— David KL Quek
The Malaysian Insider
Feb 10, 2012

FEB 10 — Out-of-Pocket and Catastrophic Payments

So what is so terrible about out-of-pocket (OOP) payments for healthcare? Why are health economists and policymakers so enamoured with this unsavoury OOP payment that this healthcare financing mechanism has been universally targeted to be eradicated, or at least reduced?

Many health authorities from the WHO and World Bank have analysed this in great detail, taking into account especially poor countries around the world, including those in Asia, Africa, Central and South America. Malaysia too has been included in many multi-country analyses to ascertain if common themes and determinants are shared within the disparate health systems in the regions.

When one looks at poverty levels and unequal economic systems, the health determinant as a function of economic underdevelopment and social aberration unfortunately looms large in some really poor nations. While poverty per se cannot all be attributed to just ill health or the lack of access to proper health care, impoverishment as a result of quests for healthcare has been a classic example of what poor countries are doing wrong.

Since many if not most of the world’s poorest countries also have the worst vital and health indices, it is not surprising that they have been studied the most intently and comprehensively. The lack of universal or affordable access to health care remains one of the predominant determinants of poverty in these countries. Sadly, out-of-pocket payments are the usual if not the only manner of health financing in these countries, where there is little or no social or financial protection or safety nets.

What has been found is as follows: out-of-pocket health payments can drive individuals and households into poverty, but standard poverty measures do not adequately account for health needs, and cannot explain all the nuances of impoverishment which can follow catastrophic ailments.

Health economists believe that OOP payments and poverty levels although usually intimately linked may not necessarily be causative, one for the other, or vice versa. Many health analysts use mathematical and statistical measures to assess poverty on the basis of household resources net of OOP payments, but this is justified only if OOP payments are in response to basic needs not reflected in the poverty line. Diversity and unpredictability of health needs makes it difficult to adjust poverty lines for some of these households. Also not all OOP payments are non-discretionary especially for middle-income households, which may be voluntary based on perceived demand or need, so subtracting them from household resources would overestimate poverty. But conversely, leaving OOP payments as part of resources, could also underestimate poverty.

Van Doorslaer and others, in a 2007 paper in the Health Economist, actually analysed in detail how out-of-pocket payments influence healthcare payments and in particular catastrophic ailments and possible household impoverishment in Asia. Their data and analysis are worth perusing in detail.

WHO researchers have defined and set the threshold at 40 per cent of capacity to spend as non-subsistence effective (disposable) income. This is household expenditure net of the estimated cost of subsistence food needs. “Households are considered to suffer financial catastrophe if they spend more than 40 per cent of their disposable income — the income remaining after meeting basic food expenditure — on health services.” Once this threshold is exceeded then households are forced to reduce spending on other essential items such as housing, clothing and education, in order to pay for health services.

This is sometimes also known as subsistence spending. Subsistence spending on food is defined as the average food expenditure of households in the 45th to 50th percentile of food budget share distribution. This threshold is useful because it helps to assess the disruptive effect of out-of-pocket, OOP payments on the living standards of the poor.

Out-of-pocket payments take several forms, which include fee for services, whether as outpatient or in-hospital care (imposed by private and/or public sector providers), co-payments where insurance does not cover the full cost of care, and direct spending for self-treatment (for drugs and pharmaceuticals, including traditional/complementary-alternative therapies).

Thus, it would appear that having a prepayment mechanism or system of healthcare financing might be the better way to avoid such capricious and uncertain out-of-pocket costs and spending for health. But the solutions towards developing such a prepayment system are complex and depend largely on differing countries’ socioeconomic and political contexts, including the nature and speed of socio-economic as well as human capital development.

For Malaysia, the out-of-pocket payments are utilised for the following services, the bulk being for inpatient care, ambulatory care and medicines:

● Public sector care (7.17 per cent)

● Inpatient care (24.82 per cent)

● Ambulatory care (45.41 per cent)

● Medicines (24.66 per cent)

● Traditional/home/other (5.11 per cent)

It can be seen that the bulk of the OOP spending is on ambulatory care and medicines. But this statistic must be examined from the perspective of household spending and consumption patterns. From the above discussion, it would be clear that OOP payments for health care should be viewed and analysed more contextually, as a percentage of household consumption/spending.

Interestingly among the 14 nations studied, Malaysia had the lowest levels of out-of-pocket, OOP spending as a percentage of total household (HH) spending, even if this were to exclude food consumption expenditure.

For Malaysia, the so-called Catastrophic payment Headcount was found to be among the lowest in the entire 14-country cohort analysis. Some 0.36 per cent had to spend in excess of 25 per cent of their total household expenditure as OOP payments; 0.98 per cent more than 15 per cent; 2.01 per cent more than 10 per cent; and 6.62 per cent more than 5 per cent of total household expenditure as OOP payments. When non-food expenditure is considered, the numbers were even smaller with some 0.21 per cent more than 40 per cent, 0.78 per cent more than 25 per cent, and 2.48 per cent more than 15 per cent of OOP payments as shares of non-food expenditure, respectively.

This contrasts sharply with, for example Bangladesh, where 28 per cent of its households spent in excess of 5 per cent of the total household expenditure on health care and a substantial 4.5 per cent spent in excess of a quarter of the budget for healthcare! The figures for China are also dismal, i.e. 28.4 per cent spending in excess of 5 per cent of total household expenses, while another 2.8 per cent spending in excess of 25 per cent of their household budget. These are numbers, which clearly can impoverish some among the poor. The data for Indonesia and the Philippines are nearly similar, with some 9.5 to 9.2 per cent OOP spending in excess of 5 per cent and 1.13 and 1.14 per cent in excess of 25 per cent of household budget, respectively. Even Hong Kong had more than twice the percentage of catastrophic spending than Malaysia!

For Malaysia thus far, it would appear that our OOP spending on healthcare, including health catastrophes, is nowhere near the threshold or danger levels of concern! We are way off the marker of 40 per cent of household spending needed to push households into impoverishment. But this is not to say that we do not have any such healthcare-induced bankruptcies, but these are still in the sustainable (possibly) sub-unity or <1 per cent) level as can be adduced and seen in the available data.

What is interesting is that this paper summarised and concluded that: “Sri Lanka, Thailand and Malaysia stand out as low to middle income countries that have constrained both the OOP share of health financing and the catastrophic impact of direct payments.”

So what are the practical issues and impacts of out-of-pocket payments for health? Undoubtedly the most serious problem with paying out of pocket is the uncertainty and unexpectedness of ill health and medical costs. Unexpected and fortuitous medical cost has that way of eating into household expenditures, especially when these have not been budgeted for or factored in adequately.

For many, but especially for the marginal and indigent, households confronting a serious illness might have to sell limited assets, borrow, and/or cut back on expendable items of consumption, just to be able to pay for such usually urgent services. This sometimes-unavoidable economic shock can lead to rapid depletion of savings and/or assets, causing households to spiral down into indebtedness; many ending up being trapped in long-term debt and becoming pushed into poverty.

The opportunity cost to escape poverty from savings, investments or meagre assets could easily be exhausted when OOP payments come out of the blue. In direst straits, some would have to make that difficult choice between diverting disproportionately large portions of household resources to cover the costs of treatment. And if these were insufficient, they would sometimes even have to forego or delay treatment at the expense of health.

However, Malaysia has about the lowest statistics for poverty headcounts due to health OOP in Asia, even when we calculate according to two thresholds of poverty lines (US$1.08 and US$2.15 per day). Malaysia’s adjusted poverty gaps also remain lowest and insignificantly changed at the two baseline poverty levels.

Thus, although severity of poverty in some underdeveloped countries can sometimes lead to predicaments in prioritisation of subsistence needs versus medical choices, the extent to which this occurs differs from country to country. Sudden and unpredictable illness shocks can lead to severe disruption to material living standards and welfare, especially for those so impoverished! Hence, disruptive and catastrophic healthcare spending can have huge economic consequences not only to the individual but also to entire households and families. This however, appears to be a very small experience for Malaysia at this current point in time, at least where we have data for.

Therefore, while it is understandable that we make serious attempts to work towards health equity and access for all around the world, we also have to consider local, regional or even national peculiarities and context.

In principle, we recognise that WHO and the World Bank are right to emphasise the threat of spiralling OOP catastrophic payments. The danger of catastrophic health payments causing impoverishment, disruption of household living standards, and entrenching the already poor, has been substantiated repeatedly in many underdeveloped countries. WHO has been at the forefront at advocating fairness of health financing and ensuring protection against such catastrophic medical expenses, while at the same time encouraging governments to provide universal access for as broad a berth of basket of healthcare services as possible.