Strategies for Pricing Publicly Provided Health Services

Abstract

User fees are important in cofinancing health care but should not be the primary means of finance, and should not be applied uniformly - or the wealthy will benefit and the poor will suffer.

Gertler and Hammer examine how governments finance and allocate public spending, with an eye to developing strategies for pricing publicly provided health services. They also examine the implications of current policy and the possibility for rationalizing competing government priorities. Because governments face budget constraints and cannot fully subsidize all programs and activities, Gertler and Hammer argue the following: Public spending on health can (1) improve health outcomes, (2) promote nonhealth aspects of well-being (for example, reducing individuals' risk of economic losses from random health crises), and (3) finance redistribution to the poor. Optimal subsidy and fee policy will depend on how much relative weight government places on those competing objectives. Subsidies need to be reallocated toward the poor and toward public health, but only a fraction of the resources needed to expand the health sector can be financed by increasing public subsidies.

Prices for curative services (user fees) have two distinct roles. They can raise revenue, freeing public resources to be reallocated to public health activities and for limited cofinancing to improve the quality of curative care. More important, they can improve efficiency in the use of public facilities and the health care system as a whole. But those gains must be weighed against evidence that increased fees can compromise public health's three main goals. The literature has focused largely on how raising revenue affects the poor, but the more important effect is likely to be the guidance of resources. User fees are important in cofinancing health care but shouldn`t be the primary means of finance.

Revenue generated from user fees is sometimes used to improve the quality of, and access to, curative medical care. There is some evidence that people are willing to pay some of the cost of improving health care (especially for drugs), but the wealthy are willing to pay a lot more than the poor. If governments charge the average willingness to pay, the wealthy will use the services more, the poor, less.

Prepayment social insurance plans hold promise, but there is evidence that they may introduce inefficient inflation of medical care costs that lower- and middle-income countries cannot afford.

This paper - a product of the Public Economics Division, Policy Research Department - is part of a larger effort in the department to analyze the impact of public expenditures. Jeffrey Hammer may be contacted at [e-mail].