Information about Asia and the Pacific Asia y el Pacífico
The Economics of Public Health Care Reform in Advanced and Emerging Economies
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CHAPTER 4: The Future of Public and Private Health Care Insurance in Asia

Author(s):
David Coady, Benedict Clements, and Sanjeev Gupta
Published Date:
June 2012
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
Ludwig Kanzler and Alexander Ng 

Globally, both public and private health care systems are facing major fiscal challenges. New technologies provide patients with more-sophisticated diagnostic and treatment methods, but they also significantly increase costs. Simultaneously, the number of patients who are elderly or have chronic diseases is surging worldwide, straining health care budgets. Paradoxically, in many countries, including emerging markets, the situation is exacerbated by an increase in wealth levels. As expendable income rises in these locations, patients are more likely to seek health care, since high copayments and out-of-pocket (OOP) expenses are less of a deterrent. Similarly, they may expect a higher quality of care, such as greater access to expensive new drugs. Even in cases in which patients pay for the majority of their treatment, payers must often cover some costs associated with the higher utilization.

Asia is no exception. In this region, governments have primary responsibility for providing care, and private insurance remains a small niche market, mainly reserved for those with expendable income. In response to spiraling health care costs, many governments—even in the wealthiest countries—have analyzed or begun implementing reforms to reduce spending. Consider a few examples:

  • As part of a widespread effort to reduce health care spending, the Japanese government has kept spending increases to about 2 percent annually, which is far below the level seen in other OECD countries (McKinsey & Company, 2008).

  • China is moving away from fee-for-service reimbursement to models that do not reward providers for high utilization; it is also capping the prices that hospitals and other facilities can charge for certain drugs (Süssmuth-Dyckerhoff and Wang, 2010; Kyburg and Stuker, 2007).

  • The Philippines is also moving away from fee-for-service reimbursement and has introduced legislation to decrease hospital costs, including a bill that encourages cooperation between tertiary and specialized facilities to eliminate duplication of expensive services (Philippines, State Senate, 2004).

Such reform efforts will intensify throughout Asia as fiscal pressures increase, but the diverse nature of the region makes it impossible to offer a single solution—each country differs in terms of economic development, political systems, social values, and health care priorities. However, all governments should consider whether private insurance can play a greater role in alleviating fiscal burdens and resolving other issues, such as the widespread lack of health care coverage in developing countries and the increasing demand for higher-quality services.

If private health care insurance does become more common, governments will need to consider several important questions. Should private insurers largely replace public payers or work in coordination with them? What are the pros and cons of private insurance? What regulations are needed to promote sustainability and guarantee that all citizens have equal access to quality care? And what measures can public and private payers implement to ensure that they remain financially strong?

In answering these questions, we will focus on the role that private insurance can play in one basic area: providing reimbursement for services. While private payers in the United States and some other locations are well established and have assumed more complex responsibilities—serving as provider network managers, for instance—such capabilities take years to develop. Since private payers have only a small presence in Asia and lack infrastructure in the region, we expect that their initial growth efforts will concentrate on reimbursement.

HEALTH CARE SYSTEMS IN ASIA: A WIDE DIVERSITY OF MODELS, CHALLENGES, AND BENEFITS

To understand the current health care systems in Asia, we looked at 13 major countries, examining government budgets, the role of private payers, and typical OOP costs. In all cases, private health insurance represented less than 10 percent of total health expenditures, ranging from a low of 1.6 percent in Singapore to a high of 8.3 percent in Australia. But there were significant differences among countries in other respects, including total health expenditures and GDP per capita. Looking at these two variables, we divided Asian countries into three major groups favored by macroeconomic analysis (Figure 4.1):

  • Developed countries: Australia, Japan, New Zealand, Singapore, and the Republic of Korea. All countries in this cohort provide near-universal public health care coverage, although benefits may be fairly basic. Health care spending is high—an average of 7.4 percent of GDP—but still lower than the OECD average of 9.5 percent in 2009. OOP expenses account for about 28 percent of total health expenditures.

  • Emerging markets: China, Malaysia, and Thailand. As in the developed markets, these countries have achieved near universal coverage under public health plans. However, consumers in emerging markets face a greater burden from OOP expenses—about 33 percent of total health expenditures. Health care spending is lower (4.6 percent of GDP) than in developed countries, and patients may not have as much access to sophisticated treatments.

  • Developing countries: Cambodia, Indonesia, the Lao People’s Democratic Republic, the Philippines, and Vietnam. For these countries, access to health care is still a major problem, with many people lacking sufficient coverage for various reasons. For instance, the Philippines, Indonesia, the Lao People’s Democratic Republic, and Vietnam have public insurance for workers, with mandatory payments taken from both employers and employees. (Some governments may make additional contributions.) But many people in these countries, such as taxi drivers and street vendors, do not have a “formal” employer; this segment of the population often lacks the ability to pay premiums, and it is difficult for the government to enforce collection (Tangcharoensathien and others, 2011). And while governments in developing countries subsidize insurance for the poor with tax revenues, the scope and quality of care is often extremely limited (Tangcharoensathien and others, 2011). In fact, OOP expenses may be high at all levels of society because of coverage restrictions. However, health care spending in this cohort is similar to that of emerging markets (4.7 percent of GDP), and many countries have been increasing health care significantly to improve coverage and provision.

Figure 4.1Categorization of Health Care Systems in the Asia Pacific Region

Sources: World Health Organization; and IMF staff estimates.

Note: PPP = purchasing power parity.

Not surprisingly, health outcomes also vary significantly by cohort, with developed countries scoring the highest on key metrics and developing countries the lowest. For instance, people in developed countries can expect to live four years longer than those in emerging markets and eight years longer than those in developing markets.

Box 4.1 provides more detail about the opportunities and challenges in developed, emerging, and developing markets, using selected countries as examples.

Given the variations among developing, emerging, and developed countries, each cohort will naturally have different priorities regarding the three fundamentals of health care: cost effectiveness/sustainability, equal access to treatment for all citizens, and quality of care (Angrisano and others, 2006). But in all locations, private insurance could potentially play a role in solving many problems. For instance, it could help reduce OOP expenses in emerging and developing countries, thereby making health care more affordable and accessible.

BOX 4.1Variations Within Asia: Patterns of Health Care Coverage

Developed-Country Example: Japan

Japan requires its citizens to pay premiums to receive public insurance coverage. While this should theoretically provide universal access, about 10 percent of households do not pay the mandatory premiums (McKinsey & Company, 2008). Copayments are also high, representing 30 percent of treatment costs for most people and 10 percent for those over 70 (McKinsey & Company, 2008). (Some intractable diseases are not subject to any copayment, and expenses may be capped for other conditions, but not until patients have already incurred rather high costs.) There are over 4,000 public insurers in Japan, but patients must enroll in the one that serves their employer or, if not employed, their prefecture (Henke, Kadonaga, and Kanzler, 2009). With a guaranteed customer base, payers have no incentive to improve quality or offer better services to attract patients.

Emerging Market Example: China

Over the last few years, China has enrolled significantly more people in public insurance plans, with about 95 percent of the population now covered (China, Office of State Council, 2007). But public insurance focuses on coverage for catastrophic diseases and inpatient services, and patients still have little assistance with basic outpatient care, a factor that will become more problematic as the rate of chronic diseases continues to rise. OOP expenses have fallen in recent years but remain high at 41 percent of total health expenditures.

Developing-Country Example: Vietnam

Like most developing countries, Vietnam provides all services through a public health insurance system. The government pays about two-thirds of the premiums, and employers or consumers contribute the remaining amount. Given the significant financial burden, many people—about 45 percent—lack health care coverage (Tangcharoensathien and others, 2011). OOP payments remain high, at about 55 percent of total health expenditures, and have decreased only modestly in recent years (Tangcharoensathien and others, 2011).

A WINDOW OF OPPORTUNITY FOR PRIVATE INSURANCE IN ASIA

Worldwide, in developing and developed countries, health care spending has been growing for decades at a rate of 2 percent above GDP. This pattern is occurring, in part, because income levels are rising globally, promoting greater health care utilization. The increased spending will produce many benefits, such as greater longevity, but unrelenting high growth will also raise costs to ultimately unsustainable levels that could bankrupt health care systems.

Although Asia trails the United States and many other Western countries in health care spending, the situation in this region is still serious and will become increasingly problematic, even if the growth rate declines to a more modest rate of 1 percent above GDP growth (Figure 4.2).

Figure 4.2Projected Rise in Health Care Costs in Asia

Sources: World Bank; and McKinsey analysis.

Note: 1995–2009 compound annual growth rate (CAGR): GDP = 4.13%, health care spending = 4.49%; if Japan is excluded: GDP = 9.55%, health care spending = 11.25%.

aIncludes 13 major countries: Australia, Cambodia, China, Indonesia, Japan, the Republic of Korea, the Lao People’s Democratic Republic, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.

Many of the forces that are raising health care costs in Asia are similar to those at work in other countries, such as greater use of sophisticated and costly technologies, a growing elderly population, and an increase in the number of patients suffering from chronic disease. But perhaps one factor—rising incomes and the growth of the middle class—is having a greater effect in Asia than in the rest of the world. For the first time, many patients in China and other emerging markets have expendable income to devote to health care. While they may have ignored a minor ailment or accepted a place on a waiting list in the past, they are now more likely to seek immediate treatment or make more frequent visits to providers, increasing utilization. In addition, patients may expect access to the latest diagnostic and treatment methods, even if the new technologies are more expensive than traditional methods.

Traditionally, Asian governments have taken a laissez-faire approach to private health insurance. While private payers have been free to offer products, generally through employers or as a rider to existing life or property and casualty insurance policies, governments have not actively promoted the industry. But the current fiscal environment and the rising expectations of the new middle class may prompt Asian countries to encourage a greater role for private payers, since they could relieve some of the financial burdens on the public sector.

THE ASIAN HEALTH INSURANCE MODEL

If private insurance does become more common in Asia, what form will it take? To answer this question, we reviewed the current health care paradigms throughout Asia and in other regions. Our research showed that health care models vary greatly worldwide, with some countries offering only public or only private coverage, and others providing a mix of the two (Figure 4.3). Historically, countries have been reluctant to change their existing models, so attempts at health care reform tend to proceed slowly.

Figure 4.3Common Health Care Coverage Models across the World

Source: McKinsey analysis.

At present, most Asian countries mandate state coverage but allow patients to purchase private insurance as a supplement—for instance, to receive a better hospital room or additional services that are not included as part of the public benefit package.

Overall, we do not expect the Asian paradigm to change significantly, largely because of social beliefs. Even in the most free-market countries, politicians and the general population value the role of public payers in ensuring access to care and providing some degree of financial protection for all citizens. A system in which the private sector has primary responsibility for health care, as in the United States, would be greeted warily, unless it was to assume the same broad and mandatory coverage as public insurance. Given these beliefs, we expect Asian governments to continue to offer or aspire to have universal public coverage, and private insurance to be used largely as a supplement that allows patients to receive more extensive or frequent services or some other type of upgrade.

There will be some variations in the extent to which different Asian countries incorporate private insurance into their systems, mostly because of differences in health care priorities and economic standing. As one example, developed countries may see private insurance as a tool for improving quality or expanding the depth of services provided, such as by providing reimbursement for sophisticated new diagnostic and treatment methods that public plans do not cover. By contrast, developing countries and emerging markets may be primarily interested in private insurance as a tool to increase access to health care, since large segments of the population lack any form of coverage. For instance, developing countries and emerging markets could encourage private payers to offer low-cost policies that reduce OOP expenses, thereby removing some financial barriers to treatment. These countries might also be interested in the ability of private insurance to solve basic health care problems that developed countries have already addressed, such as the spread of communicable diseases and high infant mortality rates.

POSSIBLE BENEFITS—AND CHALLENGES—RESULTING FROM AN INCREASED ROLE FOR PRIVATE INSURANCE IN ASIA

Governments in Asia may welcome private insurance, believing that it will improve care and ease financial strains on the public sector. But what can private insurance realistically provide in terms of cost control/sustainability, equal access to treatment for all citizens, and quality improvement, especially if, as expected, it continues to serve as a supplement to public coverage? And what potential problems may arise as private insurance becomes more common?

Cost Control/Sustainability

A few facts suggest that private payers might be better able to control costs than public payers. For instance, private payers are more likely to undertake cost control initiatives to improve profitability—as one example, by hiring pharmacy benefit managers to negotiate discounts for drugs. In addition, most public plans start off with fee-for-service reimbursement, which encourages providers to see as many patients as possible. While private payers may follow fee-for-service schemes when establishing themselves in new markets, most eventually gravitate toward systems that reward providers for judiciously conserving resources more quickly than public plans do. These include capitation models (known as managed care in some locations), in which providers are paid a set amount for each patient, and diagnosis-related group models, in which reimbursement fees are based solely on a patient’s diagnosis. Both of these methods give providers a financial incentive to avoid unnecessary treatments.

In reality, however, private payers typically need to differentiate themselves from competitors and attract subscribers based on the services that they reimburse. As such, their ability to manage cost is severely limited. By contrast, public payers that dominate or monopolize a health care system have more power to set reimbursement limits, since patients have few or no other alternatives for coverage. For the same reason, public payers can exert more influence over providers, since hospitals and physician groups cannot opt to align themselves with other health plans. Finally, private payers are also associated with higher administrative costs, which increase overall expenses (Hacker, 2008).

Given these facts, the introduction of private payers into Asia will not automatically control rising costs. However, it will produce some financial benefits for both the public sector and providers. For instance, supplemental private insurance will inject money into the health care system by freeing latent demand for a higher level of care than most public plans provide, such as an upgrade to a better hospital room or the ability to get a CT scan or other expensive tests that public payers deem medically unnecessary (McKinsey & Company, 2008). The additional income that providers receive for these services may become even more important as cash-strapped governments continue to reduce reimbursements and set limits on covered services. And supplemental private plans can relieve some financial pressures on governments by assuming reimbursement responsibility for expensive new treatments that would pose additional burdens for public plans or for other services that patients expect but that governments cannot afford to cover.

Later in this chapter, we will discuss how public and private payers can be more effective in controlling costs, since both groups have had limited success in their efforts to date.

Equal Access to Care

The health care issues that plague the United States and other countries that lack a strong public option are well known. For instance, patients who cannot afford private coverage may forsake treatment or preventive care—a problem that will have even greater implications as the rate of chronic disease rises. Other patients face financial hardship because of high premiums or OOP expenses for services not covered under their private plans. And most disturbingly, some patients find it difficult or impossible to get private insurance because of preexisting conditions or other factors that make them a high financial risk.

If private insurance continues to play a supplemental role in Asia, as expected, the risk of such problems is more limited. But it could still introduce some degree of inequity between those willing and able to pay for additional services and those who opt out or cannot afford this option (McKinsey & Company, 2008). Such a development could raise major concerns, since, as noted, social values throughout Asia strongly emphasize the importance of equal access to health care.

As we discuss in the next section, however, Asian countries can minimize problems by enacting strong regulations that keep private insurance affordable and require payers to accept all patients regardless of health status. In fact, we believe that private insurance may increase access to care, especially in emerging and developed markets, by decreasing OOP expenses.

Quality of Care

Among its greatest benefits, private insurance has the potential to contribute to an increase in health care quality. Since private payers have to compete for patients, they want the best provider networks—those that offer the widest range of innovative treatments and demonstrate the best outcomes. To win contracts with private payers, providers may need to prove their worth by monitoring quality and measuring outcomes. In addition, private insurance typically provides greater reimbursement for advanced care than public insurance, which can have many benefits. For instance, it gives medical facilities an incentive to specialize in particular areas and become true centers of excellence. Such facilities are rare in countries like Japan, which lack a private option and provide the same compensation for specialists and generalist physicians (McKinsey & Company, 2008).

In Asia, private insurance could also help provide the quality services that patients in the growing middle class increasingly expect. As one example, public payers sometimes limit reimbursement for new and innovative therapies until they have been proven to be more cost effective than traditional treatments. If private payers assume more responsibility for these costs to attract subscribers, they will reduce the financial burden on the public sector while simultaneously raising patient satisfaction.

Private insurance may also encourage quality improvements beyond the provider sphere. Looking broadly at the health care industry, for instance, both pharmaceutical companies and medical device manufacturers will have greater incentives to introduce new treatments into the market if they know that private payers will provide reimbursement.

REGULATING PRIVATE INSURANCE: WHAT NEEDS TO BE DONE

Given the risk of inequity associated with private insurance, how can Asian countries maximize its benefits while still protecting payers from financial hardship? The answer lies in a strong regulatory system that should, at minimum, include guidelines related to the following:

  • Fixed premiums: Regulators should consider setting fixed private insurance premiums for basic coverage. In addition to keeping health care affordable, fixed premiums will encourage payers to differentiate themselves from the competition based on quality, rather than cost, which may improve outcomes.

  • Mandatory acceptance of all patients: Regulators should consider instituting a law that requires private insurers to accept all patients, regardless of preexisting conditions. Mandatory acceptance will eliminate the paradoxical situation that occurs in the United States, where the seriously ill patients who most need health insurance are least likely to qualify for it.

  • Creation of risk equalization funds: If regulators are to block insurers from screening out high-risk patients, the health care burden may be unfairly distributed, with some payers having responsibility for a high proportion of subscribers with expensive medical needs. To ensure fairness, regulators should establish a fund that reimburses insurers for all high-risk patients that they cover. Among other benefits, this fund would eliminate financial incentives for selectively targeting lower-risk populations (e.g., by creating advertisements or promotions designed to appeal to young, healthy patients).

In Asia, such regulations could make supplemental private insurance a feasible option for most patients while protecting payers from financial hardship. In fact, the regulations have already been highly effective in countries where private insurance dominates. For instance, the Netherlands does not offer any form of public insurance but instead mandates that citizens must purchase private plans that provide a basic range of services—a system described as “private health insurance with social conditions” (Netherlands, MoHWS, 2009). (Patients may opt for additional coverage at an added cost.) Overall, Dutch patients express a high degree of satisfaction with the health system. The risk-sharing provisions have also made the Netherlands more attractive to private insurers, resulting in a higher degree of competition than might otherwise be expected.

To guarantee impartiality, regulators should be fully independent, free from undue influence from both government officials and private industry executives. They should emphasize pricing transparency, since health care plans often have fine print that makes it difficult to determine the exact cost of coverage. In addition, regulators should monitor the quality of each payer’s health care network and make this information publicly available, also as part of an effort to increase transparency. For instance, the regulator in the Netherlands has a website that ranks payers based on health care quality.

In some cases, regulators may look beyond payers to other participants in the health care value chain in their efforts to protect patients. As one example, they may consider setting laws regarding the amount that pharmaceutical or medical device companies can charge for their products to ensure that treatments remain affordable to all, while also preserving those companies’ right to profit.

ENSURING SUSTAINABILITY OF PUBLIC AND PRIVATE HEALTH CARE BY CONTROLLING COSTS AND UTILIZATION

As we noted, the introduction of private payers into the Asian market will not automatically solve the fiscal challenges facing the health care system. Public payers, who will continue to dominate the market, will still need to take proactive steps to reduce their costs. But what measures will be most effective? And how can private payers entering this region develop better cost containment methods and avoid the financial problems that they have encountered elsewhere?

While many payers have instituted copayments to discourage patients from seeking unnecessary treatment and thus reduce costs, evidence suggests that they have little impact. For instance, Japan increased its copayment rate from 20 percent to 30 percent for patients under 70 seeking inpatient services in 2003. However, hospital utilization fell by only 2 percent, and even this modest benefit disappeared within 12 months (Japan, MoHLW, 2007). Furthermore, spending per patient actually rose after the copayment increased (Japan, MoHLW, 2007).

Copayments are largely ineffectual because patients do not regard health care as an optional expenditure. If they are concerned about their health, or if a physician directs them to have a certain procedure performed, a small copayment will not discourage them from seeking care. Research does suggest that if copayments are set at a very high level, utilization will be reduced and financial sustainability promoted—but they also burden patients and potentially limit access to care.

As an alternative to copayments, public and private payers in Asia may want to consider the following:

  • ensuring that they have access to outcomes data from providers; in addition to promoting quality, as noted previously, this will allow payers to create reimbursement formulas that promote cost effectiveness and improve care;

  • following capitation or diagnosis-related-group-based reimbursement models, rather than fee-for-service models;

  • providing incentives or penalties to encourage hospitals to merge or take other action to reduce costs; and

  • mandating flat fees, based on diagnosis, to reduce the length of hospital stays.

Public and private payers could also significantly reduce costs through patient education, because misconceptions and long-ingrained habits about seeking treatment often increase costs in this region. For instance:

  • Some Chinese patients ask to receive expensive intravenous drugs for common colds because they believe that represents the best value for their money.

  • Japanese patients visit physicians about 14 times each year—three times the rate in other developed countries (Henke, Kadonaga, and Kanzler, 2009).

  • In Taiwan Province of China, native citizens and Chinese patients spend about $1.40 on treatment for every $1 premium paid in public or private insurance, compared to 40 cents for every $1 premium paid for foreigners living in the country who have comparable plans (Chang, 2011).1

Among other initiatives, payers could actively monitor patients with chronic diseases and ensure that they visit their general practitioners. While payers have to fund such programs, they ultimately benefit from decreased health care costs.

THE EVOLUTION OF PRIVATE HEALTH CARE IN ASIA

Well-established private payers in Western countries often play a sophisticated role in the health care system, having responsibilities that extend far beyond provider reimbursement (Figure 4.4). For instance, private payers may purchase hospitals or other health care facilities or acquire physician groups, allowing them to serve as network managers. In this role, they can exert more influence over provider quality and efficiency (e.g., by providing financial rewards to providers with the best health outcomes, or setting care guidelines). At an even more advanced level, some private payers play a role in disease management, working directly with patients, providers, and other stakeholders to improve care. As one example, a payer could appoint a disease management facilitator to identify patients with diabetes who are at risk of high-cost complications and help them proactively receive preventive care. Such measures increase short-term costs but have long-term benefits.

Figure 4.4Possible Roles for Payers

Source: McKinsey analysis.

Although private payers will become more common in Asia over the next few years, we expect that their responsibilities will initially be restricted to provider reimbursement because of infrastructure issues. For instance, most private payers in Asia have a list of preferred providers but do not own any physician networks or facilities, making it impossible for them to serve as network managers. And it could be difficult for payers to acquire hospitals in Asia, especially in developing or emerging markets, because of a lack of existing facilities that are available for purchase, since most are owned by the public sector. Construction of new hospitals, the only other option, is time consuming. As another complication, payers in emerging markets or developing countries might first need to make significant investments in provider education and training, since there may not be enough qualified personnel available to staff a network.

Despite these complications, private payers in Asia could eventually assume the role of network managers or disease management facilitators, following the path taken in Western countries. Such advances, however, probably will not be seen for many years.

While the growth of private health care in Asia is a welcome development, both governments and payers should proceed with caution. As recent experience in the United States shows, any efforts to reform a health care system may be met with distrust and violent objections. To avoid such problems, all reforms should support a country’s long-standing social values, political goals, and health care priorities.

APPENDIX 4.1. MAJOR HEALTH INSURANCE MODELS IN ASIA

Appendix Figure 4.1 summarizes the major health insurance models in Asia.

Appendix Figure 4.1Asian Insurance Models

Note: Coverage of figure is not exhaustive. PHI = private health insurance; THE = total health expenditure.

REFERENCES

The authors would like to acknowledge the contributions to this effort of their McKinsey colleagues, Jeffrey Livingston, Claudia Süssmuth-Dyckerhoff, Scott Lichtenberger, Jean Drouin, and Saum Sutaria.

Here and throughout this volume, the $ symbol always indicates U.S. dollars.

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