This project has been first and second marked following the Business School’s examination process. All marks have been confirmed by the MSc International Health Management Exam Board

MSc International Health Management

Individual Research Report

Student Details

Name: Shen Ju Tsai

CID: 00605769

Supervisor: Christopher Chapman

Grade: A

Feedback

The comments of the first marker are as follows: An extraordinarily ambitious project that is generally very coherent. The limitations are fully acknowledged. In elaborating the support for a distinction grade they further add: The ambition and scope of the project, soundness of analysis and potential impact on policy. I would add to this that your conduct of this project was exemplary. You demonstrated an impressive blend of concern to explore an issue of great significance to your home healthcare system and also a desire to deeply explore the potential of analytical modelling in understanding the nature of the problem, and in helping to formulate responses. Really an exceptional outcome, well done.

IMPERIAL COLLEGE BUSINESS SCHOOL

UNDERSTANDING THE FINANCIAL SUSTAINABILITY OF TAIWAN’S HEALTH SYSTEM: MODELLING HEALTH EXPENDITURE THROUGH 2035

By

Shen-Ju Tsai (S.J.)

A report submitted in partial fulfilment of the requirements for the M.Sc. degree and the DIC

September 2010

I

SYNOPSIS Financial sustainability is central to healthcare policy debates. Developed countries find

it increasingly difficult to provide healthcare in the face of ageing populations, increased

expectations, and advancing medical technologies. Taiwan is not alone. Since the

country adopted a new National Health Insurance (NHI) scheme in 1995, the greatest

challenge has been to sustain a healthcare level while maintaining its financial balance.

This report adopts a modified financial modelling structure, comprising Personal Care

Spending per age groups, impact of increased wealth, and advancing medical

technology, to project health expenditure through 2035. Base case scenario suggests

that National Health Expenditure will surpass, in real terms, NT$4,000 (US$121 or £80)

billion1

To close the funding gap, general options are increasing revenue to finance healthcare

demand, containing spending and demand to curb the speed of rising expenditure, and

improving efficiency to generate more value from current resources. In the context of

Taiwan, past experiences from home and abroad suggest all three options will be

difficult for the cash-strapped NHI.

in 2035, or 378% of the level in 2010. Based on the current growth rate of

financial funding, NHI will face a financial deficit of NT$1,000 (US$ 30 or £20) billion in

2035.

As a result, Taiwan faces tough choices in securing future healthcare. This report aims

to demonstrate the value of applying analytical modelling to informing healthcare policy

and understanding the financial sustainability of Taiwan’s health system.

1 NT$ is New Taiwan Dollars. Throughout the report, exchange rate is used of £1: NT$50 and US$1: NT$33.

II

ACKNOWLEDGEMENT I would like to thank the following individuals for their support in the writing of this

Individual Research Report (IRR):

Prof. Christopher Chapman, IRR advisor, for his indispensible guidance on

researching method, quantitative, and qualitative analysis, who has patiently

guided me through my overall structure of this report. Dr. Timothy Heymann, Professor of Imperial Business School, for encouraging,

proofreading, and commenting on my work.

Prof. Peter Smith, Professor of Imperial Business School, for providing me with

great insights on references.

汪立本 , PhD in Civil Engineering at Imperial College for his assistance on

building up forecasting model.

Raffaele Fiorelli, classmate of MSc International Health Management 2009,

Imperial College, for his curiosity in , interest of, and discussion on this report.

Sunil Sharma, classmate of MSc International Health Management 2009,

Imperial College, for proofreading and commenting on this report.

高偉唐, Master of Public Administration at National Chengchi University, Taiwan,

for reminding me of limitations in this report.

Monique Ng for her support, love, and understanding.

III

LIST OF CONTENT SYNOPSIS ....................................................................................................................... I

ACKNOWLEDGEMENT ................................................................................................. II

LIST OF CONTENT ....................................................................................................... III

1. INTRODUCTION ......................................................................................................... 1

1.1 BACKGROUND ................................................................................................................... 1

1.2 AIMS AND OBJECTIVES: ................................................................................................... 1

2. LITERATURE REVIEW............................................................................................... 2

2.1 SUSTAINABILITY IN TAIWAN ............................................................................................ 2

2.2 SUSTAINABILITY IN HEALTHCARE .................................................................................. 3

2.3 IMPACT OF FINANCIAL SUSTAINABILITY ........................................................................ 3

2.4 HEALTHCARE COST DRIVERS ......................................................................................... 4

2.5 HEALTH EXPENDITURE PROJECTION METHOD ........................................................... 7

3. METHODOLOGY ........................................................................................................ 8

3.1 USING INTERNATIONAL COMPARISON TO OUTLINE SPECIFIC FEATURES OF TAIWAN’S HEALTH SYSTEM ................................................................................................... 8

3.2 MODIFYING METHODOLOGIES OF CUTLER AND MCKINSEY TO PROJECT HEALTH EXPENDITURE AND REVENUE IN TAIWAN THROUGH 2035. ............................................. 8

3.3 USING PEST FRAMEWORK TO IDENTIFY CONSTRAINTS ON POLICY LEVELLERS IN TAIWAN ..................................................................................................................................... 9

4. SPECIFIC FEATURES OF TAIWAN’S HEALTH SYSTEM ..................................... 10

5. ANALYSIS ................................................................................................................ 17

5.1 HEALTH EXPENDITURE WILL BE ALMOST QUADRUPLED IN 2035. .......................... 17

5.2 TAIWAN’S FUNDING GAP WITH CURRENT FINANCING MECHANISMS WILL POSE SERIOUS CHALLENGE TO GOVERNMENT AND ITS PEOPLE. ......................................... 19

5.3 TO SECURE TAIWAN’S FUTURE HEALTH, GENERAL OPTIONS ARE INCREASE REVENUE, CONTAIN COST AND IMPROVE EFFICIENCY. ................................................. 21

5.4 HEALTHCARE POLICY LEVERS WILL HAVE CONSTRAINTS TO RESPECT. ............. 22

5.5 TAIWAN FACES TOUGH CHOICES IN SECURING ITS FUTURE HEALTH. ................. 23

6. CONCLUSION .......................................................................................................... 24

7. LIMITATIONS ........................................................................................................... 25

VI. REFERENCE ........................................................................................................... 26

V. APPENDIX .................................................................................................................. a

1

1. INTRODUCTION

1.1 BACKGROUND It is increasingly difficult for developed countries to provide care in the face of ageing

populations, increased expectations, and advancing medical technology. Taiwan is not

alone. Since the country adopted a new National Health Insurance scheme in 1995, the

greatest challenge has been to sustain healthcare levels while maintaining financial

balance (NHI, 2008).

By law, the scheme is to operate on a self-sustaining basis—balancing healthcare

spending with revenues. For the first three years, the program ran a surplus because of

a predetermined cash reserve. Since 1998, the NHI’s expenditures outstripped its

revenue—cost increased by 7.9% and revenue 5.8% on the accrual basis from 1998 to

2002 (NHI, 2008). In September 2002, the NHI faced imminent bankruptcy. Only then,

was the Department of Health (DoH) able to push through a premium rate increase for

the first time in seven years from 4.25% accessible income to 4.55%. In the same year,

the bureau completed phased-in global budgeting programs to contain cost (Chen,

2003, p.70). Despite numerous efforts, NHI is still struggling to balance its budget. A

further increase premium rate is under heated debate and Second Generation Reform

is brought back into discussion. The magnitude of the challenge and reform needed

remains unclear.

1.2 AIMS AND OBJECTIVES: Primarily, I will examine how future healthcare demand and funding mechanisms may

shape the financial outlook of Taiwan’s healthcare system. The aim is to demonstrate

the value of applying analytical modelling to enable and enhance healthcare policy and

debate with discussions on:

1. Specific features of Taiwan’s Health System: how will the context shape the

challenges of funding future healthcare needs?

2. Cost drivers in healthcare: how they may shape the financial outlook in Taiwan’s

NHI in the next 25 years?

3. Implications to Taiwan policy makers: what can be done to meet future

healthcare needs?

2

2. LITERATURE REVIEW 2.1 SUSTAINABILITY IN TAIWAN • Whilst future healthcare sustainability has been researched and forecasted on

behalf of some countries such as the UK, US, and EU, similar studies that

quantify the challenge has yet to be found in Taiwan.

Taiwan shares similar challenges with developed countries on sustaining a health

standard in the face of ageing populations, increased expectations, and advancing

medical technology (Chiang, 2002). In terms of quantitative studies, Kung et al. (2006,

p.1) endeavoured to establish the applicability of Grey Theory, one of the methods to

study uncertainty, in predicting Taiwan’s future personal care spending. However, they

have yet to project Taiwan’s National Health Expenditure for the next 25 years. On the

other hand, Kwon and Chen (2008, p.20) adopted a governance approach to exam

health sustainability in Taiwan and Korea respectively, asserting that “state dominated

policy making […] mode has gone”; policy makers have to “compromise and build trust

among stakeholders”. More recently, Wang (2010, p.8) analyzed the issue from a

political point of view, addressing the importance of political feasibility in healthcare

reform. However, it still remains unclear for how long and by how much can Taiwan’s

health system sustain the current level of spending.

In the UK, one of the most comprehensive studies on sustainability in the British NHS, a

series of “Securing Future Health,” is led by Sir Derek Wanless (Wanless, 2002;

Wanless et al., 2007). In the US, similar studies such as “Health Spending Projection”

series are conducted first by a group of scholars (Borger et al., 2006), and later joined

by National Health Expenditure Accounts Projections Team (Poisal et al., 2007; Keehan

et al., 2008). For the European Union member countries, the latest research on

Financial Sustainability, a trilogy2

, is conducted by Thomson et al. (2009). In Taiwan, I

have yet to find reports of similar magnitude on “securing” or “projecting” Taiwan’s

future healthcare needs. Hence, this paper aims to encourage future interest in this

area of study.

2 I. Addressing financial sustainability in health systems; II. How can health systems respond to populations ageing?; III. How can European states design efficient, equitable and sustainable funding systems for long-term care for older people?

3

2.2 SUSTAINABILITY IN HEALTHCARE • Sustainability of health system often refers to financial capability of attaining

and sustaining a level of health status and expenditure without compromising

quality. However, financial performance should be understood as a ‘policy

constraint’ and health performance ‘policy goal.’

In 1992, UNICEF used a definition of sustainability as “the ability of the system to

produce benefits valued sufficiently by users and stakeholders to ensure enough

resources to continue activities with long-term benefits.” The problem of how we may

afford health expenditures is often phrased in financial terms (Thomson et al., 2009).

Such a problem is alleviated if resources are unconstrained. Such a problem arises

when the health systems “have to treat proportionately more people, with more illness,

higher expectations, often using more expensive technologies, and using relatively

fewer tax dollars and workers (Coiera and Hovenga, 2007).” Ruggeri (2002, p.1)

confines sustainability to three aspects: 1) “ability of the economy to sustain current and

projected levels of healthcare spending”; 2) “capacity of the full fiscal system to

withstand the pressure of rising healthcare expenditures”; and 3) “ability of provincial/

territorial government to fulfil their constitutional commitment for the provision of

healthcare.”

However, it is important to recognize financing policies as policy tools, not policy goals.

The raison d’être of a health system is health status, equity, and satisfaction, according

to World Health Report 2000 (WHO, 2000). For “the most financially sustainable health

system would be no health system at all (Thomson et al., 2009, p.5).”

2.3 IMPACT OF FINANCIAL SUSTAINABILITY • Success or failure in balancing health expenditure with other national interest

has major impacts on personal wellbeing, economic competitiveness, and

wealth of a nation.

The health system posts as a motor for economic growth. Even during the time of

economic recession, they may actually offer an important alternative for public

investment to reactivate the economy (Thomson et al., 2009, p.16, sec 4). Ruggeri &

Doucet (2007, pp.4-7) provide a framework on analyzing health expenditure as an

investment, as opposed to a consumption. Financial sustainability is critical because of

the direct contribution of health to societal well-being; failing to secure personal health

4

will pose a negative effect on economic productivity and health expenditure (Figueras et

al., 2008). Additionally, health is essential to human capital as human capital is

essential to economic growth (Suhrcke et al., 2006).

Nevertheless, countries often have multiple national interests, vying for resources.

Increasingly, governments in developed countries face a “dilemma” of judging the

“appropriate level of spending (Docteur and Oxley, 2003, p.7).” “Crowd-out effects”,

when health expenditure outgrows the others, constrain resources on pursuing other

national interests. Opportunity cost arises when an investment in healthcare produces

less “value” than it would in other areas (Newhouse, 1993). Therefore, efficiency

becomes critical for inefficient public expenditure will eventually impose a burden on the

economy as a whole; negative public sector performance can largely undermine a

country’s competitive position (Eugene, 2008, p.5).

As mentioned, Taiwan’s NHI operates on a self-sustaining basis. “Premium revenues

need to be able to cover medical expenses. Short-term discrepancies are to be covered

by the reserve fund and long-term financial balance is to be achieved by setting

reasonable levels of premium rates on actuarial valuation (NHI, 2008, p.23).” One

potential benefit is that since the insurance operates on a pay-as-you-go basis, it

minimizes risk of volatile governmental budgets. However, challenges arise when the

bureau fails to exercise its own right to raise premium rates. One of the main reasons

is that politicians and the public resent paying more in the face of the “allegedly

widespread waste, fraud, and abuse” in the system. Consequently, the result is a highly

restrained NHI operating at the brink of bankruptcy (Cheng, 2003, pp.70-71).

2.4 HEALTHCARE COST DRIVERS • Ageing population, increased wealth, and advancement in medical technology

are the three mostly cited cost drivers in developed countries. However, the

degree to which these factors contribute differs substantially across nations.

Considerable amount of studies have identified ageing population, increased wealth,

and advancement in medical technology as the main cost drivers in healthcare

(Newhouse, 1977, 1993; Gerdtham and Jönsson, 2000; Chiang TL, 2002; Cutler, 2003;

Brockmann and Gampe, 2005; Martins and Maisonneuve, 2006; Pammolli et al., 2008;

Thomson et al., 2009; McKinsey, 2008). While most countries share these challenges in

common, impacts of these cost-drivers differ substantially across countries. In this

5

report, I will determine whether or not these challenges of ageing population, increased

wealth, and advancing medical technology apply to Taiwan and, if so, to what extent

2.4.1 Ageing Population An ageing population refers to an increasing population of people aged above 64. It

reflects falling fertility rates and rising life expectancy, which is common in most of the

developed countries. Despite considerable researches have been conducted, why and

how elderly costs more health resources still seem inconclusive (Martins and

Maisonneuve, 2006; Gray, 2005; Weaver et al., 2006; Dormont et al., 2006; Pammolli et

al., 2008). Victor Fuchs (1990) notes cost rises rapidly in the period before death, and

since deaths concentrate among elderly as age rises and mortality falls, therefore

ageing population may increase healthcare costs. While scholars generally agree on

the proximity to death in health expenditure (Seshamani and Gray 2004a, 2004b;

Batljan and Lagergren, 2004; Gray, 2005; Martins and Maisonneuve, 2005), many more

argue that “increased life expectancy and decreased fertility rate only tells part of the

story (Pammolli et al, 2008)”. For instance, Reinhardt (2003) argues that “[K]ey factors

include rising per capita incomes, the […] costly new medical technology, workforce

shortages […], and the asymmetric distribution of market power in health care that

gives the supply side of the sector considerable sway over the demand side.” In

summary, Gray (2005, p.19) concludes that “changes in demographic structure and in

health status are only part of a much wider set of influences on future health

expenditure.”

In Taiwan, the government faces a population that is gradually ageing into an “aged

society” in 2018 and “super-aged society” in 2026, which will mean less potential tax

revenue and more expenditure from various sources (Lee and Yang 2007, pp.4-9). Lee

and Yang (2007) conclude ageing population in Taiwan will not only have a substantial

impact on health expenditure but also a systematic impact on the nation as a whole3

3 Lee and Yang fear that ageing population will have a negative impact on tax revenue, health expenditure, social assistance and allowance for the elderly, public retirement pensions, and education expenditure.

.

While this argument may seem compelling, it remains to be clarified that the extent to

which ageing population contributes to healthcare cost.

6

2.4.2 Increase Wealth From “curing” to “caring”, increased wealth has shifted medical seeking behaviour

(Newhouse, 1977). Increased wealth is arguably the earliest “one, very clear, very well-

established statistic fact” to increasing healthcare cost (Hoffmeyer and McCarthy, 1994,

p.67). Researches generally hold increased wealth, which drives up healthcare demand

and expectation, accountable for inflating healthcare costs. Gerdtham and Jönsson

(2000, Ch.6, p.109) assert that “a common and extremely robust of international

comparisons is that the effect of per capita GDP (income) on expenditure is clearly

positive and significant, and further, that the estimated income elasticity is clearly higher

than zero and close to or higher than unity.” However, its mechanism is often complex

and inconclusive.

While most studies use personal income proxied as GDP per capita, debates continue

on the level of income elasticity, whether healthcare is a “normal good” or “luxury good”

(Docteur and Oxley, 2003, p.73). Getzen (2000a) suggests that healthcare could be

both “an individual necessity and a national luxury.” Dreger and Reimers (2006) argue

that high income elasticity may result from failure to control true price effects. Martins

and Maisonneuve (2006, p.121) assume unitary income elasticity and found that

between 1981 and 2002, public health expenditure grew on average by 3.6% per year

for OECD countries, among which ageing population accounts for 0.3%, increased

wealth 2.3%, and technological innovation the residual 1%. Chiang (2002) finds that the

income elasticity in Taiwan from 1980 to 2000 is less than 1, i.e. healthcare is a “normal

good” in Taiwan. Nonetheless, at the macro-economic level, the vast majority of

international studies find that age structure has a small or non significant impact on

health expenditures, whereas GDP has a sizeable and highly significant impact.

2.4.3 Advancing Medical Technology One of the most important cost drivers in healthcare is advancement in medical

technology. “Technological innovation in medicine comprises not only new physical

capital and equipment, but also new surgical procedures, drugs, treatments, as well as

their combination (Pammolli et al., 2008).” From early studies on health expenditure

(Newhouse, 1992, 1993), to recently, Ginsburg (2008), and Thomson et al. (2009, p.3)

argue technological innovation is the most important driver of healthcare costs. Some

may argue technical progress can also be cost-saving in some cases, but overall, it

induces more cost than it can reduce (Cutler and Huckman, 2003). Price elasticity,

7

impact of rise and fall in price on demand, is another way to assess its impact on

healthcare expenditure. Expenditure will increase, if price elasticity is high, a fall in

prices per unit/ service induces more in demand, vice versa (Dormont et al., 2006).

Moreover, even if prices do not fall, improvements in medical science can still drive up

demand; it generally allows “treatment expansion”, shifting diseases from untreatable to

treatable and increasing variety and quality of products. “As a result of these contrasting

effects,” Pammolli et al (2008) argue, “medical innovations can lead to an increase in

overall expenditure (even if cost-reducing at the micro level).”

Medicare Technology Advisory Panel suggests that medical advancements will

increase 1% on top of GDP in the future (Cutler 2003, p.6), which is used by Cutler to

project international medical spending. Wanless (2002) finds that technology

contributes 3% on average a year and assumes that it will continue to contribute from

2% to 3% for different scenarios in the United Kingdom. Borger et al. (2006, p.6)

capture 1.2% as cost contribution from medical innovation and hold it as a constant

term for the spending projection in the United States. In Taiwan, new drugs account for

3%-5% annual growth in NHI (Cheng, 2009, p.1037). Consensus emerges that

advancing medical technology will at least contribute 1% on personal care spending.

With this basis, this report adopts 1% (for base case scenario) and 3% (for pessimistic

case scenario) for advancement in medical technology to provide a range of

expenditure projection.

2.5 HEALTH EXPENDITURE PROJECTION METHOD Empirical research on sustainability in OECD countries has been conducted thoroughly

by different scholars and entities (Getzen, 2000b; Wanless, 2002; Cutler 2003;

Brockmann and Gampe, 2005; McKinsey, 2008). Gray (2005) provides a fine record on

“the evolution of research.” “One of the earliest serious attempts”, Gray (2005) points

out, “was made by Abel-Smith and Titmuss in 1956,” which was later “adopted by many

other analysts.” As a nature of forecasting, Abel-Smith and Titmuss (1956, p.154)

operate on ceteris paribus assumption, which states “everything else remains

unchanged: the incidence and character of sickness and injury; standards of diagnosis;

quantity and quality of treatment; the provision of resources in goods and services; the

present level of unsatisfied demand; and the present proportionate distribution of

consumer use of the service by age, sex and many other factors.” Consequently,

forecasting is not designed to be an exact science but to inform decision makers by

8

painting future scenarios, even though there are rough sketches and refined methods.

Despite having employed a probabilistic forecast model, Brockmann and Gampe (2005,

p.1) state in the beginning: “[f]orecasts are always wrong. Still, they paint potential

future scenarios and provide a platform for policy decision today.” Cutler (2003), on the

other hand, developed a straightforward forecasting model to assess international

healthcare expenditure. More recently, McKinsey (2008) adopts a similar model that

builds on the effect of ageing population, increased wealth, and advancement in

medical technologies.

3. METHODOLOGY 3.1 USING INTERNATIONAL COMPARISON TO OUTLINE SPECIFIC FEATURES OF TAIWAN’S HEALTH SYSTEM. While developed countries face similar challenges in sustaining healthcare, no country

shares the same exact features or characteristics. To come up with a “personalized”

solution, comparison with OECD countries aids in understanding specific features of

Taiwan’s health system and how its context may shape the task of healthcare

sustainability. Sources of data include OECD Health Data 2009, CIA World Factbook

2009, and relevant data, reports, and announcements from Department of Health and

Bureau of National Health Insurance in Taiwan.

3.2 MODIFYING METHODOLOGIES OF CUTLER AND MCKINSEY TO PROJECT HEALTH EXPENDITURE AND REVENUE IN TAIWAN THROUGH 2035. To quantify the financial challenge of Taiwan’s healthcare provision through 2035, this

report adopts a modified version of the models and methods found in Cutler (2003, p.3)

and McKinsey (2008, p.38). Accordingly, this report focuses on projecting the biggest

chunk of National Health Expenditure: personal care spending (or medical care

spending in other countries).

Personal Care Spending is structured as the sum of total spending per capita in

different age groups multiplied by year-on-year real GDP growth and effect of

technological innovation (formulated as consumer price inflation in medical equipments).

Next, I simulated two scenarios for the impact of increased wealth and impact of

medical technology. I used average real GDP growth from the past ten years—3.7% for

9

base case scenario and 2.7% for pessimistic case simulation. Similarly, I adopted 1%

(Cutler, 2003) and 3% (Wanless, 2002) to assess the impact of medical technology

throughout 2035. I then multiplied the sum of estimated personal care by the effect of

increased wealth and advancing medical technology.

Finally, I checked the accuracy of this method by comparing the figures in my

simulations with the historical personal care spending. The variance in pessimistic case

is 6.2% in 2005, 6.0% in 2006, 5.8% in 2007, and 6.8% in 2008. The difference in base

case is 5.2% in 2005; 5.0% in 2006, 4.7% in 2007, and 5.7%, in 2008.

The nature of this report is primarily to use modelling tools to aid decision-making and

enhance public debates by quantifying the challenge. Thus, I placed a detailed

explanation of how future expenditure and revenue are formulated and how cost drivers

are isolated in the technical notes in the appendix.

3.3 USING PEST FRAMEWORK TO IDENTIFY CONSTRAINTS ON POLICY LEVELLERS IN TAIWAN. In order to come up with feasible solutions to ease the financial pressure of providing

quality care, I adopted a PEST (Political, Economic, Social, and Technological)

framework to identify key constraints on different levers in healthcare policy. Essentially,

this macro-analysis identifies political factors, economic environment, social values, and

technological status in relations to different levers in health policies. Combined with

Taiwan’s specific features and magnitude of financial challenges, this allows a reality

check on existing options in search of a practical solution.

10

4. SPECIFIC FEATURES OF TAIWAN’S HEALTH SYSTEM While many countries provide universal health, Taiwan is unique in many ways. In this

section, I start with my first objective of this report—specific features of Taiwan’s Health

System: how will the context shape the task of healthcare sustainability in Taiwan?

• Low health expenditure may imply a low cost structure in the NHI’s operating

method, a high level of administrative efficiency, or both in Taiwan’s health

system

According to OECD Health data 2009, the average life expectancy at birth in 2006 is

79.0; comparatively, Taiwan is 78.6 years on average, 0.4 years behind. Nevertheless,

Taiwan has attained a life expectancy with much lower cost than OECD countries.

Compared with the richest countries in the world, Taiwan spent 6.1% of its gross

domestic product (GDP) on total health expenditure, United States 15.8%, United

Kingdom 10.8%, Japan 10.4%, France 11%, and Korea 6% (Exhibit 1). This may imply

a low cost structure in the NHI’s modus operandi, a high level of administrative

efficiency, or both in Taiwan’s health system. However, health status is determined by

more than just GDP per capita, factors such as education, lifestyle, etc, should be

considered (Joumard et al., 2008).

Exhibit 1

AMONG THE RICHEST COUNTRIES, TAIWAN SPENDS THREE TIMES LESS THAN THE OECD AVERAGE ON HEALTHCARE

11

• Unrestricted access and freedom of choice without control will increasingly

challenge the NHI’s financial sustainability in providing healthcare

Taiwan has the most egalitarian health system in the industrialized world. Aiming to

achieve the goal of freedom of choice, the bureau of NHI has contracts with 91.87% of

all healthcare facilities in the country. Upon enrolment and payments for their insurance,

individuals receive an IC card, which grants them access and freedom of choice to

contracted services. There is no “long waiting times”, or rationing of care as in

Canadian and British system, “to visit a doctor or undergo surgical procedures or

sophisticated tests (BNHI, 2009, p.24).” Compared with the US managed care models4

Exhibit 2

,

patients have larger degree of freedom in choosing providers and treatments (Cheng,

2003, p.64). Doubtlessly, concern arises over costs and “doctor-shopping” due to the

lack of a gatekeeper. Hence, in 2001 the bureau raised copayments for certain types of

visits, drugs, and care. In 2002, co-payments apply for some lab tests and examinations.

In 2005, a referral system was introduced to contain demand for Western Outpatient

Care. Nonetheless, this measure is relative mild, charging NT$50-360 (US$1.5-10.9 or

£1-7.2) for patients who seek outpatient care without referral (Exhibit 2).

Degree of access: Significantly restricted Somewhat restricted Unrestricted

4 All comparative data with the US refers to the pre Obama healthcare reforms. The healthcare bill was passed by Congress on 22 March 2010, to ensure 95% of Americans are covered. (Source: guardian.co.uk)

TAIWANESS ENJOYS LARGER FREEDOM IN CHOICES OF CARE.

12

• Comprehensive benefit coverage may impose a financial burden on the NHI

The system covers most forms of treatment, including surgeries, and related expenses

such as examinations, laboratory tests, prescription medications, supplies, nursing care,

hospital rooms, and certain over-the-counter drugs. It also pays for certain preventive

services, such as paediatric and adult health exams, prenatal checkups, pap smears,

and preventive dental health checks (BNHI, 2009, p.19). Expensive treatments,

normally not covered in other countries, such as HIV/AIDS and organ transplants are

also covered. However, doctors must gain patient’s consensus on recommendation of

non-covered treatment. This comprehensive benefit is supported by a NHI IC card and

a nation-wide information technology network. It allows the NHI to provide broad

services while detecting any waste or abuse in medical resources. The benefit package

is rather broad in an international perspective (Exhibit 3). This, however, may impose

an enormous financial burden on the NHI in the future as far as healthcare provision is

concerned.

Exhibit 3*

TAIWANESES ENJOYS COMPREHENSIVE AND UNIFORM CARE.

Not covered except for special cases

Partially covered

Mostly covered

Dental care Influenza Eye

check Prescription drugs

Optical glasses

Cosmetic Surgery** Maternity Health

check Taiwan***

Japan

US

Switzerland

Germany

Denmark

Sweden

UK

13

• Further increasing Out-Of-Pocket Payment can be burdensome to poor people

Out-of-pocket spending represents services that are not covered by the NHI and “user-

fee” paid per visits. As mentioned above, copayment was raised and referral system

introduced. For those who go first to a clinic, with or without reference, the co-payment

is NT$50, US$ $1.50, or £1. For a patient who skips referral to go to the medical centre

NT$360, US$11, or £7, is charged. Extra charges for “premium” services are gradually

in places, e.g., private room. Since the referral system is arguably mild, it should not

dissuade patients genuinely ill from seeking help. To reinforce the core value of social

health insurance, copayment is exempted for patients with serious illnesses, women

giving child, people in rural or outlying areas, and families with low-income. Despite

generous exemptions from the government, Mr. Yeh, the Minister of Health, is

concerned that further increasing general copayments “can be burdensome to poor

people (Cheng, 2009)”. As Taiwan has one of the highest co-payment rates in the world,

increasing user-fee any further may undermine the concept of a Social Health System

(Exhibit 4). In the face of rising difficulty to raising premium rate and further increasing

co-payment rates may prove regressive, Taiwan needs a solution to fundamentally

change its funding strategy if current coverage and benefit are to be preserved.

Exhibit 4 Total Expenditure on Out-of-Pocket Payments, % Spending on Health, 2006

Taiwan*

35.4

Japan

15.1

UK

11.4

France

6.8

Germany

13.3

US

12.3

S. Korea

36.8

OECD average 19.1

14

• High utilization of services combined with low physician fee and high risk for

malpractice suits can pose serious threat to Taiwanese healthcare quality

Taiwan is famous for its short physician visits, averaging 1.7 doctors per year and 12.4

visits per person per year (Cheng, 2009, p.1024), which translates into 7,294

consultations per doctor. This is largely due to a fee-for-service payment system, which

has “resulted in excessive services and waste of medical resources (Wang, 2010, p.6).”

Moreover, there is “a shortage of practitioners in certain medical specialties in which

either the fees are low, the level of difficulty of the work is high, or the risk for

malpractice suits is high and compensation not commensurately higher (Cheng, 2003,

p.62).” The NHI fee schedule inherited from previous insurance scheme a relative value

scales that is “artificial and arbitrary”, unlike the US Medicare program that based on

costs on medical resources (Chang, 2006, p.4). This has caused concern that

“commercialization of medicine” and “profit-driven practices” may lead to misdiagnosis,

improper treatment, or delays in proper treatment (Chang, 2006, p.5). However, the link

between high physician visits and low quality is not clear (Cheng, 2009, p.1043). What

is clear is that low-paid Taiwanese physicians conduct more than three times more

consultations than others (Exhibit 5).

Exhibit 5

PHYSICIANS IN TAIWAN HAVE THREE TIMES AS MANY PATIENTS TO SEE.

Doctor consultations (per capita), 2006, per year

Number of practicing physicians, density per 1,000

Number of consultations per doctor, 2006, times per year

Taiwan*

12.4 1.7

7,294

Japan **

13.6 2.9 4,690

UK

5.1 2.44 2,090

US

3.8 2.42 1,570

6.8 3.07 2,215 Average for OECD member countries

15

• Revolutionary IT system has potential to improve healthcare efficiency

Taiwan has one of the most efficient health information technologies and the lowest

administrative cost in the developed world. Without spending billions on

computerization, Taiwan’s NHI has achieved a level of information and coordination that

cannot be matched by Britain’s NHS (Williams, 2008). Taiwan’s integrated IT system

and IC card help improve efficiency, reduce waste, encourage best practice, and much

more.

First of all, it improves administrative cost-efficiency. Providers in Taiwan submit claims

electronically. The bill is transferred to the insurance and paid in real time. To reform

the payment system, five separate Global budgeting systems are phased in and claims

review system introduced. “Claim reviews are generally computerized, with some

claims randomly selected to undergo peer review (BNHI, 2009, p.22).”

Next, it reduces waste of medical resources. Williams (2008) argues that the IT system

checks for overprescribing and inflated prescription from supply side. It contains records

of both prescriptions and drug allergies, thus averting avoidable complication and

duplication of prescriptions for dangerous or expensive drugs. For instance, “in 2004,

the NHI reduced or deducted claims from over a thousand institutions, 231 were

awarded demerits, which affect their contract payment levels, and 90 were suspended

from the system for periods of one to three months. Four were dropped entirely

(Williams, 2008).”

Thirdly, the IT system also tracks patterns of usage of medical resources from demand

side. For instance, if a patient visits physicians too many times during a period, the IT

system will identify susceptible over-usage, and the NHI bureau will call or visit the

patient to understand the situation. Moreover, it also encourages best practice and

evidence-based clinical decision from detailed profile of patient’s clinical history

(Williams, 2008). Lastly, the bureau also makes the data available for academic

research but scrambled the data to protect patient privacy.

In short, it has multiple implications and much potential in various aspects to improve

overall healthcare efficiency. To do so, current IT system will need to be updated and

fully utilized; nonetheless, this will require more funding from the financial-starving NHI.

16

• The NHI faces a difficult task to sustain future healthcare in Taiwan

In summary, Taiwan quickly turned a 40% uninsured nation into a 99% coverage with

70% satisfaction over time. It provides free access and freedom of choice to medical

treatment but posts no effective gatekeeper. Politicians are afraid of making any kind of

premium increases or any form of medical benefit reduces. Despite that the bureau of

NHI has the right to adjust insurance premium rates biannually and enjoys monopoly

over care providers and drug prices, it seldom abuses its power. Taiwan is unique in

allowing unrestricted healthcare freedom to its people while constraining its care

providers, which presents the NHI a difficult task to secure Taiwan’s future healthcare

(Exhibit 6). Exhibit 6*

TAIWAN’S HEALTH SYSTEM IS UNIQUE

Centrally controlled Partially centrally controlled Not centrally controlled

Taiwan** Japan France UK Canada Germany US5

Health insurance coverage

Percentage of people insured

Basically 100% covered

Basically 100% covered

Basically 100% covered

Basically 100% covered

Basically 100% covered

90% covered

More than 20% not covered

Coverage of total treatment cost**

Almost 100% covered

95% covered

79% covered

88% covered

74% covered

79% covered

45% covered

Copayment required

NT$ 50-450, US$1.5-13.5, or GBP £1-9

10%, 20%, or 30% of total cost with ceiling

Depends on condition

Co-payments on certain items

No co-pay Co-payments on certain items

Varies widely by payor and health plan

Medical service regulation

Patient Flow No effecitve control except for a mild referal system

No regulation or guideline

Patients go to gatekeep first (GP/Specialist)

Patients go to GP first

Patients go to GP first

Patients have monetary incentices to go toGP first

Varies widely by payor and health plan

Restrictions on reimbursement based on cost efficiency

No cost efficiency check

No cost efficiency check

Restrictions on medically unnecessary drugs

NICE checks cost-efficiency

No restriction for cost reasons

Restrictions through reimbursement rule

Varies widely by payor and health plan

Restrictions on no. of private facilities in each geographic area

No govern-mental control

No govern-mental control

Government decideds

NICE provides guidelines

No govern-mental control

Exists for those providing treatement reimbursed

Government provides guideline

Ratio of public facilities

16% of the hospitals are public

20% of the hospitals and 7% of clinics are public

62% of the facilities are public

37% of the facilities are public

35% of the facilities are public

34% of the facilities are public

22% of the facilities are public

5 All comparative data with the US refers to the pre Obama Healthcare Reform.

17

5. ANALYSIS 5.1 HEALTH EXPENDITURE WILL BE ALMOST QUADRUPLED IN 2035. To discuss how cost drivers in healthcare may shape the financial outlook in Taiwan’s

NHI in the next 25 years, I simulated Taiwan’s health expenditure throughout 2035.

According to my projection, Personal Care Spending in Taiwan will rise from NT$827

(US$25 or £17) billion in 2010 to NT$1,508 (US$46 or £30) billion in 2020 and

NT$3,867-3,905 (US$ 117-118 or £77-78) billion in 2035. This will push National Health

Expenditure from NT$919 (US$28 or £18) billion in 2010 to NT$1,692 (US$51 or £34)

billion in 2020, and NT$4,339 (US$131 or £87) billion in 2035, which represents 9.1-

9.3% of GDP in 2020, 12.2-13.7% in 2030, and 14.2-16.8% in 2035. A range based in

two cases of scenarios in real GDP growth and advancing medical technology is

simulated (Exhibit 7).

In pessimistic scenario, GDP growth is 1% below long term average and advancing

medical technology 2% higher than base case. As shown, the difference between two

scenarios in National Health Expenditure as percentage of GDP is less obvious initially

but widens incrementally. This may reflect the fact that Taiwan’s Health System starts

from a lower cost structure than most OCED countries. Exhibit 7

EXPENDITURE WILL BE ALMOST QUADRUPLED IN 2035. NT$, Billion

National Health Expenditure*** as percentage of GDP 2010 2015 2020 2025 2030 2035 Base Case*

7.0 7.9 9.1-9.3 10.5-11.3 12.2-13.7 14.2-16.8 Pessimistic Case**

-500

500

1,500

2,500

3,500

4,500

2010 2015 2020 2025 2030 2035

Personal, Base Personal, Pessimistic National, Base National, Pessimistic

18

While it is certain that personal care spending are to increase, it is less clear what is

driving the cost in Taiwan’s healthcare and by how much. Hence, I used the three

mostly cited cost drivers to observe their impact on health expenditure in Taiwan.

Contrary to the belief that health expenditure is mainly driven by senior citizens in

Taiwan, my research shows that increased wealth appears to have the biggest impact

on Taiwan’s personal care spending. (Exhibit 8)

Exhibit 8

INCREASED WEALTH SEEMS TO HAVE THE BIGGEST IMPACT IN TAIWAN’S PERSONAL CARE SPENDING.

NT$, Billion By 2020 By 2035

+84% +372% *The cross effect of all three drivers is estimated to be 55 billion by 2020 and 13 billion by 2035. This effect is

redistributed based on its size. For details, please see technical notes.

** Based on pessimistic case simulation

827

166 (20%)

447 (54%)

1,523

83 (10%)

Estimated expenditures**

Advancing technology

Increased wealth

Ageing population

Expenditure in 2010* 827

530 (64%)

2,202 (266%)

3,905

346 (42%)

19

• Ageing Population will continue to require medical attention and resources. Cost is estimated to be NT$166 (US$5 or £3) billion or 20% in 2020 and NT$530 (US$16 or £10) billion or 64% in 2035 of the total spending in 2010.

• Increased Wealth will continue to drive up demand and expectations for medical treatments, from seeking “cure” to seeking “care” (Newhouse, 1977). This effect is projected to raise expenditure by NT$447 (US$13 or £9) billion or 54% in 2020 and NT$2,202 (US$67 or £44) billion or 266% increase based on the level of 2010.

• Advancing Medical Technology will continue to contribute to personal care spending growth by shifting untreatable illness to treatable, expanding range of medical treatments. It is projected to increase spending by NT$83 (US$2.5 or £1.66) billion or 10% in 2020, NT$ 346 (US$10 or £7) billion, or 43% to the spending from 2010.

In the case of Taiwan, it will be difficult to stop these factors. It would be unthinkable to

imagine reducing the length of life expectancy. It will cause more problems than it

solves to slow the already delayed medical update in Taiwan. It will be infeasible to

fasten, instead of facilitate, economic growth in the face global recession and the hope

for those who elected President Ma for economic consideration.

5.2 TAIWAN’S FUNDING GAP WITH CURRENT FINANCING MECHANISMS WILL POSE SERIOUS CHALLENGE TO GOVERNMENT AND ITS PEOPLE.

Having observed the magnitude of cost drivers, I now turn to the next objective of this

report—Implications to Taiwan policy makers: What can be done to meet future

healthcare needs?

Currently, personal care spending is composed of copayment (40%) and NHI premium

(60%). Copayment is paid each time at the point of service. NHI premium is shared

between municipal governments (30%), employers (35%), and the insured (35%). To

meet the future health demand in the following decade, NHI will have to collect NT$914

billion, 60% of total personal care spending in 2020. This figure may not seem

monumental, but based on current funding mechanism the likelihood of collecting this

money is negative. Seven years after establishment, the bureau has only successfully

raised premium rate once. Another seven years later, the agency pushed through

second payment increase. Without any substantial reform on the funding base, it is

almost certain that Taiwan will face severe challenges of meeting its future healthcare

need.

20

Unlike the British NHS which relies on general taxation, the NHI in Taiwan operates on

a self-sustaining basis with its own premium revenue and health expenditure. Since its

implementation, the greatest challenge has been to run the insurance operation while

maintaining financial balance. Revenue growth rate has been slow to catch up with

increases in expenditure. The result is a funding gap first seen in 1998 (BNHI, 2008,

Part II, pp.23-24). Other things being equal, if revenue grows at 5% a year, long-term

average, a funding gap of NT$1,063 (US$32.21 or £21.26) billion will occur in 2035. On

the other hand, if revenue grows at or above 7% a year, Taiwan may weather the storm.

(Exhibit 9)

Exhibit 9

ONE THOUSAND BILLION DOLLARS FUNDING GAP WILL OCCUR IN 2035 BASED ON CURRENT REVENUE GROWTH RATE AND CONTRIBUTION RATES.

NT$, Billion

Source: Revenue and Expenditure in 2002-2009: Accrual Basis, II. Financial Status, National Health Insurance Statistics. *Revenue in 2010-2035: projection based on long-term-average (2002-2009) ** 2010-2035: Expenditure based on pessimistic projection

496 664

914

1,246

1,704

2,198

425 530 661

824 1,027

1,280

-

500

1,000

1,500

2,000

2,500

2005 2010 2015 2020 2025 2030 2035

Expenditure Revenue, 5% Revenue, 6% Revenue, 7%

21

5.3 TO SECURE TAIWAN’S FUTURE HEALTH, GENERAL OPTIONS ARE INCREASE REVENUE, CONTAIN COST AND IMPROVE EFFICIENCY. To close the funding gap of NT$1,063 (US$32.21 or £21.26) billion, options are increasing revenue, containing cost and improving efficiency by taking advantage of Taiwan’s IT system as previously mentioned. Further breakdown on increasing revenue and containing cost is elaborated below.

5.3.1 Increase Revenue

• Increasing premium rate from the current system will continue to be an important lever. In the past, raising premium rate timely proved to be difficult unless the government could justify the cost.

• Reconstruct funding base is one of the main features of Second Generation Reform. It is clear that tapping into non-payment income has potential to allow NHI to travel towards a more sustainable system.

• Seek alternative sources of funding is favourable in Taiwan. For instance, tobacco tax passed in 2009 generates an additional 4% of NHI’s total revenue (Cheng, 2009, p.1037). Exploiting “Sin Tax”, sumptuary taxes that are socially deemed as unwanted, appears to be a better-tasted prescription for politicians and the public in Taiwan.

5.3.2 Contain Cost/ Demand

• Further reduce reimbursement fees is not advisable in Taiwan. NHI’s fee schedule is already low. Taiwan’s physician has three times more patient visits compared to the OECD average. Further pursue in this direction may have unintended consequences of inferior-quality care.

• Reduce unnecessary spending is commonly agreed by scholars, but disagreed over how to achieve. Chang (2006) proposed to a more radical reform, tackling the Tragedy of the Commons directly, by linking personal care spending to a medical subaccount of government pension, while a more incremental approach may have more success in Taiwan. Second Generation Reform aims to inform the insured more of the spending, by enlarging patient participation in medical treatment.

• Reduce benefit level is not favourable in Taiwan. Cost-effectiveness is necessary but not sufficient to convince the public. Thomson et al. (2009, p.5) also points out that “by increasing user charges or cutting cost-effective interventions might eliminate its budget deficit”, yet it can “significantly undermine the goal of financial protection and health gain.” Finally, unless the Taiwanese government has a solid public support or a strong political will, explicitly reducing current benefit will be socially inconceivable and politically unpalatable in Taiwan.

22

5.4 HEALTHCARE POLICY LEVERS WILL HAVE CONSTRAINTS TO RESPECT. To come up with feasible healthcare policies, one may first consider political, economic,

social, and technological (PEST) factors. These factors are not mutually exclusive and

collectively frame contextual constraints as well as boundaries to any policy levers in

Taiwan.

• Political Environment is one of the key success factors of healthcare reform. Cheng (2003) argued that “Taiwan’s NHI is a result of an “entrenched political party” challenged by a “rising opposition party”, rushing the implementation of a universal health plan to win back the favour of the public. Nonetheless, from autocracy to democracy, Taiwan government no longer holds the authoritative power (Kwon and Chen, 2008); Second Generation Reform is subject to public review and political involvement. Policy makers will have to find “ways to reduce transformation cost and control the failure risk under the more fragmented environment.” (Wang, 2010)

• Economic Sustainability is essential to healthcare spending. “Opportunity cost of spending on healthcare plays a central role at the level of the economy, at the level of the government budget and at the level of the individuals (Thomson et al., 2009, p.20).” In Taiwan, it is the population that bears the greatest share of the responsibility of using medical resources. Nevertheless, as a social health insurance, Taiwan falls “victim to the Tragedy of the Commons”, whereby individuals seeks to maximize own utilization at the expense of common wealth (Cheng, 2003). As a result, most Taiwanese citizens prefer “All-You-Can-Eat” healthcare deal without any form of premium increases, extra charges, or benefits cut-backs.

• Social Context is important regarding health policy changes on medical benefits. Whereas the British NHS can turn down payments that fail cost-effective requirement, e.g., kidney dialysis for the elderly, this is unacceptable in Taiwan. Taiwanese politicians and patients simply do not accept any arbitrary value over life (Cheng, 2009, p.1042). As mentioned, unless the Taiwanese population is convinced or the ruling party determined to reduce medical benefits, explicitly reducing the comprehensive coverage is inconceivable in the near future.

• Technology Application can significantly improve efficiency, reduce waste, eliminate fraud, encourage best practice, etc. Using a smart IT card and nation-wide IT system, providers in Taiwan submit claims electronically. It allows the NHI to look for examples of fraud, overbilling, overprescribing, inflating drug-prices and similar practices from provision side. Secondly, it contains records of both prescriptions and drug allergies. Thirdly, it tracks patterns of patient overusing of medical resources. Lastly, it encourages best practice and evidence-based clinical decision from detailed profile of patient’s clinical history. Updating the current IT system to second generation in the future should be encouraged to fully maximizing its benefits and realizing its potential to improve healthcare. Nonetheless, this option will require more funding from the cash-strapped NHI, which makes upgrading the system less attractive to financially constrained policy makers.

23

5.5 TAIWAN FACES TOUGH CHOICES IN SECURING ITS FUTURE HEALTH. By law, the bureau of National Health Insurance has the authority to adjust premium

rates to balance its budget biannually. However, Taiwanese government is aware of

any unpopular measure such as raising premium rate or reducing medical benefit.

Moreover, public and politicians resisted paying more for healthcare in the face of

alleged widespread of waste, fraud, and abuse of the bureau and drug-price arbitraging

healthcare profiteers (Cheng, 2003, pp.70-71). It appears that only in the face of an

imminent bankruptcy could the Department of Health succeed in budging premium rate:

the rate was adjusted from 4.25% of assessable income to 4.55% in September 2002

and from 4.55% to 5.17% in April 2010. The difficulty of raising premium rates is no

surprise, considering that Germany that took 50 years to double its average premium

from 6% in 1950 to its current level (McKinsey, 2008, p.25). Therefore, it is clear that

raising premium rates in a timely manner will be challenging in Taiwan.

President Ma, Ying-Jeou acknowledges the severity of the situation and urges reform

on healthcare financing (BNHI, 2010). As the latest rate raise affects mostly on those

earn above NT$54,000 (US$1,636 or £1,080) monthly, the adjustment is instrumental to

transiting Second Generation Reform in healthcare. The reform is designed to

restructure the funding mechanism, expanding the funding base, and involving the

insured (BNHI, 2010). Currently, premium is lifted on the basis of assessable income, or

payroll income. Non-payment income such as capital gains is not subject to premium

assessment. Such non-assessable income represents as much as 30% of total national

income (Cheng, 2009, p.1037). While premium is generally shared between the

government, employers, and the insured, individuals earn the same amount of salary

may face a different contribution rate based on occupational difference (Appendix:

Exhibit A7). Moreover, the reform also intends to contain cost by informing the insured

more forcefully about the link between their medical seeking behaviour and health

expenditure.

According to the Bureau of National Health Insurance’s official website, a more

equitable National Health Insurance law is anticipated to be revised within two years,

approximately in 2012 (BNHI, 2010). However, two years may be somewhat optimistic,

considering the American Health Care Reform has been hostage to political gridlock for

almost two decades (Cheng, 2003, p.73). While a reform is still under discussion since

its inception in 2004, a financial challenge is well under way.

24

6. CONCLUSION Both case scenarios in this report suggest that National Health Expenditure will surpass

at least NT$4,000 (US$121 or £80) billion in 2035, or 378% of the level in 2010. Based

on the current growth rate of healthcare funding, Taiwan’s NHI will have accumulated

NT$1,063 (US$32.21 or £21.26) billion financial deficits in 2035.

To close the funding gap, general options for the Taiwanese government are increasing

revenue, containing cost, and improving efficiency to provide more care with less

healthcare resources. Raising premium rate to bump up revenue is increasingly

challenging; increasing general copayment (already among the highest in OECD

countries) may prove regressive. Containing cost by reducing the broad medical benefit

explicitly may make economical sense but is socially inconceivable and politically

unpalatable; cutting physician fees (already low) and laying-off care personnel (in

shortage) may cause more problems than it solves. Finally, updating the current IT

system to increase overall efficiency is needed; it will, however, require more funding

from the cash-strapped NHI. The finding is, without a substantial healthcare reform,

Taiwan is not likely to secure its future health.

Currently, the premium rate was adjusted from 4.55% to 5.17%. This transitory

measure should allow Taiwan to buy time for Second Generation Reform to be

implemented. Under the reform, funding base will be expanded to tap into the non-

payment income, which represents 30% of total national income. By involving the public,

it recognizes the Tragedy of the Commons, while preserving the solidarity of the Social

Contract in Taiwan. It is to inform the citizenry more forcefully of impact on the nation

from their medical seeking behaviour and physician’s medical care provision (Cheng,

2003). Second Generation Reform may be best available option for that.

Based on the pessimistic scenario, if revenue continues to grow at an average 5% a

year, a funding gap of NT $1,063 (US$32.21 or £21.26) will result in 2035. All else

equal, if revenue grows at or above 7% year-on-year, Taiwan may be able to secure its

future and financial health throughout 2035. The conclusion is we cannot meet future

healthcare needs with current operating method; a fundamental reform on healthcare

financing is needed. While Second Generation Reform appears to be the way forward,

policy makers and public would have to consider the magnitude of a possible crisis and

the consequences of inaction and indecisiveness.

25

7. LIMITATIONS This report adopts a blend of methodology from Cutler (2003) and McKinsey (2008).

Likewise, I approached the financial sustainability in Taiwan’s health system from top-

down. This inevitably neglected more granular factors as to what is driving the cost of

ageing population, e.g., proximity of death; which department is contributing to costs,

e.g., emergency medical treatment, dialysis treatment, etc. However, a top-down

approach serves the aims and objectives of this report to demonstrate value of

quantitative models in informing healthcare policy and exploring the magnitude of a

financial challenge on Taiwan’s healthcare sustainability.

Next, judging healthcare from a financial point of view has its own limitations. Three

major issues can be found in Thomson et al. (2008, pp. 5-6). First, the raison d’être of a

health system is not about “profit” but “benefit” to its people. Second, financial balance

is a means to an end, not a goal per se. Third, framing health sustainability as a cost

problem can be misleading, as it may “distract attention from other factors contributing

to fiscal imbalance, in particular efficiency problems.”

Finally, the basic parameters used in Cutler (2003), McKinsey (2008), and this report on

building up health expenditure project are not flawless. It would be interesting to ask:

“would Personal Care Spending continue to rise, isolating the effects of ageing

population, increased wealth, and advancing medical technology?” Briefly, yes, there

are other factors costing healthcare but probably not as influential as these three most

widely cited “cost drivers”. Further elaboration will require an in-depth-analysis on how

each individual factor drive healthcare costs, such as “Population Ageing and Health

Care Expenditure” of Alastair Gray (2005). Nevertheless, this should not prevent this

report from encouraging interest to the study on financial sustainability in Taiwan’s

health system and demonstrating the value of using quantitative tools to enhance

decision making of healthcare policy in Taiwan.

To close with McKinsey(2008)’s words, this report aims “to provide a sound and

unbiased fact base for use in the public debate on health care and to enable policy

makers, regulators, intermediaries, payors, providers, employers, clinicians, and

patients to make more informed and therefore better decisions.”

26

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a

V. APPENDIX

V.1 TECHNICAL NOTES

V.1.1 How Personal Care Spending Is Projected

In its simplest form, the method of McKinsey (2002) on projecting healthcare spending

can be illustrated as below:

(𝐴𝑔𝑒𝑏𝑒𝑙𝑜𝑤14 + 𝐴𝑔𝑒14𝑡𝑜64 + 𝐴𝑔𝑒𝑎𝑏𝑜𝑣𝑒64) ∗ 𝐺𝐷𝑃𝑅𝑒𝑎𝑙 ∗ 𝐶𝑃𝐼𝑀𝑒𝑑 = 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐶𝑎𝑟𝑒 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔

V.1.1.1 Medical Expenditure Per Capita by Age Group First, I obtained the latest available data (four years from 2005-2008) for total health

expenditure by age from Taiwan’s Department of Health (DoH). Then, I categorized

nine age groups into three age groups (Age below 14, Age 14 to 64, and Age above 64).

𝐴𝑔𝑒𝑏𝑒𝑙𝑜𝑤14 = 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑏𝑦 𝑎𝑔𝑒 𝑏𝑒𝑙𝑜𝑤 14 ∗ 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑎𝑔𝑒 𝑏𝑒𝑙𝑜𝑤 14

𝐴𝑔𝑒14𝑡𝑜64 = 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑏𝑦 𝑎𝑔𝑒 14 𝑡𝑜 64 ∗ 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑎𝑔𝑒 14 𝑡𝑜 64

𝐴𝑔𝑒𝑎𝑏𝑜𝑣𝑒64 = 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑏𝑦 𝑎𝑔𝑒 𝑎𝑏𝑜𝑣𝑒 64 ∗ 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑎𝑔𝑒 𝑎𝑏𝑜𝑣𝑒 64

Unlike McKinsey (2008) that used “intensity”, personal care spending in one year, I

used “linearity” over four years (latest available data) to obtain spending per person in

each age group (Exhibit A1). Using a log10 to obtain the formula, R square in all three

equations is above 85%, indicating a high linearity (Exhibit A2).

Exhibit A1

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000

2005

2009

2013

2017

2021

2025

2029

2033

PERSONAL CARE SPENDING PER CAPITA, NT$Under 14 14 to 64 Over 64

b

Exhibit A2 Formula for Health Expenditure per Age Group

V.1.1.2 Population Projection

For population age structure from 2005 to 2008, I used historical data from National

Health Expenditure Report 2008 from Department of Health (DoH, 2008). For

population projections from 2009 to 2035, I used Population Projections for Taiwan

Areas: 2008~2056 (CEPD, 2008), using median variance, from the Council for

Economic Planning and Development, for the projection of age structure (Exhibit A3).

Accordingly, expenditure by age groups is the product of age cohorts and the estimated

spending per person obtained from the expenditure formula above.

Exhibit A3 CEPD Population Projection, Median Variance

y = 0.0386x + 4.1141R² = 0.8695

y = 0.034x + 4.3081R² = 0.9106

y = -0.0235x + 5.0388R² = 0.8743

4.00

4.50

5.00

5.50

0 0.5 1 1.5 2 2.5 3

Using Log10 to Obtain Expenditure FormulaAge <15 Age 15-65 Age >65

0 5,000 10,000 15,000 20,000 25,000

2005

2010

2015

2020

2025

2030

2035

Total Population

NUMBER OF PEOPLE BY AGE GROUPUnder 14 14-64 Over 64

c

V.1.1.3 Economic Growth and Advancement in Medical Technology

In the analysis, I simulated two scenarios for expenditure projection. In a base case

scenario, I used 3.37% for GDP and 1% for advancing medical technology. This figure,

3.37%, is based on the long-term average from 1998-2008 (Exhibit A3). The impact of

advancing medical technology is based on the arguments that it would to be

accountable for at least 1% of the health expenditure in the future (Cutler, 2003). In a

pessimistic case scenario, I tested the financial sustainability in Taiwan’s health system

by using 2.37% year-on-year for real GDP growth, or 1% less than the average growth

rate. For the advancement in medical care technology, like Wanless (2002), I used 3%

to observe its impact on healthcare spending in my pessimistic case. Exhibit A3

LONG-TERM AVERAGE OF REAL GDP GROWTH OVER THE PAST DECADE IS 3.37%.

V.1.1.4 Isolating Impact of Cost Drivers For the purpose of observing individual impact, I isolated each cost drivers based in the

pessimistic case. As mentioned, I used 2.37% year-on-year for real GDP growth and

3% year-on-year for advancing medical technology to project personal care spending

throughout 2035. Based on the technical note in McKinsey (2008), impact of increased

wealth and advancing medical technology are assessed by a method of compounded

interest rate. Hence, a compounded annual growth rate of 2.37% real GDP growth

would be 129.4% in 2020 and 183.9% in 2035. On the other hand, medical

advancement of 3% year-on-year growth would be 138.4% in 2020 and 215.7% in 2035.

3.37

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

Real GDP Growth, per cent1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Average

d

V.1.1.4 Testing Robustness of the Model

Finally, I tested accuracy of the model, comparing estimated expenditure in two cases

with historical data. The variance in base case is 5.2% in 2005; 5.0% in 2006, 4.7% in

2007, and 5.7%, in 2008. The difference in pessimistic case is 6.2% in 2005, 6.0% in

2006, 5.8% in 2007, and 6.8% in 2008.

V.1.2 How National Health Expenditure Is Projected National Health Expenditure is mainly consisted of personal care spending and other

expenditures, e.g., public health, education, etc. According to Statistics of Final

Expenditure for Health, 1996－2008, personal care spending appears to be stabilized

as 90% of the total national health expenditure (Exhibit A4). Based on ceteris paribus

assumption, other things being equal, I used this ratio to project the total National

Health Expenditure throughout 2035, as formularized in the equations below.

𝐼𝑓 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐶𝑎𝑟𝑒 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔

𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝐻𝑒𝑎𝑙𝑡ℎ 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒= 90%

𝑇ℎ𝑒𝑛 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐻𝑒𝑎𝑙𝑡ℎ 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 =𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐶𝑎𝑟𝑒 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔

90%

Exhibit A4

PERSONAL CARE SPENDING APPEARS TO BE STABILIZED AS 90% OF THE TOTAL NATIONAL HEALTH EXPENDITURE.

0%

20%

40%

60%

80%

100%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

National Health Expenditure

Exp on Personal Care Exp on Others

e

V.1.3 How Personal Care Spending Is Shared In 2007, financial resources for personal care totalled NT$695.7 billion, comprising of

Out-Of-Pocket payment NT$ 282.5 billion (41%), National Health Insurance premium

NT$ 401.1 billion (58%), and others NT$ 9.3 billion (1%) (2008 Statistics Of

Government Health, Table 52 Personal Healthcare Fund Source by Year). Historically,

co-payment has been circa 40% and premium 60% of financial resources (Ibid, Table 4).

Assuming without policy changes, I use the current distribution rate to discuss the

implications to policy makers and the public in Taiwan (Exhibit A5).

Exhibit A5

CO-PAYMENT HAS BEEN AROUND 40% AND PREMIUM 60% OF FINANCIAL RESOURCES IN THE PAST.

V.2 NHI Premium V.2.1 NHI Premium Formulas The NHI is primarily funded by the premiums shared by the insured, employers, and

central and local governments. All insured is divided into income and non-income

earners and subdivided into six categories (Exhibit A6 and Exhibit A7).

Exhibit A6 NHI Premium Formulas

0%20%40%60%80%

100%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Personal Health Care Fund Source

Out-of-pocket Insurance

f

V.2.1 Classification of the Insured Exhibit A7 Classification of the insured

g

V.3 CO-PAYMENT In 2005 a new co-payment schedule was introduced as shown below: user-fee for a

visit to a Western medicine facility is based on the level of institution and types of care.

For medical centre, regional hospital, and district hospital, referral system is

implemented to serve as a gatekeeper like GPs, general practitioners, in UK’s NHS to

encourage appropriate use of medical resources. The co-payment for hospitalized

patients can range from 5% to 30% of their bills, depending on length of stay and type

of ailment (BNHI 2009, Ch.2, p. 19-20) (Exhibit A8 and A9).

Exhibit A8 Basic Outpatient Co-payment (US$1: NT$33, £1: NT$50)

Exhibit A9 Basic Inpatient Co-payment