategies And Mechanisms

In 1960, total health expenditure (privately as well as publicly financed) in the world’s 18 richest countries— those belonging to the Organisation for Economic Cooperation and Development—accounted for 4.2 percent of their combined gross domestic product (GDP). Ten years later, the figure was 5.8 percent, rising to 7.2 percent in 1980 (OECD 1987). Both the rate of increase, and the proportion of GDP devoted to health, differed among countries. Between 1960 and 1980, spending in the United States increased from 5.3 to 9.5 percent of GDP, rising to 10.7 percent by the mid-1980s, whereas the figures for the UK were 3.9 and 5.6 percent respectively, leveling out thereafter. From this flowed a widespread perception that spending on health was out of control, imposing damaging fiscal burdens on the economy and a consequent interest in mechanisms for halting, or at least slowing down, the seemingly inexorable rise.

The problem of ever-escalating costs could not be solved by invoking the usual market mechanisms and restraining demand by raising prices. Not only is health care financed predominantly through insurance schemes of various types; i.e., third parties rather than the consumers pay most of the costs. Equally, there is only limited scope for using co-payments or user charges to limit demand: the long-term effects on population health of deterring use may outweigh any short-term fiscal gains. Controlling the supply of health care thus seemed a more feasible and effective option, all the more so because of evidence that much of the demand for health care was generated by the system itself; i.e., was provider-driven. While it is consumers who make the initial contact with the health care system, it is the professionals who decide how they should be treated. And it is these decisions— about the number of tests to be carried out, the drugs to be prescribed and so on—which drive spending. Enter global budgeting.

Here the UK’s National Health Service (NHS) was the paradigmatic case. Outside the communist bloc countries, the UK was the only health care system funded overwhelmingly by central government out of general taxation. In this it differed both from the tax funded Scandinavian model, where both control and fiscal responsibility was divided between central and local government, and the social insurance based West European model, where responsibility was divided between central government and an often large number of insurance funds. In the UK, therefore, the Treasury controlled the fiscal tap, for both current and capital spending, to the health care system. Almost from the launch of the NHS in 1948, the system operated what in effect was a global budget; i.e., the Treasury set the limits of total spending for the next fiscal year. In turn, the UK’s record suggested two conclusions. First, it appeared to demonstrate that global budgeting could restrain the rate of increase in health care expenditure: the UK continued, and continues, to be a restrained spender relative to other countries with a comparable national income. Second, it seemed to show that there was a direct relationship between fiscal centralization and the successful operation of a global budget.

Both conclusions were borne out, if to a differing extent, as an ever higher proportion of countries adopted variations on the global budgeting theme in the 1980s and early 1990s as part of their strategies for cost containment. The rate of increase in health care expenditure, as a proportion of national incomes, did indeed slow down (Abel-Smith 1992, OECD 1992, 1994), and much of this could be attributed to the introduction of global budgeting. In all this, the USA was the most conspicuous exception; it did not introduce global budgeting and its spending on health care was almost 14 percent of GDP by the end of the 1990s (twice the UK figure). However, success did not necessarily correlate with fiscal centralization. Sweden not only halted, but reversed, the upward trend, even though its model of health care divides responsibility between central and local government: no doubt because the former carries by far the heavier fiscal clout. And the Netherlands, perhaps the most pluralistic variant on the European social insurance model, introduced global budgeting covering both the public and the private insurers (Maarse 1996) with the same set of fee schedules applying to both sectors.

This suggests that there are various mechanisms for achieving global budgeting—i.e., control of the supply side of health care—although the UK’s single-payer model offers the most direct leverage. Without the simplicity of the UK model, these mechanisms vary with the nature of the reimbursement system used in different sectors of health care services and the political determination of governments to make their policies stick. In the case of the hospital sector, it proved relatively easy to impose global budgets (Glaser 1993). In the case of service payments for general practitioners or office-based specialists, controlling spending turned out to be less easy. Freezing the fee schedule tends to multiply activity as physicians safeguard their incomes by doing more. Here the strategy adopted was to impose a limit on the total amount to be paid out in fees, with retrospective downward adjustments of the payments to individual physicians if the total exceeds the target figure: Germany providing one such example, leaving responsibility for administering the pool to the medical profession (Schwartz and Busse 1996). And while the USA is a conspicuous failure in macro-terms, it has generated innovative models for microglobal budgeting; i.e., various forms of capitation payments to providers.

Systems also vary in the extent to which global budgets are underpinned by, or complementary to, other supply side measures. Some systems, such as that in the UK, control the production and distribution of the medical labor force. Most systems seek to control the number and distribution of hospitals and to exercise birth control over the diffusion of expensive new technologies. In the case of health care systems based on the social insurance model, governments can further buttress policy by regulating—in some instances freezing—the level of contributions charged by insurance funds, so controlling the flow of money into the system.

Global budgets have their pathologies as well as their advantages. By removing the incentive to maximize income by maximizing activity (possibly a desirable policy goal, since it also lessens the risk of overtreatment), global budgets for hospitals may also undermine the incentives to maximize efficiency (so leading to the undesirable policy outcome of queues for treatment). Hence Britain’s brief experiment with a mimic market in the 1990s. This separated the purchaser and provider roles. Previously, health authorities had been responsible for managing hospitals and other services directly for the population within their geographical boundaries. Under the new system, they became responsible only for buying the necessary care from semi-autonomous agencies. Both before and after the changes, however, health authorities worked within budgets fixed by central government. The aim (never fully achieved) was to introduce an element of competition between providers—and thus provide incentives to greater efficiency—within the framework of a global budget for the NHS as a whole.

Some other issues also require noting. Global budgets for item-of-service payments raise awkward questions about the distribution of income between physicians: between those who maximize their activity and those within a fixed total who do not. Above all, global budgets tend to be associated with rationing: if the supply is limited, waiting lists may be the result. And while the phenomenon of rationing is far from exclusive to health care systems with global budgeting, it does raise questions about the adequacy of the budget level set.

2. Setting The Budget

The adoption of global budgets represents the pragmatic reaction of governments searching for policy instruments to restrain the growth of collective spending on health. A global budget for the health care system of a country is thus the byproduct of a government’s decisions about priorities between expenditure on health and other programs competing for funds, between maintaining public services and cutting taxation. Its level reflects as much calculations of political feasibility—assumptions about how much spending can be restrained without provoking a political backlash from professional providers and the public—as calculations about what the appropriate level of spending on health should be. As such, it is an entirely atheoretical exercise. For no formula for determining a global budget, independent of the actual level of spending in different countries, has yet been devised: there are no agreed benchmarks against which the adequacy or otherwise of a given level of spending can be assessed. Nor is it likely that such benchmarks can be devised, given the heterogeneity of the services produced under the ‘health’ label, the scope for substitution between them, and the productive factors involved and variations in productivity.

Global budgets are therefore best seen as history modified by politics, and often rationalized by appeals to demography. The inherited level of spending on health inevitably provides the baseline for setting global budgets. This is then modified in the light of factors either extrinsic to the health care system (usually the prospective capacity of the economy to produce extra wealth), or intrinsic to it (usually demography and the cost of technological innovation). The first strategy puts the emphasis on what a country can afford. The second puts the emphasis on what a country needs. Neither is as objective as it appears (Smee 1996). ‘Affordability’ is an elastic concept. And so is need. Even the most commonly used indicator of ‘need,’ the demographic structure of any given population, is problematic. For sure, people need more health care as they age. But projecting the cost of demographic change into the future assumes that patterns of both morbidity and service use will remain the same as in the past: a highly questionable assumption. And many of the same problems arise when it comes to apportioning global budgets, whether geographically or by health care sectors.

3. Dividing Up The Budget

The issue of distributing global budgets geographically arises only in the case of health care systems—on the UK and Scandinavian models—where public agencies are responsible for delivering health care to a defined population. In these cases, the equity principle demands that resources should be distributed according to need. In the past, need was often equated with use: if use was high so, it was assumed, was need. But given increasing evidence that demand (or use) was strongly influenced by supply, emphasis has switched to devising other indicators. The demographic composition of the population provides, as noted above, the core of the various formulas that have been devised to allocate resources. Standardized Mortality Ratios are another. So is morbidity data, where available. Debate continues as to whether social deprivation is in itself a need indicator, over and above its contribution to the mortality and morbidity figures. In all this, need is, of course, a relative concept. That is, the various distributive formulas that have been developed purport to measure the needs of population A as against those of population B, not to measure the absolute level of provision that either requires.

In the case of the West European social insurance model of health care provision, the question of geographical distribution clearly does not arise. Responsibility for funding health care is divided between funds whose members—as often defined by occupation as by place of residence—do not necessarily live within the same geographical areas. However, some of the same distributional issues do arise. One frequent element in social insurance systems is a central pool of money which is then distributed to individual funds according to the risks that they carry. Designed to weaken the incentives of funds to discriminate against potential members who may—because they are older or sicker—require more expensive health care, risk compensation in turn means devising a formula for assessing relative need. This raises the same conceptual issues as devising a formula for distributing global budgets geographically and leads to many of the same solutions, notably heavy weighting for demographic factors.

Global budgets are, in most systems, also broken down by sectors for accounting and control purposes. Indeed, a national global budget may be the product of a step-by-step process of imposing expenditure limits on specific sectors; primary care, acute hospital care and so on. However, in this case there have not been—and probably cannot be, given the absence of a conceptual basis for such an exercise—any attempts to devise a formula for allocating funds between sectors. The sectoral distribution of global budgets, even more than the determination of their total, remains the product of history modified by incremental policy decisions.


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  2. Glaser W A 1993 How expenditure caps and expenditure targets really work. The Milbank Quarterly 71(1): 97–128
  3. Maarse H A M 1996 Fixed budgets in the inpatient sector: The case of the Netherlands. In: Schwartz F W, Glennerster H, Saltman R B (eds.) Fixing Health Budgets: Experience from Europe and North America. Wiley, Chichester, UK
  4. OECD 1987 Financing and Delivering Health Care: A Comparative Analysis of OECD Countries. OECD, Paris
  5. OECD 1992 The Reform of Health Care: A Comparative Analysis of Seven OECD Countries. OECD, Paris
  6. OECD 1994 The Reform of Health Care Systems: A Review of Seventeen OECD Countries. OECD, Paris
  7. Schwartz F W, Busse R 1996 Fixed budgets in the ambulatory care sector: The German experience. In: Schwartz F W, Glennerster H, Saltman R B (eds.) Fixing Health Budgets: Experience from Europe and North America. Wiley, Chichester, UK
  8. Schwartz F W, Glennerster H, Saltman R B (eds.) 1996 Fixing Health Budgets: Experience from Europe and North America. Wiley, Chichester, UK
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