1. Investing in Health

Health System Development and Finance

DCP1 focused principally on intervention priority. What mix of public health and clinical interventions would best respond to important disease conditions in highly resource constrained environments? Given the results of those assessments, where were the most important overall best buys? Where were resource commitments likely to be of low value? DCP2 returns to those questions but goes beyond them in assessing the steps required for strengthening of health services and systems in ways that will allow the appropriate mix of interventions to be delivered equitably and well. De Savigny and others (2004) describe a specific example from Tanzania that links system reform to intervention selection.

Part 3 of the volume addresses strengthening of health systems. For valuable discussions of the goals of health systems, see WHO's World Health Reports for 1999 and 2000 (WHO 1999, 32-33; 2000, 23-25) and Roberts and others (2003).

Part 3 first reviews options for public health services with chapters on surveillance and information (chapters 53 and 54), drug resistance (chapter 55), community health and nutrition programs (chapter 56), contraception (chapter 57), school-based health (chapter 58), adolescent health (chapter 59), occupational health (chapter 60), natural disaster relief (chapter 61), and disease elimination and eradication (chapter 62). A major point implied by the simple number of chapters devoted to public health is that health system strengthening and reform efforts need to commit substantial financial resources and political and managerial attention to public health.

A second cluster of chapters in part 3 deals with strengthening personal health services. The first of those chapters deals with an important facet of community-level health services, the integrated management of the sick child (chapter 63). Chapters 64 to 66 deal with levels of care: general primary care, the district hospital, and the referral hospital, respectively. Three chapters address services offered at multiple levels of the system: surgery (chapter 67), emergency medical services (chapter 68), and complementary and alternative medicine (chapter 69). The final cluster of four chapters addresses capacity strengthening and management reform: quality of care (chapter 70), the health workforce (chapter 71), supplies of drugs and vaccines (chapter 72), and management of clinical services (chapter 73).

This overview of the topics on health systems provides a sense of the breadth of the issues considered. Chapter 3 provides a concise and integrated statement of the main findings. The remainder of this section deals briefly with assessing the performance of health systems and with the key issue of finance. Before we turn to those topics, however, it is worth highlighting several particular points.

First, in low-income countries, limited health system capacity has sometimes led governments (and development assistance agencies) to focus their capacity on a few high-priority items—such as immunization or control of HIV/AIDS. The objective may be a reasonable one: a greater reduction in disease burden in the population and more financial protection for it are likely to be achieved by doing a few important things well than by doing many things poorly. Yet if this focused effort is undertaken by establishing vertical structures outside the health system, then important opportunities for increasing capacity may be missed. Chapter 3 stresses a critical point: a focused program should be designed so that it contributes to, rather than detracts from, long-term system strengthening. Second, quality of care is important; it can be measured, and it can be improved (box 1.3). Third, providing basic surgical services, particularly at the district hospital level appears to offer major but neglected opportunities for addressing significant sources of disease burden. An important substantive component of health sector reforms should often involve strengthening surgical capacity.

Health System Performance

Since about 1940, the publication of economic performance indicators in national income and product accounts has made it possible to hold political leaders accountable for economic management. Additionally, measures of economic performance—such as GDP growth rates and unemployment rates—have allowed economists to move toward evidence-based assessments of which policies facilitate good economic performance and which do not.

In many ways, unfortunately, the assessment of health system performance remains where economic performance measures were before the development of national income and product accounts in the United Kingdom in the late 1930s. Chapter 3 observes, for example, that "The body of knowledge [on health systems] represents a largely ad hoc and disjointed collection of facts, figures, and points of view. Making confident recommendations relevant to strengthening health system capacity is thus difficult." In its 2000 World Health Report, WHO made an ambitious effort to provide the performance measures for health systems that would enable progress toward more systematic knowledge of the policies to improve health systems (WHO 2000). Such knowledge could replace what is now frequently simply ideology and opinion. The 2000 World Health Report proved to be highly controversial, and its ranking of health system performance may in the end be judged as more of a first attempt than an initial approximation (Jamison and Sandbu 2001). WHO set an agenda that will certainly continue to be advanced.

Despite current inability to judge health system performance and the consequently ad hoc character of knowledge, much is in fact known that bears on health policy. Chapters 2 and 3 of this volume summarize very specific knowledge about intervention characteristics and system design that can inform policy. Although broad prescriptions may still elude us, particular knowledge is still important. Additionally, the performance of countries is better understood even though relating country performance to performance of its health systems may remain only judgmental for the moment. For example, Brazil and China had under-five mortality rates that were quite close in 2002: 37 per 1,000 for Brazil and 38 per 1,000 for China. In 1990, however, Brazil's rate was 60 per 1,000 and China's was 49 per 1,000: the rate of improvement in Brazil was far more rapid than in China. This measure is only one dimension of outcome, and many explanations are possible. Yet hard numbers on country perform do exist to initiate discussions of policy.

Financing Health Services

Chapters 12 and 13 in this volume discuss domestic and external financing of health systems. Different issues arise in low-income countries than in middle-income ones, and the discussion that follows is so divided. Table 1.2 provides context by conveying the level of health expenditures in 2001 in different income groupings of countries, the fraction of GDP spent on health, and the extent to which those expenditures are publicly financed. Almost 10 percent of the total product of the world pays for health services. In the low-income countries, about three-quarters of expenditures are from private, out-of-pocket payment. In the high-income European countries, only about one-quarter of expenditures is private. Middle-income countries spend about 5 times as much per capita on health services as do low-income ones and over 10 times as much through the public sector. Although available data sets (for example, from the World Bank or WHO) provide no direct evidence on trends over time in health expenditures (for more than very short periods), current levels of expenditure are likely to substantially exceed those of several decades ago, even as a percentage of growing incomes. The availability of physicians provides one indicator: in a large sample of countries the number of physicians per 100,000 population increased from 54 in the mid 1960s to 116 in the early 1990s, an annual rate of increase of 2.8 percent.

Before we turn to questions of financing health services (or insurance), briefly discussing related issues concerning the public sector's financial role is worthwhile. Those issues address what chapter 11 calls "healthy fiscal policy and fiscal policy for health." An example of unhealthy fiscal policy was the Polish government's subsidy of fatty animal products. Elimination of that subsidy was a gain for the treasury and resulted in improved diets and health. Minimally, a healthy fiscal policy identifies and corrects such inappropriate subsidies. Fiscal policy for health is exemplified by tobacco taxation, which chapter 46 deals with at length and chapter 11 deals with more briefly. Fiscal policy for health involves taxes whose principal purposes lie more in changing health-related behaviors than in generating revenue (although the latter can be important as well).

Financing Health in Middle-Income Countries

A major cause of poverty (and economic insecurity more generally) results from highly uneven and unpredictable needs to finance health expenditures. In consequence, most societies have moved toward prepaid care as income rises. The current high-income countries, with only two exceptions, have decided in favor of universal public financing (rather than private voluntary insurance) as the principal means of meeting the demand for prepaid care. Taiwan (China) and the Republic of Korea, several years ago, and Mexico and Thailand more recently, have also taken the path toward universal public, financing. The health sector is exceptional: no one in the mature capitalist democracies would contemplate substantial public financing for food or housing, and public subsidies and protection for agriculture result from unusually powerful interest groups.

Public financing for health, including for clinical services for well-off individuals, has been the result of the democratic process in all the major capitalist countries except Switzerland and the United States. (Public financing is, of course, consistent with private provision of services, and the countries of the Organisation for Economic Co-operation and Development (OECD) display substantial diversity in this regard.) Efficiency as well as equity concerns underlie this pattern. Barr (2001) examines in detail the efficiency rationales that have underpinned major public sector financial involvement in health, education, and social protection in the high-income countries.

Why do market economies choose public sector financing (either public spending or publicly mandated social insurance) for many of their personal clinical services? The case for publicly financing interventions that are shared by all (for example, antitobacco advertising or water fluoridation) or where significant externalities exist (such as interruption of transmission of TB by treatment of infections) is widely accepted. Providing personal clinical services, like hernia repair, has none of those attributes. Nonetheless, as Arrow (1963) articulated in a now-classic article, the pervasiveness of incomplete information for decision makers (patients, providers, insurers) dominates private health insurance and delivery of clinical services. These personal clinical services account for the bulk of health expenditure. The evidence is increasingly clear that a strong government presence in finance is the least bad way of dealing with these problems. Such a presence is necessary to achieve universal access to health care and makes it easier to impose the hard budget constraints that impose discipline in resource allocation. Additional evidence indicates that introducing universal mandatory health coverage favorably affects both wages and employment levels. Gruber and Hanratty (1995) provide thorough documentation of these effects in Canada. Some combination of these factors likely underpins the choices of the high-income democracies to fund a large fraction of private clinical services with public resources.

Public financing of services for all does not imply that all services can be provided. Indeed, given their resource constraints, countries face hard choices about what to include (and exclude) in the universal benefits package—choices that this volume seeks to inform.

Middle-income countries vary substantially in the extent to which health care providers are financed on a fee-for-service basis—that is, by direct payment for specific services. Although that is traditionally the chief way to pay for private care, it is worth clarifying that government providers can also be financed (legally or illegally) on a fee-for-service basis—as is increasingly the case in China, for example. Similarly, providers are sometimes compensated through other means, such as capitation, and individual physicians in the private sector are sometimes on salary or a combination of salary plus capitation. Out-of-pocket payments to a public sector provider are usually called user fees, but they differ little from fee-for-service compensation of private providers.

What is the OECD experience with user fees? Basically, it is that both providers and patients respond strongly to the incentive environment. Indeed, a problem exists of providers being too responsive: much low-value or useless surgery, diagnosis, and drug use is, in some systems, highly profitable to the provider, and often the provider must, as agent for the patient, decide what to do. This conflict of interest has led to cost escalation and to inappropriate care. A case may be made for divorcing provider compensation from the delivery of individual services, drugs, or diagnostic tests unless a need exists to accelerate coverage of critical services by giving bonuses to providers for providing them, as the United Kingdom's National Health Service has done with immunization.

If fee-for-service financing can generate a perverse incentive environment, does that imply that a system must forgo charging beneficiaries for services they receive? Not at all: other ways exist to ensure that funds are adequate for costs—ways that may be more effective. Earmarking payroll taxes to finance health care for workers and their dependents (usually called social insurance) is one approach for recovering costs that is consistent with provider compensation mechanisms relying principally on salaries or capitation rather than fee-for-service. It has been argued that cost recovery through payroll taxes will generate more economic distortions than do income, consumption, or sin taxes—although recent evidence suggests that may not be true (Blanchard and Katz 1997). Nonetheless, when general revenue mechanisms are incapable of financing the nationally defined basic package of services for all, the option of cost recovery through payroll taxes for the privileged workers in the formal sector is clearly desirable on equity grounds. This form of taxation also links contributions to a specific service, which increases its acceptability.

Financing Health in Low-Income Countries

Approximately 2.5 billion people live in countries the World Bank classifies as low-income—that is, with a per capita gross national income in 2002 of less than US$735 per year. These countries include India but not China. Table 1.2 reflects that the estimated average per capita health expenditure for these 2.5 billion people is about US$23 per year, of which US$5 or US$6 comes from public sources. Chapter 12, on financing health systems, points to the severe challenges in setting priorities that these resource limitations imply. Not only are expenditure levels currently very low, but also the fiscal space needed to increase them is, in most low-income countries, sharply constrained. Fiscal space results from an excess of potential government revenues, including reasonable projections of official development assistance (ODA), over public expenditures. The concept of fiscal space combines both short-term fiscal balance and long-term debt sustainability. Grant ODA can help with short-term balance, and soft loans (such as International Development Association credits from the World Bank) can reduce the repayment burden from a given level of incurred debt. Health financing policy for low-income countries must focus heavily on mobilizing public sector resources and concentrating resources on true priorities (although the broader range of issues just discussed that middle-income countries must address is relevant to low-income countries with large formal sectors).

The chapters in this volume make clear that incremental resources for health, well spent, could have an enormous effect: resource mobilization is important. Increasing public sector expenditures in health by 0.5 percent or more of GDP will be possible in some countries, but not in all, and even where it is possible other investment priorities will also be pressing. However, increases of as much as 1 percent of GDP may possible where the political will exists, as is now being attempted in India. Cost estimates for meeting just the health-related MDGs, as reported in chapter 9, can exceed that amount, and other estimates have run higher. Development assistance for health, discussed in chapter 13 and here, can expand the available resource envelope, but even multiples of current levels of development assistance would likely prove insufficient to finance attainment of the MDGs in some countries.

Achieving gains for health (and frequently concomitant gains in financial protection) requires that critical decisions be made on how to allocate highly limited public sector resources. Much of this volume deals with resource allocation across interventions. Public finance must address an additional set of decisions. Do interventions with substantial positive externalities have a particular claim on public resources—beyond the amount of health and financial protection they buy per million dollars spent? Should public resources be spent only on individuals with low income? Or should health systems provide universal public finance for the very limited range of interventions that can be afforded? Should public finance emphasize providing interventions that maximize financial protection or improvements in health? What patterns of public sector resource allocation are likely to prove politically sustainable? Fewer tradeoffs may exist among these criteria than at first seems to be the case.

A starting point for thinking about these criteria is the availability of an increasing number of good benefit incidence studies—that is, studies of how the benefits of a public intervention distribute across income (or asset) quintiles of the population. Those studies find that in a great majority of countries wealthier people are more likely to benefit from public programs than are the poor, at least where benefits are measured in expenditures. The World Bank's 1993 World Development Report pointed to that pattern some time ago (although noting a number of important exceptions), and more recent studies add support to that conclusion. The caveat "measured in expenditures" is important and insufficiently noted. The value or welfare benefit to the poor of a given level of transfer may well exceed the value received by the well off from the same level of transfer. A landmark benefit incidence study of the U.S. Medicare program, a mandatory health insurance for the elderly, found it to be regressive in dollar terms but pro-poor in welfare outcomes (McClellan and Skinner 1997).

Public programs that are not universal appear to systematically benefit the better off, and that pattern is understandable from a political perspective. It follows that if an immunization program, for example, is differentially benefiting the well off, then making immunization universal would be pro-poor in terms of incremental public expenditures. Figure 1.7 uses data from a careful benefit incidence assessment in the Philippines (Gwatkin and others 2000) to illustrate this point for immunization and for attended deliveries.
[Figure 1.7]

Making coverage universal for cost-effective interventions for conditions important to the poor is thus likely to prove to be an efficient way of both improving health outcomes and enhancing equity. Many of these interventions address infectious disease where control has significant externalities, and implementing universal coverage is likely to prove more politically sustainable than targeting population subgroups. Lindert (2004) extensively discusses the experience in high-income countries with universalization of public financing of education, health, and old-age pensions and concludes not only that it is politically sustainable but also that no evidence indicates that the resulting higher taxes have harmed economic growth.

Two final points are worth stating about making coverage universal:

• First, early adoption of universalization of coverage for publicly financed interventions—even if only a few can be financed—sets the stage for expansion, in a middle-income environment, to universal public financing of health care, the overwhelming choice of the democratic process in high-income countries.

• Second, the implementation capacity of health systems in low-income countries will often be highly constrained. Capacity is likely to grow most rapidly by building on a base of doing a few things well rather than many things poorly. Universal coverage implies tight focus in highly resource-constrained environments.