Health system effects of economy-wide inflation: how resilient are European health systems?

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The European Observatory on Health Systems and Policies is a partnership that supports and promotes evidence-based health policy-making through comprehensive and rigorous analysis of health systems in the European Region. It brings together a wide range of policy-makers, academics and practitioners to analyse trends in health reform, drawing on experience from across Europe to illuminate policy issues. The Observatory’s products are available on its website (www.healthobservatory.eu). Health system effects of economy-wide inflation POLICY BRIEF 65 How resilient are European health systems? Patrick Jeurissen Rono Hasan Marjon den Besten Jonathan Cylus World Health Organization Regional Office for Europe UN City, Marmorvej 51, DK-2100 Copenhagen Ø, Denmark Tel.: +45 45 33 70 00 Fax: +45 45 33 70 01 E-mail: eurocontact@who.int Website: www.euro.who.int HEALTH SYSTEMS AND POLICY ANALYSIS Print ISSN 1997-8065 Online ISSN 1997-8073 PolicyBrief_PB65_COVER.qxp_Cover_policy_brief 01/06/2024 15:30 Page 1 This policy brief is one of a new series to meet the needs of policy-makers and health system managers. The aim is to develop key messages to support evidence- informed policy-making and the editors will continue to strengthen the series by working with authors to improve the consideration given to policy options and implementation. What is a Policy Brief? A policy brief is a short publication specifically designed to provide policy makers with evidence on a policy ques- tion or priority. 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All reasonable precautions have been taken by the European Observatory on Health Systems and Policies to verify the information contained in this publication. However, the published material is being distribu- ted without warranty of any kind, either expressed or implied. The responsibility for the interpretation and use of the material lies with the reader. In no event shall the WHO, the European Observatory on Health Systems and Policies or any of its Partners be liable for damages arising from its use. The named authors alone are responsible for the views expressed in this publication. The views and opinions expressed in Observatory publications do not necessarily represent the official policy of the Participating Organizations. The Policy Brief Series 1. How can European health systems support investment in and the implementation of population health strategies? David McDaid, Michael Drummond, Marc Suhrcke 2. How can the impact of health technology assessments be enhanced? 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The socioeconomic drivers and impacts of Antimicrobial Resistance: Implications for policy and research Michael Anderson, Gunnar Ljungqvist, Robin van Kessel, Victoria Saint, Elias Mossialos The European Observatory has an independent programme of policy briefs and summaries which are available here: https://eurohealthobservatory.who.int/publications/policy-briefs Keywords: Health systems financing Inflation Provider costs Budget Health, well-being and the economy PolicyBrief_PB65_COVER.qxp_Cover_policy_brief 15/10/2024 17:29 Page 2 Editors Jonathan Cylus Rebecca Forman Managing Editors Jonathan North Lucie Jackson The authors and editors are grateful to the reviewers who commented on this publication and contributed their expertise. Contents Acknowledgements 2 List of figures, table and boxes 3 List of abbreviations 4 Key messages 5 Executive Summary 7 Policy Brief 9 1. Introduction 9 2. Theory: towards a framework for how 11 economy-wide inflation affects health systems 3. Evidence: how do European health systems 14 respond to (high) economy-wide inflation? 4. So what? Policy implications of high 20 economy-wide inflation for health systems References 22 Annex 24 Authors Patrick Jeurissen, Radboud University Medical School, Netherlands Rono Hasan, Consultant Marjon den Besten, Radboud University Medical School, Netherlands Jonathan Cylus, European Observatory on Health Systems and Policies, United Kingdom and WHO Barcelona Office for Health Systems Financing, Spain page Health system effects of economy-wide inflation: How resilient are European health systems? Print ISSN 1997-8065 Online ISSN 1997-8073 2Policy brief Acknowledgements We would like to thank the following survey respondents and focus group participants: Florian Bachner (Austria), Sophie Gerkens (Belgium), Antoniya Dimova (Bulgaria), Mamas Theodorou (Cyprus), Jana Votápková (Czechia), Tanel Ross (Estonia), Andres Vork (Estonia), Zeynep Or (France), Charalampos Economou (Greece), Krisztina Davidovics (Hungary), Péter Gaál (Hungary), Sigurbjörg Sigurgeirsdóttir (Iceland), Stephen Thomas (Ireland), Antonio Giulio de Belvis (Italy), Michela Meregaglia (Italy), Liubovė Murauskienė (Lithuania), Vanessa Di Bartolomeo (Luxembourg), Alexia Bezzina (Malta), Kenneth Grech (Malta), Madelon Kroneman (Netherlands), Sander van der Meer (Netherlands), Juliane Mekki (Norway), Silvia Gabriela Scintee (Romania), Adam Marek (Slovakia), Martin Smatana (Slovakia), Enrique Bernal-Delgado (Spain), Nils Janlov (Sweden), Icaro Rebolledo (United Kingdom) and Ruth Thorlby (United Kingdom). We also wish to thank Stephen Thomas, Ruth Waitzberg, Rodney Ortiz Rivera and Rebecca Forman for comments on earlier drafts. 3Health system effects of economy-wide inflation: How resilient are European health systems? List of figures, table and boxes Figures Figure 1: The recent period has seen the highest rates of 9 inflation in the past 15 years or more in most countries according to annual growth in HICP monthly data from 1997 to 2024 Figure 2: Framework to consider how inflation affects 12 the health system Figure 3: Dutch hospitals vary substantially in their 17 susceptibility to inflation depending on their cost structure, 2021–2023 Figure 4: A 10% increase in the cost of meeting 18 basic needs increases households’ risk of catastrophic and impoverishing health spending to varying degrees Table Table 1: How are the prices paid for health care updated? 15 Boxes Box 1: The degree of inflationary pressure varies 17 Box 2: Inflation can increase the risk of financial 18 hardship associated with out-of-pocket health care spending for low-income households 4Policy brief List of abbreviations AMC academic medical centre CPI consumer price index EU European Union GDP gross domestic product GH general hospital HICP Harmonised Index of Consumer Prices HSPM Health Systems Policy Monitor HTA health technology assessment ITC independent treatment centre NHS National Health Service OECD Organisation for Economic Co-operation and Development PPI producer price index UK United Kingdom USA United States of America VAT value added tax 5Health system effects of economy-wide inflation: How resilient are European health systems? Key messages The recent cost-of-living crisis raises questions about the extent to which economy-wide inflation causes challenges for health systems. • High inflation impacts purchasers, providers and patients differently but how far they are affected depends on the health system context. Any impact can be mediated by the system’s characteristics, its regulatory mechanisms, market power of key stakeholders, cost structures, and payment mechanisms. • Purchasers (who have the power to set prices) often don’t adjust health care budgets to cover inflation fully, passing on the burden to health care providers. However, there is a natural limit to how far providers can absorb extra cost by increasing productivity. • Providers are more exposed to market prices than purchasers and may try to shift any financial burden to patients, undermining care and creating access barriers. Providers may do this by: o increasing waiting times; o reducing quality of care; o charging patients higher prices or for extra services (e.g. balance billing); o taking on more private patients. • Some adjustment for inflation over time is necessary because if provider payments do not keep up with prices (and providers face financial losses), patient care suffers. Many countries don’t automatically adjust health system financing for inflation and although health systems may absorb pressures in the short term, the cumulative effects can have adverse consequences for patients. • Using a general consumer price index to adjust provider payments is fairly common but it often is ‘not good enough’. Countries that explicitly account for inflation may link increases in health financing to generalized inflation measures. These don’t capture changes in health care-specific input prices (wages, health care goods) adequately. • Health care workers have been particularly concerned about wage growth lagging behind inflation and during the most recent cost-of-living crisis many countries saw access to care disrupted by protests. • Inflation has delayed capital investments in the health sector. Steeply rising material and building prices, plus higher borrowing costs have made investment much more expensive and slowed capital projects. • Health system strategies to respond to growth in economy-wide prices are key. They need to: o be context specific; o offer some reasonable compensation for providers to offset inflation-related costs; o address workforce costs (and the labour intensive nature of health care); o ringfence investments in capital; o provide financial protection for vulnerable populations and tackle out-of-pocket spending on health care; o contain growth in parallel private care sectors and secure access. 6Policy brief 7Health system effects of economy-wide inflation: How resilient are European health systems? Executive summary Why is economy-wide inflation relevant for health systems? In recent years, many countries have seen growth in economy-wide prices. This has led to questions around how much inflation impacts health systems and what measures countries can implement to build resilience and avoid any negative consequences of inflation on their health systems. In the period following COVID-19, many factors, including the war in Ukraine, the surge in energy and other commodity prices, increased pressures on global supply chains, prolonged low interest rates, and labour shortages, contributed to growth in economy-wide prices and ultimately, a cost-of-living crisis. Economy-wide inflation can affect health systems through a number of pathways. Health care delivery relies on a range of inputs, including fixed expenses such as energy, rent and – given the labour-intense nature of the sector – personnel costs, all of which are linked with the overall economy and affected by inflation. However, health systems differ from some other sectors of the economy as they tend to be highly regulated and may have fixed or capped budgets or otherwise constrain provider payment rates, which can lead to a disconnect between economy-wide prices and health system prices. This may leave providers who face market prices feeling that there are no other options but to seek ways to shift the burden to patients, for example through increased waiting times or compromised quality of care, or by increasing their earnings through balance billing and other forms of direct payments for private health care. Any increases in out-of-pocket spending for households alongside steeply rising bills for other essentials can lead to greater incidence of financial hardship, unmet needs and increased inequalities in health and well-being. This policy brief looks at the impacts of high economy-wide price growth on health systems and considers policy responses. The brief explores the limited literature on the topic and provides a framework for analysis. It draws on the results of a survey of country experts as well as two focus groups to understand the extent of insulation from (or exposure to) the effects of economy-wide price inflation in European health systems. The brief ends by discussing policy implications of responses to inflation and considers areas for future action. How does economy-wide inflation affect health systems? A conceptual framework This policy brief proposes a conceptual framework to guide thinking on the impacts of inflation on health systems’ key actors: purchasers, providers and patients. It argues that: • Purchasers may have varying degrees of influence over the prices they pay for goods and services. This can range from a single purchaser with the power to set prices to multiple purchasers who pay providers based on market prices. If purchasers have little influence over prices, economy-wide inflation is likely to strongly influence the prices of health care goods and services. Therefore, high economy-wide price growth will typically mean that less health care can be purchased on a fixed budget; otherwise, if budgets are not fixed, health spending growth will correlate with economy-wide price growth if there is no increase in the volume of care provided, potentially threatening financial sustainability. If purchasers do have the power to set prices, they may keep the prices they pay artificially low (i.e. below that which a free market would indicate), shifting inflationary pressures to providers. • Providers may have influence on prices depending on their size and market power. If providers are large organizations, or form sector-wide alliances, they may hold bargaining power and be able to negotiate with purchasers. They may also have bargaining power with suppliers from whom they purchase. Both traits could protect providers’ bottom lines during periods of high economy-wide inflation. If providers do not have influence over the prices they are paid for care, or for their own inputs, they may alter the volume and/or quality of care they provide to counter the inflationary pressures they face, or otherwise seek ways in which to shift the costs associated with economy-wide inflation to patients. • Patients may face the burden of economy-wide inflation through longer waiting times, higher user charges, balanced billing, fewer services and/or substandard care if providers are not compensated for higher costs. In response, patients may: forego health services – leading to unmet need; increase their use of private health care – leading to inequalities in access to care; or have to spend more out of pocket for health care – leading to financial hardship. How do European health systems respond to high economy-wide inflation? A survey of health system and policy experts from 21 European countries as well as two focus groups were conducted on the effects of inflation on health systems and protective mechanisms implemented or recently adopted. While country experience differs, several key trends emerged: • Inflation may increase revenues such as taxes and social insurance contributions, depending on health financing arrangements, but these additional resources are not necessarily reflected in health care budget increases. In many cases, budgets and prices are determined through negotiations between relevant stakeholders rather than by the size of the overall public-sector budget. Moreover, inflation can be accompanied by economic slowdown, reducing public-sector revenues. • Many health systems do not have an automatic mechanism in place to adjust budgets or payments to account for inflation. Some countries that do adjust provider payments tend to use consumer price indexes (CPIs), but these may not appropriately capture changes in health care-specific input prices, including wages and health care goods. • In many countries in Europe, there has been pressure on governments to adjust wages to better reflect the cost of living. This has included strikes, workforce shortages due 8Policy brief to recruitment and retention difficulties, and greater worker unionization. • Providers are often not well protected against economy- wide inflation and, as a result, have seen a decline in their real purchasing power. Nevertheless, since purchasers may not take into account providers’ size or capacity to cope with inflation, some providers face greater financial pressures due to input price growth than others. • For many countries, opportunities for capital investments have been constrained by inflation due to higher borrowing and building costs. However, some European Union (EU) countries have benefited from the post- COVID-19 European Recovery and Resilience Fund to support capital investments. • With rising inflation, some countries have made (limited) efforts to protect household finances by reducing out-of- pocket payments or other mechanisms (e.g. through capping co-payments, providing subsidies). Policy implications and future directions This policy brief emphasizes that inflationary pressures pose concerns for health systems, but particularly for providers and patients. Where providers are not adequately compensated for inflation, there is a risk of greater privately financed health care provision, greater inequalities in access, and reductions in solidarity and support for the welfare state. Thus, health systems should design long-term strategies for addressing the challenges of economy-wide inflation. At the same time, automatically adjusting health budgets and provider payments to fully account for economy-wide inflation may cause unsustainable expenditure growth and ultimately be untenable. There is a need to strike a balance. While the exact approach will necessarily be context specific, in general health systems should consider: 1) provider compensation mechanisms that take inflation into account to some extent; 2) safeguarding capital investments and earmarking funding to develop workers’ skills; 3) protecting chronic patients and vulnerable households from out-of- pocket payments; and 4) preventing the rise of a private parallel sector to avoid greater inequalities in access and health outcomes. 9Health system effects of economy-wide inflation: How resilient are European health systems? 1. Introduction How resilient are European health systems against economy-wide inflation? The immediate period following the COVID-19 pandemic saw sharp upward trends in economy-wide prices globally. The war in Ukraine and the related surge in energy and other commodity prices, pressures on global logistic chains, a prolonged loose monetary policy (i.e. low interest rates), and labour shortages, among other factors, all contributed to increases in economy-wide prices and ultimately a cost- of-living crisis. Inflation began to rapidly climb past the 2% target rate preferred by most central banks in the second quarter of 2021 at the same time that many nations embarked upon their recovery from COVID-19. Annualized inflation eventually reached double-digit levels in many economies in 2022. For example, in the EU, the annualized growth in the Harmonised Index of Consumer Prices (HICP) reached a peak of 11.5% in October 2022 (Eurostat, 2024). While energy price growth eventually subsided, core inflation remained high for an extended period of time in many countries (Figure 1). POLICY BRIEF -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Austria Belgium Cyprus Czechia Denmark Estonia EU* Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovakia Slovenia Spain Sweden 19 97 -0 1 19 97 -0 7 19 98 -0 1 19 98 -0 7 19 99 -0 1 19 99 -0 7 20 00 -0 1 20 00 -0 7 20 01 -0 1 20 01 -0 7 20 02 -0 1 20 02 -0 7 20 03 -0 1 20 03 -0 7 20 04 -0 1 20 04 -0 7 20 05 -0 1 20 05 -0 7 20 06 -0 1 20 06 -0 7 20 07 -0 1 20 07 -0 7 20 08 -0 1 20 08 -0 7 20 09 -0 1 20 09 -0 7 20 10 -0 1 20 10 -0 7 20 11 -0 1 20 11 -0 7 20 12 -0 1 20 12 -0 7 20 13 -0 1 20 13 -0 7 20 14 -0 1 20 14 -0 7 20 15 -0 1 20 15 -0 7 20 16 -0 1 20 16 -0 7 20 17 -0 1 20 17 -0 7 20 18 -0 1 20 18 -0 7 20 19 -0 1 20 19 -0 7 20 20 -0 1 20 20 -0 7 20 21 -0 1 20 21 -0 7 20 22 -0 1 20 22 -0 7 20 23 -0 1 20 23 -0 7 20 24 -0 1 Source: Eurostat, 2024 . Note: EU* is defined as EU15 from 1995, EU25 from 2004, EU27 from 2007, EU28 from 2013, EU27 from 2020. Figure 1: The recent period has seen the highest rates of inflation in the past 15 years or more in most countries according to annual growth in HICP monthly data from 1997 to 2024 10 Policy brief Why study how economy-wide inflation affects health systems? High economy-wide inflation could be expected to have effects on the health system through a variety of pathways. Naturally, the first pathway to consider is the effect of high economy-wide price growth on changes in the prices paid for health care goods and services, also referred to as medical price inflation. Health prices can be affected by a range of factors, which themselves are influenced by economy-wide prices, including: 1) the prices of health care inputs; 2) productivity in the health sector; and 3) provider profit margins (Smith, Newhouse & Cuckler, 2022). Economy-wide prices can have a major impact on the price of health care inputs, particularly fixed expenses like energy or rent. For example, providers with high energy consumption, such as large, older, energy-inefficient hospitals, may face financial pressures given higher energy prices. Arguably, if health system actors face higher input prices, just as with any other sector exposed to market forces, the prices paid for health care may follow in tandem. Health care is also labour intensive, and in many health systems workers demand higher incomes when economy- wide prices increase, although any effects of inflation on wages usually occur on a lag. Paying health workers higher wages despite the low potential for productivity gains in the health sector can also push health care prices upwards, consistent with the concept of Baumol’s cost disease (Baumol, 2012). At the same time, health systems are distinct from many other sectors of the economy due to their proclivity to be highly regulated, which may prevent prices in the health sector from tracking consistently with those in the rest of the economy. Many health care systems have regulators that set or cap provider payment rates and budgets. This discontinuity between economy-wide prices and health system prices could cause a number of reverberations throughout the health system. While health care providers like hospitals or primary care facilities can have full exposure to market prices if they have to pay for wages, medical supplies, energy and the like, they may not necessarily be able to renegotiate their regulated payment rates to better account for inflationary pressures, especially in the short term. Since many providers, particularly those who are public and not-for-profit, work with razor-thin budget margins and low solvency rates, rising economy-wide prices may easily bring them into financial trouble. Ultimately, providers may see no other option than to seek ways to shift costs to patients (Rigby et al., 2023). If provider payments are not linked to the volume of care delivered, providers may reduce their costs by increasing waiting times or compromising on quality of care. The burden of paying for health care may also be shifted to patients, for example through balance billing or by encouraging patients to otherwise pay for private care. Patients, especially those from lower socioeconomic backgrounds, may struggle to pay for higher out-of-pocket expenses alongside steeply rising bills for other essentials, leading to financial hardship due to out-of-pocket payments and unmet needs (WHO Regional Office for Europe, 2023). In addition to the financial toll, the emotional stress related to higher economy-wide prices may be unevenly distributed within populations and exacerbate inequalities in health (Wu et al., 2023). The above hypothetical pathways raise important questions about the nature of how health systems are affected by inflation, as well as the mechanisms and regulatory instruments health systems can use to insulate themselves from economy-wide inflation while still maintaining health system performance. While studies of the performance of the health system in the context of COVID-19 and other pandemics or financial crises are common (Sagan et al., 2021), no comprehensive study of the resilience of health systems to economy-wide inflation exist to our knowledge. Outline of this policy brief In this policy brief, we consider how health systems are affected by high economy-wide price growth. Section 2 reviews the sparse literature. We discuss the difficulties of measuring health care-specific inflation and present a framework that builds on the hypothetical pathways described above to more comprehensively illustrate how economy-wide inflation affects health systems; this framework underpins the remaining analysis. Section 3 summarizes the main results from a survey of country experts on how health care systems are insulated from (or exposed to) the effects of economy-wide price inflation. We show that there is substantial variation in effects among purchasers, different types of provider, between cost categories (e.g. labour vs capital), among patients, and across health systems overall. We also include a case study from the Netherlands to illustrate how different providers are affected by inflation to varying degrees due to differences in the costs that providers face. Section 4 discusses this brief’s strengths, limitations and policy implications. Section 5 concludes and presents avenues for further work on this vital topic. 11 Health system effects of economy-wide inflation: How resilient are European health systems? 2. Theory: towards a framework for how economy-wide inflation affects health systems The effects of economy-wide inflation on health systems and health care spending have been under-studied (Charlesworth, 2014; Duffy, 2022). This stands in stark contrast to other factors that affect health systems and, particularly, which influence health care spending, including drivers of expenditures such as health care-specific price growth (Papanicolas, Cylus & Lorenzoni, 2024), population aging, new technologies and societal expectations, all of which have received considerable attention in the academic literature (Bodenheimer, 2005). Some grey literature points to a possible transformative impact of economy-wide inflation on the health care sector. This literature argues that the health care sector urgently needs to become more productive (Fleron, Krishna & Singhal, 2022) and points to the fact that sticky-price theories (i.e. that prices of goods and services do not change in spite of rising costs) persist in the health care sector, because regulated prices and (multi) annual contract prices generally lag behind changes in market conditions (Knapp, 2023). Moreover, purchasers of health care may actively choose not to adjust provider budgets or reimbursement rates to account for inflation (Reynolds & Vangeli, 2024). This suggests that, in the presence of high inflation, health care providers have no choice but to innovate in order to remain financially viable. While inflation may affect the prices of health care goods and services, health sector-specific inflation is very hard to measure A reasonable avenue of inquiry would suggest exploring the effects of economy-wide prices on the prices of health care goods and services. However, studying this relationship presents empirical challenges due to difficulties in measuring health care prices. First, much of health spending occurs in non-market based settings where prices are not directly observed. Second, any observed price changes might conflate price growth with improvements in quality, a phenomenon commonly seen in other sectors, such as electronics. Third, given the enormous heterogeneity in the outputs produced by health systems, reliable disaggregation of health spending into price and volume components is difficult. Volume indicators do not typically capture entire patient pathways or outcomes, and themselves consist of heterogeneous sets of underlying activities; as a result, measures of health sector prices that are derived through estimates of volume are imprecise. One consequence of the difficulties in measuring health prices is that governments and statistical agencies often use more general price indexes to study changes in real (i.e. price-adjusted) health care spending and consumption patterns, although sometimes with slight adjustments. These general price indexes include: 1) Gross domestic product (GDP) price deflators that include all sectors of the economy. 2) CPIs that measure changes in prices for a defined bundle of consumer goods. 3) Producer price indexes (PPIs), which measure changes in the prices faced by producers, but which are only available in a subset of countries, including the United States of America (USA). The key limitation of using these price indexes is that they are unlikely to accurately capture changes in health care- specific prices, particularly where health prices do not trend closely to price growth in other sectors (Dunn et al., 2018). Taken together, this means that it is difficult to demonstrate the relationship between economy-wide prices and health prices because, oftentimes, measures of health care price growth are lacking. How economy-wide inflation affects health systems: a conceptual framework Figure 2 presents a framework to better understand the impact of economy-wide inflation on the health care sector. The framework is organized vertically according to the key actors in the health system: purchasers, providers and patients. Below we explain the intuition behind the framework. First, starting from the top of the diagram in Figure 2, we consider how inflation can affect public-sector revenues. For example, tax brackets may be adjusted to account for inflation, or value added tax (VAT) revenues can increase when prices of consumer goods increase, if people continue to purchase the same quantities of goods. The real value of public debt also may decrease due to inflation because inflation erodes the purchasing power of money over time. When a government issues debt, it borrows a specific amount of money with the promise to repay it in the future, typically with interest. If high inflation occurs during the period when the debt is outstanding, the value of money decreases, meaning that the same amount of money which is needed to be paid back will buy fewer goods and services than it did when the debt was issued; therefore, the real value of that debt will decrease unless the interest rate on the debt goes up, leading to an easing of debt pressures due to inflation (Aizenman & Marion, 2011). Alternatively, if inflation and rising interest rates reduce economic activity, it could put downwards pressure on public-sector revenues, which also makes it more difficult to sustain public debt. Second, inflation can affect the prices paid by purchasers. If purchasers have no influence over the prices they pay for services, then inflation will likely mean that the prices paid will increase and less health care can be purchased for a given budget. When governments or purchasers do have power to set most prices, they may be able to keep prices artificially low, shifting part of the inflationary pressures to health care providers. Monopsony purchasers (i.e. where there is a single purchaser in a market) will be better able to do so than systems with multiple purchasers that lack such powers. Third, providers may also differ in their degree of exposure to market prices. Large health care provider organizations, such as hospitals or health care conglomerates, may hold high bargaining powers, both with the purchasers who pay them as well as with the suppliers from whom they purchase. If prices are negotiated bilaterally or through collective bargaining, providers may be able to obtain prices that grow in line with prices in the rest of the economy. In other words: market power matters to counter inflationary pressures, at least in the short term (Dafny, Ho & Lee, 2019). 12 Policy brief Figure 2: Framework to consider how inflation affects the health system Economy-wide price growth Purchaser Effects on public-sector revenues and health budgets Shift costs to compensate for inflationary pressures Shift costs to compensate for inflationary pressures Full exposure to market prices Provider Patient Full exposure to market prices Full exposure to market prices No exposure to market prices Possible implications on the continuum • Price control • Provider discontent • Potential volume rationing • Shifts to private sector • Possibly unsustainable if price divergence between health sector and overall economy continue in the long-term • Higher catastrophic spending and unmet • Greater health spending growth • Greater volume incentivised by higher prices unless budgets are fixed • Higher catastrophic spending and unmet need if price growth is passed onto patients Partial exposure to market prices No exposure to market prices (e.g. monopsony) 13 Health system effects of economy-wide inflation: How resilient are European health systems? Where providers cannot meaningfully influence the prices they are paid for care, or the prices they pay for their own inputs, they may respond by altering the volume, mix of services, or quality of care they provide. If they are paid based on activity, providers may try to increase their productivity (i.e. provide a greater volume of services to offset the effects of paying higher prices for inputs) to increase their income, which could potentially adversely affect quality of care. If their payment is not based on activity (e.g. salary-based), they may reduce the volume or quality of care to reduce their costs. Fourth, if providers cannot withstand inflationary pressures (i.e. if they are not adequately compensated for economy- wide price growth), part of the burden of inflation may be shifted to patients, either implicitly or explicitly. For example, patients may be confronted with longer waiting times, fewer amenities, higher user charges or balanced billing (where providers are able to do so), and even substandard care. In response, patients may either reduce their use of care, leading to unmet need, or increase their use of privately financed health care, paid either through voluntary health insurance or out-of-pocket payments. This may increase inequalities in access to care because some people will not be able to afford to pay privately, or it can increase the risk of financial hardship due to out-of-pocket payments for those that opt to use health services (WHO Regional Office for Europe, 2023). For each of the four levels of Figure 2, health systems can be placed along the various horizontal continuums. We can illustrate this for example with the situation in the United Kingdom (UK). In the UK, the National Health Service (NHS) has strong monopsony powers, and is able to set prices for many goods and services for which it pays. Thus, the NHS is not highly exposed to market prices, particularly for goods; it would be placed towards the left-side of the framework at this first stage. The majority of health care goods used by providers are purchased in bulk and distributed to providers by NHS Supply Chain; in that sense, NHS providers are not exposed to market prices for many of the goods they use. However, health care workers themselves – regardless of whether they are specialized medical professionals working in hospitals, general practitioners or administrative staff – are exposed to cost-of-living increases, which means that economy-wide inflation creates pressure for the NHS to raise wages. If wages are not raised, part of the burden of maintaining relatively low prices will be passed on to patients who face long waiting times and substandard levels of amenities and quality, as providers struggle to retain and recruit staff (Rigby et al., 2023); if wages are raised but budgets are not increased commensurately, then there may also be consequences for patient care as a greater proportion of provider resources are allocated away from other cost centres to pay for higher labour costs. In response to rationing of care in the NHS, wealthier Britons have increasingly taken up private insurance and are accessing small-scale private facilities (Bagri & Scobie, 2023), which have a high degree of exposure to market prices but may be able to raise the prices they charge in response. 14 Policy brief 3. Evidence: how do European health systems respond to (high) economy-wide inflation? We conducted a survey among the Health Systems Policy Monitor network (HSPM) in the Spring of 2023. The HSPM is an international group of high-profile academics and institutions working in health systems and policy analysis. This survey consisted of questions on: 1) the effects of economy-wide inflation; and 2) protective mechanisms that were in place or were newly installed (see Annex). We also held two focus groups with experts to discuss our main findings. Twenty-one countries completed the survey, although the analysis below also draws on information from other sources as well.1 Inflation-driven revenue growth is not usually automatically passed on to health systems When prices increase, the taxes generated from those goods or services can increase as well if aggregate demand remains the same. In this case, health systems that rely substantially on earmarked revenue sources may receive higher revenues. For example, the Estonian Health Insurance Fund relies heavily on earmarked social contributions, which implies an implicit link – theoretically, at least – between the health care budget and (past) inflation once wages and income catch up with economy-wide price growth. There is limited use of earmarked consumption taxes (e.g. VAT) for health, with the exception of health taxes for alcohol and tobacco in some countries (e.g. France), but these tend to make up a small share of health system revenues. However, unless earmarked for the health system, additional tax revenues are not usually automatically passed on to the health-sector budget because budgets and prices are typically determined based on negotiations by relevant public agencies and stakeholders, not by the size of the overall public-sector budget. This can be true even in countries with substantial earmarking because much of the budget still comes from general, non-earmarked tax revenues. Health care budgets are often influenced by spending targets set by governments. In almost all European countries, fiscal rules set spending targets and enforcement mechanisms, including monitoring and early warning. The European Semester also sets out targets for member state debt as well as a ceiling on annual deficits (Schakel, Wu & Jeurissen, 2018). For example, in the Netherlands, health care spending needs to comply with multi-year spending targets. In Spain, despite 14.4% growth in tax revenues in 2022 due to economic recovery and inflation’s effects on indirect tax revenues, health care spending did not follow suit. Norway stipulates that government expenditure growth (including health care) shall, over time, equal the increase in government revenues from the mainland economy and the expected future real return from the Government Pension Fund. Luxembourg is among the very few exceptions with health care prices (and in turn, budgets) automatically adjusted to reflect inflation once economy-wide price growth exceeds 2.5%. Countries do not use health care-specific (price) indexes to automatically update prices paid by purchasers for goods and services, and many do not use automatic price updates at all We did not find any examples of countries that regularly use health sector-specific price indexes to automatically update prices paid for care. The closest example that we found of a country using health sector-specific price indexes to inform price updates was in Lithuania, where user charges for services on the negative list are automatically recalculated in part based on growth in a health services price index. Table 1 contains some of the relevant price adjustments that are in place to adjust health care provider payments for inflation. First, a general conclusion is that inflationary adjustments are not the norm in a number of countries (Bulgaria, Cyprus, Czechia, France, Greece, Hungary, Ireland, Lithuania, Romania, Sweden). As most of these countries are single- payer systems, it could be that such systems are under less pressure to update prices based on inflation because they do not face competition with other purchasers to buy services. Second, CPIs are most often used as an update mechanism, which may not entirely reflect changes in the prices faced by health care providers. Third, prices for pharmaceuticals and expensive technologies are an exception – specific mechanisms, such as health technology assessments (HTA), reference pricing and certificate-of-need regulations, largely unaffected by inflationary trends, determine these prices. In Belgium, inflation is accounted for to determine provider payments, although with a legal time lag. Here, the importance of details can be nicely illustrated. The country adjusts the CPI to better reflect health prices by excluding price increases for alcohol, tobacco and motor fuels. The new ‘health index’ is subsequently smoothed (average value of the health CPI of the past four months multiplied by a factor of 0.98), making it slightly lower than the broader CPI. If this smoothed health index reaches a predetermined threshold, wage rates are updated accordingly. In Luxembourg, health providers and worker wages are adjusted once the CPI inflation exceeds 2.5% (with that percentage). Few countries have specific adjustments for wage increases. In Austria, wages negotiations are conducted between health insurance funds and medical associations or trade unions; the latter typically use CPI +/– economy-wide productivity trends (the so-called Benya formula) as their starting point for negotiations. In the Netherlands, when paying providers, non-wage payments are based on a general PPI, while wage expenses are increased by a technical formula that is based on average negotiated wage agreements in the private sector. Unlike Austria, no productivity gains are included in that formula, but most prices are negotiable between insurance companies and providers. 1 Austria, Belgium, Bulgaria, Cyprus, Czechia, Estonia, France, Greece, Hungary, Iceland, Ireland, Italy, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Romania, Slovakia, Spain, Sweden. 15 Health system effects of economy-wide inflation: How resilient are European health systems? Many countries do not (fully) account for inflation with automatic price and/or wage adjustments. Consequently, providers need to find alternative ways to make up for increases in their input costs. The fact that many countries have no regular automatic mechanisms of indexing health budgets for inflation does not imply that prices are never updated in line with inflation. This is simply not sustainable in the longer term. For example, the National Health Insurance in Romania announced (in December 2022) that all rates would be adjusted for inflation. In Czechia, providers received about half of the recent wage increase demanded by labour unions. In Italy, the 2023 health budget increased by around 3%, while inflation was predicted to reach almost 12%, leading to a real decrease of resources. French hospital rates (2023) were set between an increase of 5.4% (private clinics) and 7.1% (public hospitals), which also lags both salary increases and actual inflation. Prices for medical goods are either determined based on private markets, centrally set, or set through regulated negotiations. Regulations seek to link prices to the value of the product and willingness to pay; such regulated prices are less prone to both economy-wide and more health care- specific inflationary pressures. Procurement processes (including prices) for new products are typically informed by HTA, which is of increasing importance in many European health systems, although more so for medicines than for medical devices. The UK is seen as a frontunner in this respect (Naci & Dixon, 2019). In France, where HTA is also well developed for the access of new technologies, inflation is reported to have had limited effects. Italy, Norway and the Netherlands also have well-developed HTA systems. Because inflation is usually not automatically accounted for in price and wage updates, health workers have protested in an effort to obtain earnings more in line with higher costs of living, with varying degrees of success Health care is a labour-intensive sector and much of total spending goes toward worker wages (Erixon & van der Marel, 2011). Substantial variability exists between the different sectors within the health system, with long-term care among the most labour-intensive. Where payments are based on activity levels, there may be a desire to increase output to compensate for low prices, however the potential to increase output substantially is limited. At the same time, like other workers, health care staff face the burdens posed by growing economy-wide inflation in their private lives (Boccarini, Rocks & Shembavnekar, 2022). When combined with increasing staffing shortages seen in Europe (owing to a complex set of causes, including COVID-19, burnout, high turnover, growing workloads, and dissatisfaction with working conditions), it seems only logical that there is substantial pressure to increase health worker wages (WHO Regional Office for Europe, 2022). Some countries have seen strikes in efforts to raise health care workforce income. The duration of these strikes has varied. Slovenia experienced its longest doctors’ strike in the country’s history in early 2024. Belgium and the Netherlands witnessed short strikes in early 2023, but in the UK strikes went on for many days. Severe strikes also hit Slovakian health care in mid- 2022. In Bulgaria, there were protests by emergency care workers and Romania saw unrest among health care workers. Table 1: How are the prices paid for health care updated? CPI WAGE SPECIFIC HTA, REFERENCE PRICING, ETC. NO AUTOMATIC UPDATES Input prices (e.g. medical goods) Belgium, Finland, Italy, Luxembourg, Norway, Slovakia n/a Pharmaceuticals; certain new technologies – all, with exception of some smaller countries (that follow peers) Bulgaria, Cyprus, Czechia, Estonia, France, Greece, Ireland, Lithuania, Romania, Spain, Sweden Wages Belgium, Finland, Italy, Luxembourg, Norway, Slovakia, Sweden (former health workers, pensioners) Austria (+/– economy- wide productivity as a basis for negotiations), Estonia, Netherlands n/a Capital (property, equipment, ICT) n/a n/a Certain capital-intensive technologies Central allocation and tendering; European resilience funds 16 Policy brief Industrial unrest among nurses was also reported from Malta, while France had already experienced strikes by nurses in public hospitals at the beginning of 2020. While wage increases were significant (between 15% and 25% for many), inflation has also been high, eroding some of the potential gains in purchasing power. In Italy, some planned strikes were eventually cancelled. Few countries, among them Norway and Sweden, did not report any unrest in the health labour force. Pressures for higher health wages also relate to worker shortages and workforce unionization. For example, Austria reports that the lack of workers has been a fundamental driver of upward wage pressures. Bonus payments from the pandemic were granted in several countries (Austria, Czechia, Germany, Ireland and the Netherlands). In Lithuania, the average pay for each health worker grew by about 6% and even more for the lowest-paid staff (2022), but still did not totally cover inflationary effects. In the Netherlands, wage agreements exceeded 10% for 2023 (Vries de, 2022). Slovakia has also substantially raised health worker wages in an effort to address workforce shortages in recent years and, in the case of hospital employees, to achieve relative parity with Czechia. In England, junior doctors demanded a 35% increase (Wooller, 2023), while in Germany employees including nursing staff in municipal hospitals will benefit from a pay increase of up to 17% in 2023 and 2024 In some countries, health workers increasingly opt to be self-employed if it means they can receive higher remunerations and choose their working schedules. France responded to the increasing numbers of well-paid interim physicians (in April 2023) by setting a maximum fee they may be paid. In the Netherlands, this is also seen as a significant problem in the health labour market and it is something of an issue in Norway too. Because providers are not well protected against inflation, they experience reductions in their real purchasing power Many health care purchasers are effectively price setters, at least in the short term, due to their substantial market power. As such, price updates often lag behind changes in input prices. For example, Bulgaria experienced average annual inflation of 15.3% in 2022 versus 3.2% price growth in the health care sector. Cyprus has lump-sum agreements with almost all health care providers and this implies that, without index adjustments, inflationary pressures are shifted to providers. In Greece, extensive regulations curb price increases for many health care services, forcing providers to control input costs or to try and increase their efficiency. As a rule of thumb, the Irish government aims for health budgets that are able to (at least) deliver the same amount of health services as the previous year, which suggests some room to adjust for inflation. In November 2022, Irish nursing homes were able to apply for funds to cover for the rising energy bills up to a threshold. In Italy, some resources have also been made available to compensate health care providers for higher energy costs. Different types of provider vary in terms of how sensitive they are to economy-wide inflation. Among other things, this depends on their underlying cost structure and their exposure to energy costs, as well as their size, which may help to absorb inflationary pressures. Box 1 illustrates some of these differences across providers through an empirical study among Dutch hospital providers. Since many purchasers do not differentiate between providers in terms of how they are compensated for inflation, it implies that some are under more inflationary cost pressures than others (den Besten, 2023). Capital investments have been constrained in many countries, although EU funds post-COVID-19 have provided opportunities Health systems also require capital investments, such as buildings and properties, new medical equipment, and an infrastructure for digital health. Annual spending on health and social care equipment in Organisation for Economic Co-operation and Development (OECD) countries has been around 0.25% of GDP. This includes capital spending on medical and non-medical equipment, IT hardware, machinery and transportation. Capital spending on infrastructure, such as hospitals and clinics, also averages around 0.25% of GDP among OECD countries (Morgan & James, 2022). Most countries centralize decisions about planning and purchasing expensive investments, and capital budgets are ringfenced before procurement and tendering, although sometimes individual providers have full investment autonomy, with the Netherlands an example of the latter situation. Several factors impact decisions about capital spending, including availability and borrowing costs. Central banks have now raised interest rates in an effort to contain inflation. This increases the cost of borrowing for new equipment and infrastructure projects. On top of that, shortages of building materials and steeply higher prices have made capital projects more expensive. Such factors reduce available resources for capital investments. After COVID-19, the European Recovery and Resilience Fund has provided substantial capital for additional investments in the health care sector in many EU countries. However, such outlays have mainly been in nominal terms, which do not account for changes in prices. Some countries have curbed their original planned capital investments, while others have managed to continue as planned. For example, in Czechia, some projects have been postponed or redeveloped due to high inflation; and Slovakia faces the same situation: the number of built and renovated beds has decreased from a planned 2400 (2022) to 1600 in 2023. In Greece, gaps between the financial scope of project grants and tender offers are significant and this sometimes leads to postponing capital projects. Malta has also reported putting new capital projects on hold, as did Hungary. On the other hand, in France, there have been promises by the government around capital investments in health care (an 18 billion euro 17 Health system effects of economy-wide inflation: How resilient are European health systems? Box 1: The degree of inflationary pressure varies across Dutch hospitals Depending on cost structures and contracts, inflation may impact hospitals differently. We use the Netherlands as a case study. A national spending target exists which is adjusted to account for price growth and average wage growth across the broader economy. Insurers and providers have substantial leeway to adapt to specific market pressures, including the freedom to negotiate on 70% of hospital payment rates and to make use of selective contracting strategies. Negotiations are mainly about (total) volume and prices under a maximum cap although there are agreements that insurers will pay reimbursements to account for national adjustments to wages. To understand how sensitive hospitals are to inflation, we predict hospital-specific inflation (2022 and 2023), based on each hospital’s specific cost structure – that is, differences in the costs each hospital faces. Figure 3 shows median predicted input cost inflation and the differences between 50% of all hospitals (difference between the first (Q1) and third quartile (Q3)) for academic medical centres (AMC), general hospitals (GH) or independent treatment centres (ITC). We see that ITCs generally face the highest inflation in their input costs and that, with rising inflation, variability between providers (i.e. between Q3 and Q1) also increases. This is also most significant for the ITCs (2.6% in 2023). Figure 3: Dutch hospitals vary substantially in their susceptibility to inflation depending on their cost structure, 2021–2023 Insurers are able to adjust reimbursements to account for hospital-specific inflation attributable to differences in cost structure. In theory, one could make the case that they should do so if providers cannot in a reasonable way adjust themselves for such differences. However, when hospital-specific inflation (2006–2021) was compared to observed hospital budget growth using four linear regression models with variables adjusting for demand, volume and bargaining power, the models could only explain a small portion of the variance in budget growth: correlations between observed budget growth and predicted inflation were insignificant, indicating that insurers do not fully reimburse for inflation. We conducted interviews with financial experts from hospitals and insurers, which suggested that, in most cases, insurers do not fully update reimbursements to account for inflation as they prefer to maintain some buffers for additional allocations toward hospitals that struggle financially. If insurers do reimburse a higher price index for a specific hospital provider, this is typically not due to its higher sensitivity towards inflation, but due to planned investments. Taken together, we find that Dutch insurers do not make use of hospital-specific inflation adjustments. 2021 2022 2023 2021 2022 2023 0 1 2 3 4 5 6 7 8 9 10 2021 2022 2023 2021 2022 2023 AMC 11 GH GH + AMC + ITC togetherITC 0 1 2 3 4 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 8 9 10 11 H os pi ta l- sp ec ifi c in pu t co st in fla ti on ( % ) H os pi ta l- sp ec ifi c in pu t co st in fla ti on ( % ) H os pi ta l- sp ec ifi c in pu t co st in fla ti on ( % ) H os pi ta l- sp ec ifi c in pu t co st in fla ti on ( % ) 18 Policy brief package) and additional resources from the European Recovery and Resilience Fund. Romania, also with help from EU funds, constructed six new hospitals and will redevelop 27 existing hospitals. Italy has plans to use billions of euros from the European Recovery and Resilience Fund to invest in hospital infrastructure as well as telemedicine. Both Austria and Ireland have reported that no capital projects have been put on hold and this is the case in Norway as well, although current pressures will reduce the possibilities for future capital projects. Health systems have made some (limited) efforts to protect household finances during the cost-of-living crisis by reducing the burden of out-of-pocket payments Research on the risk of financial hardship due to out-of- pocket payments argues that households must meet their basic needs before paying for health care (Cylus, Thomson & Evetovits, 2018). Growth in economy-wide prices will mean households have less disposable financial resources. This can increase people’s risk of financial hardship due to out-of- pocket payments or unmet needs, unless countries take Box 2: Inflation can increase the risk of financial hardship associated with out-of-pocket health care spending for low-income households Economy-wide inflation affects household spending patterns, potentially leading to changes in the mix and level of consumer spending for certain goods and services. If the prices of non-discretionary goods – things like food or housing – increase substantially relative to income, it suggests that households will have less money available to spend on other discretionary items, the prices of which may have increased as well. It also means that some households may face financial hardship to meet basic needs, or forgo some of their basic needs, like food, housing-related costs such as heating, or out-of-pocket spending for health care. To better understand how inflation can affect the risk of financial hardship due to out-of-pocket spending, we used harmonized household budget survey data from EU countries and simulated the effects of a 10% increase in the cost of meeting basic food and housing costs on the risk of catastrophic and impoverishing out-of-pocket spending. Our assumption is that households continue to spend on basic needs despite the 10% increase in prices, and that they continue to spend the same out of pocket on health care as they did previously but that, as a result, they have less money remaining for other goods and services. This is a strong assumption, as some households in reality will defer spending on out-of-pocket payments in lieu of other basic needs – leading to unmet needs for health care – while others may defer spending on basic needs like food and housing in lieu of paying for health care. We find that a 10% increase in the cost of meeting food and housing needs would increase the incidence of impoverishing expenditure by 1.3% on average, and the incidence of catastrophic spending by 1.8% on average. The largest increase in impoverishing spending would be expected in Bulgaria, Hungary and Romania, whereas the smallest increases would be in Ireland, Sweden and the Netherlands (Figure 4). Overall, these findings suggest that, even if countries make no changes to user charge policies during periods of high inflation, the inflation itself can have adverse effects on the risk of financial hardship. This suggests a need to reduce the burden of out-of-pocket payments during times of high inflation. Figure 4: A 10% increase in the cost of meeting basic needs increases households’ risk of catastrophic and impoverishing health spending to varying degrees 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% BG HU RO PL LT LV SK EE IT EL HR FI CY PT CZ BE LU DE ES FR DK IE SE NL Change in catastrophic spending incidence Change in impoverishing spending incidence 19 Health system effects of economy-wide inflation: How resilient are European health systems? steps to improve affordable access to publicly funded health care during periods of high inflation. Box 2 provides a recent simulation of such adverse affects for the European region and shows how if households continue to spend out of pocket on health care during a cost-of-living crisis, more households will experience catastrophic levels of out-of- pocket health care expenditure. In practice, countries mainly compensated households to limit their exposure to inflation, particularly rising energy bills and other non-health-related spending categories. Many countries put in place energy subsidies including Austria, Belgium, Bulgaria, Estonia and Greece. Lithuania, the Netherlands and Belgium temporarily reduced excise duties on gas and energy. Other countries, among them Bulgaria, reduced the VAT rate on food. Certain countries saw substantial increases in minimum wages and pensions, including Greece, Bulgaria and the Netherlands. ome countries also took measures that affected health- related out-of-pocket spending. For example, Belgium froze the maximum rates for hospital balance billing (May 2022– December 2023), preventing private medical specialists from increasing co-payments. Income-related co-payment caps have also been frozen. Israel froze the prices of pharmaceuticals for a year, which provided some financial protection to households due to the use of percentage- based co-insurance. Slovenia froze premiums for voluntary insurance under cost-of-living legislation after voluntary insurance companies planned substantial premium increases, while Ireland removed hospital user fees. In Ireland, out-of- pocket contributions for general practice have also been lowered for those under the median household income. In Italy, certain regions lowered out-of-pocket payments (Tuscany, Umbria and Piedmont). In Romania, in 2022, a law was introduced that set a minimum amount of the daily food allowance for patients. On the other hand, all Belgian physician fees that were under 30 euros per visit were increased to 30 euros (2023). In Iceland, private (but not public) providers can raise co-payments and negotiations for a new public–payer contract are underway. Bulgaria also witnessed increases in co-payments (some pharmaceuticals) and saw additional fees by some physicians. Balancing billing practices are common in some countries, among them Lithuania, and in those countries user fees may have seen increases. In the Netherlands, subsidies to help people pay for health insurance premiums have been temporarily raised by 700 million to 3 billion euros and almost 60% of the Dutch people are entitled to these subsidies. Overall relatively few countries took measures to reduce out-of- pocket payments for health care services to protect the purchasing power of households. 20 Policy brief 4. So what? Policy implications of high economy-wide inflation for health systems The main takeaway of this policy brief is that inflation matters for health systems and that high inflation matters a lot – primarily for providers and patients. Over the longer term, the negative consequences of high inflation may be significant: higher interest rates may hamper health care investments and a wage–price upward spiral may be triggered. It can be tempting for purchasers that hold powers over prices to not fully adjust health care budgets for higher inflation and thus pass much of the burden of inflation on to health care providers. However, there is a natural limit to how much providers can absorb this by increasing their efficiency. Thus, ultimately, patients may suffer through increases in waiting times, implicit rationing of services and amenities, and even deterioration in the quality of care. Well-to-do patients may opt for privately financed treatment in response. However, many people with health needs will lack the resources for such private alternatives and will therefore experience unmet need or financial hardship due to the costs of health care. While it may not be practical or sustainable for health systems to automatically adjust budgets and prices to account for economy-wide inflation in all instances, health systems should design a long-term strategy for addressing the adverse effects of persistent higher inflation; what that looks like may be country specific. The fact that we find large institutional differences in how European health systems are affected by high inflation suggests that there is room for mutual learning. Our evidence nevertheless points to some general guidance on how to deal with high inflation. Health systems should: 1) Provide some reasonable degree of compensation to providers to account for inflation, particularly high inflation, but this should not necessarily be done automatically. 2) Protect capital investments and investments in worker skills since both are important for future health system performance. 3) Protect high-use patients and poor households with limited financial means against out-of-pocket payments, as these may trigger a health care-induced cost-of-living crisis. 4) Constrain the possibilities of a private parallel sector since this may increase inequalities in access to care and also erode popular support for public investments in the regular health system. Currently, reliable measurements of health-specific inflation are absent. While better information on health prices is useful for understanding health care markets, we do not feel that this should be a top priority among policymakers for the purposes of price updates, as these are extremely difficult and technical exercises. More importantly, the use of health- specific price indexes to update provider payments may lead to spiralling costs, as well as reinforce potentially inefficient practices. Quite a number of countries do not regularly adjust for inflation; single payer systems seem to be somewhat overrepresented among those that do not adjust for inflation, possibly indicating that they do not do so due to monopsony powers and a lack of alternative purchasers for providers to sell their services to. Among those that do use general price indexes to update health care prices, most make use of consumer price indexes which may not appropriately reflect health care input prices. Furthermore, some providers are disproportionally hit by inflation and thus find it increasingly difficult to deliver high- quality patient services. Smaller providers as well as those that employ more labour-intensive services, use lots of energy, and need large investments, are among the more susceptible to periods of high inflation. Health systems frequently do not differentiate in a systematic way between provider types when compensating them for inflation, even if it is evident that providers are affected by inflation to varying extents due to cost structure differences. Despite pragmatic challenges, purchasers should consider any potential reimbursement adjustments according to provider- specific circumstances. Investments in both capital and people skills are important for the future resilience of health care systems. However, such investments are especially vulnerable when savings are needed or high inflation erodes real health spending levels, since adverse effects of a lack of such investments only become apparent after a number of years. We find that higher materials and building prices, plus rising borrowing costs, have led to delayed capital investments in many countries. It is wise to ringfence budgets for these investments to be prepared in the event of high inflationary periods. Some countries protect households through strategies such as freezing or reducing out-of-pocket payments for vulnerable groups. However, we found only a few examples of such policies during the recent cost-of-living crisis, with more general income compensation programmes, such as energy subsidies, increases in the minimum wage and reductions of VAT rates being more common. Reducing the burden of out-of-pocket spending, especially for low-income households and frequent users of health care may be a wise strategy to maintain affordable access to health care. Providers who are adversely affected by inflation may seek to take on more private patients or charge balance billing where this is allowed to increase their earnings. While this will likely reduce access for poorer households who cannot afford to pay, more well-off patients may opt to pay for private health care services out of pocket or rely on private insurance. In many countries this adds to further tailwinds for the private sector (Jeurissen, 2010; Jeurissen & Maarse, 2021; Jeurisson et al., 2020) at the cost of creating or exacerbating a two-tiered system and worsening inequalities in access and health outcomes. This is consistent with how, in some countries, labour shortages or capped public budgets also stimulate a shift to the private sector, within the constraints of any possible dual practice rules. It is likely that high inflation without sufficient compensation to providers also increases such shifts to private care. Ambulatory clinics in particular have seen steep growth in utilization rates recently and private equity firms have taken strongholds in health care (Scheffler et al, 2023). 21 Health system effects of economy-wide inflation: How resilient are European health systems? The recent inflationary period has subsided in much of Europe, but this does not mean that the cost-of-living crisis has gone away; although growth rates have slowed, price levels remain high in many countries and, until wages catch up, many purchasers, providers and patients will still feel the consequences of high prices for some time. Ultimately, no system over the longer term is immune to inflation, and since this may compromise access to and quality of care, some sort of update mechanisms need to be in place. Persistent heightened inflation levels make such policies more imminent. To our knowledge, this is the first study of the ramifications of high inflation on health care systems. The repercussions of inflation have proven significant amid the post-COVID-19 era of increased living costs, impacting key stakeholders – ranging from purchasers and providers to patients – each with differing degrees of vulnerability and protective mechanisms. 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The war in Ukraine and the resulting increase in energy prices, pressures on global logistic chains, a long period of loose monetary policy and labour shortages, among other factors, all contribute to increases in economy- wide prices, which may have spillover effects for the health system. For example, providers may face rising costs of their inputs without sufficient increases in their payments, or patients may have difficulties paying out-of-pocket payments. Alternatively, some health systems may be well- insulated from the consequences of rising prices in the rest of the economy. The European Observatory on Health Systems and Policies seeks to explore how inflation affects health care systems and how the latter respond to these challenges. We hope that you are willing to contribute to researching this impor- tant topic. This questionnaire consists of two sections: 1. How health systems manage inflationary pressures. 2. The fiscal rules and institutions that steer health budgets. We would also like to create a list of actors and experts that have a formal role or specific expertise in adjusting health prices for inflation for follow-up questions. For example, specific units within the government or (independent) re- search and scoring agencies. We also ask you if you would like to participate in a virtual focus group on this important topic. • Stakeholders/experts on inflation and compensat- ing measures in health care (name, contact details, organization/role) • I would like to participate in a focus group on health systems and inflation – YES/NO 1) How health systems manage inflationary pressures Inflation may put pressure on prices of health system inputs, including labour (e.g. wages), intermediate goods, and rent and capital investments. Please use the following questions as a basis for understanding to what extent economy-wide price growth is having an impact on health system prices in your country. • Impact of inflation on input prices in the health system Are effects of high inflation noticeable or evident within your health system (e.g. worker strikes, media coverage, other well-known evidence of financial pressures among purchasers or providers due to inflation, etc.)? Describe. Has wage (or compensation) growth for health workers been competitive relative to comparable industries in recent years? How does health worker wage (or compensation) growth compare with changes in the cost of living? Have there been changes to compensation, since the beginning of the current inflation crisis? Discuss. To what extent are labour shortages leading to additional pressure on labour costs and, if so, how? (e.g. do providers increasingly use short-term health workers at higher payment rates)? To what extent are purchasers (government, insurers) and providers able to control prices of goods (e.g. general expenses, energy, medical goods, drugs, new technologies, etc)? What mechanisms are in use to control prices (e.g. HTA, negotiations, etc.)? Are there any examples where purchasers have managed to change the prices paid for goods in response to high inflation? Governments make use of different (technical) indexes (e.g. consumer price indexes or other ones) to automatically update some prices paid for health care goods and services as well as salary increases. Does your country use indexes for this purpose? Which ones and how does it work? To what extent are capital investments being put under pressure as a result of high inflation and rent (e.g. are capital projects being stopped)? Overall, how well are purchasers and providers insulated against inflation shocks? Describe protective mechanisms in place (including potential ways additional cost pressures may be passed on to others) or particular vulnerabilities. • Impact of inflation on out-of-pocket payments Are user charges updated periodically to account for changes in prices or economic conditions? Discuss the basis for these changes if relevant. Have specific policies been implemented (or considered) during the current period of high inflation that either shift greater costs to households or, alternatively, that provide greater financial protection (e.g. removal of user fees)? Can and do providers pass on additional costs to patients (e.g. through balance billing)? 25 Health system effects of economy-wide inflation: How resilient are European health systems? 2. Fiscal rules and institutions that steer health budgets Fiscal rules are instruments that impose budgetary constraints at the macro level. The aim of this section is to provide an overview of the different relevant approaches towards fiscal rules and relevant institutions to understand how budgets are set overall. Please consider the following questions: To what extent do the current budget and future budgets take the inflationary crisis into account? Who are the key actors setting budgets and how is this done (focusing primarily on aspects relevant to price growth or expected price growth)? To what extent are budgets centralized or decentralized? Consider differences between health and social care budget setting to the extent it is relevant. Is health expenditure largely based on volume of care provided (i.e. entitlement based) or are budgets set prospectively and largely fixed? Consider whether this substantially varies by provider or service. Are there spending targets for health? If so, what is the time frame and what happens if targets are not met? Are there early warning systems to indicate overspending is likely? Does your country have established (external) agencies that provide (technical) input to the budgetary process for health care spending? Or is this nested within the Ministry of Finance or Ministry of Health? And what are their most important tasks (e.g. budgetary forecasts or predictions on the impact of election manifestos of political parties)? This policy brief is one of a new series to meet the needs of policy-makers and health system managers. The aim is to develop key messages to support evidence- informed policy-making and the editors will continue to strengthen the series by working with authors to improve the consideration given to policy options and implementation. What is a Policy Brief? A policy brief is a short publication specifically designed to provide policy makers with evidence on a policy ques- tion or priority. 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All reasonable precautions have been taken by the European Observatory on Health Systems and Policies to verify the information contained in this publication. However, the published material is being distribu- ted without warranty of any kind, either expressed or implied. The responsibility for the interpretation and use of the material lies with the reader. In no event shall the WHO, the European Observatory on Health Systems and Policies or any of its Partners be liable for damages arising from its use. The named authors alone are responsible for the views expressed in this publication. The views and opinions expressed in Observatory publications do not necessarily represent the official policy of the Participating Organizations. The Policy Brief Series 1. How can European health systems support investment in and the implementation of population health strategies? David McDaid, Michael Drummond, Marc Suhrcke 2. How can the impact of health technology assessments be enhanced? 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How can knowledge brokering be advanced in a country’s health system? John. N Lavis, Govin Permanand, Cristina Catallo, BRIDGE Study Team 18. How can countries address the efficiency and equity implications of health professional mobility in Europe? Adapting policies in the context of the WHO Code and EU freedom of movement Irene A. Glinos, Matthias Wismar, James Buchan,Ivo Rakovac 19. Investing in health literacy: What do we know about the co-benefits to the education sector of actions targeted at children and young people? David McDaid 20. How can structured cooperation between countries address health workforce challenges related to highly specialized health care? Improving access to services through voluntary cooperation in the EU Marieke Kroezen, James Buchan, Gilles Dussault, Irene Glinos, Matthias Wismar 21. How can voluntary cross-border collaboration in public procurement improve access to health technologies in Europe? Jaime Espín, Joan Rovira, Antoinette Calleja, Natasha Azzopardi-Muscat, Erica Richardson,Willy Palm, Dimitra Panteli 22. How to strengthen patient-centredness in caring for people with multimorbidity in Europe? Iris van der Heide, Sanne P Snoeijs, Wienke GW Boerma, François GW Schellevis, Mieke P Rijken. On behalf of the ICARE4EU consortium 23. How to improve care for people with multimorbidity in Europe? Mieke Rijken, Verena Struckmann, Iris van der Heide, Anneli Hujala, Francesco Barbabella, Ewout van Ginneken, François Schellevis. On behalf of the ICARE4EU consortium 24. How to strengthen financing mechanisms to promote care for people with multimorbidity in Europe? Verena Struckmann, Wilm Quentin, Reinhard Busse, Ewout van Ginneken. On behalf of the ICARE4EU consortium 25. How can eHealth improve care for people with multimorbidity in Europe? Francesco Barbabella, Maria Gabriella Melchiorre, Sabrina Quattrini, Roberta Papa, Giovanni Lamura. On behalf of the ICARE4EU consortium 26. How to support integration to promote care for people with multimorbidity in Europe? Anneli Hujala, Helena Taskinen, Sari Rissanen. On behalf of the ICARE4EU consortium 27. How to make sense of health system efficiency comparisons? Jonathan Cylus, Irene Papanicolas, Peter C Smith 28. What is the experience of decentralized hospital governance in Europe? Bernd Rechel, Antonio Duran, Richard Saltman 29. Ensuring access to medicines: How to stimulate innovation to meet patients’ needs? Dimitra Panteli, Suzanne Edwards 30. Ensuring access to medicines: How to redesign pricing, reimbursement and procurement? Sabine Vogler, Valérie Paris, Dimitra Panteli 31. Connecting food systems for co-benefits: How can food systems combine diet-related health with environmental and economic policy goals?Kelly Parsons, Corinna Hawkes 32. Averting the AMR crisis: What are the avenues for policy action for countries in Europe? Michael Anderson, Charles Clift, Kai Schulze, Anna Sagan, Saskia Nahrgang, Driss Ait Ouakrim, Elias Mossialos 33. It’s the governance, stupid! TAPIC: a governance framework to strengthen decision making and implementation Scott L. Greer, Nikolai Vasev, Holly Jarman, Matthias Wismar, Josep Figueras 34. How to enhance the integration of primary care and public health? Approaches, facilitating factors and policy options Bernd Rechel 35. Screening. When is it appropriate and how can we get it right? Anna Sagan, David McDaid, Selina Rajan, Jill Farrington, Martin McKee 36. Strengthening health systems resilience: key concepts and strategies Steve Thomas, Anna Sagan, James Larkin, Jonathan Cylus, Josep Figueras, Marina Karanikolos 37. Building on value-based health care Peter C Smith, Anna Sagan, Luigi Siciliani, Dimitra Panteli, Martin McKee, Agnès Soucat, Josep Figueras 38. Regulating the unknown: A guide to regulating genomics for health policy-makers Gemma A Williams, Sandra Liede, Nick Fahy, Kristiina Aittomaki, Markus Perola, Tuula Helander, Martin McKee, Anna Sagan 39. In the wake of the pandemic: Preparing for Long COVID Selina Rajan, Kamlesh Khunti, Nisreen Alwan, Claire Steves, Trish Greenhalgh, Nathalie MacDermott, Anna Sagan, Martin McKee 40. How can we transfer service and policy innovations between health systems? Ellen Nolte, Peter Groenewegen 41. What are the key priority areas where European health systems can learn from each other? Johan Hansen, Alexander Haarmann, Peter Groenewegen, Natasha Azzopardi Muscat, Gianpaolo Tomaselli, Mircha Poldrugovac 42. Use of digital health tools in Europe: Before, during and after COVID-19 Nick Fahy, Gemma A Williams, COVID-19 Health System Response Monitor Network 43. European support for improving health and care systems Nick Fahy, Nicole Mauer, Dimitra Panteli 44. What are patient navigators and how can they improve integration of care? Hannah Budde, Gemma A Williams, Giada Scarpetti, Marieke Kroezen, Claudia B Maier 45. What are the implications of policies increasing transparency of prices paid for pharmaceuticals? Erin Webb, Erica Richardson, Sabine Vogler, Dimitra Panteli 46. How can skill-mix innovations support the implementation of integrated care for people with chronic conditions and multimorbidity? Juliane Winkelmann, Giada Scarpetti, Gemma A Williams, Claudia B Maier 47. Addressing backlogs and managing waiting lists during and beyond the COVID-19 pandemic Ewout van Ginneken, Sarah Reed, Luigi Siciliani, Astrid Eriksen, Laura Schlepper, Florian Tille, Tomas Zapata 48. Does provider competition improve health care quality and efficiency? Luigi Siciliani, Martin Chalkley, Hugh Gravelle 49. Health system performance assessment: A primer for policy-makers Dheepa Rajan, Irene Papanicolas, Marina Karanikolos, Kira Koch, Katja Rohrer- Herold, Josep Figueras 50. Making Health for All Policies: Harnessing the co-benefits of health Scott L. Greer, Michelle Falkenbach, Luigi Siciliani, Martin McKee, Matthias Wismar, Praneetha Vissapragada, Marie C. Montás, Janamarie Perroud, Olivia Rockwell, Josep Figueras 51. How can the EU support sustainable innovation and access to effective antibiotics? Michael Anderson, Dimitra Panteli, Elias Mossialos 52. Global Health Workforce responses to address the COVID-19 pandemic Margaret Ziemann, Candice Chen, Rebecca Forman, Anna Sagan, Patricia Pittman 53. What can intersectoral governance do to strengthen the health and care workforce? Margaret Caffrey, Tara Tancred, Joanna Raven 54. What steps can improve and promote investment in the health and care workforce? Barbara McPake, Prarthna Dayal, Julia Zimmermann, Gemma A Williams 55. Strengthening primary care in Europe: How to increase the attractiveness of primary care for medical students and primary care physicians? Marieke Kroezen, Dheepa Rajan, Erica Richardson 56. Engaging the private sector in delivering health care and goods: governance lessons from the COVID-19 pandemic Anna Maresso, Ruth Waitzberg, Florian Tille, Yulia Litvinova, Gabriele Pastorino, Naomi Nathan, David Clarke 57. European support for improving global health systems and policies Scott L Greer, Nicole Mauer, Holly Jarman, Michelle Falkenbach, Ilona Kickbusch, Dimitra Panteli, Matthias Wismar 58.Transforming health service delivery: What can policy-makers do to drive change? Dimitra Panteli, Nicole Mauer, Juliane Winkelmann, Nick Fahy 59. Financing for health system transformation: spending more or spending better (or both)? Rebecca Forman, Govin Permanand, Jonathan Cylus 60. Assessing health system performance: Proof of concept for a HSPA dashboard of key indicators Josep Figueras, Marina Karanikolos, Frederico Guanais, Suszy Lessof, Guillaume Dedet, Natasha Azzopardi Muscat, Govin Permanand, Francesca Colombo 61. Health as a driver of political participation and preferences: Implications for policy- makers and political actors Nolan M Kavanagh, Anil Menon 62. How to implement integrated care?: A framework with 12 overall strategies to transform care delivery Verena Struckmann, Nathan Shuftan, Giada Scarpetti, Willemijn Looman, Roland Bal, Maureen Rutten-van Mölken, Ewout van Ginneken 63. Strengthening the EU response to prevention and control of Antimicrobial Resistance: Policy priorities for effective implementation Michael Anderson, Dimitra Panteli, Elias Mossialos 64. The socioeconomic drivers and impacts of Antimicrobial Resistance: Implications for policy and research Michael Anderson, Gunnar Ljungqvist, Robin van Kessel, Victoria Saint, Elias Mossialos The European Observatory has an independent programme of policy briefs and summaries which are available here: https://eurohealthobservatory.who.int/publications/policy-briefs Keywords: Health systems financing Inflation Provider costs Budget Health, well-being and the economy PolicyBrief_PB65_COVER.qxp_Cover_policy_brief 04/10/2024 11:40 Page 2 The European Observatory on Health Systems and Policies is a partnership that supports and promotes evidence-based health policy-making through comprehensive and rigorous analysis of health systems in the European Region. It brings together a wide range of policy-makers, academics and practitioners to analyse trends in health reform, drawing on experience from across Europe to illuminate policy issues. The Observatory’s products are available on its website (www.healthobservatory.eu). Health system effects of economy-wide inflation POLICY BRIEF 65 How resilient are European health systems? Patrick Jeurissen Rono Hasan Marjon den Besten Jonathan Cylus World Health Organization Regional Office for Europe UN City, Marmorvej 51, DK-2100 Copenhagen Ø, Denmark Tel.: +45 45 33 70 00 Fax: +45 45 33 70 01 E-mail: eurocontact@who.int Website: www.euro.who.int HEALTH SYSTEMS AND POLICY ANALYSIS Print ISSN 1997-8065 Online ISSN 1997-8073 PolicyBrief_PB65_COVER.qxp_Cover_policy_brief 01/06/2024 15:30 Page 1