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Jun 05, 2020

How are costs contained?

Health System Features


The major drivers of cost growth are the MBS and PBS. The federal government regularly considers opportunities to reduce spending growth in the MBS through its annual budget process. To influence PBS costs, the government makes determinations about which pharmaceuticals to list on the scheme and negotiates the price with suppliers. It also provides funds to pharmacies to dispense medicines subsidized through the PBS and to support professional programs and the wholesale supply of medicines. This arrangement is implemented through the current Community Pharmacy Agreements, which are renegotiated every five years. The Sixth Community Pharmacy Agreement, which began in July 2015, supports AUD 6.6 billion (USD 4.6 billion) in savings through supply chain efficiencies.

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A 17 percent increase in the cost of medicines and medical supplies was observed between 2010 and 2014. Important efforts have been launched by the federal government to contain these costs, including more-pervasive regulation of new technologies, centralized purchasing of high-cost medicines, and public–private partnerships for the national production of strategic products through technology transfer. In 2012, the National Commission of Technologic Incorporation (CONITEC) was established. The CONITEC approves inclusion, exclusion, and approval guidelines for the use of new and existing health technologies. From 2012 through 2016, 69 health technologies were removed while 132 new health technologies were incorporated (62% of these were medicines and 38% were medical devices, diagnostic products, health products, and procedures). In 2018, 84 partnerships for technology transfer were initiated: 67 for medicines, 12 for equipment and medical materials, and five for vaccines, with an estimated savings of BRL 4.68 billion (USD 1.09 billion) in product purchases between 2011 and 2017.

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Costs are controlled principally through single-payer purchasing, and increases in real spending mainly reflect government investment decisions or budgetary overruns. Cost-control measures include:

  • Mandatory global budgets for hospitals and regional health authorities
  • Negotiated fee schedules for providers
  • Drug formularies for provincial drug plans
  • Resource restrictions for physicians and nurses (such as provincial quotas for students admitted annually)
  • Restrictions on new investment in capital and technology.

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Health expenditures have risen significantly in recent decades because of health insurance reform, an aging population, economic development, and health technology advances. Health expenditures increased from CNY 584 (USD 164) per capita in 2004 to CNY 4,237 (USD 1,194) in 2018.

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The overall framework for controlling health care expenditures is outlined in a budget law, which sets budgets for regions and municipalities and specifies automatic sanctions if budgets are exceeded. The budget law is supplemented by annual agreements between regional, municipal, and state governments to coordinate policy initiatives aimed at limiting spending, including direct controls of supply.

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Costs in the NHS are constrained by a national health care budget that cannot be exceeded, rather than through patient cost-sharing or direct constraints on supply. NHS budgets are set at the national level, usually on a three-year cycle. CCGs are allocated funds by NHS England, which closely monitors their financial performance to prevent overspending. Both CCGs and NHS providers are expected to achieve a balanced budget each year.

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SHI has faced large deficits over the past 20 years, but they have fallen from EUR 10–12 billion (USD 12.6 –15.2 billion) in 2003 to EUR 4.1 billion (USD 5.2 billion) in 2016. This trend is the result of a range of initiatives, including:

  • a reduction in the number of acute-care hospital beds
  • the removal of 600 drugs from public reimbursement
  • an increase in generic prescribing
  • a reduction in the price of generic drugs
  • the use of over-the-counter drugs
  • a reduction of official fees for self-employed radiologists and biology labs
  • the inclusion of central purchasing to better negotiate costs
  • an increase in the proportion of outpatient surgery
  • the institution of earlier post-surgery and post-delivery discharge
  • a reduction in duplicate testing.

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Recently, there has been a shift away from reliance on overall budgets for ambulatory physicians and hospitals and collective regional prescription caps for physicians, toward an emphasis on quality and efficiency. The Hospital Care Structure Reform Act of 2016 aims not only to link hospital payments to good service quality but also to reduce payments for low-value services. Currently, the IQTiG works on preparing appropriate concepts and recommendations for the Federal Joint Committee.

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Cost-containment mechanisms include annual hospital budgets as well as prices for health care services, drugs, and other consumables set administratively by the central and state governments. Significant shortages in the public sector, however, have led patients to use private services, for which prices are unregulated and set far beyond the procured purchase price.

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Among high-income countries, Israel is one of the most successful at containing costs. Strategies include:

  • Instituting tight control of resources and expenditures. About half of national health expenditures are channeled through the Ministry of Finance. There are rigorous controls on key supply factors, such as hospital beds and expensive medical equipment, as well as physician and nurse positions in hospitals. In addition, the government sets maximum reimbursement rates and global revenue caps for hospitals.
  • Using various managed care approaches. The NHI health plans essentially work as managed care organizations, providing care within budgets that are largely determined prospectively by capitation. The plans employ a variety of mechanisms for controlling utilization and costs, such as purchasing pharmaceuticals in bulk and incentivizing the use of generics. Health plans also maintain a well-developed system of prevention and community-based services to reduce reliance on high-cost hospital care.
  • Explicitly prioritizing public funding for new technologies included in the NHI benefit package.
  • Deploying risk-sharing agreements for certain high-cost drugs. The pharmaceutical companies fund patients’ drugs after a predetermined supply has been depleted.
  • Implementing demand-side levers, including cost-sharing for specialist visits and coinsurance for pharmaceuticals, with higher rates for patented medications.
  • Aligning organizational and financial incentives between clinicians and the hospitals or health plans for which they work. For example, health plans have various internal processes for discouraging the delivery of care that provides poor value.

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Containing health care costs is a core concern of the central government, as Italy’s public debt is among the highest of the industrialized nations. Fiscal capacity varies greatly across regions. To meet cost-containment objectives, the central government can impose recovery plans on regions with health care expenditure deficits. These plans identify the tools and measures needed to achieve economic balance, such as revising hospital and diagnostic fees, reducing the number of beds, increasing copayments for pharmaceuticals, and reducing human resources through limited turnover.

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The 30 percent coinsurance in the SHIS does not appear to work well for containing costs. By contrast, price regulation for all services and prescribed drugs seems a critical cost-containment mechanism. The fee schedule is revised every other year by the national government, following formal and informal stakeholder negotiations. The revision involves three levels of decision-making:

  • the overall rate of increase or decrease in prices of all benefits covered by SHIH
  • revised prices for drugs and devices
  • prices of individual services.

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The main approach to controlling costs relies on market forces while regulating competition and improving the efficiency of care. In addition, provider payment reforms, including a shift from a budget-oriented reimbursement system to a performance- and outcome-driven approach, have been implemented. In the wake of the 2008 global financial crisis, additional activities have been undertaken to contain costs. Since 2012, health care spending has declined from 10.9 percent to 10.5 percent of GDP.

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New Zealand

The financial sustainability of publicly funded health care is a top government priority. To support this goal, government has implemented a range of measures, including four-year planning within district health boards to align expenditures with priorities and improve regional collaboration to drive efficiencies. All new proposals must demonstrate their fit with the four-year plan and the strategic direction of the health sector.

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The central government sets an overall health budget annually, and the municipalities and RHAs are responsible for maintaining their budgets. About 10 percent of the RHAs’ operating expenses go to buy health services from private providers. Private providers are contracted through tender agreements, for which price of service is one of several criteria.

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The hallmark of Singapore’s health care market has been strong government control and oversight. Demand- and supply-side controls encourage patients and providers to be judicious and cost-conscious in their use of health care services. In addition, the public sector’s role as the dominant health care provider sets the benchmark for the private sector, as well as the entire health system’s ethos of deemphasizing profit maximization. Private providers need to ensure that they do not price themselves out of a market where public-sector care is available, and therefore offer reasonable prices and quality.

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Regions and municipalities are required by law to set and balance annual budgets for their activities and to consider the cost-effectiveness of different treatment alternatives when organizing care. For prescription drugs, the central government and the regions form agreements, lasting a period of years, on the subsidy levels paid by the government to the councils.

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Switzerland’s health care costs are the second-highest in the world. The Swiss Federal Department of Home Affairs postulated in 2013 that the costs of providing mandatory benefits in the health system could be reduced by up to 20 percent. The Health2020 strategy lists possible cost-reducing measures, including:

  • further flat-rate remuneration mechanisms, such as capitation
  • revision of existing fee schedules to eliminate existing incentives for expensive and unnecessary services
  • the concentration of highly specialized medicine for greater efficiency
  • improvements in quality of treatment through use of more-experienced provider teams.

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The global NHI budget system is, by far, Taiwan’s most powerful cost-containment tool. After global budgets were introduced, national health expenditures grew by 3.87 percent a year on average between 2004 and 2015. Prior to that period, annual growth rates ranged from 6 percent to 9 percent.

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United States

Annual per capita health expenditures in the United States are the highest in the world (USD $11,172, on average, in 2018), with health care costs growing between 4.2 percent and 5.8 percent annually over the past five years.

Private insurers have introduced several demand-side levers to control costs, including tiered provider pricing and increased patient cost-sharing (for example, through the recent proliferation of high-deductible health plans). Other levers include price negotiations, selective provider contracting, risk-sharing payments, and utilization controls.

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