Issues Monitor Healthcare

KPMG INTERNATIONAL Issues Monitor

Acute or chronic: the impact of economic crisis on healthcare and health

July 2012, Volume Nine

kpmg.com

KPMG INTERNATIONAL Issues Monitor

Acute or chronic: the impact of economic crisis on healthcare and health

July 2012, Volume Nine

kpmg.com Dr Mark Britnell Chairman and Partner, Global Health Practice Keeping up to date with the very latest and most pressing issues in healthcare can be a challenge, and while there is no shortage of information in the public domain, filtering and prioritizing the knowledge you need can be time-consuming and unrewarding. I hope that you find this edition of Issues Monitor useful and I welcome the opportunity to further discuss the issues presented and their impact on our sector.

Welcome to the July edition of Issues Monitor — Healthcare. Each edition pulls together and shares industry knowledge to help you quickly and easily get briefed on the issues that affect your sector. In our continuing series of Issues Monitors for Healthcare, this issue examines the response of various health systems to the current economic crisis, the prolonged austerity, a range of supply-side strategies, and the need to identify and implement measures that are effective in the short as well as the long term.

The deepening economic crisis in the eurozone has exposed health systems around the world, particularly in Europe, to public and private budgetary constraints. Healthcare systems currently face a funding crisis, which is adversely affecting health outcomes. High unemployment and the slow pace of recovery have further weakened the public sector and its ability to supply quality health services in Europe. This trend is spreading beyond Europe to other geographies, including the US, as economies across the globe are far more interdependent than ever before. The current financial crisis is an acute form of what is likely to become chronic in many western economies. The scale of the challenge not only requires solutions that are effective in the short term, but also some bold and radical measures in the medium to long term.

Overview

The economic downturn and the to support the retired population and In the US, the emergence of both consequent squeeze on public those using healthcare services. This the Patient Protection and Affordable spending have significantly affected imbalance is leading to a growing Care Act (PPACA) and accountable spending on healthcare in Europe demand for healthcare globally. care organizations (ACOs) reflects and North America. Despite signs of a realization of the need to contain Demand-side pressures — such as recovery, the economic environment spending. Even so, the ambition to an increase in chronic diseases and remains fragile, with a strong possibility slow the rate of increase in expenditure the number of patients with multiple that some countries may implement suggests that the urgency of the conditions — are significant challenges further austerity measures to stabilize situation may not have been fully to the way healthcare systems operate. their finances. This, in turn, is expected reflected in the legislation. In Europe, However, the majority of growth in to significantly affect publicly funded while many short-term measures exist health expenditure over the last 20 years healthcare systems. to contain costs and review the extent has been driven by policy choices and of coverage, there are no signs yet In many countries, healthcare is likely supply-side factors. In fact, factors of providers, payers or policymakers to enter a period of extended austerity. such as increasing use of technology; having identified alternative models that Further, the pressures that are surfacing new drugs; improved facilities that help are likely to be financially sustainable in are likely to be a common feature of provide services to an increasing number the long term.1 many health systems in future. of patients; rising costs of providers; and the tendency for spending on healthcare The unfunded entitlement payments Rising healthcare expenditure to grow at more than 0.5–2.5 percent (burden of social security, Medicare Over the past few years, total above GDP growth have generally had and other entitlements in excess of healthcare expenditure has risen in a greater impact on health expenditure money set aside for them) may be both developed and emerging markets. than aging has. Its likely that up to as high as 188 percent of GDP, in Public spending on health constitutes one-third of the growth in public health the US. The National Health Service a significant share of total government expenditure could be modified by (NHS) in England has a task to become expenditure and GDP.2 In most cases, policy decisions. 20 percent more productive by 2015. health expenditure has increased, often Other healthcare systems have already Countries, states and payors will need more rapidly than GDP. During times started buckling under the pressures to adopt new and more sustainable of recession, the widening gap is also of increasing demand and constricted approaches to service delivery and likely to be reinforced by a decrease public finance. healthcare funding. In the long- in GDP growth rates.3 For example, in term, many health systems may Organization for Economic Co-operation The demographic imbalance caused face the challenge of containing the and Development (OECD) countries, by an increase in aging population impact of population changes while health spending as a percent of the globally leads to a much larger issue of simultaneously managing expectations, GDP rose from 8.8 percent in 2008 to change in dependency ratio — reduced saying no to developments and 9.5 percent in 2009.4 tax-paying and working population reprioritizing existing expenditure.

Figure 1: Total health expenditure as a share of GDP, 2009 (or nearest year)

15 9.1 10 2.6 2.7 1.7 3.4 1.6 1.5 3.5 3.8 2.1 2.5 % of GDP 2.8 1.6 4.9 5.1 2.3 2.0 1.8 5 9.2 9.8 8.3 8.9 8.1 8.2 8.1 7.4 1.9 6.5 5.8 7.0 5.9 6.9 2.3 4.1 5.2 5.3 5.3 2.8 3.4 3.5 2.3 0 1.4 Italy India Brazil China Spain Japan France Poland Estonia Greece Canada Norway Hungary Portugal Germany Denmark Australia South Africa Russian Fed. United States United Kingdom Public Private Source: OECD Health Data 2011; WHO Global health expenditure database

Note: Healthcare expenditure values for Portugal and Greece are available for 2008 and 2007, respectively.

According to OECD estimates, public trend and is projected to grow faster health expenditure as a percentage of than the GDP. According to estimates According to GDP is likely to increase by an average by the Congressional Budget Office estimates by the of 3 percent in advanced economies, (CBO), Medicare spending amounted to Congressional over the next 20 years. This growth is US$572 billion in 2011, and is expected Budget Office 6 higher than the growth in the 28 years to be more than US$1 trillion in 2021. (CBO), Medicare up to 2008 (i.e., between 1980 and Moreover, according to the 2011 spending 2008), during which time only six Medicare Trustees Report, unfunded amounted to countries had growth in excess of Medicare benefits to its beneficiaries US$572 billion 2.5 percent, while some grew at a are likely to total approximately in 2011, and is 7, 8 significantly lower rate — six had US$24 trillion over the next 75 years. expected to be less than 1.5 percent growth over The reforms introduced under the “ more than US$1 5 this period. Patient Protection and Affordable trillion in 2021. Care Act (PPACA) of 2010 are The situation in the US is especially expected to expand health insurance worrisome, as public health spending coverage and reduce the budget as a percentage of GDP is projected deficit. However, forecast savings to rise by about 5 percent over the on healthcare spending are not very next 20 years. Medicare spending high and the future of these reforms is expected to continue its upward remains uncertain.9

On the other hand, in Europe, public costs of providers and change the way inequalities. In fact, approaches such health expenditure is expected to the money is spent. Spending methods as reducing benefits — particularly by increase at an average rate of 2 percent can be altered by: removing high-income groups from of the GDP, and by more than coverage — have the potential to •• Reducing benefits offered to 3 percent in seven European countries, undermine the solidarity principle that the population by implementing over 2011–21.10 Although the current underpins all successful social insurance measures such as completely health budget cuts are expected to and tax-based systems. Adding to this, removing some items from reduce healthcare spending in the the implementation of such measures coverage; increasing patient short term, the long-term impact may be extremely difficult from a wait times; substituting generic remains uncertain.11 political standpoint. for branded medication; and In emerging economies, public health implementing health technology Many national governments have expenditure is projected to rise by assessment systems recently announced their budgets 1 percent of the GDP over the next •• Requiring patients to cover a for FY13. Most countries are either 20 years, representing one-third of proportion of the cost by introducing freezing or cutting spending. For advanced economies’ total projected or increasing cost sharing example, in April 2012, the Spanish growth. The challenges related to public government announced cuts to health health spending are also different for •• Reducing the size of the population and education spending of EUR10 billion these economies.12 In these economies, covered, for example, by mandating (US$13 billion) per year. It also approved health coverage is less extensive than in high earners to take private Royal Decree-Law 16/2012, which advanced economies, allowing a better insurance outlines a series of measures to contain scope to increase healthcare spending.13 However, all these methods have public health expenditure, such as risks. If not properly designed, they increasing medicine copayments and Containing expenditure can lead to patients failing to seek establishing a new central purchasing Lack of additional funding sources will early treatment and increase health system for prescription drugs and health compel policymakers to squeeze the

technology assessment systems.14 outlined cuts to the healthcare budget the short term, they tend to be counter- The US budget for FY13 proposes proposed in March 2012. Over the productive and ineffective in the applying a premium surcharge for new next four years, the government medium to long term. The scale of the beneficiaries, beginning in 2017, if plans to reduce the increases in challenge that faces many healthcare they choose Medigap coverage. It also healthcare budget it allocates to providers is such that it now requires introduces new TRICARE copayments various provinces.18 a more radical redesign of internal and fees, to help limit the cost of processes as well as the way personnel While measures taken to control the healthcare while maintaining quality.15 work. It also requires bold rethinking supply-side costs of healthcare — such The UK government announced public around the way services function, the as restraining payments, freezing spending cuts of up to GBP2 billion role of hospitals and business models, capital investments, controlling (US$3.3 billion), to fund reduction in which, in many cases, have remained prices, closing hospitals and reducing income tax for more than 20 million unchanged for decades.19 providers’ budgets — seem effective in people.16, 17 The Canadian government

Regional responses: Europe

Current healthcare scenarios balance budgets and restrain spending. Healthcare systems are organized Other trends have further exacerbated Almost all and financed in different ways across the financial crisis: European countries Europe. Health insurance coverage •• Changing demographics — aging are adopting is either universal or almost universal population and rise in chronic measures to in all European Union (EU) member diseases contain healthcare states, through compulsory social spending, allocate health insurance or national/local health •• Rising cost of healthcare — for available resources service provision. Public expenditure example, rising cost of medical adequately accounts for a high proportion of technology and manage total expenditure (77 percent in •• Increasing patient awareness of expenditure on 2008). However, the share of private “ their entitlements health and hospital healthcare insurance is increasing. •• Unhealthy lifestyles care effectively and Copayment and direct spending efficiently. accounts for a small share of total •• Financing structures and policies healthcare expenditure (14 percent aligned more toward providing acute in 2008 — EU average).20 To ensure rather than chronic care21 access to services by vulnerable groups, such as low-income individuals Governments' response and patients suffering from chronic Health expenditure accounts for a diseases, a system of cost-sharing significant and growing proportion exemptions is applied in almost of resources in Europe. Almost all all countries. European countries are adopting measures to contain healthcare The healthcare sector across the spending, allocate available resources continent is facing the heat of the adequately and manage expenditure ongoing debt crisis and is struggling to on health and hospital care effectively

and efficiently. These include the direct quarter and also reduced the 2 Increase in cost sharing: The rationing and control of expenditure, number of employed healthcare increased cost sharing/copayment price cuts; changes in the extent of professionals' and workers’ salaries of medicines, lower reimbursement coverage and cost sharing; reference by a similar fraction in 2010. rates, and a rise in prescription pricing for reimbursement; policies Countries such as Cyprus, Portugal fees are some of the methods that related to generic medicines; and and the UK introduced hiring and/ governments are using to reduce the reorganization of the decision- or salary freezes, while others, public healthcare expenditure. This making process, such as through such as Hungary, the Republic of has helped raise funds for the sector the adoption of health technology Ireland and the Baltic Republics, as well as reduce the demand for assessment (HTA).22 made salary cuts. Luxembourg healthcare goods and services passed a legislation that allows the (mostly pharmaceuticals, dental care 1 Rationalization of healthcare government to cap the number of and eye glasses). Given the current budgets, staff and services: Most health professionals over the next situation of fiscal constraints and EU member states have adopted five years.23 In Latvia, the number in view of demand pressures, cost extremely direct cost-containment of medical institutions providing sharing is likely to be used more measures — reducing their inpatient healthcare was reduced extensively over time. However, its healthcare budgets, headcount and from 59 in September 2009 to 42 in application to the entire population services. For example, Romania January 2010.24 and its ability to create substantial reduced its health budget by a revenues are under debate.25, 26

Table 1: Overview of applications of copayments in Europe

No copayments The Netherlands and Malta Flat rate Austria, Italy and the UK (with implicit ceiling prescription pre-payment certificate) Percentage rates Belgium, France, Greece, Estonia, Finland (with annual ceiling), Latvia, Lithuania, Poland, Portugal, Slovakia, Slovenia and Spain Uniform % Cyprus, Germany and Norway Co-insurance, with % decreasing with Denmark and Sweden accumulated expenditure over a given period and with a ceiling Deductible Ireland and Sweden Many countries have explicit exemptions for certain products, as well as for some patient and socio-economic groups.

Source: Is it time to reconsider the role of co-payments in Europe?, Office of Health Economics, January 2012

In the past two years, countries benefit" from 20 to 15 percent.28 In announced budget cuts, employed such as Iceland, Latvia, Denmark Luxembourg, patients’ contribution people will have to contribute and Portugal have either introduced toward the payment of certain more to the cost of medicines, or increased copayments for medical and paramedical services with copayments rising from the certain products.27 As a part of has been increased. Out-of-pocket current 40 percent to 50–60 percent, the Social Security Budget Bill, expenditure on hospital stays has depending on the patient's the Economic Committee on risen from an average of EUR12.9 income level. Patients earning Health Products (CEPS) in France (US$17.2) to EUR19.4 (US$25.7).29 an annual salary higher than changed the reimbursement rate Patients’ contribution of 12 percent EUR100,000 (US$132,360)31 will of drugs with "moderate clinical toward nursing care has also been contribute to 60 percent of the cost, benefit" from 35 to 30 percent introduced in the country.30 which will be capped at EUR60 32 and for drugs with "low clinical In Spain, based on the recently (US$79) a month.

3 Reduction in drug prices and and pricing decisions in Europe. coverage: Countries such as Countries such as England, Denmark Comparative Germany, Greece, Spain, Ireland, and Sweden have adopted different Effectiveness Denmark, Sweden, France and approaches to using CER in drug Research, 36 the UK have adopted measures coverage decisions. HTA agencies conducted by such as price cuts or freezes to help establish a well-documented health technology reduce expenditure on medicine. and comprehensive overview of the assessment Most price cuts have been in the consequences of new healthcare agencies such range of 4–5 percent. France also technology. With new expensive as the National intends to curtail tax incentives for technologies additionally burdening Institute for Health orphan drugs. Greece has designed healthcare agencies in the times and Clinical a program to save more than of crisis, HTA can help assess “ Excellence, is US$2.5 billion, by reducing drug the cost-effectiveness of such increasingly being 33, 34 prices by at least 20 percent. technologies and tackle the cost employed for drug 37, 38 Additional changes have been burden more effectively. coverage and introduced to reimbursement An EUnetHTA project has also been pricing decisions in lists in many countries. Drug initiated to create an integrated, Europe. reimbursements in France effective and sustainable network were reduced from 35 percent for HTA across Europe. To tackle to 30 percent in 2010. Iceland the complexity of pricing and introduced changes in reimbursement reimbursement across Europe, status on specific group of medicines the concept of an integrated, such as antidepressants.35 Europe-wide, reimbursement Comparative Effectiveness agency ‘EuroNICE’ is also 39, 40 Research (CER), conducted by being discussed. health technology assessment Table 2 provides an overview of (HTA) agencies such as the National the pharmaceutical reimbursement Institute for Health and Clinical and other policy measures Excellence (NICE), is increasingly undertaken by European countries, being employed for drug coverage over 2010–11.

Table 2: Reimbursement and other policy measures undertaken by European countries over 2010-11

Reimbursement lists/delisting/ Copayments Reference price system (RPS) reimbursement procedure Czech Republic* Austria Belgium France* Belgium Czech Republic* Germany Czech Republic* Estonia Greece Denmark Ireland* Iceland France Latvia Malta Iceland Lithuania Netherlands* Latvia Poland* Poland* Lithuania Portugal Portugal Portugal Romania Poland* Spain

* indicates that policy measures are planned or discussed in these countries Note: Please refer to Page 8 for details on Reference price system (RPS) Source: Pharmaceutical policies in European countries in response to the global financial crisis, Southern Med Review, Vol 4 Issue 2, December 2011

4 Policies for managing an equivalent, less expensive A number of pharmaceutical expenditure: A product — for example, a generic policies such as number of policies such as generic or parallel imported product — for generic promotion; promotion; financial incentives such a prescribed medicine.43 In 2011, financial incentives as discounts, rebates, clawbacks Belgium and Latvia introduced such as discounts, and paybacks; external price new rules for pricing generics in rebates, clawbacks referencing; mark-ups; and value- a cluster. Drugs are grouped in and paybacks; added tax (VAT) on medicines are clusters and a reference price is set external price directed at pharmaceuticals and for all drugs within a cluster.44, 45 pharmacists.41, 42 referencing; – Reference price system (RPS): “ mark-ups; and – Promotion of generics: The RPS prices drugs by reference value-added tax International non-proprietary to therapeutic comparators, on medicines name (INN) prescribing and including generic drugs. In 2010, are directed at generics substitution are two key Estonia included 50 percent of pharmaceuticals measures used to promote the all reimbursable medicines in the and pharmacists. use of generics. INN prescribing RPS and implemented new rules is mandatory in Estonia, Lithuania, for pricing generics and biologics Portugal and Romania. In Denmark, via this system.46 Germany, Finland, Malta, Sweden and Slovakia, pharmacists – Increase in VAT: VAT on are obliged to apply generic medicines has been increased in substitution. In other EU countries, several countries. Greece raised pharmacists may substitute its VAT twice during 2010, before reducing it in 2011.47

– Distribution margins: Changes their existing EPR system — they has faced criticism from Romania’s in drug payment schemes have have extended their basket of pharmaceuticals industry. It is affected wholesale and pharmacies reference countries and changed projected that the value of the in the distribution chain. Wholesale the methodology for calculation to Romanian pharmaceuticals market markups have been reduced in obtain a decreased price.50 (from a producer’s perspective) Greece, Latvia and Italy. Despite the will decline nearly 30 percent, as – Other discounts, rebates, crisis, pharmacy margins have also a result of the clawback system.51 clawbacks and paybacks: been increased in a few countries, In Poland, a new Reimbursement Spain introduced discounts of including Spain, Portugal and Italy. Law Reform was enforced on 7.5 percent on original products Pharmacy markups have also been January, 2012, introducing an and 4 percent on orphan medicines reduced in Switzerland.48, 49 obligatory payback system under in March 2010. Introduced in which the applicant receiving a – External price referencing (EPR): Romania, the clawback system reimbursement decision will have EPR compares the prices of was revised in October 2011. The to pay back an ‘excess amount’ medicines in one country to those system obliges pharmaceutical (calculated by a set formula) in others to arrive at a pricing and/ companies to pay back any to the National Health Fund, or reimbursement decision. Malta expenditure on pharmaceutical whenever the reimbursement and Germany have introduced this reimbursement in excess of the budget (i.e.,17 percent of the pricing procedure (under specific amount approved in the budget public funds assigned to finance circumstances, only applicable (on quarterly basis). Payments are guaranteed healthcare benefits) from 2012), while four other due from companies on the basis is exceeded.52, 53 European countries have modified of their market share. The system

Table 3: Pharmaceutical pricing policy measures undertaken by European countries in 2010 and 2011.

Pricing policy measures Price Discounts, rebates, External price Distribution VAT on medicines reductions clawbacks/paybacks and referencing (EPR) remuneration other agreements (margin*) Czech Republic Estonia Germany Belgium Czech Republic ↑ Germany Germany Iceland Germany* Finland Greece Italy Lithuania Greece Greece** Iceland* Lithuania Malta Iceland Latvia Ireland Poland Slovakia* Italy Poland Lithuania Portugal Spain Latvia Portugal Malta Romania Switzerland Lithuania UK Portugal Spain Poland* Spain Portugal Switzerland Spain Turkey Switzerland UK

* indicates that policy measures are planned or discussed in these countries ** VAT was first increased in Greece and then decreased to 6.5% Please note that the term “margin” is used in this table as a broad term covering different kinds of distribution remuneration (e.g. margins, mark-ups, and fees). Source: Pharmaceutical policies in European countries in response to the global financial crisis, Southern Med Review, Vol 4 Issue 2, December 2011

5 Fiscal support: To mitigate the Health systems are adopting measures Health systems impact of the economic crisis and policies to reduce the demand are adopting on government budgets, sector for public healthcare products and measures and spending and household income, services. One way is to discourage policies to reduce the World Bank is providing use of such services, for example, the demand for fiscal support to a number of by changing the perception of people public healthcare European countries (Hungary, toward access to these services. products and Latvia, Poland, and Romania) in the This has indirectly given impetus to services. One way area of healthcare reforms. The private healthcare services and has is to ration access loan programs include technical also increased the share of private to such services, assistance and policy dialog expenditure in these services. “ for reforms.54 for example, by 1 Increased waiting times: The changing the 6 Health promotion and disease focus on cost reduction is leading to perception of prevention: Improving health can an increase in the number of people people toward be an effective way to prevent in waiting lists at many healthcare access to these or control potential increases in organizations. The number of services. healthcare expenditure. Unhealthy patients who are choosing to pay lifestyles, obesity and habits for their own care, after having such as alcohol consumption and their treatment delayed or denied smoking can have a significant altogether, is also growing.58 The adverse impact on health in future. Estonian Health Insurance Fund Many countries in Europe are faced a similar situation in March therefore stressing the need to 2009, when it had to extend promote health and wellness to the maximum waiting period for reduce the burden of disease and outpatient specialist visits from four manage healthcare demand more to six weeks.59 effectively.55, 56 Countries such as Greece have raised taxes on 2 Relocation of services: A number alcohol and tobacco to discourage of services from walk-in centers excessive use. in the UK are being integrated within hospital trusts or other local Health systems’ response urgent care services, as a step to In the UK, hospitals plan to improve deliver better health outcomes efficiency by at least 5 percent for the patients. For example, a annually, for the next four years, and walk-in center in Tooting in South a national program has been launched London was incorporated into the to improve efficiency and productivity accident and emergency (A&E) and sustain quality. The NHS has a department at a nearby hospital task to become up to 20 percent more (St. George’s hospital).60 productive by 2015.57

3 Restructuring of hospital system outpatient treatment is required functional referral system and and services: Emphasis on primary on a regular basis but the patient coordination between public and outpatient specialist care and is unable to attend a healthcare and private providers has further homecare is growing, in a bid institution to receive this care compounded the problem. This has to reduce the unnecessary use for reasons such as being too led to high healthcare costs and of hospital care and to improve chronically ill or being immobile inadequate access to healthcare the efficiency, effectiveness and following surgery or trauma. in the country.65, 66 The country responsiveness of health systems. There are about 189 centers for is working toward improving The use of a ‘referral system’ has homecare in Latvia.62, 63 interaction between GPs and been implemented by a number Germany provides incentives doctors, enhancing the use of of EU member states, in which a for care coordination through its medical records and strengthening general physician (GP) or a primary 'disease management programs,’ the role of homecare and care physician is the first point of which include financial incentives community care.67 contact and serves as a gatekeeper/ for service providers and for Implications for other sectors related care coordinator to other types of sickness funds to focus on the to healthcare system care (specialist outpatient care or treatment of the chronically ill.64 61 The eurozone crisis is increasing hospital care). Greece, on the other hand, is an pressure on sectors related to the The Portuguese healthcare system example of a country plagued healthcare industry such as life is going through a number of by inefficiency in primary care. sciences companies, insurance changes to improve the continuity Specialist physicians are in providers, outsourcing companies and of care. Portugal aims to achieve oversupply, while GPs and nurses procurement companies. efficiency in healthcare through are in short supply. Lack of a the restructuring of its primary care network (health centers/family health units) and secondary care network (hospitals) as well as the development of the integrated care network. The Mobile Support Unit for homecare offers support to patients with chronic diseases, who are dependent on technology. These units help decrease hospital admissions and associated costs, as well as improve people's quality of life. Focus on the provision of medical care services at home in Latvia is also growing. Medical care services at home are provided if

Pharmaceuticals: According to the making payments in Spain is now effect on the financial performance European Federation of Pharmaceutical 525 days, with four Spanish regions of many companies. Price cuts and Industries and Associations exceeding the 800-day mark. These mandatory discounts levied by Greece, (EFPIA), unpaid debts owed to the delays are compounding the burden on Ireland, Italy, Portugal and Spain have pharmaceuticals sector are estimated the pharmaceuticals industry, which cost drug companies more than EUR7 up to US$16–20 billion. Greece, is struggling with challenges of patent billion (USD 9.5 billion) in 2010 and Portugal, Spain and Italy are major losses, high research and development 2011. According to EFPIA, the state- contributors to total unpaid bills in (R&D) costs and increasingly stringent controlled price cuts in countries such Europe. According to Spanish industry regulatory compliance requirements.69 as Greece and Romania have also led group Farmaindustria, at the end of In February 2012, Greece introduced to shortages of some medicines, due December 2011, Spain’s national a plan to cut drug spending by to parallel trade.71 This has weakened health system owed pharmaceutical US$1.3 billion.70 The implementation of the aggregate growth for the top five companies EUR6.37 billion price cuts imposed on pharmaceutical European pharmaceutical markets, (US$8.7 billion),68 a year-on-year growth companies to reduce expenditure on which collectively grew 2–3 percent in of 36 percent. The average delay in medicines has had a considerable 2011, as shown in Figure 2.72

Figure 2: European pharmaceuticals market growth, (%)

8 7.1 7.0

4.9 % 4

2.4 2 to 3

0 2007 2008 2009 2010 2011F

Source: IMS Health Market Prognosis, March 2011

Pharmaceutical companies have such as R&D to achieve growth and to US$2.67 billion.74 Local contract implemented certain remedial improve margins. According to a report research and manufacturing services measures such as offering cash on by Frost & Sullivan, the European companies in emerging markets delivery, switching from hospitals to Pharmaceutical and Biotech Contract such as India, Brazil and China pharmacies and supplying relatively old Manufacturing Markets, the European are also likely to gain a number of and inexpensive versions of drugs.73 pharmaceutical contract manufacturing partnership opportunities.75 market is expected to grow substantially Outsourcing: In the wake of restrictions Procurement: In many countries, from US$10.02 billion in 2011 to on healthcare spending, pharmaceutical cuts in wholesale and pharmacy US$20.75 billion in 2018. During the companies are increasingly turning margins are likely to impact the same period, the European market to emerging markets to outsource distribution and procurement of for biotechnology outsourcing is manufacturing and other functions pharmaceutical products. forecast to grow from US$1.21 billion

Case study — Finland Healthcare system and challenges: Healthcare in Finland is provided through a publicly funded healthcare system and a small private sector. The system offers universal coverage and is decentralized, with municipalities responsible for healthcare delivery. Municipal taxes, state subsidies and user charges are the financing sources for municipal services, including healthcare. Finland suffered from a deep recession in the early 1990s. The central government’s fiscal balance deteriorated rapidly from surpluses prior to the 1991 crisis, reaching a deficit of more than 10 percent of the GDP by 1994. Public healthcare expenditure grew substantially to 6.3 percent of the GDP in 1990, and further to 7.2 percent by 1992. Reforms and their impact: A number of cost-containment reforms were implemented in Finland in the 1990s. These included supply constraints, budget caps, price controls, and public management and coordination reforms. •• Public management and coordination: All municipal hospitals were brought under the ownership and management of 21 health care districts, to improve coordination within districts and reduce duplication of services. In 1991, multi-purpose hospital districts were created, with each municipality required to be a member of a hospital district. •• Supply constraints and price controls: Focus on reducing the number of beds in hospitals increased, and a shift was witnessed from an integrated system to a public contract model in the early 1990s. By 2000, most hospital districts in the country had adopted case-based diagnostic-related group (DRG) pricing. •• Budget caps: Central subsidies to local governments were reduced. The system of funding operating costs also changed, and hospitals revenues became dependent on the type and number of services that municipalities purchased from them. Local governments were given greater freedom to take decisions on administration, user charges and the arrangement of services. •• Pharmaceuticals cost sharing: Focus on increasing cost sharing and controlling drug prices was high. In 1993, regulations were changed, allowing pharmacists to substitute prescribed drugs with less expensive generic options. Although cost-containment reforms significantly affected expenditure in the 1990s, health outcomes remained strong. Per capita public expenditure on health reduced from US$1,752 in 1990 to US$1,203 in 2000. Meanwhile, per capita expenditure on in-patient care decreased from US$743 to US$563 between 1991 and 1995. As a result of supply-side reforms, hospital beds per 1,000 people decreased from 8.3 in 1,990 to 6.5 in 2008. Average excess cost growth in the five years following the state subsidy reforms of 1993 was –3.3, down from 4.4 in the five preceding years. Further, public expenditure on pharmaceuticals grew from 5.5 percent in 1991 to 10 percent in 2000, mainly as a result of a reduced number of hospitalizations, with hospitalizations substituted with pharmaceutical care. Lessons: The Finnish experience is reflective of how costs are better controlled when growth in spending is addressed through macro-level reforms supplemented with micro-level, efficiency-enhancing measures.76

Regional responses: United States

The US is still struggling to recover from significant risk for the healthcare system of the total US population. During the 2008 recession and addressing the in the US and the RoW. the same year, government health inefficiencies in its healthcare system. insurance programs covered Healthcare in the US is decentralized Although there are more encouraging 30.6 percent of the population, while and is primarily based on private signs of growth than in Europe, the level nearly 16.7 percent of the people insurance (dominated by employment- of debt and in particular the fiscal position remained uninsured. The government based health insurance). The system of some of the states in the US is a healthcare insurance system is funded does not have a concept of ‘universal cause for concern. Europe’s deepening by many programs, including Medicare, coverage.’ In 2009, private health sovereign debt crisis also creates a Medicaid and military healthcare. insurance covered about 63.9 percent

The increase in unemployment leads 7.3 percent of the country's total sought to reform the healthcare system to a decrease in the number of insured economic output. Over 2012–22, and proposed to reduce costs and people. Further, due to the prevailing healthcare spending is estimated to improve the quality of care through economic crisis, employers are under rise eight percent annually, driven increased public insurance coverage. pressure to reduce health coverage primarily by an aging US population As part of healthcare reform, the of retained employees. The economy and the rising cost of treatment.77 Patient Protection and Affordable Care faces a significant financial deficit, •• Healthcare coverage: According Act (PPACA) was signed into law in and challenges such as increased to the US Census Bureau, the March 2010. One of the major goals unemployment, widening gaps in number of people without health of this act is to extend coverage to health coverage, a retired American insurance increased from 49 million individuals without insurance, such baby boomer population, and rising in 2009 to 49.9 million in 2010. In as people with pre-existing medical costs of private insurance put further 2010, 16.3 percent of the population conditions or low/middle-income pressure. This poses a major threat to was uninsured. Increased individuals not covered by health the overall health system. unemployment has resulted insurance through their employer. It in widening gaps in healthcare also mandates cuts in Medicare and Major challenges coverage. The percentage of the Medicaid payments as well as has •• High healthcare spending: population with health insurance provisions to reduce fraud, waste, and According to the Congressional through their employers decreased abuse in public programs. One such Budget Office (CBO), US from 56.1 percent in 2009 to provision is the creation of Health government spending on Medicare, 55.3 percent in 2010.78 Insurance Exchanges, where individuals Medicaid and other healthcare and small businesses could purchase insurance policies. This is designed to programs will more than double Government’s and health system’s promote transparency and convenience over the next decade (by 2022), to response to crisis in the purchase of health insurance.79 US$1.8 trillion. It will account for Healthcare reform: President Obama

According to the CBO, the PPACA constitutionality of the requirements mitigate the duplication of services and is estimated to cost around under the healthcare reform law. On reduces the need for high-cost services US$938 billion and reduce the federal 28 June 2012, the US Supreme Court such as hospitalization. The model deficit by US$138 billion over a period upheld the core components of the incentivizes healthcare providers to of 10 years.80 healthcare law, requiring that almost all offer quality and cost-effective care to Americans obtain health insurance by patients. Such incentives are linked to Several changes have been made 2014 or pay a tax. The court also upheld outcomes or the performance of ACOs. during the reform process. The reforms the expansion of the Medicaid health In October 2011, the US Department stress reduction in hospital admissions, insurance program to the poor.82 of Health and Human Services (HHS) improvements in health and changes introduced the Medicare Shared Savings in reimbursement models. In February Adoption of new healthcare Program and the Advance Payment 2012, as part of the national budget models: The fragmented nature of model to help doctors and other proposal, President Obama proposed the US health care system leads to healthcare providers in ACOs to improve US$320 billion in cuts to Medicare significant waste, duplication and high the quality of care. The Medicare and Medicaid in 2013. This attracted cost. One of the potential solutions Shared Savings Program provides considerable criticism as it is feared provided in the Affordable Care Act participating healthcare providers with that the cuts in funding for hospital (ACA) includes Accountable Care incentives to work together and become care could lead to further job cuts, Organizations (ACOs).83 ACOs are a accountable for coordinating care for reduced access to new technology network of doctors, hospitals and other patients. Meanwhile, the Advance treatments, and longer waiting periods healthcare providers that voluntarily Payment model provides additional for emergency care.81 provide coordinated care to Medicare start-up resources to build requisite beneficiaries. Coordinating healthcare A number of states and organizations infrastructure such as new staff or across settings — doctors, hospitals throughout the US had filed lawsuits IT systems.84, 85 and long-term care facilities — helps in the federal court challenging the

How states are handling tight finances they face — New York State’s redesign of Medicaid initiative Medicaid is the largest health insurance program in New York State. It spends more than US$53 billion annually, to provide healthcare to more than 4.7 million people in New York. The costs are borne by state, county and federal taxpayers. In January 2011, Governor Cuomo issued an Executive Order to create a Medicaid Redesign Team (MRT), to find ways to reduce costs and increase quality and efficiency of Medicaid program over FY 2011–12 (April 2011–March 2012). The 32-member MRT sought ideas from the public at large, as well as from experts in healthcare delivery and insurance, the healthcare workforce, economics, business, consumer rights and other relevant areas. The MRT's work was split into the following two phases: In Phase 1, the MRT developed a package of 78 reform proposals that achieved the Governor's Medicaid budget target, introduced significant structural reforms that will bend the Medicaid cost curve, and achieved the savings without any cuts to eligibility. These 78 proposals were approved in the 2011–12 budget. The Department of Health, in collaboration with other state agencies, is currently implementing the 78 proposals. In Phase 2, the MRT has been directed to create a coordinated plan to ensure that the program can function within a multi- year spending limit and improve program quality. Work groups focusing on specific issues have been created to develop recommendations for the MRT. Work group membership will allow for even more stakeholder involvement.

Impact on health

Fiscal austerity programs aiming to to seek medical care from a doctor Fiscal austerity reduce public spending on healthcare or dentist despite its necessity. The programs aiming may have a negative impact on overall reasons cited for this trend include to reduce public public health. Although some austerity long waiting lines, distances to the spending on measures may have been designed point of care and the inability to afford healthcare may to reduce costs while not affecting care following the 2009 crisis. Greek have a negative the quality of care, they pose a risk of citizens (including those with social impact on overall negatively affecting health outcomes insurance) are entitled to visit GPs for public health. or status of a population. For example, free and to attend outpatient clinics of while cost sharing or charging patients hospitals for just EUR0–5 (US$0–6.6).89 for specific services could reduce Therefore, reduction in access probably “ the unnecessary use of services, it reflects supply-side problems — cuts of may also reduce the necessary use about 40 percent in hospital budgets, of services by vulnerable groups, understaffing, reported occasional such as low-income individuals and shortages of medical supplies, and patients with chronic or complex health bribes offered to medical personnel to conditions (with above-average direct jump lines at overstretched hospitals. costs of care).86 The system of ‘informal payments’ in public hospitals to facilitate access to Greece, which has been significantly services and preferred providers also affected by the financial crisis since leads to a number of inefficiencies in 2007, reflects how health outcomes the system.90 Another study cited a can deteriorate over time. According decline of 25–30 percent in admissions to officials at the Athens Medical to private hospitals in the country, in Association, by 2015, around 26,000 2010. However, admissions to public public health workers (up to 9,100 hospitals in 2010 increased over 2009.91 doctors) could lose their jobs, and a The number of suicides as well as the healthcare spending cut of EUR2.122 number of people seeking emotional billion (US$2.8 billion), is likely to be support on the suicide helpline also implemented as part of the second increased. The national suicide helpline package of fiscal austerity and reported that 25 percent of callers tax increases.87 faced financial difficulties in 2010. Further, a study was conducted in There are signs that health outcomes Greece to evaluate the effects of have worsened, especially among the economic crisis on the country’s vulnerable groups. Further, violence, healthcare scenario.88 It revealed homicide and theft rates nearly doubled that people are increasingly hesitant over 2007–09.92

Drug-related HIV infections and drug Europe, with more than 30,000 cases box below). Generally, poor nutrition addiction are on the rise in European reported across the region in 2011. and low living standards lead to high countries such as Bulgaria, Estonia and The strains of multi-drug-resistant and stress levels and lower immunity, Lithuania.93 The prevalence of HIV in drug-resistant tuberculosis (TB) are also which in turn result in increased Greece is estimated to have increased growing at a rapid rate in the region.95 incidence of diseases such as TB 52 percent between 2010 and 2011.94 and measles. The current economic In the past, a number of studies have situation in Europe may also have As per the European Centre for indicated a relationship between similar repercussions, due to the Disease Prevention and Control economic recession and increased impact of ongoing austerity measures (ECDC)’s annual epidemiological report susceptibility of certain populations and affecting access and quality of care in 2011, measles is slowly becoming high-risk groups such as prisoners and the region.96, 97 an epidemic for many countries in homeless to infectious diseases (see

Over 1974–77, as a result of the financial crisis, the Department of Health in New York budget was slashed by 20 percent; about 28 percent of the 1974 workforce was reduced; and 7 out of 20 district health centers and 6 of 14 chest clinics were closed (the units responsible for TB screening and diagnosis). The city experienced a rise in TB rates (about 10,000 excess TB cases, of a total of 47,000, occurred over 1979–99) and a sub-epidemic of multidrug-resistant TB (MDR-TB). The excess medical expenditures were estimated at US$0.5 billion. Therefore, such budget cuts may not only make controlling diseases such as TB challenging, but also increase control costs.98

Potential future measures

The current financial crisis is an acute •• Redesigning delivery models to reduce errors in hand-offs, and form of what is likely to become a lower dependence on institutional improve decision making, patient chronic problem in several western care, improve preventative care, self-management and seamless economies — growing healthcare reduce variation, make step coordination demand and costs outstripping sluggish improvements in coordination and •• Tackling corruption and fraud, growth and diminishing willingness or integration and maintain focus on which hamper reform in a number ability to pay, as governments struggle effectiveness of systems, including preventing to reduce debt and deficits. To deal •• Empowering patients and care informal payments, unofficial private with the issue, several measures providers to take more responsibility practice, coding fraud, procurement are imperative. for their own care irregularities and unambiguously Reducing costs and improving •• Focusing on measuring and pur- criminal activities operational management while chasing value for patients; using •• Focusing on prevention maintaining quality will be essential but HTA to increase value and not just not necessarily sufficient. However, control costs The extent to which such measures are it will buy time to implement other implemented will decide the future of •• Facilitating effective use of IT to al- healthcare in these economies.99 initiatives, including the following: low population health management,

Further information

Visit kpmg.com for the following Key contacts related publications Dr Mark Britnell •• Accelerating innovation: the power way to reduce costs and improve Chairman and Partner of the crowd outcomes. We do this with a clear focus Global Health Practice on the care delivery system, how care Tel.+44 20 7694 2014 •• Taking the Pulse – A global study is purchased, financed and insured, and [email protected] of mergers and acquisitions in through government policy. Gerald Crowell Healthcare Health IT Global Head, Marketing and Communications, Healthcare •• A Better Pill to Swallow KPMG’s Healthcare professionals can help clients to get the most from Tel.+1 416 777 3926 [email protected] •• Eurozone Crisis – Five Practical healthcare information and data. We Strategies can help define a relevant and realistic information strategy; align this to the Global healthcare propositions objectives of the organization; enable reliable and insightful reporting and With deep industry experience, insight embed robust governance frameworks and technical support, KPMG firms are so that data is captured, processed and among the leaders in delivering a broad stored accurately and securely. range of audit, tax and advisory services to meet the unique needs of healthcare Quality and Margin Improvement policy-makers, providers and payers. Quality and Margin Improvement is our Our propositions revolve around five proposition to create high-performing core themes: organizations. KPMG provides expertise and support to refine, improve and, Board Grip if required, fundamentally redesign Working alongside clients, our firms' the operating model of a healthcare professionals are assisting boards in organization to improve quality and value leading their organizations effectively for money. in the face of changes to healthcare delivery systems and increasing Strategy, Transactions and Financing regulations. We help boards to have KPMG’s Transactions & Restructuring the appropriate skills, capabilities, practice applies the full capability of, information, and confidence in their transactions, strategy and financing organizations’ systems and processes services across the health sector to to lead effectively and fulfill their duties help clients form better strategies and relative to governance, risk, compliance, develop clearer understanding of market and assurance. opportunities; to better understand the risks and value creation opportunities Care System Redesign when they merge, buy or sell KPMG firms address the needs of businesses, and execute transactions health system funders and providers to more effectively; to help them finance improve quality, access, and costs in their activities in an appropriate way, the drive to improve population health. and at an appropriate cost; and where We help our clients achieve added value necessary to improve business through a clear focus on quality, as performance and cash management. improving quality is the most effective

Organizations mentioned in this issue

Athens Medical Association 16 Farmaindustria 12 Congressional Budget Office (CBO) 3, 14, 15 National Health Service (NHS) 2, 10, 11 Department of Health, New York 17 National Institute for Health and Clinical 7 Economic Committee on Health 6 Excellence (NICE) Products (CEPS) US Census Bureau 14 EuroNICE 7 US Department of Health & Human 15 European Centre for Disease Prevention 17 Services (HHS) and Control (ECDC)

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Notes

A new vision for healthcare

In healthcare, every patient is unique yet many of the challenges facing their healthcare systems are similar. KPMG practitioners spanning 150 countries in our global network help clients see their biggest issues clearly, delivering solutions that help change the face of health.

Take a closer look at kpmg.com/healthcare

Issues Monitor: July 2012, Volume Nine | 25

Global Healthcare Contacts

A new vision for Chairman and Partner Global Health Practice Central/Eastern Europe Ireland healthcare Dr Mark Britnell Miroslaw Proppe Alan Hughes T: +44 20 7694 2014 T: +48 604 496 390 T: +353 17004169 E: mark.britnell @kpmg.co.uk E: [email protected] E: [email protected] In healthcare, every patient is unique yet Angola China Italy many of the challenges facing Fernando Mascarenhas Andrew Weir Alberto De Negri their healthcare systems are similar. T: +244 227 280 102 T: +852 2826 7243 T: +39 02 67643606 E: [email protected] E: [email protected] KPMG practitioners spanning E: [email protected]

150 countries in our global network Argentina Denmark Japan help clients see their biggest issues Mariano Sanchez Claus Hammer-Pedersen Keiichi Ohwari T: +5411 4316 5774 T: +4525294721 T: +81 3 5218 6451 clearly, delivering solutions that E: [email protected] E: [email protected] E: [email protected] help change the face of health. Australia France Korea Shane Solomon Benoit Pericard Min Shik (Michael) Cho Take a closer look at T: +61 7 3233 3258 T: +33 1 55 68 86 66 T: +82 2 2112 7777 kpmg.com/healthcare E: [email protected] E: [email protected] E: [email protected]

Austria Germany Luxembourg Johann Essl Volker Penter Patrick Wies T: +43 732 6938 2238 T: +49 30 2068 4740 T: +352 22 515 1 6305 E: [email protected] E: [email protected] E: [email protected]

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Netherlands South Africa Taiwan Wouter Bos Sven Byl Eric K. J. Tsao T: +31 0 20 656 7428 T: +27 11 647 6713 T: +88 628 101 6666 E: [email protected] E: [email protected] E: [email protected]

New Zealand Spain Thailand Gareth Jones Candido Perez Serrano Chotpaiboonpun Boonsri T: +64 4 816 4812 T: +34 914 513091 T: +66 267 721 13 E: [email protected] E: [email protected] E: [email protected]

Norway Saudi Arabia UK Lisbeth Normann Sashikanth Ramakrishnan Andrew Hine T: +47 406 39607 T: +966 1 874 8615 T: +44 121 2323744 E: [email protected] E: [email protected] E: [email protected]

Philippines Sweden US Emmanuel P Bonoan Annacari Astner Wimmerstedt Ed Giniat T: +63 2 885 7000 T: +46 8 7236120 T: 1 312 665 2073 E: [email protected] E: [email protected] E: [email protected]

Portugal Switzerland Vietnam Alexandre Pinho Michael Herzog Kwang Puay Chong T: +351 210 110 003 T: +41 44 249 31 53 T: +84 8 3821 9266 E: [email protected] E: [email protected] E: [email protected]

Singapore Wah Yeow Tan T: +65 641 18338 E: [email protected]

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