Elsevier

Health Policy

Volume 47, Issue 3, 2 May 1999, Pages 207-223
Health Policy

Public spending on health care: how are different criteria related?

https://doi.org/10.1016/S0168-8510(99)00024-XGet rights and content

Abstract

At least nine different criteria are relevant for decisions about public spending for health care. These include economic efficiency criteria (public goods, externalities, catastrophic cost, and cost-effectiveness), ethical reasons (poverty, horizontal and vertical equity, and the rule of rescue), and political considerations (especially demands by the populace). Sometimes one criterion should be examined before another one is considered; that is, they are hierarchically related. Sometimes two criteria will not be compatible but will conflict, forcing difficult choices—particularly between efficiency and equity. Properly thought-out choices of which health care interventions to finance with public funds therefore depend not only on looking at all these criteria, but also on treating them in the appropriate sequence and taking account of their possible inconsistencies. Public funds should finance public and semi-public goods that are cost-effective and for which demand is inadequate; cost-effective interventions that preferentially benefit the poor; and catastrophically costly care, when contributory insurance will not work or there are good reasons to finance insurance publicly.

Introduction

It is standard practice in courses on health economics, to explain each of the several justifications for the state to intervene in this sector. These include the different kinds of market failure that can occur in health care interventions and insurance, together with the equity reasons for intervention, such as to assure some minimum coverage of health insurance or access to health care for the poor or for some other group. What is almost always missing from such a course, is any explanation of how these different criteria are related to one another. In particular, the participant seldom gets any help understanding two kinds of potentially very important relations between one criterion and another. One question is whether they are compatible with each other or are in conflict, requiring one to choose between them in deciding how to use public resources. The other question is whether they are connected sequentially or hierarchically, so that one should examine one criterion before asking if another one is applicable.

This note asks and answers these two questions—about compatibility and about hierarchy—for nine frequently used criteria. Working out the connections among these criteria leads to a partial decision tree concerning three possible outcomes: a particular service should be financed publicly (or subsidized in part); it should be left to private markets to provide; or it should not be produced at all. Helping to reach such decisions is one of the main goals of public finance theory [1], and making the decisions is among the principal tasks of government.

Section snippets

Which criteria matter?

Fig. 1 displays the nine criteria, and classifies four of them as being primarily economic (about efficiency), four primarily about equity, and one as neither of these. To keep the analysis as simple as possible, each criterion is considered chiefly as a reason for spending public money on health care, or choosing how to spend it, rather than as a justification for other, non-financial kinds of government intervention.

The economic efficiency criteria start with cost-effectiveness, or the

Cost-effectiveness and public goods

This is the simplest relation among those considered: cost-effectiveness is the criterion for choosing which of a number of public goods are worth financing. Simply being a public good is not reason enough for the government to finance a health care intervention, because the result in improved health might not be worth the cost—the same resources could be better used for another health service or for some non-health activity [2]. But if something is a public good, there is no private market for

Externalities, or partly public goods

If an intervention does not qualify as a pure public good, because private purchasers are willing to pay for it, there may still be significant effects on non-purchasers: that is, externalities. Measures to treat communicable disease can fall into this category, because while a person with the disease may be willing to pay to be cured, treating him or her also reduces the risk of transmission and thereby protects others. (Chemotherapy for tuberculosis is an often-cited example.) The service is

What if the cost is catastrophic?

Two health care interventions may look equally justified because they have the same ratio of cost to effectiveness—the same cost per life saved, per year of healthy life gained, or some other measure of results—but one may be an order of magnitude more expensive than the other ([5] Figure 3.2). People paying out of pocket will afford the cheaper service, but the catastrophically costly service will be available only if the financial risk is shared. The fact that some services cost too much for

Poverty and cost-effectiveness

Since poverty is defined independently of either the costs or the outcomes of health care, there would seem to be no obvious or necessary relation between these two criteria. The situation is not quite so simple, however, to the degree that the poor are not only sicker and die younger than the non-poor, but are afflicted by different diseases. Both the level and the composition of the burden of disease differ somewhat between poor and non-poor populations, with the poor suffering more from

Horizontal equity in health care

This ethical principle implies giving equal treatment to people with equal health problems, that is, not discriminating among them as to how much or what kind of care to provide. If two people are really equal in the nature and severity of a disease or injury, and they get the identical treatment, then the results should also be the same. So horizontal equity implies equal effectiveness. In practice, outcomes often differ among patients who appear alike both in their problem and in their

Vertical equity in health care

Horizontal equity presents a straightforward possibility of conflict with the criterion of cost-effectiveness, in which only one variable is involved—the cost of the intervention. The case of vertical equity and its relation to efficiency turns out to be much more complicated, because three variables are relevant. These are the cost and the effectiveness of different treatments, and the severity of different health problems. Since vertical equity concerns preferential treatment for people with

Is the rule of rescue efficient?

This last ethical criterion is much simpler to deal with than those just discussed, because it does not involve comparisons among individuals, except of the simplest form—between those who will die without an intervention and those for whom the appropriate health care will not make such an all-or-nothing difference. This choice is the basis of triage, the custom of dividing patients into those whose lives can be saved by intervening, those who will die even if given treatment, and those in

And what do the people want?

The rule of rescue is the last of the seven relatively technical, explicit criteria to be contrasted to cost-effectiveness. It remains to consider briefly how all this relates to what the public may think or want, and in particular to whether cost-effectiveness is likely to be compatible with those views and demands. This question cannot be answered conclusively, because what the public thinks varies from place to place and time to time, and is often either amorphous or polarized. There may be

Putting everything together: a guide to decision-making

As promised in the Introduction, the object of this note is not only to examine the compatibility of different criteria, but to relate them sequentially or hierarchically when that is appropriate. If the different criteria can be taken up in some logical sequence, some of the problems of conflict among them are reduced, and it becomes easier to decide how to choose whether to finance a health care service out of public funds, leave it to the private market, do some of each, or conclude that the

Acknowledgements

This note grew out of an impromptu lecture during Module 5 (‘Designing a Cost-Effective Benefit Package’) of the Flagship Course in Health Economics and Sustainable Financing organized by the Economic Development Institute (now the World Bank Institute) of the World Bank in October–November 1997. I am grateful to Ricardo Bitrán, who developed Module 5, for the opportunity to participate in that part of the course and for his reactions to the ideas presented here; to my colleagues Paul Shaw,

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