Navigating the deep seas of health systems financing and country economics

In recent years, health status and access to care have improved markedly for populations around the world. Financial protection has also significantly increased, as demonstrated by a worldwide decrease in out-of-pocket health spend. However, these improvements have come at a cost; health expenditures are growing faster than GDP almost everywhere. Escalating costs are threatening not only the health sector, but also the fiscal and financial sustainability of many countries. All countries need to ensure that they get the most out of their health care spending today and that effective measures to slow cost escalation are put in place going forward.

During two recent conferences—McKinsey & Company’s annual Forum for Health in Geneva in May and a workshop held in parallel with the World Bank/IMF* meetings in Istanbul in October—Ministers of Health and Finance and other senior health systems stakeholders from around the world discussed concrete measures country leaders can take to deal with these growing challenges.

Healthcare costs are escalating in many parts of the world— in particular in middle and high income countries—at a rate well above GDP growth. Although growth above GDP may be unavoidable, healthcare and finance decision makers should be able to control both the rate of the increase and the rate of return on health expenditures in the context of their country finances.

The cost escalation risk posing a significant challenge to a country’s fiscal performance, competitiveness, and growth because an increasing part of the burden is being financed through fiscal expenditures (Exhibit 1) Therefore, health and public finance leaders need to assess:

• How a country can get best returns from its investment in health, not only by improving the health status of its population but through economic development (e.g., does the spending on health also result in wealth creation?)

• The trajectory of a country’s health expenditures, the feasibility of the fiscal effort to sustain it, and the implications to both households and its aggregated fiscal performance and competitiveness

• The level beyond which increased fiscal health spending hampers other sectors or stalls the country’s overall macroeconomic growth.

Given the potential effects of high tax pressure on the economy, clearly, if health expenditure continues to grow as we expect, decisions on the source of funding to finance future growth in the health sector (e.g., public or private) matters significantly. It matters not only for the financial protection of the individual household but also for economic development. In controlling fiscal health expenditures, both the individual household and the macroeconomic performance interests need to be balanced.

It is likely that in countries with high levels of public financing of the health sector and high levels of overall taxation, future healthcare spend will need to be increasingly financed by private funding to ensure feasible tax loads compatible with good macroeconomic performance.

Moreover, if net increases in health expenditure continue to be desirable in low income countries, and as international donors increase their funding of the health sector in these countries, there is a need to solve the problem of ‘crowding out’ low income countries’ own public financing of health in a way that does not also create undesirable opportunity costs from other sectors for their economic development.

There are concrete actions countries can take to manage short and long term causes and effects of increases in health care costs and to improve the return on health expenditures (Exhibit 2).

In addition to skilful technical design, there is a strong need to master the political economy of resource allocation and to effectively communicate with the public Both quality and clarity of technical design is needed to ensure a rational and efficient implementation of a health reform or adjustments to current system but are far from sufficient to ensure success in containing costs.

It is essential that the Ministry of Health and the Ministry of Finance communicate effectively with each other, that they understand their respective legitimate objectives, build confidence and empathy from both ends, and come to constructive solutions to ensure effective development of the sector contributing to overall country economic development

It is equally crucial that the respective Ministries speak clearly and with one voice to the public, in a way that tax payers can easily understand the trade offs they have to make both as recipients and funders of care.

Ensuring synergy between a good health system development that serves people well and the overall economic development in the country has become one of the most critical factors for success of any health sector reform.

To build on lessons learnt and to go deeper into levers to pull to effectively lead health systems through change, join us for our annual Forum for Health in Geneva, Switzerland in week 20, 2010.

Authors: Dr. Cristian Baeza | Dr. Paolo De Santis Margareta Harrit | Dr. Nicolaus Henke

McKinsey & Company was founded in 1926 in New York by James O. McKinsey. The Firm has a presence in 45 countries around the world with 90 offices. We serve private sector companies, governments and social sector organizations. Since 2001, we have been serving more than 30 health systems in the design and implementation of various health systems reform aspects.

Dr. Cristian Baeza and Dr. Paolo De Santis are leaders of the McKinsey & Company Health Systems Finance Initiative and based in the McKinsey Rome office. Dr. Nicolaus Henke chairs the global McKinsey Health Systems practice and Margareta Harrit is a health systems knowledge expert, both are based in the McKinsey London office.

For further dialogue on Health Systems reform or an invitation to next year’s McKinsey Forum for Health in Geneva, please contact Margareta Harrit on

+44 782 502 9528              

margareta_harrit@mckinsey.com