Healthcare Financing Reform in Hong Kong

Peter Yuen, PhD., Associate Head of Department of Management and Professor in Public Policy Analysis and Health Services Management, the Hong Kong Polytechnic University, was the Foundation's guest speaker on 4 November 1999. This is a summary of his remarks.

Professor Yuen began by alerting his audience to the fact that he believed Hong Kong's existing health financing system was working and did not need fundamental reform. In this he differed from the majority of commentators, from the Harvard review team, and from the Foundation itself.

Reasons for change

There were, Professor Yuen conceded, reasons to consider change to the health care financing system. The commonly stated arguments for change were as follows.

• The health care financing system, in which the main funding was from taxation and Government provided most of the hospital services, had remained unchanged for decades, in fact, it was almost the same as when introduced in the early days of the British colony. In this Hong Kong differed from the other little dragons. Taiwan had introduced national health insurance two years ago; South Korea over ten years ago; and Singapore had introduced its Medisave system in the 80's.
• The population was ageing, with the percentage of those aged 65 or over rising from 7% in 1985 to 12% in 2001.
• High-tech medicine and expensive drugs would push health care costs up.
• Rising patient expectations, driven by the increase in affluence, would also raise costs. In the old days patients had been laid on camp beds in wards with little public complaint; now the papers were full of criticism of medical services.
• Economic growth was slowing, limiting Government's ability to pay.

Hong Kong's existing health financing system was working and did not need fundamental reform.

Reasons for status quo

However, the foregoing were not in fact good reasons if examined closely. There were the following grounds to maintain the status quo.

Firstly, notwithstanding its age, the system worked well and enjoyed strong popular support. The health indices were among the best in the world. Some commentators argued that these indices did not reflect the health system but rather the overall socio-economic environment. However, if one looked at indices that were sensitive to the health care system, such as maternal mortality, Hong Kong also scored well. Then there was universal access to care. There was no separate contribution system; thus much administrative effort was saved. And public health care spending and total health care spending were relatively low, roughly half the level of some European countries. So the system was cost-effective.

Secondly, the ageing of the population was a gradual process, and would level off by 2001. Largely because of immigration from China, the ratio of the 65-and-overs would remain at 12% from 2001 to 2011. In fact the demographic problem would actually lessen. The dependency ratio, which was the crucial factor in a tax-funded system, was dropping.

Thirdly, although equipment and drug costs were rising, they remained a small component of total cost. In the 1996/97, drugs and medical instruments amounted to 9.3% of total recurrent expenditure in the Hospital Authority budget. Staff costs were the biggest component at 82%. New equipment represented only 1.2% of staff costs.

Fourthly, although rising affluence led to rising expectations, it also led to increasing numbers of people with private health insurance. Admittedly the coverage given by private health insurance was very variable. But this could be remedied by Government registration of schemes that met certain standards. Rising affluence also led to increasing government revenue.

Fifthly, there was scope, even in a scenario of lower economic growth, for cost-recovery to be improved. The per diem charge was too low and could be raised. A higher charge should be levied for Class B beds. Itemised charges for non-essential and less cost-effective items and procedures could also be raised. And Hong Kong taxes were low: if necessary, salaries and corporate profits taxes could also be raised by a small amount.

Reasons to retain tax-based system

Professor Yuen acknowledged that it was fashionable to privatise Government services and to move to market-based systems. Why, then, did he prefer to retain the existing tax-based system? Because it was effective in controlling costs.

• The current system imposed a spending cap. A set amount was provided in the Government's budget and no more. International experience showed that a spending cap was the most efficient means of controlling costs. It was true that the Hospital Authority had received large increases in budget in its first six years. However, the Government did not need to be so generous; it could chose to be more stringent. Rather than simply giving the HA what it asked for, the Government could move to a population-based system of fund allocation, i.e. so many dollars per head of population in given age ranges.
• Transaction costs were low. There was no need to establish a territory-wide collection and reimbursement system. Hospitals did not need elaborate cost accounting systems either.
• There was no supply side moral hazard. The current public hospital system had no incentive to provide treatments that were unnecessary since it had a fixed budget. Doctors were on fixed salaries, and so had no incentive to prescribe or perform procedures beyond what was absolutely necessary.
• Demand side moral hazard was not serious for hospital services. Patients could not admit themselves to hospital; there were gatekeepers in the form of referring doctors. These doctors had no incentive to refer patients excessively.
• Outpatient services were mostly privately financed.

Harvard model not preferred

The Harvard model was not preferred, said Professor Yuen, for the following reasons.

• Transaction costs would be higher. The infrastructure to collect and reimburse would need to be created and administered.
• There would be more supply side moral hazards.
• Government would be subsidising outpatient services, which would lead to more moral hazard.
• If the HA were broken up into regional health authorities the current economies of scale achieved by the HA would be lost.
• In a decentralised environment it would also become difficult to control the proliferation of high-tech medicine. Every hospital would want its own CAT scanner, etc, and one would see expensive duplication, just as in China.

The Harvard team's analysis of spending trends was inappropriate, said Professor Yuen. The Harvard team had taken the spending trend of HA's first 6 years and projected it forward for twenty years. However, growth in HA spending in its initial years was a one-off phenomenon: spending would level out in future as HA demands were more closely scrutinised.

Population-based funding

Professor Yuen then presented an alternative financial projection model assuming the adoption of population-based public sector funding. The model started from the premise that funding to the HA should be changed from primarily historical based to primarily population-based. Under the existing funding approach, the HA is given money to maintain its current level of services (hence historical) plus whatever new services are deemed to be necessary. Such funding basis does not provide incentives for the HA to be efficient. It encourages expansion.

The proposed population based funding will provide a sum to the HA every year according to the following factors.

Figure 1: Population Based Funding Model

Professor Yuen then presented detailed calculations based on population demographics, scenarios for GDP growth and assumptions regarding health care expenditure (the detail is available on the Foundation website www//hkdf.org). The results, in 1996 dollars, are summarised as follows:

Concluding, Professor Yuen stressed that he was not suggesting that the existing financing and delivery system needed no improvement or that the community should be complacent. On the contrary, reform was needed. However, he believed that the introduction of population-based funding as per the foregoing model would solve most of the problem.

The above does not necessarily represent the views of the Foundation