MSc International Health Management

Individual Research Report

Student Details
Name: CID: Supervisor: Grade: Shen Ju Tsai 00605769 Christopher Chapman 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.

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

IMPERIAL COLLEGE BUSINESS SCHOOL

UNDERSTANDING THE FINANCIAL SUSTAINABILITY OF TAIWANS 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

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) billion 1 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. 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. 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 Taiwans health system.

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

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.

, 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.

, 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.

II

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 TAIWANS 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 TAIWANS HEALTH SYSTEM ..................................... 10 5. ANALYSIS ................................................................................................................ 17

5.1 HEALTH EXPENDITURE WILL BE ALMOST QUADRUPLED IN 2035. .......................... 17 5.2 TAIWANS FUNDING GAP WITH CURRENT FINANCING MECHANISMS WILL POSE SERIOUS CHALLENGE TO GOVERNMENT AND ITS PEOPLE. ......................................... 19 5.3 TO SECURE TAIWANS 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

III

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 basisbalancing healthcare spending with revenues. For the first three years, the program ran a surplus because of a predetermined cash reserve. Since 1998, the NHIs expenditures outstripped its revenuecost 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 Taiwans 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 Taiwans 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 Taiwans NHI in the next 25 years? 3. Implications to Taiwan policy makers: what can be done to meet future healthcare needs?

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 Taiwans future personal care spending. However, they have yet to project Taiwans 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 Taiwans 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 trilogy 2, is conducted by Thomson et al. (2009). In Taiwan, I have yet to find reports of similar magnitude on securing or projecting Taiwans future healthcare needs. Hence, this paper aims to encourage future interest in this area of study.

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?

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 dtre 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 3

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 countrys competitive position (Eugene, 2008, p.5). As mentioned, Taiwans 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 Jnsson, 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 4

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 whole 3. While this argument may seem compelling, it remains to be clarified that the extent to which ageing population contributes to healthcare cost.

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.

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 wellestablished 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 Jnsson (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, 6

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 7

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 TAIWANS 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 Taiwans 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 Taiwans 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 years3.7% for 8

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 Taiwans specific features and magnitude of financial challenges, this allows a reality check on existing options in search of a practical solution.

4. SPECIFIC FEATURES OF TAIWANS 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 reportspecific features of Taiwans 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 NHIs operating method, a high level of administrative efficiency, or both in Taiwans 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 NHIs modus operandi, a high level of administrative efficiency, or both in Taiwans 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

10

Unrestricted access and freedom of choice without control will increasingly challenge the NHIs 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 models 4, 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).
Exhibit 2

TAIWANESS ENJOYS LARGER FREEDOM IN CHOICES OF CARE.

Degree of access:

Significantly restricted Somewhat restricted Unrestricted

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)

11

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 patients 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 Taiwan*** Japan US

Switzerland

Influenza

Eye check

Prescripti on drugs

Optical glasses

Cosmetic Surgery**

Maternity

Health check

Germany Denmark

Sweden UK

12

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 userfee 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

13

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 Japan ** UK 5.1 US 6.8 3.8 2.44 2.42 3.07 Average for OECD member countries 2,090 1,570 2,215 13.6 1.7 2.9 4,690 7,294

14

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, Taiwans NHI has achieved a level of information and coordination that cannot be matched by Britains NHS (Williams, 2008). Taiwans 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 patients 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.

15

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 Taiwans future healthcare (Exhibit 6).
Exhibit 6*

TAIWANS HEALTH SYSTEM IS UNIQUE

Taiwan** Percentage of people insured Coverage of total treatment cost** Copayment required Basically 100% covered Almost 100% covered NT$ 50450, US$1.513.5, or GBP 1-9 No effecitve control except for a mild referal system No cost efficiency check No governmental control Japan Basically 100% covered 95% covered 10%, 20%, or 30% of total cost with ceiling No regulation or guideline France Basically 100% covered 79% covered Depends on condition UK Basically 100% covered 88% covered Copayments on certain items Patients go to GP first

Centrally controlled Partially centrally controlled Not centrally controlled

Canada Basically 100% covered 74% covered No co-pay

Germany 90% covered 79% covered Copayments on certain items Patients have monetary incentices to go toGP first Restrictions through reimbursem ent rule Exists for those providing treatement reimbursed 34% of the facilities are public

US

More than 20% not covered 45% covered Varies widely by payor and health plan Varies widely by payor and health plan

Health insurance coverage

Patient Flow

Patients go to gatekeep first (GP/Speciali st) Restrictions on medically unnecessar y drugs Government decideds

Patients go to GP first

Medical service regulation

Restrictions on reimbursement based on cost efficiency Restrictions on no. of private facilities in each geographic area Ratio of public facilities

No cost efficiency check No governmental control

NICE checks costefficiency NICE provides guidelines

No restriction for cost reasons No governmental control

Varies widely by payor and health plan Governmen t provides guideline

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

22% of the facilities are public

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

16

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 Taiwans NHI in the next 25 years, I simulated Taiwans 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 9.19.3% 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 Taiwans Health System starts from a lower cost structure than most OCED countries.
Exhibit 7

EXPENDITURE WILL BE ALMOST QUADRUPLED IN 2035.

NT$, Billion

Personal, Base 4,500 3,500 2,500 1,500 500 -500 2010

Personal, Pessimistic

National, Base

National, Pessimistic

2015

2020

2025

2030

2035

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

7.0

7.9

9.1-9.3

10.5-11.3

12.2-13.7

14.2-16.8

17

While it is certain that personal care spending are to increase, it is less clear what is driving the cost in Taiwans 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 Taiwans personal care spending. (Exhibit 8)
Exhibit 8

INCREASED WEALTH SEEMS TO HAVE THE BIGGEST IMPACT IN TAIWANS PERSONAL CARE SPENDING.
NT$, Billion

By 2020

By 2035

Expenditure in 2010*

827

827

Ageing population

166 (20%)

530 (64%)

Increased wealth

447 (54%)

2,202 (266%)

Advancing technology

83 (10%)

346 (42%)

Estimated expenditures**

1,523

3,905

+84%
redistributed based on its size. For details, please see technical notes. ** Based on pessimistic case simulation

+372%

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

18

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 TAIWANS 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 reportImplications 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.

19

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

Expenditure 2,500 2,000 1,500 1,000 500 2005 2010 496 425

Revenue, 5%

Revenue, 6%

Revenue, 7% 2,198 1,704

1,246 914 664 530 2015 661 824 1,027 1,280

2020

2025

2030

2035

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

20

5.3 TO SECURE TAIWANS 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 Taiwans 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 NHIs 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. NHIs fee schedule is already low. Taiwans 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.

21

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 Taiwans 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 patients 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. 22

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 Insurances 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. 23

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, Taiwans 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 nonpayment 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 physicians 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.

24

7. LIMITATIONS
This report adopts a blend of methodology from Cutler (2003) and McKinsey (2008). Likewise, I approached the financial sustainability in Taiwans health system from topdown. 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 Taiwans 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 dtre 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 Taiwans 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.

25

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Ruggeri, J. & Doucet, M., 2007. Government Spending on Healthcare as Public Investment. [Online] Available at: http://bit.ly/c7Xccz [Accessed 14th July 2010]. Ruggeri, J. 2002. Population Aging, Health Care Spending and Sustainability: Do we really have a crisis? Caledon Institute of Social Policy. [Online] Available at: http://bit.ly/d8PKI1 [Accessed 14th July 2010]. Seshamani, M. & Gray, A., 2004a. Ageing and health-care expenditures: the red herring argument revisited. Health Economics; 13: 303-14. Seshamani, M. & Gray, A., 2004b. A longitudinal study of the effects of age and time to death on hospital costs. Health Economics; 23: 217-235. Suhrcke, M. et al., 2006. Investment in health could be good for Europe's economies. BMJ, 333, 1017-1019. Thomson, S. et al., 2009. Addressing financial sustainability in health systems. In: Ministerial Conference on the Financial Sustainability of Health Systems. 10-12 May 2009, Prague, Czech Republic. Wang, G-X., 2010. Financial Sustainability of Universal Healthcare and Its Reform: The Case of Taiwan Asian Social Science Vol. 6, No. 4; April 2010. Wanless, D. (2002) Securing Our Future Health: Taking a long term view. London: HM Treasury. [Online] Available at: http://bit.ly/9FoqhS [Accessed 14th July 2010]. Wanless, D. et al. 2007 Our Future Health Secured? A Review of NHS Funding and Performance. London: Kings Fund, 2007. [Online] Available at: http://bit.ly/a1IZlm [Accessed 14th July 2010]. Weaver, F. et al., 2006. Proximity to death and participation in the long-term care market. Health Economics, 18, 867-883. WHO, 2000. World Health Report 2000: Health systems: improving performance, World Health Organization, Geneva 2000. [Online] Available at: http://www.who.int/whr/2000/en/ [Accessed 14th July 2010]. Williams, I., 2008. Health Care in Taiwan: Why Cant the United States Learn Some Lessons? Dissent Magazine, [Online] Available through: http://www.dissentmagazine.org/article/?article=985 [Accessed 14th July 2010].

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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: (14 + 1464 + 64 ) =

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 Taiwans 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). 1464 = 14 64 14 64 14 = 14 14

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

64 = 64 64

PERSONAL CARE SPENDING PER CAPITA, NT$

Under 14 2033 2029 2025 2021 2017 2013 2009 2005 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 14 to 64 Over 64

Exhibit A2 Formula for Health Expenditure per Age Group

Using Log10 to Obtain Expenditure Formula

5.50 5.00 4.50 4.00 0 0.5 1 1.5 2 2.5 3 Age <15
y = -0.0235x + 5.0388 R = 0.8743

Age 15-65
y = 0.034x + 4.3081 R = 0.9106

Age >65
y = 0.0386x + 4.1141 R = 0.8695

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

NUMBER OF PEOPLE BY AGE GROUP

Under 14 2035 2030 2025 2020 2015 2010 2005 0 5,000 10,000 15,000 20,000 25,000 14-64 Over 64

Total Population

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 Taiwans 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%.

Real GDP Growth, per cent

1998 8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 3.37 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Average

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.

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, 19962008, 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. 90% = 90%

Exhibit A4

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

National Health Expenditure

100% 80% 60% 40% 20% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Exp on Personal Care Exp on Others

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.

Personal Health Care Fund Source

100% 80% 60% 40% 20% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Out-of-pocket

Insurance

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

V.2.1 Classification of the Insured

Exhibit A7 Classification of the insured

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 UKs 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