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7.177.187.197.20IB2.1IB2.2IB4.1xiiA typical data list for a national health budget modelThe core contents of the legal description of the schemeA possible disaggregation of the insured populationCommon forms of co-payments and their usual useVariables and projection parameters in a social insurance modelApplying the 12 equationsIncome distribution of individuals in Demoland, 1998Sensitivity testing and the effect of income ceilingsObserved and approximated values of the J-curve for a utilizationindicatorCalculation of the constant contribution rateContribution rate calculation, MSH modelPopulation, health insurance membership and care cases in Hai Phong,Viet NamFinancial results of model for the health insurance scheme in HaiPhong, Viet NamSummary of expenditure by type of service, Turkish health care systemSummary of expenditure by source of funds, Turkish health caresystemFinancial effects of 1997 amendments to the Employees' HealthInsurance scheme in JapanFinancial projections for the Employees' Health Insurance scheme inJapanProjected contribution rates for the Statutory Health Insurance Systemin the Federal Republic of Germany, 1981-1985Estimated fund operation in short-term benefits, 1996-2007Assumptions for health care financing and social budget projection forUkraine, 1995-2015Ukraine's social budget as a percentage of GDPHealth care parameters and assumptions for the Ukrainian exerciseProjections for the government health care delivery system in UkraineHealth care projections: Results of the Ukrainian exerciseCalculation of contribution base (in Euroland currency units)Per capita costs in Euroland currency units (CU), 1997Total health costs in Euroland CUsConsolidated income and expenditure forecastCosts shared through co-paymentsSimulating alternative policy options in EurolandSystems of financial accountingSample components for annual reportsData for multiple regression 0261282

ContentsFiguresNotes: B Box (e.g. Figure B2.1 is found in Box 2.1, in Chapter 2)IB Issue Brief (e.g. Figure IB2.1 is found in Issue Brief 6.1bB6.47.17.27.37.47.57.6IB2.1IB4.1A roadmap through this book, or What this book doesThree basic transformations in national health sectors and the scope offinancial modelsIncome levels and life expectancyThe financial equilibrium of a health care financing scheme and itsdetermining factorsThe hierarchy of models and accounts in social protection and healthcareAlgorithm of critical decisions in policy designHealth expenditure as a share of GDP and per capita GDP in60 countries in the mid-1990sCategories of health care financing systemsThe bipolar structure of a public health service systemThe structure of a social insurance health care finance and deliverysystemExpected macroeconomic effects of rising health care costs under a socialhealth insurance schemeThe flow of data in the pluralistic health care system of the FederalRepublic of GermanyA standard flow chart for a financial model of a health care schemeThe log-normal distribution of mean 10,000 and standard deviation4,000Income distributionThe J-curve and its proxyThe sustainability of health insuranceValuation results under partial premium payment complianceValuation results under full premium payment complianceProjected and real development of contribution rates in the FederalRepublic of GermanyContribution rates under alternative policy optionsDevelopment of reserves and deficits under alternative policy optionsSummary of the accounting processResult of sample 9170184206206256284

ACKNOWLEDGEMENTSThis book is the result of a team effort by a number of people who have madesubstantial contributions:Jose TossaDiane VergnaudCompiled the statistical annex.Kenichi HiroseProvided descriptions of the social security modelin Thailand and the methodology of the ILOpopulation model.Janet NeedhamPrepared papers for the ILO some years ago,upon which the accounting section of the bookdrew.Guy CarrinContributed the description of the latest WHOmodel, SimFin, which simulates financial needs andgovernment budget options for the health system.David CollinsChecked on our write-up of accounting principlesin health care schemes.Theodore FisherUndertook the first round of comprehensiveediting and lay-out work, and made this volumereadable. He also prepared the index.Colin GillionRobert FontaneauXenia Scheil-AdlungProvided us with annoyingly critical butconstructive comments on successive draftversions.Guy CarrinAndrew CreeseJosep FiguerasColin GillionWarren McGillivrayXenia Scheil-AdlungServed as final reviewers of the book. Theircomments provided us with a very important finalquality control.

AcknowledgementsKaruna PalAssisted with editing and performed the final checkPatricia Frenetteof the layout.The PublicationsShepherded this book through the internal andBureau of the ILOexternal publication process.Our sincerest thanks to them all.The authorsBoston, Cologne, Geneva, London and WashingtonSummer 1998

ABOUT THE AUTHORSMichael Cichon holds a Masters degree in Pure and Applied Mathematics (Technical University, Aachen, Germany), a Master of Public Administration degree(Harvard University) and a Ph.D. in health economics (University of Goettingen). He is a member of the German Actuarial Association (DAV), andworked in the Planning Department of the German Ministry of Labour andSocial Affairs in Bonn as an actuary for eight years before joining the SocialSecurity Department of the ILO in 1986 as senior actuary and health economist.Between 1992 and 1995, he served as the social security specialist on the ILOadvisory team for Central and Eastern Europe in Budapest. In 1995, he wasappointed Chief of the Financial, Actuarial and Statistical Branch of the ILO'sSocial Security Department. He writes on financial and economic issues relatedto social security, with occasional excursions into governance. He has undertakentechnical cooperation assignments in more than 15 ILO member countries.David M. Dror trained in economics and business administration. He becameinvolved in social security issues when he served as Director of the LaborRelations Department in the Israeli Employers' Federation. He has elaboratedand negotiated a nationwide pension agreement, developed innovative solutionsfor COLA wage indexation during periods of hyperinflation, and served as leadrepresentative on the Council of the National Insurance Institute of Israel. Hewas appointed to the ILO Committee of Experts on Social Security Questions,and was involved in the elaboration of social security standards during the yearshe served as Delegate to the International Labour Conference. As an ILOofficial, he first dealt with the issue of the investment of social security funds;later on, he was the Chief of the ILO-ITU Staff Health Insurance Fund for anumber of years. He now serves as senior specialist for health questionswithin the Social Security Department.William Newbrander is a health economist and Director of the Health Reformand Financing Program of Management Sciences for Health (MSH) in Boston.xvii

About the authorsPrior to joining MSH, he worked with the WHO for eight years, both ashealth economist at their Geneva headquarters, and as Program ManagementOfficer and Acting WHO Representative in Thailand and Papua NewGuinea. He has served as a hospital administrator in the United States andother countries. He has authored numerous journal articles and severalbooks, including Private Health Sector Growth in Asia: Issues and Implications;and Decentralization in a Developing Country: The Experience of PapuaNew Guinea and Its Health Service; as well as the WHO document HospitalEconomics and Financing in Developing Countries. He received his Ph.D. inHealth Economics and also earned a Masters of Hospital Administration andMasters of Applied Economics from the University of Michigan.Charles Normand trained in economics at the Universities of Stirling and York(UK). He became interested in health economics and financing when working asprincipal economist for health and social services in Northern Ireland. Since1991, he has been Professor of Health Policy at the London School of Hygieneand Tropical Medicine, and was head of the Department of Public Health andPolicy from 1993 to 1998. At the School, he teaches health economics and healthsector management. He has carried out research and advisory work on healthcare financing in many of the countries of Central and Eastern Europe,Ghana, Zimbabwe and South Africa. He co-authored the WHO/ILO Guidebook for Planning with Axel Weber. His other research interests are mainly inhealth technology assessment, modelling outcomes and cost-effectiveness, andhuman resources in health care.Alexander S. Preker is currently Lead Economist for the Health, Nutrition, andPopulation (HNP) sector of the World Bank. He is responsible for overseeing theBank's policy development, analytical work, and staff development relating tohealth care financing and delivery systems. He coordinated the Bank team thatprepared the recent HNP Sector Strategy Paper, and is now heading a teamthat is examining methods of harnessing private-sector resources to meet broaderhealth care objectives in low- and middle-income countries. Recent publicationsinclude: World Bank Sector Strategy: Health, Nutrition, and Population; HealthCare for an Aging Population: Issues and Options; Health Status during the Transition in Central and Eastern Europe: Development in Reverse; Balancing Competitionand Solidarity in Health Care Financing; Health Care, Labor Markets and SocialPolicy in Central and Eastern Europe; and Meeting the Challenge: Policymakingand Management during Economic Transition. He also contributed to the followingpublications: 1993 World Development Report: Investing in Health; EuropeanHealth Care Reforms: Analysis of Current Strategies; and Investing in Peopleand Growth. He received a Ph.D. in economics from the London School ofEconomics and Political Science, a Fellowship in Medicine from UniversityCollege London, a Diploma in Medical Law and Ethics from King's CollegeLondon, and an MD from University of British Columbia/McGill.

About the authorsAxel Weber is an economist specializing in social protection and healthcare financing. He studied in Cologne (Germany) and at Pennsylvania StateUniversity (USA). He has worked for the German Ministry of Labour, theFederation of the German Sickness Funds and the European Commission.Currently, he is working as a freelance consultant for the ILO, WHO, theWorld Bank and bilateral aid agencies. He has experience on assignments inall regions of the world.Hiroshi Yamabana is an actuary in the Financial, Actuarial and StatisticalBranch (SEC/FAS) of the Social Security Department of the ILO. He studiedmathematics at Kyoto University (Japan) and worked as an actuary for theJapanese Ministry of Health and Welfare for five years. His experience at theMinistry included establishing the National Pension Fund, periodical actuarialvaluations of the National Pension Scheme (NP) and the Employees' PensionInsurance Scheme (EPI), and the integration of industry-specific pensionschemes (e.g. for Japan Railway) into the EPI. He is currently working onactuarial valuations of social security schemes in developing countries and thedevelopment of actuarial methodologies and techniques in social security.xix

PARTITHE CONTEXT OF MODELLING

INTRODUCTION1Health care systems are a prominent focus for national leaders and policymakers in most countries today. This fact reflects concerns about the availability of necessary health services for the population, as well as about theefficiency and costs of current health systems in delivering those services.The degree of importance of this issue in any given country is directly relatedto the size of the health care system relative to the national economy. Nearlyall decisions of policy makers about national health systems must be based onthe quantitative aspects of the options available, and the impact of anydecisions taken. A quantitative description of the current health system andprojection of the impact of changes to the system through new policyinitiatives is also critical to reform. Hence, the ability to quantitativelydescribe health systems as well as to create a range of "what if" scenariosbased on new directions for those systems is increasingly important in allcountries.The objective of this book is to help those who do the quantitative work thatserves as a background for policy decisions to present reasoned projectionswhich will, in turn, facilitate the creation of informed policies. Those calledupon to map the current state of health systems, to simulate financial outcomesof proposed changes to existing health systems, or to predict the future underdifferent scenarios will need to use mathematical modelling techniques. Thisbook is concerned with describing the context and techniques for developingquantitative descriptions and projections through modelling. It provides thetools to build models of health care financing systems.1.1BACKGROUNDThe main objective of a health care delivery system is to maintain or improvethe health status of the population. This is accomplished mainly by preventingdisease and illness - or in the case of illness, by providing curative and rehabilitative care. These objectives should be carried out as efficiently as possible, and

Modelling in health care financeat costs that are both bearable for the participants and financially sustainablefor society.A social or national health care system would also aim to guarantee access tohealth services for the entire population, regardless of individual ability to pay.Many national health care systems in Africa, Asia, Europe, Latin America andNorth America may be regarded as successful because of their extent of accessto care, and the high quality of that care. However, many schemes in the developing world do not yet provide adequate physical or financial access to qualityhealth services for the entire population. In the past two decades, the cost ofhealth care systems has become an increasing concern for governments in developed as well as developing countries. In the past, rapid real economic growthoften made it possible to increase both the level of access to and quality ofcare. This was the case, for example, in the postwar period of most OECDcountries. However, since the mid-1970s and the economic crises of the 1980sand 1990s, evidenced in the dramatic reductions in GDP growth rates, theemphasis in many countries has shifted from expanding services and improvingquality to attempting simply to maintain the level of existing services. Thus, thesustainability and cost containment efforts of health systems have become themajor challenges, and financing is a critical element in meeting these challenges.The emphasis in health care financing today has shifted to cost containmentthrough efficiency gains in existing systems, while finding effective mechanismsfor funding the overall health system in a long-term, sustainable fashion. Forless affluent countries of the world, the pressure to reform their health systemsand financing mechanisms has become even more acute.Demand for health services continues to rise. While some of the increasemay be attributable to population growth and changing disease patterns,demand has also been created through such factors as new technologies to diagnose and cure illnesses. These technologies are generally more costly than existing ones, and often represent only a slight marginal benefit in terms of healthoutcomes relative to increased costs. While consumers demonstrate a considerable tolerance for rising health care prices, collectively financed health care systems are increasingly sensitive to the rising costs of health care. The ultimateconsequence of unrestrained cost increases may be a rationing mechanism forthe distribution of health services. Simply allowing the health care marketand prices to perform this rationing function creates ethical concerns and provokes debate about the equity of the system. This ongoing debate in manynational systems reflects the fact that interactions between three key factorsare not fully understood: the objective need for health goods and services, thedemand for those goods and services, and the development of benefit entitlements under the health care financing system. The relationship between theuse or consumption of health services and health outcomes is also not wellunderstood, especially since stochastic biological processes make this relationship difficult to determine. In short, uncertainty is a major characteristic ofthe health sector.

IntroductionIn order to provide affordable, accessible and effective health services tothose of the population in real need, resources must be targeted at the mostcost-effective interventions. This is accomplished primarily through the effectiveallocation and efficient use of existing resources, through such means as utilization and cost control. For the health care delivery system to be financially sustainable, sound resource allocation, financial governance, and monitoring ofhealth outcomes are necessary, regardless of whether the system is primarilypublic, private or mixed.1.2MODELLINGQuantitative tools are needed for sound resource allocation and financial governance of health systems. These are of two primary types: descriptive tools andanalytical tools. Descriptive tools are standard instruments for sound governance, and consist of financial reporting and controls in the form of accountsand statistics. Analytical tools allow policy makers to perform status quo mapping, which is used to assess the financial development of existing systems, underthe assumption that present regulatory or managerial frameworks are maintained. The "map" of the s

4.3 Core statistical data and data sources for financial modelling 87 4.4 Data handling for modellers 89 4.5 Summary 94 ix . Contents 5 The modelling process 97 5.1 The six steps of the modelling process 97 5.2 Methodological philosophy and principles