Market solutions for improving the health of the poor

Andre Cezar Medici

Introduction

Markets in health are by definition imperfect. Their main imperfections[1] are associated with the sector’s intrinsic characteristics and the information asymmetries between producers and consumers of health services. In view of the frail state that consumers find themselves in when they are in need of health services, and given the power wielded by suppliers (doctors and hospitals) by virtue of the knowledge that they have, consumers frequently have no option but to accept the treatment, medication and advice offered by service providers.

For these reasons, historically, the health sector has been one in which the structure of supply prevails over demand. The information asymmetry between suppliers and consumers is even more marked for socially deprived groups who lack the education and resources with which to make informed decisions. They lack information both on how to look after their health properly and on how to gain access to health services. They also lack a network of contacts that could provide them a second opinion on diagnoses or alternatives to the solutions prescribed by suppliers, even if they have the means to pay for these services.

Although from earliest times the health market has been predominantly private, growing public intervention in regulating, financing and providing health services over the course of the twentieth century has increasingly changed its nature. From an economic point of view, these interventions are justified in areas such as the provision of public and mixed (public-private) goods in health (sanitary and epidemiological oversight, vaccination, etc.), in covering the financial risk of cost-effective services for the poor, in covering catastrophic health risks for all, in regulating the quality and efficiency of services, and in matters relating to public and collective health.[2]

In welfare economies like those of Europe, and even in other developed countries like the United States, Canada and Japan, public financing of health services, and often their actual provision, cover a large segment of the health market. In some instances, this has led to extremely high costs (particularly in proportion to the results achieved in terms of health service coverage and quality) because of inefficiency in the provision of services and high transaction costs, gaps in coverage (especially among the poor), and defective evaluation and oversight systems, among other failures. Throughout the world, governments have attempted to minimize these shortcomings by relying on private health insurance, and outsourcing public services to private suppliers and nongovernment organizations.

The Private Dimension of Health Spending in Latin America
In Latin America and the Caribbean, private sector spending accounts, on average, for more than half of spending on health.

Private health spending can be evaluated according to its two components: spending on private health insurance and direct out-of-pocket spending. The former represents a more rational method of organizing health spending, since it allows for economies of scale in the purchase of collective health services and, in addition, provides means to protect families against unplanned financial health risks, averting catastrophic costs that could lead to vulnerability and indigence.

Out-of-pocket spending, in turn, is an inefficient method of private spending on health, since families generally lack the information required to manage their health spending properly and to use it in such a way as to meet the criteria of rationalization that the use of private insurance facilitates. In the structure of health insurance, out-of-pocket spending may be used to complement the purchase of drugs and direct payment for consultations, hospitalization, and medical examinations. Generally, co-payments may help provide a more rational structure in the use of out-of-pocket spending when linked to properly designed health insurance schemes, but these are frequently exposed to unplanned spending in cases of catastrophic illnesses. In these cases, the design of such financial protection mechanisms as stop-loss insurance may minimize the negative effects.

In LAC, the country with the highest share of insurance in health spending (Uruguay) has a high rate of private insurance participation. The second country in terms of the importance of insurance in health spending (Costa Rica) has a high rate of public sector participation in the provision of health insurance.

There is no private insurance in countries where the health system is public and universal (Trinidad and Tobago, Jamaica and Brazil). In countries with higher average incomes, such as Chile, Argentina and Colombia (with the exception of Mexico), private insurance plays a strong part in financing health insurance.

In Mexico and in countries with lower average incomes, like those of Central America and some of the Andean countries, the share of private insurance in total health spending is minimal. These are countries in which the share of out-of-pocket spending is high. Consequently, they represent fertile ground for expanding methods of insurance (public or private), following the example of Mexico’s experience with the Popular Health Insurance program (Seguro Popular de Salud).

Direct out-of-pocket spending by families constitutes an important part of private health spending. Such spending constitutes a high proportion of family budgets, ranging from 11 percent (in Cuba) to 57 percent (in Belize). In the largest countries (Brazil and Mexico) where more than half of the region’s population is concentrated, out-of-pocket spending represents 37 percent and 51 percent of health spending, respectively. The poor countries of Central America as well as the countries of the Caribbean also have high percentages of direct spending in the composition of total health spending.

Health spending involves a heavy budgetary burden in the population quintiles with the lowest levels of income. Studies based on household expenditure surveys in Brazil show that lower-income families spend a higher share of total family outlays on health than do higher-income families. This is the exact opposite of what occurs in educational spending, where rich people spend proportionately more.

Moreover, unable to benefit from health insurance mechanisms, families end up spending these resources on health goods and services inefficiently. For example, the share of spending on health among poor families is higher for items like drugs, which can account for as much as 70 percent of family budgets in the lowest income deciles in countries like Brazil. Similarly, spending on direct costs for consultations, hospitalization, medical examinations and other procedures reach very high levels among the poor. This justifies providing these services in ways that bring efficiency, economies of scale and lower costs.

Inequalities in Financing and Coverage

Over recent years, there has been much discussion about equality in health. Some argue that direct public spending is more effective in promoting equality, since everyone, even the poorest, in theory, gets medical attention on the basis of their needs. Others argue that equality can be achieved through public regulation and the use of proper economic incentives, and that some market solutions (such as the use of the proper economies of scale, competitive pricing, well-targeted subsidies and the use of suppliers with a reputation for quality) are indispensable in promoting equality.

It is difficult to establish which one of these views is the correct one. Doing so involves bringing in other variables, such as the efficiency of procedures, control and the degree to which there is transparency or social participation to monitor results. In some instances, these variables are impossible to measure, or are taken into account only after the fact in the evaluation of experiences.

Partial information for Latin America and the Caribbean in the 1990s shows that while public spending reached all income quintiles, some governments at particular points during the decade spent health resources in a more equitable manner than others.

For example, in 1991, the distribution of public health spending in Argentina favored the first and third quintiles, public health spending in Guatemala in 1999 and in Ecuador in 1995 favored the wealthiest quintiles. In most cases, this was not intentional, but resulted from policy focus and the implementation of health policies, in the search for greater transparency, oversight and the proper means of evaluation.

For instance, it is possible that the population in the richest quintile in Guatemala consumes more health services for treating chronic ailments because of longer life expectancy, whereas people in lower income quintiles consume less expensive primary medical services. However, it may be the case that in poor countries with fiscal constraints, public health spending directed toward the wealthier sectors end up reducing expenditures on the poor. Once again, asymmetries of information and the distribution of social capital (this time between the poor and the rich) mean that, where there are no proper policies for targeting expenditure, the relatively more well-off have the knowledge, information and lobbying capacity to garner relatively larger shares of health spending.

As we pursue this theme of health coverage, a different sort of picture begins to emerge. The highest levels of service coverage in the first quintile were achieved by two countries that undertook reforms: Brazil and Colombia. In Brazil, reform was driven by a sharp expansion in the public supply of services. Colombia undertook pluralist reforms, with a mix of public finance and private service provision.

Similarly, as table 2 shows, countries like Guatemala demonstrate a striking inequality in coverage as well as in the use of public spending. In addition, the proportion of out-of-pocket spending to overall health spending is high.

It is true that inequality in the distribution of private spending tends to be higher than in that of public spending, since out-of-pocket spending is the most inequitable form of health spending. Still, the question that needs to be asked is: how to encourage the proper use of the market to promote solutions that increase coverage and equity in health, in a context where the large ratio of out-of-pocket spending is both a challenge and a window of opportunity for rationalizing the use of scarce family resources in poor countries?

Market Solutions for Improving the Health of the Poor

The coverage and quality of health services for low-income populations need to be reviewed by analyzing the interrelation between financial mechanisms and service provision. Using this sort of approach, we can study both conventional mechanisms and nonconventional market ones that integrate public and private provision.

Public financing of public provision is the conventional way of organizing the delivery of services to the poor. The public sector finances public health services at different levels of government. Traditional budgetary arrangements are used to fund health establishments, pay salaries and evaluate health services through processes rather than results. A number of studies have shown that such solutions have not had a beneficial effect on health services.

Public funding of private provision enables innovative market solutions that increase the capacity of health services to respond to the needs of the poorest. In Latin America and the Caribbean, when contracts are transparent and results are monitored, outsourcing (such as the purchase of private supply services on the basis of health objectives or basic health packages) has proven to be efficient. According to research by the World Bank, this has been the case of such experiences as IGUALAS in the Dominican Republic. Other instances judged to have had positive effects include the schemes for basic health insurance for mothers and infants (SUMI) in Bolivia, whereby the public sector finances or subsidizes coverage of essential services to poor population groups. The Popular Health Insurance scheme in Mexico also stands out as an innovative experience in subsidized coverage of basic health insurance to groups with few means. It enables the supply and quality of services to be rationalized and expanded on the basis of the scant resources of groups that cannot afford to pay.

Private finance for the provision of public services is not very common, but can occur in instances where the expansion of private service comes up against capacity constraints and where spare capacity can be bought in the public sector. There have been examples of this in Latin America with the expansion of service provision by the ISAPRES in Chile during the 1990s. Similarly in Brazil, companies that organized health plans, such as AMIL and Golden Cross, bought specialized health services from public university hospitals. These experiences are not geared toward improving the health of the poor, but rather to consolidating markets for services aimed at middle-class users. Yet, following this modality, we can also find firms that take advantage of tax concessions, such as income tax rebates, to finance the activities of under-funded hospitals and public services for the poorest in such areas as maternity care. What is crucial here is to guarantee that new private resources are not used to fund more of the same, but to improve and innovate management and to build greater efficiency and quality in service provision.

Private funding for the private provision of services is where we find the widest range of innovative experiences in health for the benefit of the poorest. An important experience in this area is that of PROSALUD in Bolivia. This is an NGO funded through resources donated by international agencies, like USAID, and by the sale of high-quality services, such as maternity care (including for the public sector). Income from subsidies is combined with selling services to higher-income groups in order to provide services to the poorest. Such experiences have been common among philanthropic groups, in the social work of religious organizations, and in many other ways in which tax incentives are used by medium and large private companies.

Although there may be limitations in developing market solutions in the four instances listed above, it would seem that public funding of private provision and private funding of private provision provide the most potential for development. However there are two essential preconditions for their success. Firstly, they must ensure flexibility in the management of human, financial and material resources, so that these are freed from the bureaucratic constraints that have impeded progress in organizing health services in many Latin American and Caribbean countries. Secondly, use should be made of available dispersed financial resources in poor communities so as to ensure greater efficiency in the ways these are used to generate concrete results, minimizing financial risk and maximizing coverage and quality of service provisions to these communities.

The countries of Latin America and the Caribbean have been prodigal in producing innovative experiences in the private management of health services. Many of them, starting with the generation of risk pooling, such as the recent experience in popular health insurance in Mexico, have contributed to increasing levels of social health protection vis-à-vis the catastrophic costs that can decimate family budgets. However, very few of these experiences have been properly evaluated so that lessons can be learned and replicated elsewhere, both within the region and beyond.

International organizations need to promote efforts to assess such experiences and view them as market-based solutions, which—if properly evaluated, systematized and regulated—will be able to contribute to resolving problems of equity and health coverage in the region.




NOTES

[1] Arrow, K.J. 1963. Uncertainty and the Welfare Economics of Medical Care. American Economic Review 53(5): 941-73, December.
[2] Musgrove, P. 1996. Public and private roles in health: theory and financing patterns. World Bank Discussion Paper No. 339.