Journal Issue

Rethinking the Government’s Role in Health

International Monetary Fund. External Relations Dept.
Published Date:
January 1993
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AS DEVELOPING countries wrestle with the appropriate role for government in health care, the World Development Report 1993 calls for a large public role on the financing side but a greater involvement of nongovernmental organizations and the private sector in the delivery of services.

There is no question that governments all over the world have played a vital role in bringing about the great advances in health over the past 40 years. Public health measures are responsible for eradicating smallpox and have been central to the reduction in deaths caused by other vaccine-preventable childhood diseases. Expanded and improved clinical care by government doctors and nurses has saved millions of lives from infectious diseases and injuries. Better prenatal and delivery services organized by governments have lowered the rate of serious complications of pregnancy and childbirth for millions of mothers.

But there are several major problems with the way health systems are now run and financed, and if solutions are not found, and quickly, the pace of progress in reducing the burden of premature mortality and disability—and in responding to the new health challenges and emerging disease threats—will be slowed.

Misallocation. Public money is spent on health interventions with low cost-effectiveness, such as surgery for most cancers, at the same time that critical and highly cost-effective interventions, such as treatment of tuberculosis and sexually transmitted diseases (STDs), remain underfunded.

Inequity. The poor lack access to basic health services and receive low-quality care. Government spending for health goes disproportionately to the affluent, in the form of subsidies to sophisticated public tertiary care hospitals and to private and public insurance. In Indonesia, for example, despite a major investment in lower-level health facilities during the 1980s, only 12 percent of public spending for health in 1990 went for services consumed by the bottom 20 percent of households, while the top 20 percent obtained 29 percent of the government subsidy.

Inefficiency. Much of the money spent on health is wasted because brand-name pharmaceuticals are purchased instead of generic drugs, health workers are badly deployed and supervised, and hospital beds are underutilized. Disparities in the average length of stay across hospitals with a similar mix of cases point to major inefficiencies: average stays in government hospitals in Latin America varied from 5 days in Colombia to 13 days in Uruguay.

Cost explosion. In some middle-income developing countries, health care expenditures are growing much faster than income, as increasing numbers of specialists, the availability of new medical technologies, and expanding health insurance linked to fee-for-service payments together generate a rapidly growing demand for costly tests, procedures, and treatments. In Korea, for example, the share of GDP devoted to health has shot up from 3 percent in 1980 to 7 percent in 1990.

As developing and industrial countries alike rethink the best way to provide health care in the century ahead, the WDR argues that governments should step up their financing while allowing more participation by nongovernmental organizations and the private sector in supplying services.

The policy response

It makes sense for governments to be involved. The poor cannot always afford the health care that would improve their productivity and well-being. Some actions to promote health are pure public goods or create large positive spillover effects. And market failures in health care and health insurance mean government intervention can raise welfare by improving the way those markets function.

But a major government role—especially where large outlays occur—also means the potential for continuing misallocation, waste, and an inequitable distribution of resources is huge. Governments spent over $1,000 billion in 1990, or nearly 60 percent of the global expenditures on health (Table 1). In the developing world, governments accounted for half of the $170 billion devoted to health—roughly 5 percent of their GNP.

Table 1Governments spend huge sums on health, 1990
Demographic regionPercentage of world populationTotal health expenditure (billion dollars)Health expenditure as percentage of world totalPublic sector health expenditure as percentage of regional totalPercentage of GNP spent on healthPer capita health expenditure (dollars)Ratio of per capita spending (SSA = 1)
Established market economies151,48387609.21,86078.9
Formerly socialist economies of Europe7493713.61426.0
Latin America8473604.01054.5
Middle Eastern crescent10392584.1773.3
Other Asia and islands13422394.5612.6
Sub-Saharan Africa10121554.5241.0
Demographically developing countries7817010504.7411.7
Source: World Development Report 1993. Table A.9, World Bank.Note: SSA, sub-Saharan Africa.
Source: World Development Report 1993. Table A.9, World Bank.Note: SSA, sub-Saharan Africa.

Clearly, governments have a responsibility to spend wisely and to evaluate carefully exactly what form their involvement should take. The WDR recommends four main policies to overcome the existing weaknesses of health systems in developing countries:

• Governments should finance a nationally defined package of essential public health and clinical care, especially for the poor, and should ensure the widespread and efficient delivery of such a package.

• The public sector should devote far fewer resources, or none at all, to financing health services outside of the essential package, which are of lower cost-effectiveness.

• Governments should promote types of health insurance that not only achieve broad coverage of the population but also build in payment mechanisms that control the cost of health services.

• Governments should encourage diversity and competition in the supply of health inputs, particularly drugs, supplies, and equipment, as a means of improving quality and driving down costs. They should also foster a competitive private sector to provide the full range of health services, including those financed publicly.

A basic health package

Government action in many areas of public health has already had an important payoff. The challenge now is to expand coverage of interventions with high cost-effectiveness: school-based health services; information on family planning and nutrition; programs to reduce tobacco and alcohol consumption; regulation, information, and limited public investments to improve the household environment; and AIDS prevention.

At the same time, governments should also put together a package of essential clinical services, although this will vary from country to country, depending on local health needs and the level of income. At a minimum, the package should include five groups of interventions that each address very large disease burdens at low cost: prenatal and obstetric care; family planning services; tuberculosis control, mainly through drug therapy; treatment of STDs; and care for the common serious illnesses of young children—diarrheal disease, acute respiratory infection, measles, malaria, and acute malnutrition. Other interventions could be added to make up a more generous essential package if public resources permit and the minimum package is adequately financed. Widespread adoption of even the minimum public health and clinical package would greatly improve health in developing countries.

If 80 percent of the population were reached, 32 percent of the current burden of disease in low-income countries and 15 percent of that in middle-income countries could be averted. To do so would cost just $12 per capita in low-income countries and $22 per capita in middle-income countries.

Redirecting public spending

Public financing of an essential clinical package can be justified because the package creates positive spillover effects and reduces poverty. However, the case for government financing of discretionary clinical health care services outside of the essential national package is far less compelling. In fact, if governments reduced or eliminated public funding of these services, they would actually increase in both efficiency and equity.

One important way to redirect government spending away from discretionary care is to recover costs in government hospitals, especially from the wealthy and the insured. Even in low-income countries—such as Ethiopia, Kenya, Pakistan, and the Philippines—where insurance may account for less than 5 percent of total health spending, a combination of limited private insurance and the ability of upper-income groups to pay makes it feasible for governments to charge for discretionary care delivered in public hospitals. In Kenya, the government is currently attempting to recover the cost of caring for the wealthy at the national referral hospital in Nairobi. In middle-income countries, where insurance becomes more important, there is even greater potential for cost recovery.

Governments should also phase out public subsidies to insurance, which generally benefit the better-off. In Guatemala, Honduras, Mexico, Nicaragua, and Venezuela, governments contribute a percentage of individual workers’ wages to social security sickness funds; in Chile and Uruguay, they cover the operating deficits of the funds; and in Colombia and El Salvador, they pay directly for a part of the cost of publicly insured health services. Tax deductions on employer and employee contributions subsidize private insurance in South Africa and elsewhere. Once these subsidies are in place, they are extremely difficult to eliminate. An exception is Zimbabwe, where major political shifts—national independence and the advent of a democratically elected government in 1980—led to reduced tax breaks on insurance premiums.

Controlling costs

Even where subsidies on discretionary clinical services for the better-off are cut or public insurance is universal and pays for a more comprehensive set of services in the national package, governments still must contend with the problem of escalating health care costs. These costs can crowd out spending on other sectors of the economy or raise the price of labor, threatening a country’s international competitiveness.

The sources of excess health cost are complex and much debated. Health services are labor intensive, and their productivity grows slowly compared to other areas of the economy. In the United States, higher levels of underlying morbidity and greater hospital amenities relative to the other industrial countries are part of the answer. But two types of inefficiencies are also important: high administrative costs and unnecessary use of an ever-expanding array of costly technologies for diagnostic tests and surgical procedures. These inefficiencies appear to be closely linked to two basic features of the US health system. Open-ended fee-for-service compensation for health providers encourages the development of new equipment, drugs, and procedures, since neither providers nor patients have strong incentives to hold down utilization or spending. A complex system of multiple insurance institutions and other payers, each with its own procedures, raises administrative costs substantially.

These findings concerning health cost escalation in industrialized countries are especially relevant for middle-income developing countries, which are under pressure from medical professionals, manufacturers, and consumers to use new medical techniques. They face difficult policy choices related to provider compensation. One approach to controlling health costs is to pay a fixed amount for each person (“capitation”), as is now done by health maintenance organizations in the United States and by the British National Health Service. Another approach used in several industrial countries is to provide each hospital or network of physicians with a fixed total budget. Insurers can jointly negotiate uniform fees for physicians, as is done by Japan’s social insurance system and by Zimbabwe’s private insurance system, or they can set fixed payments for specified medical procedures, as in Brazil.

Promoting competition

Although governments have a fundamental responsibility for financing basic health services, they need not be responsible for delivering those services. On the contrary, experience suggests that diversity and competition lead to better results. In a competitive system, people seeking health services can choose from a variety of providers—public, private nonprofit, and private for-profit. As developing countries move toward such a system, they face a wide range of policy options (Table 2).

Table 2Policies to improve health care delivery
Potential impact on
Provider and policyAllocative efficiencyTechnical efficiencyReaching the poor
Public sector
Protect nonsalary recurrent spending
Complete the district health delivery infrastructure
Retain fees at point of collection
Decentralize financial resources and operational authority
Subcontract ancillary services to private sector
Improve drug selection, procurement, and use
Nongovernmental organizations
Legalize and simplify registration
Provide government subsidies (per case, per diem, or block grants) for essential clinical services
Subsidize training for district health workers
Private (for-profit) sector
Remove legal barriers to practice
Promote health maintenance organizations
Establish managed competition among suppliers
Regulate private hospitals and physicians
Provide public subsidies for essential clinical services and selected public health interventions

Nongovernmental organizations (NGOs) provide a major share of health services in developing countries, especially for low-income households in the poorest countries. Although it is difficult to compare the performances of NGOs and government health facilities, recent data from Africa suggest that NGOs are often more efficient. Governments that have excluded NGOs or heavily restricted their operations have seen essential services deteriorate. Where such bans or barriers to NGO activity exist, they should be removed.

Beyond this, there are opportunities for governments to form constructive partnerships with NGOs to deliver essential clinical services. Governments in Tanzania and Lesotho allow appropriately located religious mission hospitals to serve as district hospitals and make them responsible for a full range of public health and clinical services and for performing district-wide functions such as health planning, supervision of lower-level clinics and community activities, and maintenance of emergency transport. In return, the government pays some of the NGOs’ costs.

In Africa and Asia, where traditional medicine remains an important part of the health care system, governments could make greater use of traditional practitioners. Successful examples include the use of healers to screen for malaria and distribute anti-malarial drugs in Thailand, promote modern contraceptives in Kenya, and distribute condoms in Zimbabwe and Uganda. Traditional birth attendants have also been enlisted to improve pregnancy outcomes in Bangladesh.

At the same time, governments can improve the equity and efficiency of their own health programs and facilities—thereby increasing their responsiveness to local needs—through decentralization and the use of managerial incentives. The gradual devolution of Chile’s health system over the last decade shows that a measured process, accompanied by training and institutional development, can be successful.

Governments can also reap efficiency gains by converting public hospitals into semiautonomous foundations or public enterprises, as Tunisia has done. These foundations or parastatals are less restricted by public sector procedures in managing their budgets and in hiring and firing staff, and they can recover costs and collect charitable donations for investments and operational costs. Increasing evidence suggests that the technical efficiency of government health facilities can be improved by contracting out ancillary services. In Venezuela, for example, health ministry hospitals contract out maintenance of large equipment, and social security hospitals frequently contract for laundry, gardening, food services, and security, as well as maintenance.

The way forward

The WDR points to the need for widespread and fundamental reform of health policies and health systems. It calls for changes in the level and composition of government spending for health; in public and private institutions responsible for delivering health services; and in insurance, cost recovery, and other mechanisms for financing health care.

A few developing countries are already on the road to reform. Malawi, Mauritania, and Senegal have committed themselves to devoting a larger share of government health spending to basic services and vital nonsalary items (e.g., drugs, transport, and maintenance). Chile is developing individual performance-based contracts for government hospitals. Hungary is strengthening its social security-based health insurance system. Moreover, a number of other countries (e.g., Colombia, Kenya, Mexico, Tanzania, and Uganda) have already shown an interest in testing the applicability of the WDR’s recommendations to their own national policies. If developing country governments can translate rhetoric into reform, the gains in human welfare in the coming years will be enormous.

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World Development Report 1993

This sixteenth edition examines national health policies worldwide mid measures their success in improving health and reducing costs.

The Report investigates the relationship between health and other development factors such as education and economic growth. It addresses methods of controlling diseases such as AIDS, cholera, and tuberculosis. It also points out how governments can influence lifestyle habits such as smoking and alcohol abuse, which inflate health costs and mortality rates.

The Report includes numerous case studies, tables, maps, and other illustrations. It also features World Economic Indicators—the most comprehensive and current data on health and economic development in more than 185 economies, including economies of selected former Soviet Union countries. Published for the World Bank by Oxford University Press.

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