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Five Suggestions for the European Semester

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The European Semester is a key part of the annual process of economic guidance and surveillance within the EU. Each year the European Commission analyses Member State fiscal and structural reform policies and then makes recommendations for each country. The Commission then goes on to monitor national implementation with, at least a theoretical, ability to impose heavy fines (0.01% of GDP) on those who do not comply.

The Semester has received more attention recently because it is seen as one of the principle ways in which Europe could avoid some of the worst features of the recent crisis in future. This annual cycle of analysis and advice, then, is well-intended and has the potential to do good.

In terms of health policy, so far, the Commission has limited itself to a handful of somewhat ‘high-level’ recommendations in the guidance to selected countries. A debate is emerging, though, on whether or not in future the Commission will – or should – develop more detailed recommendations. An excellent report by Annika Ahtonen of the European Policy Centre reviews some of the key points of this debate and the issues.

I recently found myself on a panel organized by the French think tank ‘Confrontations Europe’ about European economic governance along with a senior official from the Commission’s Directorate General Economic and Financial Affairs (DG ECFIN) and Rita Baeten from the European Social Observatory. We were each asked to assess the opportunity and challenges for the European Semester, using health policy as an example. I suggested five issues where I think a change of approach is needed from the Commission, if a potentially more ambitious role in healthcare is to be a force for good:

1. The scale, speed and timing of overall fiscal adjustment should be realistic 

How much does a Government need to cut back in order for its public finances to be deemed ‘sustainable’? What’s the benchmark? Beyond which point does a level of public spending become a problem?

These are pretty important questions – and I’m worried that there is not enough debate about this in Europe. During the economic crisis we have, of course, seen some discussion of public debt in Southern countries. To be clear, it was not the level of public debt that was the problem, it was the cost of servicing the debt which got out of control. And this happened for all sorts of reasons that were as much to do with inadequate institutions and governance in the Eurozone as with (albeit substantial) structural problems in the countries concerned.

There was also the debate sparked by the controversial Reinhart of Rogoff paper, which wrongly claimed that a public debt level of beyond 90% of GDP would lead to slower growth.

So, coming back to the Commission’s assessment of public finance sustainability, what benchmark does it use for public debt? Does it use the 90% threshold that has been shown to be based on a mistake? No! It uses an even lower threshold – 60% of GDP!

The 60% threshold is enshrined in the European treaty and comes from the Stability and Growth Pact (SGP). Of course, many countries are way over this level and the Commission does not expect an adjustment over night. But, nevertheless, the 60% threshold is still at the heart of the Commission’s assessment of a county’s fiscal status. The amount of adjustment required from a country is at least in part based on what it should do to achieve that 60% threshold in the long-run.

I think the use of this 60% threshold is a problem. The primary goal of the SGP was surely to set the framework for macroeconomicconvergence in the context of European Monetary Union, not set a robust basis for assessing long-term public finance sustainability. What mattered more (and what still matters more) was convergence, and the removal of imbalances in the Euro-zone, not the levelof public debt.

I know of no economic research suggesting that 60% of GDP is a long term sustainable or desirable level of public debt and as I have written about previously, there is plenty of historical evidence to suggest that a) public debt dynamics are often very long term and b) there is plenty of precedent for countries living successfully for many years with much higher debt. I would also add c) that high levels of public debt to GDP are a poor indicator of sovereign credit risk. Look at Japan which has well over 200% of public debt to GDP but still some of the lowest borrowing costs in the world.

I am not suggesting, here, that the Commission should relax entirely the constraints on countries and allow public deficits and debt to run completely out of control. But the 60% threshold is arbitrary and unachievable for many countries in the short and mid-term. We need to take a hard and realistic look at what is likely to be achievable over the next decades. Given the demographic profile of Europe between now and 2050 it might be reasonable to assume that that an appropriate level of debt would be somewhat higher than periods of history where dependency ratios (the ratio of people in work to people in retirement) have been more favourable. This would give more breathing room to countries that are currently struggling to stay within the constraints.  By the way, it happens that we only have demographic projections until about 2060. It’s quite possible that dependency ratios will improve after that point – look at the current baby boom. The point is it not only might be possible to ‘live’ with slightly higher average public debt than was perhaps assumed at the time the SGP was written, it might be economically worthwhile, as long as we get good value for money for the investments we make.

This, of course, starts to be where the economics of welfare (pensions as well as healthcare) ends and the politics begins. If adherence to the orthodox (but unrealistic) view remains then it may prove necessary to take some pretty drastic political decisions in the name of ‘fiscal sustainability’. Do we cut provision of services and entitlement? Do we change the funding basis so that individuals  have to pay for more of their care (knowing, of course, that large segments of society would be simply unable to cope – increasing inequality)? The fact that these questions are being asked in Europe – the home of the welfare state – at a time when the rest of the world is finally trying to catch up with European-style universal coverage is deeply ironic. Such major political decisions are clearly beyond the mandate of the Commission or the Semester process. But I think it’s important that we understand where the natural consequences of the Commission’s current frame of thinking might take us.

How society funds pensions and healthcare in coming decades are two sides of the same coin. A line in a New York Times article on pensions recently caught my eye: ‘….are we really going to prevent janitors from retiring, just because a few lawyers are living longer?’  Says it all…

2. Policy reforms in healthcare should not be based on panic

The Commission’s health policy experience in the bailout countries of recent years should not be used as a model for the more long-term structural reform thinking that is required in healthcare. The emphasis of the Semester is bound to be mostly on reducing expenditure – less on making sure the best possible investments are made. To a degree, this is understandable and measures aimed at improving the quality, equity and efficiency of care in Europe certainly make sense. Of course cost containment is important but it needs to be done in the right way, needs to ensure patients get access to what they need and, when it comes to private sector providers, we need to ensure that the right signals are sent to companies.

It is critically important that public health expenditure is not just seen as a problem but as an opportunity as a growth driver for the European Economy. Significant inequality in access to healthcare still exists. And the effects of that are clearly seen. There is almost a decade’s difference in life expectancy between the healthiest and least healthy in Europe, for example. This is not only deeply problematic from an ethical and societal point of view, it is also a serious drag on poorer countries economic performance.

Reforms are necessary, but they must be based on an appreciation of quality, value and equity as well as cost. Too often value for money is, in practice, just a discussion of money, which in the short term never leads to acceptable outcomes.

3. There needs to be a re-think within the Commission on how markets work in healthcare to ensure equality of access

Health is unlike any other good or service. There are countless examples of where the European single market has delivered fiercer competition, more consumer choice and even lower prices. But if our point of reference is ‘normal goods’ like BMWs, iPhones or straight European cucumbers, then we’re missing a crucial point about healthcare. Society does not think that everyone should have access to a BMW! But most people in Europe would say that everyone should have access to the healthcare and treatment they need, when they need it, and at a price that can be afforded.

Whether it’s shortages of doctors and trained nurses in Romania or lack of availability of innovative medicines in a lot of Central and Eastern Europe, it is clear that the current European model is not working as well as it should in the interests of patients. The requirement that everyone should get access is a crucial point that fundamentally changes the economics of healthcare markets, with implications for what type of trade and competition is in the best interests of European citizens. There are no easy answers to this but, as the most recent European EPSCO council conclusions noted, a reflection is needed.  Commission policy, inside and outside the Semester process needs to take these issues into account.

4. Make sure that policy recommendations reinforce ‘best practice’ not work against it

If the Commission does start to make more specific recommendations in healthcare, one of the challenges – as a top down process – is to ensure that the recommendations made genuinely reflect state-of-the-art thinking on what constitutes best practice. It is also important – but often forgotten – that context matters and what works well in one country may be a disaster elsewhere. To coin a cliché, one-size-fits-all is not what we need.

Getting this right will be a particular challenge in what is mostly a finance-driven process. The experience of how medicines markets were approached in the bail out countries is a good example. Targets (medicines spend as a percentage of GDP) were imposed to ensure savings were delivered. Money needed to be saved quickly and so this approach was perhaps understandable in an emergency situation. But there were a number of problems:

  • There is no evidence to suggest what is the ‘right’ level of spend per GDP or that such a level of spending would be consistent across countries;
  • In focusing on pharmaceuticals, the targets removed flexibility to use pharmaceuticals appropriately to reduce broader (and more significant) health and social care costs, such as hospitalisation – in other words it can hinder rather than help with financial sustainability;
  • As spend was fixed as a percentage of GDP, at a time when GDP was falling, healthcare systems were faced with a moving target.

Finally, though, there is a bigger issue about targets. What we know from the best performing (and most financially efficient) healthcare systems is the importance of integrating decisions on the management of care. Rather than managing a series of siloed budget inputs separately, budget holders are given responsibility to manage a package of care, with the freedom to choose which inputs should be combined to give the best overall value for money.  The imposition of top-down targets on individual inputs, like medicines, then works against this trend making integrated healthcare management more difficult.

5. Actively encourage partnerships to ensure the delivery of long-term reform

All health systems, by their nature, are highly complex. The UK’s National Health Service, for example, is one of the largest employers in the world. Managing change in any organization is difficult but in a complex environment with competing interests, imperfect information and, sometimes, innate conservatism, ensuring that reforms are carried out in the way that was intended is a tall order.

The only way to succeed in such an environment is to bring people with you and ensure that stakeholders have a real say in how reforms are carried out. As the name implies, stakeholders ought to have a stake in how things are done and, if this is achieved, the likelihood of support for reform increases.

Ensuring that European health systems are sustainable into the future – assuming we know what that means which, as I’ve said above, we really don’t – is beyond any single organization, be it the Commission, industry, professional groups or patients. But this is why the way we develop reform programmes must combine the experience and expertise of all these groups.

Partnership can work. When it comes to pharmaceutical issues, most European countries have a good tradition of industry and government working together on the management of the medicines bill. Where there is less of a tradition, there have been more problems for both sides.

As the Commission develops its thinking on healthcare it should not do this in isolation from the stakeholders it needs to deliver against the reforms. If we collectively focus on responsible, high quality, equitable outcomes in healthcare we can ensure European citizens continue to enjoy the best care into the future. I hope the five suggestions I have set out here are seen as a constructive contribution to the debate on how to take this forward.

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Written by

RTorbett

EFPIA Chief Economist

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