Today, increases in the demand for healthcare are driving European governments to look for ways to control growth in healthcare expenditures and at the same time improve health outcomes. Consideration of ways to enhance trade in healthcare goods and services is important for governments as they struggle to find resources to finance this increasing demand for healthcare.
III. Approaching Trade in Healthcare Services
Trade in healthcare services extends beyond the world of trade in input services. Ideally, it should also involve the performance of the healthcare service. For Europe, the quest for more efficient use of existing resources through trade relates directly to the broader political ambition to deliver affordable and high-quality healthcare for all. During the crisis, many European governments have cut healthcare expenditures or introduced new measures to limit their growth. Many of these new measures have built on past efforts of cost containment. There are several methods of cost containment that help to improve the performance of healthcare systems. Mechanisms to ensure comparative economic effectiveness, or health-technology assessments, help to improve the use of resources when such methods of cost containment are transparent and premised on the ambition of increasing efficiency rather than just lowering healthcare spending. However, far too few cost-containment measures in the past qualify on that score. Nor are they fit for that purpose. Importantly, they cannot help governments to control future pressures on expenditures without severe impacts on access to healthcare or the quality of healthcare. Cost containment measures are insufficient tools for controlling spending, partly because they only address a limited part of healthcare spending. The typical programme to contain cost targets spending on pharmaceuticals and medical devices – and as they represent only a small fraction of total healthcare expenditures it becomes impossible to achieve meaningful reductions. Countries like Germany and the United Kingdom spend about 15-17% of total healthcare expenditure on pharmaceuticals: a reduction in that part of a healthcare budget will have little effect if the rest of the budget continues to grow at trend.
This is where many European governments find themselves right now – they cannot push cost containment farther without imparting damage to the quality of healthcare and to health outcomes. Reductions in healthcare spending on pharmaceuticals and medical devices have already caused undesired and unintended consequences as new products are not being introduced in certain countries. Importantly, for cost-containment strategies to stand a chance in denting aggregate healthcare spending, or its growth, they need to target staff costs and not just inputs. Obviously, such a strategy would reinforce the negative impact of cost containment on the quality of healthcare and health outcomes.
Cost containment has also proven to increase healthcare inequality. Cost containment disproportionally affects low-income and non-urban patients with little real or effective access to alternative supply of the healthcare denied by public authorities. Governments that have reduced investments as a strategy to reduce healthcare expenditure are also treading a dangerous path. An ageing capital base in healthcare has consequences for healthcare quality. It prevents healthcare operators from naturally substitute labour-intensive production with more efficient capital-intensive production, leading over the medium term to bigger rather than smaller healthcare expenditures to produce the same amount of healthcare. Not only would these measures hamper access to and the quality of healthcare, but they would also increase medium- and long-term costs to the society due to untreated people requiring more healthcare and being less productive.
For Europe’s healthcare system to become financially sustainable there will have to be a significant increase in the efficiency of healthcare production if it is to avoid spending far more resources on healthcare. Healthcare expenditures as a share of GDP will go up anyway, and it is natural for it to do so as societies become richer and change their demand for healthcare. Yet leveraging the power of international trade to improve resource efficiency is one way to make Europe’s healthcare economically sustainable. For Europe to be able to have better control over future increases in expenditure, what are necessary are measures to improve the use of resources. And that is the essence of trade.
This chapter will map some of the key economic aspects of European healthcare systems that are susceptible to improvements by international trade and division of labour – or, to be more precise, the equalisation of factor endowments that trade supports. Consequently, this section does not offer an exhaustive review of all identified economic problems within the healthcare sector in Europe. Nor will it put emphasis on explaining differences between various healthcare systems in Europe. Its purpose is to describe generic economic characters of healthcare that connect with known qualitative economic effects of trade. Importantly, this chapter is not premised on a radical overhaul of European healthcare systems towards a private system. On the contrary, it takes as given that European governments will maintain its current structure of financing healthcare in a universal system. It makes the point that for such healthcare systems, which do not build private financing into healthcare, it is even more important to use the benefits of trade.
Supply Restrictions and Variations in Healthcare
Many European countries suffer from supply constraints. Some of them are reflected in the shortage of certain healthcare professionals or long waiting lists for a number of operational procedures. While the extent to which the supply of healthcare services is efficient depends on several factors, inputs into healthcare systems can tell us one aspect of supply capacities. Inputs necessary for the production of healthcare are observable across countries and are directly related to an economy’s factor endowments. Each healthcare system utilises a set of capital and labour in order to supply one unit of healthcare. In general, one can expect these sets of factor endowments to be more or less similar across European economies and the US since they all have a reasonably developed healthcare system and share an equal level of healthcare services.
However, Table 2 below shows that this is not necessarily the case. Looking at column 1, it shows the capital-labour ratio in the healthcare sector for various European countries (US data was not obtainable) for the year 2011. A standard and convenient proxy for capital (K) is the number of ‘beds’ as capital dedicated to healthcare or hospitals is often a complex variable. The input labour is represented by the numbert of physicians in each country. The ratio shows that there is substantial variation between the countries listed. For instance, whereas Poland has a high ratio, which means that it relatively employs a lot of capital, Italy uses relatively much more labour in the production of healthcare. This variation of the input ratio remains even if we use different measures for healthcare professionals. For instance, column 2 shows the ratio when accounting only specialised professionals as a proxy for labour.
Another indication of supply variation is the relation between the number of physicians and professional nurses, which varies substantially across countries. This is shown in column 3 and 4 of the table below. Here the ratio of professionally active nurses (column 3) and all professional nurses currently active (column 4) is taken against the number of physicians. A country such as Ireland or the US has a great number of professionally active nurses for each physician, which means that the scope of substitution effects is greater.
Table 2: Supply of factors and capital intensity in the healthcare sector across EU countries and US
|K/L||K/L (spec)||Nurses (1)||Nurses (2)||Hospitals (mln.)||Capital Intensity|
Source: OECD (2013) and own calculations based on EUKLEMS
The quantity of input supply in the healthcare sector is inevitably reflected in the way healthcare is produced. This is shown in the last column of Table 1 where the usage of capital in healthcare is provided. Yet two observations are detectable that show that there are also inefficiencies visible within a certain type of factor. First, although the capital intensity of healthcare production is more or less similar across some countries such as Austria, Ireland, Spain or France, the factor supply among these countries nonetheless varies substantially. Moreover, some countries such as the Czech Republic and Spain show a relatively low factor supply of capital, but a high capital usage in the supply of healthcare services. Generally, it shows that factor endowments vary across countries and that their employment is not always carried out in the most efficient way.
Supply inefficiencies are also observable within labour used in healthcare systems. Supply restrictions of labour within healthcare mean that countries often experience a shortage of professional healthcare workers for many healthcare procedures. As one would expect, supply shortages have effects on the price of healthcare services. Studies by the OECD, for instance, have found huge differences in remuneration for physicians and specialists across OECD countries. In technical jargon, this means that the supply of these healthcare professionals is heterogeneous across countries. These supply conditions cannot explain the entire variation in income. Yet the huge wage variation between providers is also a powerful incentive for trade. It is obvious that OECD countries combine factor endowments differently and move their degree of healthcare specialisation in different directions, leading to significant price differentials between countries for various treatment classes.
Before moving our focus back to trade, it is important to understand what healthcare systems do to compensate for the absence of trade. One policy response to the costs associated with non-specialised treatments in a country has been to allow for what could be called ‘internal outsourcing’, most commonly by substituting the work of a physician with other healthcare labour, e.g. nurses, that is licensed to perform certain tasks that the physician can easily outsource. In reality, however, there are supply constraints that hold up such natural substitution within a healthcare system. For instance, there is not an excess supply of nurses that are available to substitute physicians. An oft-referred study found that the US does not produce enough professional nurses to meet its own demand, which is why nurse immigration is growing. Several countries in Europe have a shortage of nurses. The source of the problem is partly the limited expansion of graduate nurse education; partly the limited interest among young people to choose the profession of a nurse.
Another supply inefficiency is the current supply of technology in many European healthcare systems. When substantial investments are made in technology without fully utilising it, there is often an upward pressure on total healthcare expenditures. Capital dedicated to technological equipment such as CT or MRI scanners obviously has the highest rate of return when it is employed to its maximum capacity. Regardless of whether this is true for each hospital within a country, Table 3 below shows that there is substantial variation in the investment of CT scanners among European countries, and between the European average and the US
Table 3: Medical Technology Variables
|Country||CT Scanners(per mln.)||MRI Units(per mln.)|
Source: OECD (2013)
Variation in technology penetration is important for understanding the role of trade in healthcare. One explanation behind the variation is that some countries are relatively ‘over-investing’ in these inputs while other countries with, for instance, low levels of CT scans are relatively ‘under-investing’. Variation, however, is not surprising. All production of services shows great degrees of variation in the use of technology and endowments. Often, these patterns tend to follow general advantages of a country or a region. But such patterns can be altered by policy choices made by governments and the way that other production factors perform.
However, ‘over investment’ or ‘under investment’ is generally not an economic problem, provided that there are factors to help countries to complement investment and access necessary technology by other means. This is why trade is important. The problem right now in a substantial part of the healthcare sector in Europe is that supply restrictions almost inevitably lead to structural shortages – that patients do not get their treatment, or do not get it in a timely manner – and that different regions, or hospitals, do not engage as much as they should do in productive cooperation with each other.
There are some promising trends of specialisation within national healthcare sectors that are combined with internal trade. However, they are currently only promising trends, not established practices or norms. channels of trade that can utilise supply variations, countries tend to make permanent the effects of supply restrictions. It also lowers the potential gains from expanding the type of healthcare services that are already produced comparatively efficiently and where endowments suggest a greater use to drive down the unit cost of production. The consequence is that healthcare systems get trapped in combinations of healthcare production that lower the efficiency of resources. If the factor endowments could move more easily across borders, the depressing effects of the supply constraint would naturally ease.
The variations in the supply of capital, labour and technology outlined in this section show that in addition to mere expenditure reduction on these inputs, efficient employment of these inputs across borders would lead to a better use of resources. Like other capital-intense services that are based on high-skilled labour, the ability to combine domestic resources with foreign ones is crucial to avoiding inefficiencies that drive up prices or aggregate expenditures. This point is important and should be emphasised because European healthcare authorities have reduced the growth of technology in the healthcare sector in the past years. This happens in a healthcare system that shows comparably low technology-intensity when compared to other countries.
Demand Variations in Healthcare
One of the factors behind rising healthcare expenditures in the future is ageing – or, more precisely, that a growing part of the population will get very old and demand more healthcare at the same time as the demographic tax base is predicted to shrink. High unemployment rates also negatively affect the dependency ratio, the ratio between the number of people who work and the number of retired people.
This demographic trend is likely to place an upward pressure on demand as illustrated in Figure 3. This figure shows the demographic development up to 2060 for EU27 members. Between 2010 and 2060, the share of the population above 80 – an age group with high healthcare demands – will double. The share of population in retirement (above 65) will expand at a similar rate while the share of the population in working age will be reduced by ten percentage units.
Figure 3: Population age structure by major age groups, EU27
Source: Eurostat, own calculations
Other indicators also confirm the expansion of healthcare demand. Table 4 below presents alternative variables of demand (keeping in mind that data is extremely scarce and can only be presented over a short period). As the table shows, in most European countries the number of consultations, inpatient care discharges, or diagnosis executed using new technology such as CT scans has gone up when measured as the average yearly growth rate. This seems less the case, however, for the number of bed days, reflecting deliberate strategies to economise outpatient care.
Table 4: Average annual growth rate of alternative indicators of healthcare demand
|Outpatient Consultations in hospital||Number of inpatient care discharges||Number curative care bed days||Number of Computed Tomography exams, total|
Source: Own calculations based on OECD (2013). Numbers refer to the development between 2000 and 2011, except for the number of curative discharges, which is for 1990-2011.
Factors other than demographic changes that increase healthcare demand include advancement in medical technology and rising demand for higher-quality healthcare due to higher incomes and other socio-economic factors. When technology advancements have the effect of offering opportunities for treatments that did not exist before, such investments tend to push up healthcare expenditure as mortality rates fall and morbidity rates, the prevalence of certain diseases, tend to rise. At the same time, demand tends to increase indefinitely because of expanding patients’ expectations for more and better services that exploit the latest medical technologies and the best expertise. This explains why pressures continue to rise despite increases in the number of specialists and technology advancements available as shown in Figure 4.
Figure 4: The relationship between Hospital Expenditures and Technology (2011)
Note: the technology index is derived from a principle component analysis (PCA) using the technology variables from the OECD (2013). Hospital expenditures per capita are in current PPP (purchasing power parity) (2005) rates (HC.1-HC.9)
Source: Own calculations based on OECD data
However, the story around technology is not as simple. There are plenty of technological advances that ease pressures on healthcare expenditure, and the more adaptive that healthcare systems are to technology and a changed combination of endowments, the bigger the benefits of new technology tend to be. For instance, this is the case of new medical devices and mobile applications that focus on prevention, self-care and remote monitoring, which are generally referred to as mHealth solutions. Such technology helps to substitute for existing costs, and there is a strong case to be made for European healthcare systems to improve their technology and IT performance as a strategy to control the growth of aggregate expenditures. Equally important, it is necessary to build better strategies for the use of technology that does not substitute for existing costs but rather are deployed to improve the quality of healthcare. Trade within and between countries is such a strategy.
One conclusion that can be drawn from this discussion is that the demand structure in each country is not the same. In fact, although the demographic changes between the EU and the US will be more or less similar in the near future, demand for individual treatments is likely to differ. All countries are not going to experience their healthcare demand that moves at a similar pace, or in exactly the same direction, even if the aggregate trends for income, age and other factors are shared between countries. This variability of demand is also found in a recent OECD study that examines on a cross-country basis the utilisation rate of a selection of surgical procedures. Natural variability in demand of healthcare services across countries is a powerful source of trade, especially when there are supply restrictions.
Technology creates incentives for trade between countries with different technology levels but it also represents a critical enabler of trade – in the sense that it allows a better match of supply and demand. The combination of factor endowments would in fact be eased by the expansion of new technology for communication in healthcare, e.g. eHealth solutions. These solutions allow patients and other actors to seek faster contact with a healthcare professional and, often, to get cheaper access to quality treatment from providers in third countries. Furthermore, they could enable professionals to assist more patients and increase access to healthcare. This is true not only in relation to services which involve physical movement of patients, but also to all those trade interactions involving remote delivery and diagnostic services provided by a practitioner in a third country. That is, for example, the case of telehealth solutions (such as tele-surgery and tele-radiology, tele-echography, but also video consultations in areas such as dermatology, pregnancy, gynaecology, fertility and psychology) and applications of remote monitoring through mobile devices. There is an all-new generation of medical devices and mobile applications that work in this direction. As Figure 5 illustrates, so-called mHealth approaches allow patients to access a wider supply of healthcare.
Figure 5: Applications of mHealth
Source: OECD (2013a) adapted from PricewaterhouseCoopers (2012),’Touching Lives through Mobile Health: Assessment of the Global Market Opportunity’, GSMA, February, www.gsma.com/connectedliving/wpcontent/uploads/2012/03/gsmapwctouchinglivesthroughmobilehealthreport.pdf.
 Graves (2011).
 Fujisava and Lafortune (2008).
 Most probably, the fall in the number of curative care bed days is associated with the increasing use of medical devices which allow for remote monitoring of patients’ conditions as well as remote treatment compliance solutions.
 Boston Consulting Group (2012) data for five European healthcare systems show that the number of specialists grew by almost 25% between 1995 and 2004 compared with an unchanged number of general practitioners. At the same time, the number of CT scanners available grew from 11.2 per million people to 14.4.
 Variability of demand is also found in McPherson (2013). The study by the OECD examines on a cross-country basis the utilisation rate of a selection of surgical procedures.
 The role of different technology levels in bilateral trade is studied by Lai and Zhu (2006).