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SINGAPORE’S INNOVATIVE HEALTH FINANCING SYSTEM Introduction Health care costs are escalating rapidly in many countries. This reflects several factors, such as aging populations, changing disease patterns, high-cost technology and prescription drugs. But, it is also a consequence of health financing systems. Traditional indemnity insurance, which guarantees third-party payment for service provided, contributes to these cost pressures since patients and physicians are shielded from the real cost of those payments. In an effort to contain costs, governments, employers and insurers have modified payment schemes and coverage. This increasingly leads to rationing, restricted consumer choice and, in some cases, denial of care. Singapore‘s ‗3M‘ health financing system combines universal medical savings accounts (MSAs) with unique supplementary programs to protect the poor and address potential market failures in health financing. The results have been impressive, with excellent health outcomes, low costs and full consumer choice of providers and quality of care. This note describes Singapore‘s experience and its possible application to other countries. Background Despite Singapore‘s small size, with only 3.22 million residents in a land area of 660 square kilometers, the country has been a stellar economic performer, rising from impoverishment only 40 years ago. Its per capita GDP increased from US$427 in 1960 to US$24,740 in 2000, one of the highest in the world 1 . In the 1990s it enjoyed strong economic growth (7.7 percent annually in real terms), low inflation (1.7 percent annually), and low unemployment (3.1 percent in 2000). One of the most notable features of Singapore‘s transition has been the reform of its health financing system over the past two decades. In the early 1980s, the Government was faced with rising demand for increased healthcare funding. Until that time, health 1 All currency amounts are exp ressed in US$ at then-prevailing exchange rates. 2 care (which accounted for 2.5% of GDP in 1980) was funded by a combination of direct government funding of state-owned hospitals and polyclinics, plus private funding, principally in the form of out-of-pocket spending. The Government faced rising pressures for more health care funding, related to its rapid economic growth and aging population. In 1981, the Government initiated a consultative process with stakeholders and the public to reform the health care financing system in a manner which would be fiscally sustainable. National health insurance was considered but rejected due to the experience in other countries. The main drawbacks cited were excessive demand associated with third-party payer systems and the lack of incentives for individual responsibility and provider efficiency. Rather the Government‘s objectives were to promote individual responsibility towards healthcare, shift a greater share of the financing to individuals and employers, and ensure a fiscally sustainable health care system in the face of an aging population. Singapore’s ‘3M’ System The policy dialogue of the early 1980s led to the issuance of the National Health Plan in 1983 and the introduction of the Medisave program in 1984, the first pillar of its now- famous ‗3M‘ system of health care financing. Over the past two decades, the Government has added complementary programs to protect the poor and address potential market failures in health care financing, while adhering to the founding principles of its 1980s reform – individual responsibility and cost efficiency. Medisave and the complementary financing programs are summarized below. Medisave. Under the Medisave program, each employee contributes 6-8% of monthly salary (depending on age) to an individual medical savings account (MSA), with a matching contribution by the employer 2 . Medisave contributions are part of a broader compulsory savings program in which employees and employers each currently 2 Since 1992, self-emp loyed persons are also required to contribute to Medisave. 3 contribute 16% and 20% of salaries respectively into a Central Provident Fund to cover the cost of hospitalization (Medisave), pensions and mortgages. An individual can use a personal Medisave account to pay for hospital expenses incurred by himself or his immediate family 3 . To encourage prudent use and discourage unnecessary hospitalization, Singapore has placed limits on how much of Medisave funds can be used for daily hospital charges, physician fees and surgical fees. The limits are generally sufficient to fully cover the bills of most patients staying in subsidized wards in public hospitals; however cash co-payments are required from those who opt for private hospitals or more expensive accommodation in public hospitals. Medisave can also be used for expensive outpatient treatments such as chemotherapy, renal dialysis and HIV drugs. Medisave contributions are capped (as fixed amounts) monthly and over a lifetime to prevent excessive and unnecessary use of medical services. Contributions from the 6-8% payroll tax which exceed the established caps can be automatically transferred to the individual‘s ordinary account within the broader compulsory savings program. Withdrawals above a mandated level are permitted after age 55. Upon death, any remaining balance is paid in cash to the nominees of the account holder, free of estate taxes. Singapore‘s citizens currently hold 2.7 million Medisave accounts with a total balance of US$13.1 billion (at end-2000). Roughly 85-90% of hospital inpatients make use of their Medisave accounts to pay their hospital bills. In 2000, new Medisave contributions totaled US$1.1 billion, while withdrawals totaled US$227 million. Medishield. In health care, consumers face the risk of catastrophic illness with very high expenses. Traditional insurance pools this risk among many policyholders. In Singapore, Medisave account holders faced the risk that catastrophic illness could completely wipe out their medical savings. To address this risk -- and in the absence of a traditional 3 Primary care expenses are not eligible for Medisave 4 national health insurance program -- Singapore introduced the Medishield program in 1990. All Medisave account holders under 80 years of age are eligible to buy Medishield insurance and can pay their premiums using their Medisave. It covers hospital expenses (e.g. intensive care, surgical operations, implants) and selected higher-cost outpatient treatments. The Medishield program applies several measures to limit its use to catastrophic illness, including: (a) setting relatively high deductibles for hospital expenses 4 ; (b) requiring patient co-payments of 20% for amounts above the deductible levels (patients can use their Medisave accounts to pay the deductibles and co-payments), and (c) setting maximum limits for claims per treatment, policy year and lifetime. In 1994, the Government introduced an enhanced Medishield program (Medishield Plus) to provide reimbursement for accommodation in private hospitals and premium wards in public hospitals. In 2000, there were 87,000 Medishield claims, with payments totaling US$35 million. Medifund. The third pillar of Singapore‘s innovative system is the Medifund program, which subsidizes health care for the poor (roughly 10% of the population). The Government set up the fund with an initial injection of US$150 million in 1993 and has made additional contributions during years of overall budget surplus. Medifund is designed to ensure that no Singaporean is denied good basic care because of ability to pay. The Fund currently has approximately US$500 million in capital. Under the rules establishing Medifund, only interest income, not capital, may be disbursed. Within each hospital, the medical social worker will means test applicants and assess them for eligibility. Applications are then reviewed and approved by the Hospital Medifund Committee. Hospitals are given considerable flexibility in determining income criteria. In 2001, the hospitals approved 156,800 applications with disbursements totaling US$15.2 million. ElderShield. To complement its ‗3M‘ program, a new low-cost insurance program 4 There are no deductibles for certain drugs and outpatient chemotherapy, radiotherapy and kidney dia lysis. 5 (ElderShield) was introduced in June 2002 to provide financial protection for individuals suffering from severe disabilities. Singaporeans with Medisave accounts are automatically enrolled in ElderShield when they reach 40 years of age unless they opt out of the scheme. ElderShield pays a monthly cash allowance (for a maximum of 60 months) to those who are unable to perform three or more basic ‗activities of daily living‘. By not tying the insurance payout to reimbursement of institutional care, it gives the policyholders the flexibility of being cared for at home or at healthcare institutions. By end-2002, there were more than 700,000 policyholders covered under ElderShield. Provider Subsidies. The financing system is designed to help individuals pay their share of medical costs. To ensure that basic medical care is available for all, the Government also provides direct subsidies from its annual budget to public hospitals, polyclinics and aged care homes. In 2000, direct subsidies totaled US$700 million, or 25% of health expenditures. Health Care Delivery Both the public and the private sector provide health care in Singapore. The public sector provides roughly 20 percent of primary care and 80 percent of hospital care through two large, integrated health care networks. The private sector dominates in primary health care, providing 80 percent of total care through its 1,900 clinics. The 13 privately owned and managed hospitals account for 20 percent of inpatient admissions. Singapore has 11,800 hospital beds (3.7 per 1,000 people) in both the public and private sectors. Patients can choose their providers—public or private–at all levels of care. All Singaporeans are entitled to basic medical services at government polyclinics and public hospitals, where rates are regulated and subsidized. Patients are expected to pay part of the cost, and to pay more when they demand higher levels of service. Rates at private clinics and hospitals are unregulated. 6 Health Expenditures and Outcomes Singapore‘s health spending totaled US$2.8 billion (US$870 per capita) in 2000, equivalent to 3 percent of GDP. The global average is 8 perce nt of GDP. Among OECD countries health spending ranges from 5.8 percent of GDP in the United Kingdom to 13.7 percent (US$4,187 per capita) in the United States. Singapore‘s health indicators are equally impressive. Its average life expectancy increased by 15 years from 1960 (63 years) to 2001 (78) and is now one of the world‘s longest. Its infant mortality rate is the world‘s lowest, at 2.2 per 1,000 live births, much improved from the 6.6 in 1990 (and 34.9 in 1960) and far lower than rates in the United Kingdom (5.9) and the United States (7.6). Unique Features of the 3M System Singapore‘s health financing system has a unique combination of features, which differ from traditional government- funded or national health insurance programs in several ways: Incentives: Medisave accounts (MSAs) provide incentives for individuals to take responsibility for their own health care needs. Unlike traditional indemnity insurance, MSAs provide incentives for individuals to save and avoid unnecessary use of medical services. MSAs belong to the individual, accumulate over a lifetime and can be used at the discretion of the individual. Health insurance premiums in other countries do not belong to the individual, do not accrue over time, and are often subject to restrictions on services covered and eligible providers. Low-cost insurance. To address the risk of catastrophic illness (which could wipe out an individual‘s MSA), Singapore complements MSAs with catastrophic insurance (Medishield and ElderShield) to cover extraordinary expenses. Unlike traditional health insurance which usually covers a broad range of services, premiums for 7 catastrophic insurance can be kept low, as catastrophic events (and, hence, payouts) are comparatively rare. In Singapore‘s case, individuals can pay their Medishield and ElderShield premiums from their MSAs. In this manner, the majority of Singaporeans are protected with some basic insurance cover against the cost of catastrophic illness and long-term care. Targeted subsidies. To assist the poor, unemployed and elderly who may have insufficient income to accrue MSAs or pay Medishield premiums, Singapore provides targeted subsidies through Medifund, and ―top-ups‖ to Medisave and Medishield funds, specifically aimed at the poor and elderly. The Government provides ‗top- ups‘ from the Government budget when there is an overall budget surplus. As well, the Government also provides direct subsidies from the annual budget to public hospitals to ensure that basic services are available and affordable for all. Discussion Most observers agree that Singapore‘s health system has been successful in restraining costs while delivering excellent health outcomes. It has the lowest-cost health system among developed countries and ranks very high on all health indicators. But, how much of this success is attributable to its health financing system - and, in particular, MSAs? And, how replicable is this financing system in other countries? It is likely that patient co-payments have played a larger role than MSAs in restraining demand and costs, given that co-payments represent a larger annual share of health financing (roughly 50%) than MSAs (10%). But, the proportion of health expenditures funded annually by Medisave likely understates its true economic impact, both in terms of: (a) reducing current demand, as consumers will be prudent in using their MSAs so that they have sufficient resources for future needs 5 ; and in terms of (b) funding future expenditures; as Singapore‘s population ages, they will have to draw increasingly upon their Medisave accounts. 5 In other words, its success in restraining demand should not be measured by how much it is used. 8 Is it possible to introduce a Singapore-type program in other countries? Many have noted that Singapore has particular characteristics – not present in most countries – which have facilitated the introduction and implementation of its financing programs. These include a high national savings rate, high levels of education and income, and a still- relatively young population (11% over 60). These factors have helped to restrain demand for health care (young population), allow the build up of Medisave balances (young, high- income population) and permit a large proportion of expenditures to be funded by co-payments (high- income country). Nevertheless, it may indeed be possible to introduce a Singapore-type program in other countries, with adjustments to accommodate demographic, income and fiscal differences and the existence of national health insurance programs. In countries without national insurance programs or well-developed private insurance, MSAs could be introduced by requiring all employers/emp loyees to set up accounts along the lines of Singapore‘s program. This option would be particularly relevant for those countries contemplating the introduction of payroll- financed national health insurance. In countries with national insurance programs funded primarily by general tax revenue (e.g. Canada, UK), MSAs could be introduced by allocating a portion of existing tax revenue spent on health care directly to individuals to set up MSAs 6 . After the initial allocation, the government would have the option in the future of either: (a) continuing to collect the same level of tax revenue and allocating on an annual basis the portion previously used for health expenditures directly to individual MSAs; or (b) progressively reducing general taxes and replac ing them with payroll deductions allocated to MSAs. 6 This approach has been proposed by Cynthia Ramsey of the Fraser Institute (Medical Savings Accounts: Universal, Accessible. Po rtable and Co mprehensive Health Care for Canadians, May 1998). 9 In countries with payroll- funded national health insurance, as in most of Europe, part or all of the existing payroll contributions could be allocated to individual accounts. Consumers would then choose their provider and pay for eligible expenses. It would no longer be necessary for the national health insurance fund to act as the sole buyer of health care on behalf of consumers. In countries with well-developed private health insurance covering basic services (e.g. US, Australia, Netherlands), consumers could be given the choice of opting for MSAs with a catastrophic insurance provision instead of traditional insurance or managed care 7 . However, for MSAs to become truly universal, governments would have to allocate public funding -- whether drawn from general tax revenue or payroll taxes -- to individual MSAs. To date, no other countries have adopted universal MSAs, though pilot programs with some MSA features have been implemented in the United States and China 8 . In the US, the focus has been on pilots to enable employees to shift from traditional health insurance to voluntary MSAs with high-deductible health insurance, though experience to date is quite limited. In China, MSAs were initially piloted in two municipalities 9 and have since been expanded to roughly 40 others, with local variations in the original program. Despite the limited international experience, the potential benefits and drawbacks of MSA-type programs have generated considerable discussion, particularly (it appears) in 10 Canada . Indeed, various critics and researchers have argued that: (a) Singapore‘s health costs have risen faster after the introduction of Medisave than before; or (b) if overall health spending is low in Singapore, it is due to other factors (not Medisave); or 7 This option is already available in the U.S. 8 Hanvoranavongchai, Piya, 2002. ―Medical Savings Accounts: Lessons Learned fro m International Experience,‖ World Health Organization, EIP/ HFS/ PHF Discussion Paper n o. 52 9 For a d iscussion of this experience, see W. Yip and W.C. Hsiao, ―Medical Savings Accounts: Lessons fro m Ch ina,‖ Health Affairs (November/December 1997). 10 See for examp le E. Forget, R. Deber and L. Roos, ―Medical Savings Accounts: Will they reduce costs?‖ Canadian Medical Association Journal (July 23, 2002), and S.E.D. Shortt, ―Bo rrowing Po licy Misadventures from Abroad: Howe Not to Reform Canada‘s Health System, ― Queen’s University Centre for Health Services and Policy Research (November, 2001). 10 (c) the introduction of MSAs in other countries could actually drive up costs, since additional government subsidies for the poor and sick would be required to offset the MSA allocations of healthy people (which would be saved rather than spent on health care). Design Issues In considering the introduction of a Singapore-type health financing system, governments must address several design issues: Whether medical savings accounts would be mandatory and universal (Singapore) or private and voluntary (US). Whether universal MSAs would be funded by payroll contributions (Singapore) or through general tax revenue allocated by the government to individual accounts (and if so, how the allocations would be made). What restrictions there would be on eligible expenses and whether/how to use deductibles and co-payments to ensure fiscal solvency and to further restrain demand (as in Singapore). Whether MSA funds would be managed centrally (as in Singapore) or by private fund managers. How subsidies would be structured and funded for those lower- income patients who do not have sufficient MSA balances and catastrophic insurance What are the prerequisites for implementing a 3M-type program? In this author‘s view, countries need not have high savings rates, young populations or a high level of income and formal employment to implement a 3M-type program. As noted above, in even low- income countries, governments could allocate a portion of existing tax revenue spent on 11 health care to individuals‘ MSAs and allow them to accrue these funds over time and make eligible expenditures. Some administrative mechanisms would need to be put in place for tracking allocations/contributions and expenditures so that MSAs fulfill their original intent and become more than annual vouchers. And, as noted in the case of Singapore, MSAs should be complemented by low-cost catastrophic insurance and targeted subsidies to fully protect the poor and address potential market failures. The initial net fiscal impact of transitioning to a Singapore-type program will depend on the underlying health needs of the population and the complementary measures and 11 restrictions adopted . Fiscal sustainability will be reinforced as people accrue MSAs and moderate their demands over time. In this author‘s view, however, it will be difficult to accurately model the impact of adopting a 3M-type program in advance, as is the case for many significant economic reforms in other sectors. Countries which choose to adopt some form of Singapore-type program will likely do so because of two factors: growing public dissatisfaction with the existing financing system, and the presence of a core group of economic reformers who are attracted to the underlying economic principles of the approach 12 Conclusion Singapore is unique among developed countries at achieving excellent health outcomes at a low economic cost. Part of its success may be attributable to its health care financing system, which combines individual responsibility with targeted subsidies to protect the poor. This system may be replicable in other countries, with design modifications to accommodate for differences in income levels, demographic profile and current health financing systems. References 11 Such as deductibles, co-payments, and restrictions on eligible expenses 12 As is the case for virtually all major economic reforms. 12 Hanvoranavongchai, Piya, 2002. Medical Savings Accounts: Lessons Learned from International Experience. World Health Organization. EIP/HFS/PHF Discussion Paper No. 52. Nichols, Len. M., Nicholas Prescott, and Kai Hong Phua. 1997. Medical Savings Accounts for Developing Countries, Innovations in Health Care Financing. World Bank Discussion Paper No. 365, 233-245. Phua, Kai Hong. 1997. Medical Savings Accounts and Health Care Financing in Singapore. Innovations in Health Care Financing. World Bank Discussion Paper No. 365, 247-255. Ramsey, Cynthia, 1998. Medical Savings Accounts: Universal, Accessible, Portable, and Comprehensive Health Care for Canadians. The Fraser Institute, www.fraserinstitute.ca Singapore Ministry of Health. www.moh.gov.sg. World Health Organization, 2000. The World Health Report 2000: Health Systems: Improving Performance. Annex Table 8. Yip, Winnie C. and William C. Hsiao, Medical Savings Accounts: Lessons from China, Health Affairs, November/December 1997.
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