Journal Issue

Investing in Health

International Monetary Fund. External Relations Dept.
Published Date:
January 1993
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COUNTRIES worldwide spend huge sums on health—about $1,700 billion a year, or roughly 8 percent of global income. But the Development Report 1993 shows that these monies could be spent much more wisely, in the process doing a great deal to help the world’s one billion poor.

In recent years, health reform has shot up to the top of political agendas throughout the world. For the industrial countries and many middle-income developing countries, reasons include rapidly rising costs, the large numbers of people still not covered by insurance, and the fear of AIDS. For developing countries, the main reason is a better understanding of the importance of health for improving the productivity of workers and of the potential for enormous gains in health at very low cost.

The Bank’s own lending in health has more than tripled in the past three years—to over $1 billion a year—making the agency the single largest source of external finance for health. At the same time, the World Bank’s recent World Development Reports have stressed both the importance of health in poverty reduction and the key role of government in achieving the right level and mix of health outcomes.

Against this background, the World Development Report 1993 set out to answer the following questions: Could the $170 billion a year that developing countries spend on health—almost 5 percent of their income—be reallocated in ways that would substantially improve the health status of their populations? If yes, since these governments spend $85 billion a year, or about 50 percent of this amount, which financial and institutional arrangements should they adopt or promote to facilitate these reallocations?

The conclusions of the Report are heartening. The WDR found that not only could the monies be better spent but also millions of lives and billions of dollars could be saved over the next few decades if governments—supported by donors—rethought their approaches to health reform. These conclusions were reached, in part, in light of new research undertaken as background for the WDR. This involved quantitatively assessing the global (and regional) burden of disease (i.e., the present value of future streams of disability-free life lost as a result of death, disease, or injury) and systematically weighing the cost and cost-effectiveness of interventions to reduce that burden.

Progress and problems

Over the past 40 years, life expectancy has improved more than during the entire previous span of human history. In 1950, life expectancy in developing countries was 40 years; by 1990, it had increased to 63 years. In 1960, 22 out of every 100 children died before their fifth birthday; by 1990, the number had fallen to 10 (Chart 1). Similarly, the adult mortality rate (the probability of dying between ages 15 and 60 per 1,000 persons reaching age 15) fell from about 450 in 1950 to about 230 in 1990. In Chile, a country that has made exceptional progress, the rate dropped from 466 in 1930 to 152 in 1990. Smallpox, which killed more than 5 million people annually in the early 1950s, has been eradicated entirely. Vaccines have drastically reduced the occurrence of measles, polio, and other diseases.

Chart 1Child mortality has dropped sharply

Probability of dying by age five (per 1,000)

Source: World Development Report 1993, World Bank.

These dramatic improvements over the past 30–40 years matter, because not only do they translate into direct and significant gains in well-being, but they also contribute to economic growth. They reduce productivity losses caused by worker illness; they permit the use of natural resources that had been totally or nearly inaccessible because of disease; they increase the enrollment of children in school and make them better able to learn; and they free up resources for alternative uses. Indeed, a review of economic growth rates in over 70 developing countries over the past quarter century shows that healthier countries grew faster. The data suggest that in poor countries with a high burden of disease, measures that cut childhood mortality by a modest 15 percent could increase the rate of income growth by nearly 25 percent.

Despite these remarkable improvements, however, enormous health problems remain. Absolute levels of mortality in developing countries are still unacceptably high; child mortality rates are about ten times higher than those in the established market economies. If death rates among children in poor countries were reduced to those prevailing in the rich countries, 11 million fewer children would die each year. Almost half of these preventable deaths are a result of diarrheal and respiratory illness, exacerbated by malnutrition. In addition, every year 7 million adults die of conditions that could be inexpensively prevented or cured; tuberculosis alone causes 2 million of these deaths. Over 400,000 women die from the direct complications of pregnancy and childbirth. Maternal mortality ratios are, on average, 30 times as high in developing countries as in high-income countries.

Moreover, although health has improved even in the poorest countries, the pace of progress among countries and regions has been uneven. In 1960, in Ghana and Indonesia, about one child in five died before reaching age 5—a child mortality rate typical of many developing countries. But by 1990, Indonesia’s rate had dropped to about one half the 1960 level, while Ghana’s had fallen only slightly.

Besides this unfinished agenda, the world must also contend with serious new health challenges:

• Rapid progress in reducing child mortality and fertility rates will create fresh demands on health care systems as the aging of populations brings to the fore costly noncommunicable diseases of adults and the elderly. Amplifying the effects of aging, tobacco-related deaths from heart and lung disease alone are likely to double by the first decade of the next century, to 2 million a year; if present smoking patterns continue, they will grow to more than 12 million a year in developing countries in the second quarter of the century;

• By the year 2000, the toll from AIDS in developing countries could easily rise to more than 1.8 million deaths annually—a fourfold increase from 1990—erasing decades of hard-won reductions in mortality; and

• The malaria parasite’s increased resistance to available drugs—part of a disturbing trend of a growing number of drug-resistant disease strains—could lead to a doubling of malaria deaths, to nearly 2 million a year within a decade.

What governments can do

Given the enormous sums governments spend on health care—not to mention the vital role of health investments in reducing poverty and the pervasiveness of market failures in the health sector—it makes sense to expect governments to take the lead in addressing these problems. But, as Chart 2 shows, higher spending alone, for any level of income and education, will not necessarily translate into better health.

Chart 2Life expectancies and health expenditures in selected countries

Source: World Development Report 1993, World Bank.

This raises several critical questions. What does account for these large deviations? How much is attributable to the characteristics of health systems? How can public policy help to provide better health outcomes for a given national effort? The answers all point to the need for good government policies, which is why the bulk of the WDR centers on the relationship between policy choices and health outcomes, especially for the poor (see “Rethinking the Government’s Role in Health” in this issue). The Report advocates a three-pronged approach.

Foster an environment that enables households to improve health. Household decisions shape health, but these decisions are constrained by the income and education of household members (see “The Foundation for Better Health” in this issue). Besides promoting overall economic growth, governments can strengthen household capacity to improve health if they:

• pursue economic growth policies that will benefit the poor (including, where necessary, adjustment policies that preserve cost-effective health expenditures);

• expand investment in schooling, particularly for girls; and

• promote the rights and status of women through political and economic empowerment and legal protection against abuse.

Improve government spending on health. The challenge for most governments is to concentrate resources on compensating for market failures and efficiently financing services that will particularly benefit the poor. This can be done in several ways:

• reduce government expenditures on tertiary facilities, specialist training, and interventions that provide little health gain for the money spent;

• finance and implement a package of public health interventions to deal with the substantial spillover effects surrounding infectious disease control, prevention of AIDS, environmental pollution, and behaviors that put others at risk (e.g., drunk driving);

• finance and ensure delivery of a package of essential clinical services. The comprehensiveness and composition of such a package can be defined only by each country, taking into account epidemiological conditions, local preferences, and income. In most countries, public finance, or publicly mandated finance, of an essential clinical package would provide a politically acceptable mechanism for distributing welfare improvements and a productive asset—better health—to the poor; and

• improve management of government health services through such measures as decentralization of administrative and budgetary authority and contracting out of services.

Good policies matter

Differences in health spending are an obvious starting point in the search for why some countries have better health levels than others. But as this chart shows, health spending alone cannot explain the discrepancies—nor can income and education, or even spending, income, and schooling taken together.

The vertical axis shows how far life expectancy in a country differs from the value predicted on the basis of that country’s income and average schooling. France, Haiti, Singapore, and Syria have almost exactly the life expectancy predicted. China, Costa Rica, Honduras, and Sri Lanka all achieve five years or more of life beyond what would be expected. Egypt, Ghana, Malawi, Uganda, the United States, and Zambia all have a life expectancy about five years lower than expected.

The horizontal axis shows how far total health spending differs from the value predicted by income and education. Egypt, Morocco, Paraguay, Singapore, and Syria spend relatively little. France, Haiti, India, Mozambique, and the United States spend more than expected.

At any level of income and education, higher health spending should yield better health, all else being equal. But there is no evidence of such a relation. Countries are scattered in all quadrants. The countries that appear in the upper-left quadrant obtain better health for less money. China, for instance, spends a full percentage point less of its GNP on health than other countries at the same stage of development but obtains nearly ten years of additional life expectancy. The United States is another extreme case, spending 5 percent more of GNP than predicted to achieve several years less of life expectancy than would be typical for its high income and educational level.

So why do some countries have better health levels than others? The missing link looks to be the quality of a government’s health policy.

Promote diversity and competition. Government finance of public health and of a nationally defined package of essential clinical services would leave the remaining clinical services to be financed privately or by social insurance within the context of a policy framework established by the government. Governments can promote diversity and competition in the provision of health services and insurance by adopting policies that:

• encourage social or private insurance (with regulatory incentives for equitable access and cost containment) for clinical services outside the essential package;

• encourage suppliers (both public and private) to compete to deliver clinical services and provide inputs, such as drugs, to publically and privately financed health services. Domestic suppliers should not be protected from international competition; and

• generate and disseminate information on provider performance, on essential equipment and drugs, on the costs and effectiveness of interventions, and on the accreditation and status of institutions and providers.

Increased scientific knowledge has accounted for much of the dramatic improvement in health that has occurred in this century by providing information that forms the basis of household and government action and by underpinning the development of preventive, curative, and diagnostic technologies. Investment in continued scientific advances will amplify the effectiveness of each element of the suggested three-pronged approach. Because the fruits of science benefit all countries, internationally collaborative efforts will often be the right way to proceed.

The challenge to policy

The appropriate nature and extent of government involvement, however, will vary from country to country, in large part depending on income levels.

Low-income countries. The challenge for low-income countries is to take advantage of the potential of today’s technologies for achieving major gains in health at the relatively low costs that are clearly possible. One of the important findings of the Report, which in many ways confirms but also extends the received wisdom in public health, is that a relatively small number of highly efficacious interventions—activities aimed at reducing disease risks, treating illnesses, or palliating the consequences of disease and disability—can, at low cost, dramatically reduce the burden of disease (see “Designing an Essential National Health Package” in this issue).

The WDR estimates that at a cost of about $12 a person per year in the low-income countries, minimal packages of essential clinical services and public health interventions can be provided for all citizens. Even these minimal packages would reduce the current burden of disease by almost one third and, in countries where the AIDS epidemic is already established or incipient, greatly reduce or forestall the spread of HIV (human immunodeficiency virus).

Middle-income countries. For the middle-income and formerly socialist countries in Europe, certainly, the struggle against diseases must continue. Yet high on the political agendas of most of these countries are the dual problems of extending access or maintaining broad access while containing the often rapid growth in costs (hopefully, more successfully than their OECD counterparts have done). Countries at this stage in the evolution of health policies face three fundamental questions.

(1) How should insurance be provided? As incomes rise, the demand for insurance against catastrophic or even major health care needs rises more than proportionately. This induces a shift away from financing health care by out-of-pocket payments, the main source of financing in low-income countries. Two main options are open to middle-income countries. One is to move toward the current US system, which relies substantially on private voluntary insurance. The other is to follow the examples of Canada, Japan, and most European countries, where general government revenue or social insurance cover the cost of relatively comprehensive essential packages, leaving only a small discretionary residual for private insurance. After a careful review of the evidence, the WDR comes down strongly on the side of choosing the government-financed or mandated approach as the best way for the middle-income countries to achieve high levels of access and efficient operation of insurance markets. Otherwise, competition among insurers leads to the exclusion of high-risk groups from coverage, and the voluntarily uninsured can free ride on the unwillingness of most societies to leave them untreated in emergencies.

(2) What should insurance cover? Deciding which items should be covered by insurance and which items should be excluded plays a key role in determining costs and, ultimately, health outcomes. Here the Report relies on systematic assessment of the cost-effectiveness of interventions—the health gain per dollar spent on interventions as diverse as immunization programs and coronary artery bypass surgery—to help identify which interventions provide the best value for money.

(3) How should medical service providers be paid? The WDR argues that a much greater reliance on the competitive provision of service would likely improve both the responsiveness of health care systems to their clients and the efficiency with which they operate. But this can easily lead—when providers are compensated on a fee-for-service basis reimbursed by third party insurance—to the very cost escalation that government policies seek to avoid.

What are the alternatives? One approach is to encourage prepayment of a fixed amount for each person, as is now done in private health maintenance organizations and in the British National Health Service. Providers can then be paid salaries based in part on the number of individuals in their practice—so-called capitation schemes. Another is for insurers jointly to negotiate uniform fees with doctors and hospitals, as is done in Japan’s social insurance system and Zimbabwe’s private medical aid insurance system; or insurers themselves can set fixed payments for specified medical diagnoses, as in Brazil. Yet a third approach, which has been tested on a limited scale in the United States, is “managed competition.” This scheme pursues the three objectives of cost-effective health spending, universal insurance coverage, and cost containment simultaneously through tightly regulated competition among companies that provide a specified package of health care for a fixed annual fee. Each of these approaches has proved workable, but each also has its limits and disadvantages. There are no simple answers for health policymakers.

What lies ahead

Adoption of the WDR’s major recommendations will not be easy for developing countries. To reach most people with the minimum package of cost-effective public health and essential clinical services, nearly half of current government expenditures on other more discretionary care will have to be redirected. An array of interest groups will also stand to lose—from suppliers of medical services to rich beneficiaries of public subsidies to protected drug companies. Many of the proposed changes will take years to implement fully.

But a number of developing countries have already shown in recent years that broad health sector policy reforms are possible when there is sufficient political will and when health system changes are designed and implemented by capable planners and managers. Zimbabwe imposed a decade-long moratorium on new investments in central hospitals and concentrated on improving health centers and other district-level infrastructure. Tunisia has converted 11 large government hospitals to semiautonomous institutions with strong incentives for improved performance. During the 1980s, both Costa Rica and Korea achieved universal coverage with public insurance for health.

Donors can assist the reform process in several critical ways: they can provide technical and financial support to countries implementing essential public health and clinical packages; they can facilitate policy reform with transitional financial subsidies (including for recurrent costs); and they can finance and participate in the research and development agenda that will provide the knowledge and products for more effective health investments in a decade’s time. The Bank can help by boosting its own level of assistance—especially for sectoral adjustment loans aimed at easing the transitional costs of reform. It should also focus its investment projects more tightly on the essential public health and clinical packages.

Yet, despite the potential, donor support for health has actually fallen—from 7 percent of total aid in the first half of the 1980s to 6 percent in the second half. This has hit low-income Africa the hardest, as aid already covers more than half the health budget in Burundi, Chad, Guinea-Bassau, Mozambique, and Tanzania. The WDR calls for a reversal of this trend, urging donors to help catalyze reform by increasing external assistance for health by $2 billion over the next five years from its current level of about $4.5 billion a year.

The benefits to the developing world from adopting sound investment policies for health are enormous. There is great potential for change during the closing years of this decade as more countries encourage broad political participation and public accountability, as levels of education and knowledge improve, and as the understanding of human biology, public health, and health care systems increases. If the right policy choices are made, the payoff will be high. The momentum of past reductions in the burden of infectious disease can be maintained and accelerated, the AIDS epidemic can be slowed or reversed, and the emerging problems of noncommunicable disease in aging populations can be managed without rapid increases in health outlays. This will translate into longer, healthier, and more productive lives for people around the world—especially the more than one billion now living in poverty.

The World Development Report 1993 has been prepared by a team led by Dean T. Jamison and comprising Jose-Luis Bobadilla, Robert Hecht, Kenneth Hill, Philip Musgrove, Helen Saxenian, Jee-Peng Tan, and, part-time, Seth Berkley and Christopher J.L. Murray. The work was carried out under the general direction of Lawrence H. Summers and Nancy Birdsall. For information on ordering copies, see advertisement on page 9.

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