Michael de Laine

By Michael de Laine, The Copenhagen Voice, 22 October 2009

Further increases in public health spending could result in additional funding through taxes, increasing the already high tax distortions in Denmark, the independent chairmen of the Economic Council (the ‘wise men’) say in their latest report on the Danish economy, published today. Even if a tight control of health expenditure is possible, there is a need for a permanent increase in taxes or structural reforms to finance the increase in health expenditure as a proportion to GDP.

Danish health care policies are based on the principle that the health care sector should provide easy and equal access to health care services to all Danish citizens a principle that is generally accepted as a central part of the Danish welfare state.

Health spending equals 10% of Denmark’s total gross domestic product (GDP). The large majority of the expenditure is financed by taxes, while direct user fees only account for 15% of the total. Total health expenditure (private and public) has grown faster than GDP since 1970 in most OECD countries. The growth in Danish health expenditure has been more moderate, but from 2000 health expenditure has been increasing and health expenditure accounts for an increasing share of GDP.

This should not necessarily be seen as a problem as the increase may very well reflect citizens’ preferences for higher quality health care.

However, as the main part of health expenditure is financed by taxes, further increases in public health expenditure can lead to a public deficit or may require additional tax funding, the economic ‘wise men’ say.

They note two important factors affecting health spending: cohort effects and reduced mortality. The large cohorts born after World War Two will require more health care as they get older. Increases in life expectancy will further increase the number of elderly requiring health care.

A significant share of health services is provided to individuals approaching the end of their lives (terminal costs), and proximity to death has a significant impact on health costs of the individual, the ‘wise men’ say.

They add that the increase in health expenditure is likely to put pressure on public expenditure over the next decades. It is therefore worth considering alternatives to tax-based financing of health expenditure.

The economic ‘wise men’ say that one alternative is to shift from tax payments to compulsory social health insurance, which is currently used in countries like Germany, the Netherlands and France.

However, it is not obvious that social health insurance will be cheaper than tax-funding. An insurance payment system must be developed in addition to the already existing tax collection system. Furthermore, it suffers from the same incentive problems as the tax system. For example, patients’ demand for health care does not take into account the cost of treatment, and activity-paid health care providers have little incentive to limit treatments to patients.

Also, the ‘wise men’ add, it seems that the social health insurance system is generally less redistributional than tax, although this depends on the design of the insurance payments. If the insurance payment scheme has the same distributional effects as the tax-financed system, then the distortionary labour market effects are also likely to be the similar.

User charges finance 15% of total Danish health expenditure. They are mainly applied on dental services, physiotherapy, and medication. There are no user charges, for instance, on visits to the casualty departments or hospital meals, which is the case in other Nordic countries.

The economic ‘wise men’ recommended that user charges should apply on more health services, the existing budget for user charges, so that the user charges are reduced on some health services and increased on others. By spreading the user charges on more health services, they may be used to regulate the demand for other services than dental services, physiotherapy, and medication.

The number of employer-paid supplementary health insurances in Denmark has increased rapidly in this decade and one million people were covered in 2008. This increase is encouraged by a tax exemption to the employee, given that the employer offers the insurance to all employees. The tax exemption yields an indirect subsidy to the supplementary health insurances. The exemption is only given to people in the labour market and may therefore not be consistent with the principle of easy and equal access to health care services. For these reasons, the ‘wise men’ recommended that the tax exemption should be abolished.

Instead of increased funding, the increasing health expenditure could be limited by increasing the efficiency of the health sector through competitive supply of health services, the ‘wise men’ say. However, the cut in expenditure will be small and limited extent, as only a small share of the health services can be supplied competitively.

One (extreme) alternative to a health care contribution tax is a restrained development in health expenditure that ensures that health expenditure as a proportion to GDP is kept constant at the current level, the economic ‘wise men’ say. Due to the pressure on health expenditure caused by aging, this implies a slower growth rate in health expenditure per person in a given age group than growth in GDP and is a way to secure fiscal sustainability.

A less radical possibility is to let the health expenditure increase at the same pace as average income and the development of demographic factors such as the size of cohorts and aging. Such a development in health expenditure presumes a distinctive tightening of expenditure control and is hardly realistic in the light of the present focus on fast treatment of patients. Even if a tight control of health expenditure is possible, there is a need for a permanent increase in taxes or structural reforms to finance the increase in health expenditure as a proportion to GDP, the economic ‘wise men’ say.