Unhealthy burden

The poor bear the brunt of declining levels in public spending on health care.

FOR some time now, it has been accepted among economists that health care is one area that should be dominated by public activity. Even the most diehard market-worshippers recognise that health spending is a clear merit good because of the substantial presence of "externalities". And there are other characteristics of health care that are associated with "market failure", such as information asymmetry, which also require state intervention and regulation.

An externality results when an action of an agent has an effect on not only the agent but also on others. A positive externality occurs when the production of a good or service benefits not only those who purchase it but others as well. In such cases, obviously, if production is left to market forces alone, the amount produced would be less than what society would consider to be optimal. State intervention - either directly through public provision or indirectly through subsidising private provision - is then required to ensure that sufficient resources are directed to this activity.

Externalities are very evident for "public health", that is, interventions targeted at the overall conditions of nutrition and sanitation that determine health, as well as communicable diseases. An action taken by one person (for instance, ensuring clean, safe water or immunising oneself against, or seeking treatment for, a communicable disease) generates direct health benefits for other individuals through reduced incidence of disease.

However, even general health care services that apparently benefit only individuals have positive externalities not only because of the social costs of morbidity but also because inequalities in health care create other social concerns. It is now recognised that overall good health is not just socially desirable but also plays an important economic role in generating higher labour productivity and creating suitable conditions for growth.

These positive externalities make government intervention in health care essential. Such intervention can take the form of price subsidies to encourage or spread the consumption of health care services or direct public provision of such services.

Asymmetric information reflects any situation in which one party to any contract or exchange has access to some information that is not known to the other party. Such information asymmetries, primarily between the service provider and the patient, pervade the health sector and cause market failure in both health care and insurance markets related to health care. For example, in any society, patients know best how improvements in health affect their own well-being, while providers have better information regarding both the causes of ill-health as well as the effectiveness of alternative health care services in restoring health or preventing the further deterioration of health.

There are also problems of "incentive incompatibility", in which the interests of the patient and the health care provider do not coincide. Both of these point to the need for government intervention in the form of regulation. Such regulation can take the form of licensing health care providers, setting limits on advertising, insisting on some professional norms that prohibit low quality, and so on. Such regulation has to ensure a balance between the need to increase welfare, by improving or ensuring quality, and the need to check the welfare reducing effects of inadvertently granting monopoly powers to providers.

Therefore, on both efficiency and equity grounds, there is no alternative to the public provision of health care. Even for the success of an insurance system based on private provision, increasing public health spending and reforming public health facilities are necessary.

Despite all this, which is now standard knowledge across the world, health expenditure in India is dominated by private spending. And this is essentially because of the inadequate public spending that has been a constant if unfortunate feature of Indian development in the past half century. Even worse is that matters appear to have deteriorated in the past 15 years.

Even in the mid-1980s, the health expenditure of Central and State governments taken together was pitifully small at just above 1 per cent of the gross domestic product (GDP), but now it is only around 0.9 per cent. Further, it fell to as low as 0.8 per cent in 2001-02. It is also significant that in recent years a greater proportion of the GDP has been taken up by revenue expenditure (essentially, the payment of salaries) rather than on capital expenditure for creating much needed basic physical infrastructure for health facilities.

The ratio of Central government spending to total State government spending is currently around 1:2. In the past decade, Central government expenditure on health and related areas has been relatively flat at around 0.35 per cent of the GDP, with a small downturn in the mid-1990s and a small increase in the very recent period. Within this, expenditures on health care alone have been completely flat at only 0.1 per cent of the GDP. There has been some slight increase in expenditures on family welfare, which include some expenditure for reproductive health.

However, spending on women and child development has remained a relatively constant share of the GDP. This is surprising considering that this budget head is dominated by the Integrated Child Development Services (ICDS), and the Supreme Court's orders make it incumbent upon the Central government to increase dramatically the spending on ICDS in order to make it universal.

This completely inadequate government expenditure has forced citizens to bear the brunt of health spending. According to the National Health Accounts of India for 2001, households accounted for more than two-thirds of health spending in the country, around three times the amount of all government (Central, State and local) expenditure taken together. Employers (firms) account for only 5 per cent, but what is notable is the negligible role played by both external sources and others, including non-governmental organisations (NGOs).

Despite the reported increase in foreign aid for dealing with acquired immune deficiency syndrome and similar issues, all external sources taken together accounted for only 2 per cent of total health spending, while NGOs accounted for only 0.3 per cent. (However, some foreign aid - that portion going directly to governmental sources for defined programmes of the government - is included in the health expenditure of the Central and State governments.)

More recent estimates suggest that the role of households has increased even more substantially in the most recent period. According to the Report of the National Commission on Macroeconomics and Health, 2005, households undertook nearly three-fourths of all the health spending in the country. Public spending was only 22 per cent, and all other sources accounted for less than 5 per cent.

This means that India has the lowest ratio of public to private health expenditure among almost all countries in the world, both developed and developing. Compared with India's public-private health spending ratio of 1:4, the ratio in China is around 2:3, while even Pakistan has a ratio of 1:3. In most developed countries, of course, public health spending is much greater than private spending.

Further, there is a trend of gradually increasing household expenditure on health care, even as a share of household budgets. Preliminary results from the latest National Sample Survey data for 2004-05 suggest that for rural households spending on health now accounts for as much as 6.6 per cent of their total consumption expenditure, up from 5.4 per cent in 2003-04. For urban households, the increase has been from 4.6 per cent to 5.2 per cent.

This in turn probably reflects three separate trends: the value placed on health is so great that even poor households are willing to spend and incur debt to ensure minimal health care; the worsening quality and spread of, and therefore the reduced access to, reliable public health services; and the increase in user charges and other effective charges upon consumers even in the public health system, as government-run hospitals and clinics that are starved of public funds resort to making citizens pay more for medicines, diagnostic procedures and surgical aids.

Further, out-of-pocket expenses account for all the private expenditure in India. This is inherently regressive and puts a disproportionate burden for health care on poor households. The burden on citizens is particularly high because, even as households bear the brunt of aggregate health spending in the country, systems of affordable health insurance are non-existent or poorly developed.

It has already been seen that employers account for relatively little in terms of spending on health. In any case, with more than 90 per cent of Indian workers having an "informal" or unorganised status, there are few possibilities of ensuring that employers bear at least part of the costs of medical treatment. Therefore, accidents or illnesses requiring hospitalisation have drastic effects on the households of the affected persons, especially for poor households.

This is equally true of urban and rural households, but the effects may be particularly sharp among the rural population because of the relative paucity of any publicly provided treatment. Recent studies of agrarian distress have also found that health expenditures have been significant in causing or increasing the indebtedness of farmers, which has in turn been a proximate cause of farmers' suicides.

Obviously, government health expenditure has got to be increased substantially from the current abysmally low levels if India is to achieve even a small part of the potential that our leaders are so proud of declaring.