Information about Asia and the Pacific Asia y el Pacífico
The Economics of Public Health Care Reform in Advanced and Emerging Economies

CHAPTER 8: Health Financing Systems in East Asia and the Pacific: Early Successes and Current Challenges

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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John C. Langenbrunner and Ajay Tandon 

This chapter provides an overview of health financing systems in the East Asia and Pacific (EAP) region of the World Bank.1 The success of health financing systems depends upon the performance of three important functions, namely: revenue collection, pooling and management of resources, and purchasing of services and interventions. Following an assessment of the current macroeconomic, health status, and health sector situation in the region, the chapter then follows with a discussion of these functions in the EAP context. It also discusses current reform initiatives related to universal health coverage with general patterns and examples from specific EAP country cases. Finally, the chapter looks ahead to future challenges for the health sector in the region related to population aging and changing disease profiles.


The EAP region is extremely diverse, perhaps more so than other regions of the world. The region contains great variations in size and population, from small Pacific islands with fewer than 100,000 people to countries such as China and Indonesia, respectively the largest and fourth-largest countries in the world in terms of population.2 Relative to other regions of the world, the EAP region is the most populous, containing more than two billion people. It includes some of the world’s fastest-growing economies, as well as the second-largest number of fragile states after Africa. It contains a wide spectrum of political systems and forms of government organizations, from democracies to military dictatorships. While many countries are highly centralized, fiscal and political decentralization is an important trend in many EAP countries.

The region is extremely dynamic: the estimated average growth rate in developing EAP countries in 2010 was 9.6 percent (in seven countries it was above 7 percent), up from 7.4 percent in 2009 and 8.4 percent in 2008 (World Bank, 2011a). The region has demonstrated resilience to the adverse global economic developments of 2008-09. Although several countries in the region, including Cambodia, China, Malaysia, the Philippines, the Republic of Korea, and Thailand, saw a significant slowdown in growth in 2009, almost all the major economies of the region rebounded by 2010 and are projected to continue to grow at a rapid pace through 2015 (Figure 8.1).

Figure 8.1Annual Economic Growth Rates in EAP Countries, 2004–15

Source: IMF, World Economic Outlook database.

Improvements in the business environment continue to facilitate private sector growth in the region. However, the effects of prolonged rapid growth and the amassing of large foreign exchange reserves from strong exports and rising capital inflows are being felt by the larger economies, with risks of overheating, the formation of asset bubbles, and the emergence of financial sector and macroeconomic vulnerabilities (as in the Western countries in 2008 and 2009). Managing the extraordinary volatility in real commodity prices, in particular, those for energy and food, as well as the recent natural disasters in China and Myanmar, presents new challenges. Most recently, the severe downturn in commodities will present other types of challenges, such as loss of revenues from copper mining in Mongolia (Bredenkamp, Lie, and Brenzel, 2010).

Income inequality in the region has grown despite sustained growth and policies that have provided opportunities to the poor and produced dramatic advances in poverty reduction. A study by the Asian Development Bank (2007) found that income inequality rose significantly over the past decade in many EAP countries. Middle-income countries in the region, such as China and the Philippines, and emerging middle-income countries, such as Vietnam, have seen income inequality rise dramatically in their domestic economies over the past decade, as have lower-income countries such as Cambodia and the Lao People’s Democratic Republic (PDR). There has been rapid urbanization, although some countries in the region remain predominantly rural. The region also contains fragile states (such as Timor-Leste) and many conflict-affected areas, but these have tended to be limited to relatively small geographic zones.


The recent history of the region presents a surprising profile of relatively good health outcomes while at the same time relatively modest expenditures for health. EAP countries perform relatively well in global comparisons of commonly used health and expenditure indicators.

In general, the region does well on health outcomes when compared with other countries of the world with similar income and health spending levels. Outcomes on infant mortality, under-five mortality (Figure 8.2), life expectancy, and maternal mortality (Figure 8.3) are generally better than expected when regressed on levels of income and levels of health spending. (Nevertheless, there are some notable exceptions, such as Cambodia for infant and under-five mortality and Lao PDR and Indonesia for maternal mortality.)

Figure 8.2Infant and Under-Five Mortality Relative to Income and Health Spending, 2009

Sources: World Bank Institute; and World Health Organization.

Note: Plots are residuals of regressions of outcome on income and health spending separately.

Figure 8.3Life Expectancy and Maternal Mortality Relative to Income and Health Spending, 2008

Sources: World Bank Institute; and World Health Organization.

Note: Plots are residuals of regressions of outcome on income and health spending separately.

At present, EAP countries spend relatively less on health, both as a share of GDP and in per capita terms, relative to other countries at comparable levels of income. Although there are some exceptions, in general in EAP the levels of total and public (government) health spending (Figure 8.4) are lower than expected. The lower levels of health spending reflect generally lower levels of health system inputs such as doctors, nurses, and beds per capita. And as shown below, lower public spending further correlates with relatively high levels of out-of-pocket (OOP) expenditures and poor levels of financial protection in many EAP countries, even in some high-income ones such as Singapore.

Figure 8.4Health Spending versus Income, 2009

Sources: World Bank, World Development Indicators; and World Health Organization.

EAP countries generally have fewer disability-adjusted life-years (DALYs)3 per capita than other countries (Figure 8.5), which correlates with the generally higher literacy and education levels found in the region. The burden-of-disease figures for the region indicate that, for communicable diseases, maternal, perinatal, and nutritional conditions, the burden of disease (in thousands of DALYs) is greatest in China (31,878)—as a result of its large population size— and Indonesia (15,382). For noncommunicable diseases, again China exhibits the highest level (141,016), followed by Indonesia (25,623), Japan (10,961), and the Philippines (9,188).4 This “good performance” to date of fewer DALYs per person and relatively good outcomes, coupled with relatively modest expenditures, may be attributable to historic levels of investments in related sectors such as (women’s) education, clean water and sanitation, basic public health, good housing, and roads.

Figure 8.5Disability-Adjusted Life-Years per Capita in East Asia and Pacific versus Global Comparators, 2004

Source: World Health Organization.

Despite significant progress in terms of levels, many EAP countries are still characterized by large and persistent inequalities in health outcomes. Evidence from demographic and health survey data across countries indicates that in some EAP countries—such as Cambodia, the Philippines, and Vietnam—under-five mortality rates are three times higher among the lowest economic quintiles than among the highest quintiles. Similarly, under-five mortality rates are one-and-a-half to two times higher in rural areas than in urban areas (Table 8.1). In some countries, such as China, even though interprovincial health outcomes have converged, there is evidence that rural-urban health inequalities have increased substantially (Zhang and Kanbur, 2005; Tandon, Zhuang, and Chatterji, 2006).

TABLE 8.1Under-Five Mortality in Selected EAP Countries

mortality rate

(per 1,000 live births)
Ratio of

lowest to highest

economic quintiles
Rural-urban ratio
Source: World Bank estimates, based on U.S. Agency for International Development, Demographic and Health Surveys.
Source: World Bank estimates, based on U.S. Agency for International Development, Demographic and Health Surveys.

Underlying these differences in outcomes are large inequalities in the financing and delivery of health care. Improved averages in health outcomes could have very well been achieved through a pattern that benefits primarily the better-off while largely bypassing the poor (Moser, Leon, and Gwatkin, 2005). Despite relatively low levels of health spending and good outcomes, efficiency improvements— including, as discussed below, making public spending allocations more pro-poor—will be critical for generating additional public sector resources for health care in the EAP region in order to tackle inequalities.5


Total health expenditures as a share of GDP ranged from 2 to 8 percent in the region in 2009. These numbers have generally been increasing modestly every year, on average, over the past decade in most countries in the region. This increase in spending has been driven largely by sustained increases in public sector spending in countries such as China, Japan, Malaysia, and Thailand. By contrast, in Cambodia, Lao PDR, and the Pacific Island countries, increased donor spending explains a large proportion of the growth in overall spending. Only in Vietnam, with the initiation of user fees, has the increase in overall health spending been driven by an increase in OOP spending.

Per capita health expenditures in the region have tended to reflect GDP per capita levels, both over time and relative to global comparators at any given point in time, although there are some outliers, such as Cambodia. For instance, using global comparators, per capita health spending levels in Indonesia, Malaysia, the Philippines, and Thailand are low relative to these countries’ income levels. Cambodia and Vietnam are above the expected levels of spending on health relative to income. Both GDP per capita and health expenditure per capita are in a middle range compared to other regions. On both indicators, the regions of Europe, Central Asia, Latin America and the Caribbean, and the Middle East and North Africa are higher on average, and South Asia and Africa are lower.

EAP countries and territories generally conform with the global pattern, namely, with reliance on OOP declining and government’s share of total financing increasing as national income rises. The government share of total health financing ranges from 20 to 30 percent in low-income EAP countries such as Cambodia, Lao PDR, and Vietnam, compared to 50 to 60 percent in middle-income countries such as Malaysia and Thailand. Meanwhile, OOP spending finances 50 to 60 percent of total expenditures in most low-income countries in Asia and 40 percent or less of expenditures in middle- and upper-income countries (Figure 8.6).

Figure 8.6Out-of-Pocket Spending Share of Total Expenditure, 2009

Source: World Health Organization.

Significant evidence exists of pro-rich differentials in health care allocation and utilization in the EAP region. The use of public sector inpatient services is strongly pro-poor6 in Hong Kong Special Administrative Region (SAR), moderately pro-poor in Malaysia, and pro-rich in China, Indonesia, the Republic of Korea, Taiwan Province of China, Thailand, and Vietnam. Use of outpatient care services, particularly nonhospital outpatient care services, is moderately pro-poor or relatively proportional to income in most countries.

In low-income countries, inequalities in access to services are caused by deficiencies in both breadth and depth in coverage. The unemployed, agricultural workers, and workers in the informal sector either have no coverage (for example, in Indonesia and Vietnam) or have partial coverage that entitles them to a relatively shallow benefits package (for example, in China and the Philippines). This may be due either to poor design of the package or to affordability within a country’s current fiscal space. In tax-financed systems in which universal coverage has not been achieved, the poor face significant financial barriers to access in the form of formal and informal user charges at public health facilities (for example, in Cambodia, Lao PDR, and Papua New Guinea). Targeted fee waiver/exemption schemes (for example, health cards in Indonesia) and health equity funds (Cambodia, Lao PDR) have been established to help the poor overcome financial barriers to access. However, there is little compelling evidence that these targeting mechanisms succeed in improving equity in access to care.

In high-income countries, where universal coverage has been achieved, inequalities still exist due to shallow coverage. The more catastrophic expenditures may be outside the domain of health insurance, or there may be wide variations among benefits packages offered under different insurance schemes. Where the social insurance law mandates the same benefits for all (for example, Japan) there are fewer inequities. Similarly, in high-income, tax-financed countries/territories where universal coverage has been achieved (for example, Hong Kong SAR, Malaysia), inequalities are not as widespread because there are fewer restrictions on who has access to which services.

Benefit-incidence studies in Asia have typically found that public health spending in low- and middle-income countries is not pro-poor. Public subsidies for inpatient care are especially pro-rich, although there are some exceptions. The distribution of public subsidies is considerably more pro-poor in higher-income Hong Kong SAR, Malaysia, and Thailand, for both hospital and nonhospital care. What are the potential explanations for the unusually pro-poor distribution of subsidies in these countries? While the level of national income is a critical factor in improving the distribution of public subsidies, the mix of public and private services that are offered also plays a role. Targeting the poor is successful in richer countries because they can afford a system of universal public health care funded from general taxation with minimal user charges.

An alternative explanation for the pro-poor distribution of public health subsidies lies in the types of private sector alternatives available to the rich. In these territories, the combination of universal public provision, a private sector offering an attractive alternative to the basic package, and incomes that make demand for this alternative effective all lead to redistribution through public provision in precisely the way that theory predicts (e.g., Hong Kong SAR). This suggests that effective targeting of public spending on health care depends not only upon policies concerning the publicly run system but also upon the scale, locations, and allocation of public spending.


Sources of Revenues

Underlying the push for health financing reform in the EAP region is a growing concern among policymakers that the current levels of resources available for health expenditures are inadequate for meeting emergent health needs and achieving universal coverage. Other factors underlying these calls for reform are a high reliance on donor funding in low-income countries and OOP sources of financing in both low- and middle-income countries, as well as a perceived lack of sustainability of current sources of public financing.

As in many OECD countries, public prepayment, composed of taxes and social insurance, accounts for the largest share of health financing in high-income EAP countries. A large portion of prepayment revenues in social insurance systems is raised through wage-related contributions, shared between employers and employees. Hong Kong SAR is the only high-income country in the EAP region that collects more than half of its publicly funded prepayment through taxation rather than social insurance. Voluntary (or private) health insurance accounts for a relatively small share of overall health expenditures in high-income EAP countries and territories.

Despite the significance of public prepayments in total financing, the share of OOP payments in total health expenditures is relatively high in high-income EAP countries/territories compared to other OECD countries. In the Republic of Korea, for instance, copayments account for 20 percent of expenditures for inpatient care and 30 to 55 percent for outpatient care. In tax-financed countries like Hong Kong SAR, OOP payments are predominantly used to pay for services obtained from private health care providers, while in social-insurance-financed countries, OOPs consist of copayments, coinsurance, and deductibles.

Public prepayments account for a higher share of health financing in middle-income EAP countries compared to other middle-income countries globally, thanks in part to stronger economic growth in recent years. A significant portion of public prepayment in these middle-income EAP countries is accounted for by general government revenues, regardless of the type of health financing model or system. The majority of these countries also have social health insurance for civil servants and other formal sector workers, financed through payroll contributions. Private health insurance plays a minor role in middle-income EAP countries, somewhat surprising given the high OOP share of total spending, the existence of a middle class, and a viable financial market that is conducive to private health insurance growth.

Low-income countries in the EAP region, as elsewhere, are characterized by low public health spending and limited ability to mobilize domestic resources to increase the share of public prepayments for health care. On average across the EAP region, public prepayment for health accounts for 30 percent or less of total health expenditure; most of the remaining 70 percent from private sources is in the form of OOP payments.

Historically, general government revenues have financed public prepayment for health care in low-income EAP countries (Figure 8.7). Low economic growth, weak tax administration capacity, and limited potential for increasing government revenues have led to the imposition of fees. In recent years, a range of social insurance schemes and community-based insurance schemes have been introduced, partly to diversify the revenue base for health care (for example, social health insurance in Vietnam) and partly to provide low-income households with a means of financial protection in the face of rising user fees (for example, health equity funds in Cambodia and Lao PDR). Voluntary health insurance accounts for less than 5 percent of total health expenditures in low-income countries in the region and is mainly to supplement private care for middle- and upper-income groups. Donor financing accounts for a significant share of health spending in low-income countries, yet complete, consistent data on donor spending are rarely available.

Figure 8.7Share of Tax and Donor Financing versus Social Insurance in Public Spending on Health in East Asia and Pacific Countries, 2009

Source: World Health Organization.

OOP payments are the principal means of financing health care throughout much of the EAP region and are a significant burden on household resources in many low- and middle-income countries. The proportion of households incurring catastrophic payments for health care (defined at three thresholds, namely 15 percent, 25 percent, and 40 percent of both food and nonfood expenditures) is highest in China and Vietnam.

Many countries continue to assess the relative merits of different options for improving public prepayment levels. For example, Hong Kong SAR and Malaysia have each considered a move to a social health insurance model from a general government revenue model. The sustainability of social health insurance financing depends on economic growth, which is essential for ensuring the sustainability of payroll taxes as well as the existence of a large formal labor market, administrative capacity for collection, good regulatory and oversight structures, and appropriate incentive structures. In middle-income countries in EAP, economic growth has been strong in recent years, but many of the other enabling factors are not present.

Low- and middle-income countries in EAP are characterized by large rural populations and small formal labor markets. Even in the context of the limited formal labor market, the collection of social insurance contributions is constrained by weak administrative capacity and the lack of good regulatory oversight and incentive structures. The nonenrollment of formal sector workers in insurance schemes, and the full or partial evasion of payments among those who are enrolled, mean that the collection of social insurance contributions is no more efficient than the collection of tax revenues in most middle-income countries (for example, China and Vietnam). Evasion exists even where enrollment is mandatory, as workers and employers can take advantage of lax enforcement but do not enroll in the scheme at all (for example, Indonesia). Furthermore, in many EAP countries—despite robust economic growth—the share of the formal sector in the labor market has not increased significantly (Figure 8.8 shows the example of Indonesia over the period 1990–2007).

Figure 8.8Formal Sector Share of Employment in Indonesia, 1990–2007


Source: World Bank staff estimates.

Some forms of taxes, such as taxes on tobacco, cigarettes, and alcohol, represent an alternative source of revenues whose potential remains relatively untapped in most EAP countries. The tobacco tax rate is less than 50 percent of the price of cigarettes in all Asian countries with the exception of Singapore and Thailand. In EU-15 countries, taxes on the price of cigarettes average 58 percent, although the proportion of smokers in the population is quite similar in both regions. One key consideration regarding taxation of tobacco is that in most EAP countries the incidence of tobacco consumption tends to be higher among poorer quintiles, for whom elasticities tend to be higher.

There is some greater understanding of the dimension of equity in financing revenues across health sectors in the region. The incidence of the health care financing burden in high-income countries/territories in the EAP region is similar to that in the European countries: tax financing is the most progressive and social insurance is slightly regressive, while direct OOP payments are proportional (Hong Kong SAR) or regressive (Japan, Taiwan Province of China). The incidence is quite different in low- and middle-income EAP countries. There, both tax and social insurance financing are highly progressive, because their incidence is limited to skilled, professional groups and levied on a narrow tax base. Direct payments are also progressive in all low- and middle-income EAP countries, with the exception of China.

Fiscal capacity and policy priorities are twin dimensions in improving levels of public prepayment for health. Regardless of the options (above) chosen, overall levels of public prepayment tend to track a country’s GDP per capita. This is true both globally and in the EAP region. At the same time, there is significant variation in public spending as a share of GDP for countries with similar GDP (for example, Lao PDR has much higher levels of prepayment than Cambodia, even though both are low-income countries). This variation may be due to variation in fiscal capacity and/or in different public sector priorities regarding investing in health spending as a share of the public budget. Analysts will want to disentangle these two factors in order to understand how much is fiscal “context” versus how much is public policy “priorities.”7


Pooling of funds is a major challenge in the region, which is characterized by numerous small pools in many countries. This fragmentation limits the potential for cross-subsidy, while perhaps unnecessarily increasing administrative costs in very limited funding contexts. Many countries in the region—Indonesia, Mongolia, the Philippines, and Vietnam—have established, or are in the process of establishing, a national social health insurance program as a way to pool funds, while Cambodia is also developing a blueprint.

Fragmentation can also involve planned segmentation in any country, leading to “inequity by design.” This has been the experience of many low- and middle-income countries, especially in Latin America. Cambodia plans a separate administrative structure in the short run for its civil servants and formal sector workers. This approach has been administratively unsuccessful in Thailand and other countries with fragmented insurance pools. The decision is more political than technical. The government in Thailand, for example, has not been able to “take on” the civil servants politically.

Similarly, it is important to integrate new health insurance funds for poorer groups into the broader pooling of funds. New health equity funds for the poor are now well established institutionally in Cambodia and Lao PDR and could be used to make contributions to social health insurance for the poor. A similar challenge is faced by Indonesia’s health insurance program for the poor (Jamkesmas). Similarly in China, the medical assistance programs, which subsidize lower-income groups with current coverage, could be folded into larger social insurance pools. Perhaps China’s biggest challenge will be to pool funds across geographic areas within provinces to pool urban and rural populations.

Regionally, there are different approaches to pooling that EAP countries might adapt, including consolidation of a multipool system and establishment of a single national pool. The Republic of Korea went from more than 380 funds to one national fund over a 12-year time span, from the 1990s to the early part of this decade. Taiwan Province of China moved from three insurance funds to a single insurance fund model as well. Japan is an interesting model from the region, as it effectively has a single fund. In Japan, a single pooling fund was created in 1983 so that costs would be shared equally by the multiple insurers that developed over time. This single pool pays for 70 percent of all costs.

Globally, there are also useful models for pooling, such as those in Europe, Canada, and Latin America that adjust risks prospectively or retrospectively into insurance pools, or pool geographically by province. Since decentralization is a popular option in the EAP region, such geographic-based pooling mechanisms could serve as models or interim models for several countries such as China and Indonesia.

In EAP countries with multiple pools, pooling might follow two tracks related to the time frame available. In the short term, the health sector should assess disparities across risk pools and develop a risk adjustment mechanism across payers. Some regulatory framework and stewardship capacity would be needed, but this would increase equity and better spread risks as well as encourage purchasers to better manage purchasing arrangements. How the low-income countries (for example, Cambodia and Lao PDR) provide the necessary regulatory framework and stewardship capacity will be an important challenge.

Bureaucratically, there are also hurdles in several EAP countries. In many countries, such as Cambodia, China, Lao PDR, and Mongolia, different government ministries manage different funds. For example, a total of 16 ministries handle health policy in China. A decision would need to be made in each country about whether the Ministry of Social Security or Ministry of Health (or some other ministry) would bring various funds under one umbrella.


Many countries have adopted a general “strategic purchasing” of health services framework which recognizes a number of components of purchasing, or “policy levers.” These can be used by purchasers to better allocate resources across geographic areas or directly to providers. They include

  • coverage and targeting of funds;

  • setting the benefits package;

  • contracting; and

  • setting payment rates and the incentive framework for providers.

While elements of strategic purchasing are emerging in the region, capturing value for money expended remains a significant unfinished agenda.

Benefits package

Given low levels of health spending in low-income countries, a widely held view is that the state should first finance a small package of services for universal coverage, essentially encompassing public goods, goods with externalities, and other interventions that have a proven impact. All other clinical care and catastrophic expenditures would be financed for the poor using some targeting mechanism. In reality, decisions about which package of services the government should buy are based not only on economic criteria, but also on social and political criteria. While cost-effectiveness of spending is referred to frequently in policy documents in many of the low-income EAP countries, almost no country has a benefit package defined purely on this basis. Globally, tradition, corruption, and political pressures mean that increased health resources are often allocated to tertiary care centers and urban health facilities. The regional experience follows this global pattern.

For most middle-income countries in Eastern Europe and Latin America, concerns about the design of the package relate more to the depth of coverage than to its breadth. However, the same is not true of all middle-income countries in the EAP region. For instance, China and the Philippines have yet to achieve high levels of coverage of publicly financed services. Underinsurance is a key problem even for those countries that are expanding to universal coverage over time. This is also true for upper-income countries, such as the Republic of Korea.

There is a further problem stemming from variations in packages across insurance schemes within a country. Formal sector and urban-based programs or insurance schemes tend to have richer packages relative to parallel programs (for example, Cambodia, China, Indonesia, Lao PDR, and Thailand). In most tax-financed systems, in both Europe and Asia, the benefits package is not explicitly defined. High-income tax-financed systems in Asia, like those in Hong Kong SAR and Malaysia, whose systems were based on the UK National Health Service (NHS), are no different. Low-income tax-financed systems in the EAP region, such as those in the Pacific Island nations, also do not explicitly define benefits.

As the burden of disease in EAP increasingly shifts to noncommunicable and chronic diseases, preventive and promotive services—as well as screening services—become more important. The benefit packages need to be continually updated to address the changing disease profile and coordinated with basic public health programs, with due consideration for fiscal sustainability issues. The provision of early treatment can prevent longer-term complications and can help reduce costs overall.


There is significant external contracting with providers across most countries in the EAP region, and this seems to occur across all income groups. Indeed, there is a rich and well-documented tradition of this in some countries, including Cambodia. An important issue in contracting in many EAP countries is whether the payer is to contract with both the public sector and the emergent private sector. There is a growing private sector in health care delivery, and while it remains small in some countries, it has grown significantly in Cambodia (mostly nongovernmental organizations), Indonesia, Mongolia, and the Philippines. Growth in contracting both public and private providers can be found in countries such as Malaysia, Mongolia, and Thailand in addition to such high-income countries as Japan, the Republic of Korea, and Taiwan Province of China. For contracting to succeed, the regulators will need to “level the playing field,” since many public facilities receive separate subsidies for salaries and capital investment.

Some countries, including Mongolia and Thailand, also utilize the element of gatekeeping in contracts with primary care providers. This model can be used to better encourage the use of primary care and more cost-effective outpatient services. However, there is little in the way of contract evaluation in any of the countries in the region, and outside of Cambodia there is no evidence of selective contracting on the basis of quality, costs, and performance. More often, the situation is one of soft, relational contracts in which both sides (purchaser and provider) expect that a contract will be automatically extended in ensuing years. Selective contracting should be on the agenda for many countries in the region in the next few years.

Provider Payment

The EAP region displays a rich variety of provider payment systems, and many countries would appear to be in transition. Currently, though, there is an over-reliance on fee for service. Outside of high-income countries, fee for service is often utilized in conjunction with supply-side financing with line-item budgets, as in China, Lao PDR, the Philippines, and Vietnam. This can create a toxic mix of incentives. On the one hand, line-item budgets are often unresponsive to patient needs and demands. The fee-for-service overlay can encourage unnecessary demand, often becoming a way of generating new revenues for underfunded line-item budgets or for reallocating revenues across line-item budgets. The impact can be borne by the purchaser as unnecessary outlays or fall on consumers in the form of OOP costs.

At the same time, many countries are now looking to move beyond fee for service, especially as they grapple with increased health expenditures and cost containment and efficiency are becoming higher priorities. New provider payment strategies and new provider payment pilots are emerging in several countries (China, Indonesia, Mongolia, and Vietnam) regardless of income. Thailand is perhaps the regional leader in moving beyond fee for service, with a sophisticated mix of geographic caps, hospital global budgets, and case mix (often referred to as diagnosis-related groups, or DRGs) adjusters for hospital admissions.

Governments in the EAP region with multiple purchasers (Cambodia, China, Indonesia, and Lao PDR) will also need to strongly consider new and more consistent sets of payment rules and systems across insurers. Variations across payers can distort the incentives providers face, and thus distort practice patterns by encouraging overuse of highly paid services by some payers while, at the same time, discouraging access to relatively poorly paid services and discouraging equitable treatment for groups under some payers relative to others. New payment systems need to restructure incentives, but more uniform rules across payers will also help improve equity across groups.

Profiles in the Push for Reform and for Universal Health Coverage

Many governments in the EAP region have made great strides in extending coverage step by step on a path to universal health coverage. For example, Thailand achieved it earlier in the last decade through its general-revenues-based 30-baht insurance scheme.

Challenges for covering all of the populations in EAP region countries are often linked to formalization of labor and payment of the payroll tax. As mentioned above, one of the challenges faced by the region is the persistence of informality in the labor market, despite rapid economic growth (Felipe and Hasan, 2006). As dynamic economies expand in EAP, several countries have begun to assess or commit to use of general revenues to bring in newly covered. In several cases, funds have been well targeted to prioritize lower-income groups and the poorest.

China has gone from near-zero coverage to almost universal coverage (more than 90 percent) for its population of more than 700 million citizens in rural areas since the early part of this decade. It is also scaling up for nonemployed segments in urban areas and estimates coverage currently at 1.2 billion (out of 1.4 billion total population). Utilization has increased dramatically. Hospital admissions per capita have effectively doubled in most geographic areas from 2005 to 2010. This doubling of admissions per capita over just 5 years may be unprecedented globally. But is the increase due to unmet need or to induced demand? Most studies (Ping, 2010) estimate the number of unnecessary admissions to be as high as 51 percent. The Ministry of Health estimates unnecessary admissions at 29.4 percent using its national survey from 2008. Secondly, OOPs as a share of total expenditures have decreased to as low as 40 percent (from 60 percent over the last five years), but OOPs as a share of average patient income have not improved. This is true for urban and rural areas, and for all income quintiles (MOH National Health Survey, 2008). In great part, the incentives under fee for service appear to be driving up costs per admission at equal or faster levels than at the rate of benefit package coverage increases.

Increases in national expenditures for health have been estimated at 20 percent and 16.3 percent over 2009 and 2010, roughly double the GDP growth.8 In the short term, government surpluses funding health reform may be good politics and good macroeconomics (see Barnett and Brooks, 2010). In the medium term, China will need to address its fee-for-service incentive structure with improved policies aimed at efficiencies and cost containment.

More recently, Vietnam, Indonesia, and the Philippines have also made commitments to reaching universal health coverage (UHC). Each country is at a relatively early stage. Vietnam (Figure 8.9) initiated coverage for the formal sector in the 1990s and followed with a focus on the poor and near poor. Recent estimates indicate about 55 percent of the population has some form of coverage (Tangcharoensathien and others, 2011). To date there has been increased utilization of hospital services, substitution away from private sector, and some muted impact on OOP spending, with reduced incidence of catastrophic OOPs for the poor (currently 3–5 percent), but no impact on OOPs on drugs. But financial sustainability has quickly become an issue. In 2009, the health insurance fund starting running deficits due to rising unit costs and utilization. There was also some evidence of adverse selection by the informal sector and self-employed. Vietnam has also accelerated its effort toward provider incentives reform, wanting to move from fee for service to hospital DRGs and outpatient capitation. Institutional implementation of the reforms will also be a challenge with current dual management of health financing by the Ministry of Health and the Social Security Board.

Figure 8.9The Road to Universal Health Coverage in Vietnam, 1992–2015

In Indonesia, a UHC law was passed in 2004, and implementation was immediately started by covering first the poor, and then by 2008 both the poor and near poor (with a target of over 70 million citizens) under the Jamkesmas insurance scheme program. Survey data estimates indicate that about a quarter of Indonesia’s population is covered by Jamkesmas, but that the coverage rate among the bottom three economic deciles of the population was only about 42 percent in 2009 (Figure 8.10). Beneficiaries tend to have a lower incidence and intensity of catastrophic expenditure and higher rates of outpatient and inpatient utilization. Some 50 percent of the population, however, largely informal (but also many formal) sector workers, remained uncovered through 2010.

Figure 8.10Trends in Insurance Coverage in Indonesia, 2004–09

Source: SUSENAS (2004–09).

In the Philippines, the new president has committed to reaching UHC by 2016. There are two issues: making care accessible to the currently enrolled (estimated at around 42 percent of the population) and, secondly, extending coverage to those currently not enrolled (recent estimates from the U.S. Agency for International Development’s Demographic and Health Survey indicate that about 58 percent of the population—and 80 percent of the poorest quintile—had no insurance coverage). The benefit package is being restructured to include both outpatient and inpatient services. Actuarial models have been developed and estimates of reaching UHC by 2016 depend upon the specifics of the new benefit structure and the levels of copayments and policies to improve efficiency such as gatekeeping. Nevertheless, the overall incremental change estimates remain less than 1 percent of GDP overall (under an assumed 5 percent GDP growth per year). Fiscal sustainability will be driven by both efficiency gains in organization of care and payment reforms, and by new “sin taxes” on tobacco products going into general revenues. Table 8.2 provides an overview of a recent fiscal space analysis in the context of UHC for the Philippines.

TABLE 8.2Fiscal Space Analysis for the Philippines, 2010
Fiscal space sourceKey informationProspects for fiscal space
Macroeconomic conditionsGDP growth rates (reduced from 7 percent to 1 percent between 2007 and 2009), declining revenue shares and low elasticity of public expenditures on health to GDP limit likelihood of additional public resources for health, but will rebound in 2011 to 7 percent with IMF estimates of 5 percent per year to 2015.Moderate
Reprioritization of health in the government budgetPublic spending on health is low relative to revenue efforts in the country and relative to the regional average. There are some indications that the priority accorded to health may be increasing.Moderate
Health-sector-specific resourcesThe Philippines currently earmarks excise taxes on tobacco and alcohol for health as well as a portion of incremental revenues from VAT. Gaining further fiscal space from increased social health insurance contributions is unlikely given large informal sector.Limited
Health-sector-specific grants and foreign aidODA for health is 2.9 percent of total health spending. External dependence is relatively low and irregular and likely to remain so given current global economic crisis.Limited
Efficiency gainsImprovements in revenue collection efforts and governance, better allocation of health resources, quality improvements and more cost-effective interventions could create additional resources for health.Good

In low-income Cambodia, there is the promise by the government of universal coverage by 2015 (Cambodia, BHEF, 2008) as new insurance schemes emerge for the formal sector and civil servants, but together this covers only about 15 percent of the population. Nearly 50 health equity funds funded by donors are covering 5–10 percent of the poor, and multiple community-based health insurance funds are being nurtured as well. The challenge will be to scale up these programs and make sustainable, but also integrate and coordinate, these multiple schemes for reasons of both efficiency and equity.

Cutler (2002) has observed that in many member countries of the Organization for Economic Cooperation and Development (OECD), three consecutive waves of reforms can be discerned: (1) universal coverage and equal access, (2) controls, rationing, and expenditure caps, and (3) incentives and competition. The pattern in EAP is similar, at least emerging now for many of the middle-income countries. At the level of wave 1, there is a push for UHC, though in the most successful countries such as Thailand and China some insured groups and some regions may not be receiving equity of funding relative to need or demand and thus there may be a mismatch of equity of access and equity to quality of services. This can be a particular issue in the region where so many countries—China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam—utilize some form of fiscal decentralization. For example, the ratio of per capita spending between urban and rural is ten to one in China (Wagstaff and others, 2009). Variations in per capita spending for Thailand are shown in Figure 8.11. In the short term, the easiest approach technically for countries might be to move toward more population-based allocation methods.

Figure 8.11Thailand: Variations in Per Capita Expenditure by Province

In the medium term, cost containment and efficiencies will be increasingly important, especially with the changing disease profile in the region. Thailand has embarked on relatively sophisticated payment reforms,9 and perhaps China, Indonesia, the Philippines, Malaysia, and Vietnam are not far behind. In Indonesia, providers are paid capitation at primary level and DRGs for inpatient care. Although capitation or DRGs are used in some instances, Vietnam reimburses most providers primarily on a fee-for-service basis. Hospital case payments for up to 50 groups are slated to be introduced in the Philippines on a pilot basis in 2011 (Wagstaff, 2011). Even Cambodia is developing a payment reform strategy for 2011–12.

Reducing inefficiencies in health financing and provision can also generate additional resources for health. Improved revenue-raising capacity, while important, will not be sufficient by itself to increase allocations for health. The EAP countries generally commit a lower percentage of overall public funding for health relative to other countries in similar income categories. Reforms and the commitment to UHC have increased the short-term increment. But alternatively, fiscal space for health may need to be generated by improving the efficiency of sector outlays. Improvements in efficiency can increase effective fiscal space, and at the same time, improved performance and the promise of impact can attract additional resources from Ministries of Finance.

Finally, as noted recently by Wagstaff (2011), most countries in the region appear to be moving toward a greater role for government in the finance of health care and a smaller emphasis on government provision of health care. For example, in Indonesia 30 percent of hospitals contracted by the Jamkesmas scheme are private. In the Philippines and Thailand, private hospitals provide care to those covered by tax-financed insurance schemes. Similar trends can be observed in Vietnam as well as in China, although in these countries the public-private split is not as clearly demarcated (Wagstaff, 2011).10


Looking to the future, changes in the demographic and epidemiological profile of EAP countries are likely to be key determinants of health care costs and needs in the medium to long term, whereas actual public expenditures will be constrained by the overall fiscal envelope available. Demographic and epidemiological profiles and changing patterns in these profiles are important drivers of the demand for health care and thus also of the patterns of health spending and financing within a macroeconomic environment wherein several middle-income EAP countries are projected to undergo fiscal consolidation and reductions in deficits (Table 8.3).

TABLE 8.3General Government Balance and Expenditure, 2010 and 2015
CountryGeneral government balance

(percent of GDP)
General government expenditure

(percent of GDP)
Source: IMF (2010).
Source: IMF (2010).

Within the EAP region, the total fertility rate has decreased and individuals are living longer, as exhibited by increases in life expectancy from about 52 years in 1960 to 66 years in 1990 to almost 72 years in 2008. In the short term, there will be relatively more of both genders of working age, and if workers are in relatively good health, this could provide a “demographic dividend” whereby the workforce will have a lower dependency ratio and will be able to support economic expansions and help improve overall productivity. For the 22 EAP countries for which data were available, all (with the exception of Timor-Leste) exhibited a decline in the age-dependency ratio from 1960 to 2009.

Notably, however, over the next 50 years, the age-dependency ratios for many EAP countries are expected to increase dramatically from their 2005 levels. This will be the case in current higher-income countries such as Japan, the Republic of Korea, and Singapore, as well as middle-income countries such as China. In the medium term, with an aging population, the role of noncommunicable diseases in the overall disease burden profile can also be expected to increase in EAP. This will effectively place greater challenges on meeting growing demands for care for primary and secondary prevention and in the treatment of chronic diseases. As individuals live longer, there can be greater demands (on average) on the health system, particularly in the later years of life when medical needs increase.

Together, the combination of population growth, nutritional transition, an aging population, and a shifting epidemiological profile suggests that policymakers will need to be concerned about the overall macro-level efficiency of heath care expenditures. While general revenues have powered the recent push for universal coverage, there could be increased pressure on the economically productive segments of the population to provide revenues for the health sector. Demand will grow significantly by the year 2020 because of population dynamics alone, and this growth will be even more explosive because of changes in patterns of aging. Overall, most countries in the region could see expenditures grow by 20–40 percent between 2000 and 2020 (Figure 8.12). The initiation, then, of micro-level reforms through purchasing reforms and the use of a public-private mix of providers can be expected to continue if not expand in the years ahead.

Figure 8.12Expected Increases in Health Expenditures from 2000 to 2020 Due to Population and Epidemiological Dynamics


The authors wish to thank George Schieber for his review and comment on an earlier draft.

Unless otherwise noted, front sections draw on Langenbrunner and Somanathan (2011).

The World Bank’s classification includes over 20 developing countries as part of the EAP region, including Cambodia, China, Fiji, Kiribati, the Republic of Korea, the Lao People’s Democratic Republic, Malaysia, Marshall Islands, the Federated States of Micronesia, Mongolia, Palau, Papua New Guinea, the Philippines, Samoa, the Solomon Islands, Thailand, Timor-Leste, Tonga, Vanuatu, and Vietnam.

A disability-adjusted life-year is a time-based measure that combines years of life lost through premature mortality and years of life lost as the result of time lived in states of less than full health.

The DALY numbers are from the World Health Organization’s Global Burden of Disease database.

Efficiency and equity are two dimensions used to assess health sector performance in the region. Efficiency is typically defined as maximizing outcomes from inputs, although there are many dimensions to it. In the EAP region, there is suggestive evidence of poor allocative efficiency (for example, relatively low shares of expenditures on primary and outpatient care, low hospital occupancy rates) as well as poor technical efficiency (relatively long lengths of stay), but there is limited data and information with which to understand the problem of efficiency in greater depth.

Public services are regarded as “pro-poor” when the proportion of the poor who use them is greater than the proportion of poor in the population. For example, if more than 20 percent of all users of public health care facilities are poor but only 20 percent of the population is poor, then public health care is deemed pro-poor.

For more on fiscal space for health see Tandon and Cashin (2010).

Personal communication, Ministry of Finance, Beijing, China, 2011.

But Thailand now seems stuck in moving to greater pooling and integration of insurance schemes, as outlined in the last sections.

See, for example, World Bank (2010).

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