Subsidies for Health and Health-related Products
Using examples primarily from developing countries, this section of the chapter analyzes the range of subsidies that are available to promote healthy behavior and the consumption of health-related goods. The first sections deal with consumer subsidies both to promote the consumption of health-producing goods and of health care. The second section discusses producer subsidies.
Consumer Subsidies
Governments use consumer subsidies to encourage the use of a beneficial product by lowering the price consumers pay—usually in situations where the consumers are too poor, the market prices of the good are too high, or both situations apply—to otherwise achieve a socially optimal consumption level. Examples include subsidies for staple foods, condoms, soap, insecticide-treated bednets, cooking fuels, and medicines.
Staple Foods
Ample evidence indicates that food subsidies are effective in improving nutrition; however, appropriate targeting is often a problem (Alderman 2002). Subsidies may be targeted to specific foods, specific delivery locales or geographic areas, or specific populations. Often targeting includes all three.
Food-specific subsidies, whether in the form of general subsidies, ration cards, quotas, or food stamps, increase food consumption. They will have a positive effect on health if this consumption occurs in undernourished populations that require increased caloric or nutrient intake. In some cases, food subsidy programs have had unintended macroeconomic and microeconomic consequences (Adams 2000; del Ninno and Dorosh 2002; Pinstrup-Anderson 1988; Siamwalla 1988). They become expensive if they are too widely available, can create incentives for black market activities, and can affect prices and volumes in agricultural and trade markets.
Indonesia switched from a general rice support system to a limited subsidy during the 1997 macroeconomic crisis. The earlier system had successfully reduced food insecurity to low levels, but higher prices increased the cost of maintaining the subsidy and led to food being smuggled out of the country (Tabor and Sawit 2001). The government targeted the new rice subsidy to the poor and issued ration cards. Within roughly a year of implementation, the subsidy was reaching an estimated 85 percent of the poor. Only about 10 percent of the subsidy appeared to be reaching nontarget population groups.
India has subsidized essential consumer goods for decades, including health-related goods such as food grains, edible oils, sugar, and fuels (S. Jha 1992). The government rationed certain goods in the belief that only the truly needy would endure waiting in lines and purchasing the poorer quality products that were involved in the subsidy schemes. This is called self-targeting. However, Jha shows that 40 percent of the population purchased subsidized rice in 1990, only half of whom were poor. The government recently modified the program to better target the subsidy to the poor and removed such barriers as bulk purchasing (Rao 2000).
The Arab Republic of Egypt's generalized program also illustrates the problems that beset broad food subsidy programs. The program reached its zenith in 1980, when it subsidized 20 food products and accounted for 15 percent of government expenditures (Adams 2000). The program has been scaled back to cover four staple foods and now accounts for 6 percent of government expenditures. Nevertheless, about 75 percent of the population holds ration cards entitling them to purchase the subsidized foods. The program is intended to achieve self-targeting, but the nonpoor purchase many of the subsidized foods. The program accounts for 44 percent of the total calorie supply of the poorest quintile group, but in rural areas, the rich obtain more calories from subsidized food than the poor do.
Musgrove (1993) reviews 104 supplementary feeding programs in 19 countries in Latin America and the Caribbean. The review covers a range of program sizes, from those serving 1,000 individuals to those supplying 28 million people; of types of subsidies (namely, food distribution, direct feeding, and direct payments); of levels of coverage of the targeted population, ranging from 1.9 to 100.0 percent; and of extent of coverage of the poor, varying from 5.8 to 88.0 percent. The per capita costs of reaching beneficiaries differed widely. The most common reasons for program ineffectiveness were spreading resources too thinly across beneficiaries, targeting foods with minor health benefits, choosing inappropriate beneficiaries, and encountering excessive costs in distributing resources. These kinds of issues underscore the importance of design considerations and country conditions in creating effective and efficient food subsidy programs.
In sum, many food subsidy programs avoid the political and administrative challenges of explicit targeting by allowing universal access to the subsidies on the assumption that the needy will self-select into the programs. However, Adams (2000) shows that countries with targeted food programs—for example, Chile, Jamaica, and Peru—provide much higher income transfers to the poor than do self-targeted programs of the kind used in Egypt, Morocco, and Tunisia.
Condoms
Preliminary investigation indicates that subsidies on condoms can be effective in increasing their use in both general and high-risk populations, but whether price reduction, increased access, or education leads to greater use is not clear (Price 2001) because information campaigns about the health benefits of condoms usually accompany price subsidies. Recent surges in social-marketing schemes to distribute condoms as part of the fight against HIV/AIDS, especially in Africa, have increased condom use.2
Few researchers have compared HIV infection rates—or even condom use rates—before and after the introduction of a subsidy on condoms. Cohen and others (1999) conclude that in a particular jurisdiction in Louisiana, free distribution through public clinics and 1,000 small businesses in areas with high levels of HIV and other sexually transmitted diseases achieved significantly higher condom distribution than a fee-based system (77 percent use during the last sexual encounter compared with 64 percent) and that the revenues from cost recovery were insufficient to justify imposition of the fee. The dropoff in condom use during the cost-recovery period persuaded the jurisdiction to reinstate the free distribution program.
Another example suggests that promotion and information are also effective. A social-marketing effort in Turkey in the early 1990s offered condoms at a commercial price but included intensive advertising and other promotional efforts. It achieved sales well beyond original expectations and gained 41 percent of the market share (Yaser 1993).
Water Purification
The U.S. Centers for Disease Control and Prevention and the Pan American Health Organization designed the Safe Water System Initiative to improve the quality of drinking water for households that draw their water from sources outside the home. The principle underlying the initiative is to subsidize storage containers, disinfectant, and education on proper handling to avoid contamination (Quick and others 1999). Numerous countries have implemented similar initiatives, including Bangladesh, Bolivia, Burkina Faso, Kenya, and Zambia. The government provides containers and chemicals at subsidized prices, but the costs are still higher than the cost of boiling water (Quick and others 2002).
Soap
Another proven method for reducing the incidence of diarrhea and other hygiene-related diseases is hand washing, with or without soap. Whether the key factor is education or the subsidized provision of soap is unclear. Some investigators claim that small-scale programs that subsidize soap and educate households about the benefits of hand washing are self-financing because of the consequent reduction in disease (Borghi and others 2002).
Luby and others' (2001) results from Pakistan suggest that education alone may be just as effective as education accompanied by soap provision in reducing diarrheal disease. By contrast, Hoque (2003) and other researchers suggest that the cost of soap is a barrier to its widespread use among extremely poor populations and that behavioral change may be difficult to achieve without a subsidy.
Insecticide-treated Bednets
The degree of subsidization of bednets has become a controversial issue, with some arguing for full subsidization and others for partial subsidization. Most long-term studies indicate that consumers resist purchasing bednets even at subsidized prices after they have had access to free bednets (Snow and others 1999).
A number of researchers have undertaken studies in various locations in Africa to assess the effect of selling bednets rather than providing them free to vulnerable populations (Armstrong-Schellenberg and others 2001; Kolaczinski and others 2004; Snow and others 1999). The key issue is consumers' responsiveness to changes in the prices of bednets, through either subsidies or a reduction in taxes and tariffs. Many households do not own a bednet because they cannot afford it, while other reasons are lack of information, poor access to markets, and cultural preferences (Hanson and Worrall 2002; Simon and others 2002). The evidence suggests that responsiveness to price changes alone may be modest, but in combination with removing some of the other barriers, demand for bednets could increase substantially in malaria-affected regions (Simon and others 2002).
Nigeria removed tariffs and taxes on bednet insecticide in 2001, and the 18 percent price drop resulted in an estimated 9 to 27 percent increase in purchases (Simon and others 2002). Another study that reviewed a public sector subsidy for bednets combined with private sector marketing and distribution by means of a social-marketing scheme concluded that the program was successful because 18 percent of children slept under bednets as a result; however, the low insecticide retreatment rate led the authors to conclude that subsidies were needed on both bednets and insecticide (Armstrong-Schellenberg and others 2001).
Clean Cooking Fuels
High rates of respiratory illness occur as a result of exposure to smoke and particle emissions from biomass burning in many developing countries. Fuel subsidy programs have been designed to promote the use of liquid petroleum gas, natural gas, or kerosene, which burn more cleanly and emit a low amount of smoke and particulates, but none has been efficacious or efficient (UNDP 2003).
Liquid petroleum gas subsidies have been shown to benefit middle- and higher-income families in urban areas rather than the poor (UNDP 2003). In attempting to target the poor more accurately, Cote d'Ivoire and Senegal focused subsidies on smaller liquid petroleum gas cylinders but found that poor consumers still preferred charcoal (UNDP 2003). Electricity subsidies in low-income countries are also often skewed toward the well off, who are more likely than the poor to be connected to the electricity grid (Alderman 2002).
Medicines and Medical Supplies
In relation to the direct provision of health-related goods, including drugs, supplies, and services of medical personnel, governments may subsidize and regulate drug prices, make bulk purchases from manufacturers for distribution at reduced prices, and distribute certain drugs with complete or partial subsidies to target populations. Specific interventions—for instance, antiretrovirals, vaccines, or reproductive health care—are often more heavily subsidized or may be targeted by population group or disease—for example, child and maternal health, tuberculosis, and malaria. With the exception of antiretroviral drugs, the health benefits and low costs of these medicinal interventions make them good targets for subsidization.
General Health Care
In developing countries, where informal sectors tend to be large, providing subsidized health care is an important tool for health promotion. Some countries have chosen direct provision of health goods, whereas others combine the public provision of services with subsidized health insurance for families below a certain income cutoff. Both models require identifying the families that are unable to afford health care and the types of services that are considered public goods.
One example of subsidizing the production and provision of health care is the Mexican program originally called PROGRESA and now known as Oportunidades. This program is also an example of how income transfers for other goods can affect health and how cross-subsidies can be used to strengthen the incentive effects of a fiscal policy to promote healthy behavior. The government launched the program in 1997 to provide subsidized health, nutrition, and education to poor families. By mid 2004, it was serving the majority of those living below the poverty line. Oportunidades combines a cash transfer equivalent to 20 to 30 percent of families' incomes that includes incentives for positive behaviors in relation to health, nutrition, and schooling with subsidized basic health interventions. The program is largely financed from federal budgets.
Oportunidades is successful both in terms of targeting the poorest households and in terms of achieving measurable gains in health, health care use, nutritional status and growth, school attendance, and school achievement. Gertler (2004), for example, finds significant and cumulative reduction in illness rates among children, lower prevalence of anemia, and an additional centimeter of growth in the first year of the program.
The program's success is attributable to many factors, including a rigorous longitudinal evaluation process; an integrated package of services; and the presence of financial stimuli tied to school attendance, visits to health clinics, and participation in health education initiatives. Furthermore, the program incorporates several targeting methods.
Producer Subsidies
Governments use producer subsidies to encourage production that improves health by lowering manufacturers' costs in situations in which the private market supply is inadequate to meet social needs. Examples include medical supplies, vaccines, food additives, and medical research.
Food Fortification
Governments sometimes subsidize the fortification of staple foods through the addition of selected micronutrients as a way of achieving broadly based nutrition improvements. Challenges involve maintaining a relationship between the public sector, which initiates and funds the program, and the private sector, which implements the fortification. Incentives for private providers are often needed in the form of tax exemptions, import preferences, subsidies for startup costs, quality control, and training. Illegal markets selling nonfortified products at a lower price often arise in response (Alderman 2002; Dorosh, del Ninno, and Sahn 1996; Rao 2000).
Health Research
Government support for health research consists of the provision of direct subsidies for private sector investment, the granting of tax benefits for private research and development (R&D) investment, the establishment of property rights and a system to protect them, and the promotion of private goods by other means (OECD 2003). Despite the strong evidence from developed countries that the private sector will underinvest in R&D and that tax incentives increase R&D investment, developing countries should be cautious in applying those results to their own situations. Empirical investigations tend to conclude that producer subsidies for R&D in developing countries are not effective (Shah 1995; Zee, Stotsky, and Ley 2002). Many conditions need to be in place to realize high social returns and to minimize rent seeking and profiteering, including a strong private sector research effort that is stimulated by the public investment, the presence of appropriate targeting, a transparent and fair set of public laws and institutions to grant and monitor the tax benefits, and the ability to forgo alternative public investments.
