Challenges to Health Reform in Developing Nations

By: Matthew Kukla

I apologize for the delay in posts; I’ve been away doing health reform work in Costa Rica for the last few weeks and am now just returning to the daily grind.  Two weeks ago we spoke about challenges to health reform in developed societies – how political and cultural differences impact health reform.  This week, I’d like to focus on obstacles that exist primarily in developing economies, though impact developed ones to a lesser extent.  You might wonder why I am focusing on the developing world.  It appears so far away from our daily life and inconsequential.  While true to a certain extent, I would argue that as the world becomes increasingly globalized, a single nation’s actions can impact many others.  Take, for instance, China and India.  These two countries host roughly 1/3 of the world’s population, and how each respective government builds its health system will shape resource needs and the survival of billions for generations.  For instance, whether China learns from mistakes and lessons of the developed world will determine how effective, efficient and costly health care is down the road.  Ultimately, these outcomes shape how much its government can spend on defense, clean energy or other social programs.

A rule of thumb when examining health care systems in the developing world is to drastically magnify any challenges that we face and realize that underlying, world views and assumptions we take for granted do not apply there.  To begin, human, administrative and financial resource capacities, as well as corruption and poor regulation, are severe deterrents from successfully implementing health reform.  Many nations such as Colombia, Ghana and Kenya have attempted to create social health insurance systems, whereby external agencies finance health care, organize, manage and pay providers.  Yet experience indicates that these nations lack adequate technology, educated workers and regulatory structures to ensure this SHI system operates well.  Let take this example:

In India, roughly 470 million (out of 1.1 billion) people live under $1.75 per day.  75% of those individuals live in rural areas, the norm for most developing countries, and simply struggle to survive.  If given the opportunity, they would work harder than any American to get out of poverty yet such opportunities never come.  We know that in these areas, the supply of doctors, hospitals and clinics are minute; unqualified providers who may be well known in villages often fill the demand and treat patients for little costs, yet end up hurting those patients.  Health care facilities often lack personnel, medical supplies, electricity, telephones, water and sanitation, thus drastically hindering their ability to offer sound, medical care.  The uncertainties of access, quality and availability of health care cause individuals to refrain from visiting them.  Patients would rather not walk several miles to the nearest health center only to find it closed or out of supplies.  If they do choose to visit a facility, it costs time and money to travel there.  Government run health care is also not always free, because physicians can charge patients if they arrive after normal business hours or simply price gouge.  If the facility has no medications, the patient must pay out of pocket to obtain them on the private market.  Making $1.75 per day, the poor will often go bankrupt and die paying these fees.

Challenges to Health Reform

By: Matthew Kukla

As mentioned last week, the next two posts will be broken into two sections.  This post will discuss how government structure, culture and social differences muddy the reform waters.  These challenges must be strongly considered and overcome throughout the process, because theory and empirical evidence simply isn’t enough to get an effective, efficient and equitable health system implemented.

Successful reform is often a long process – nations rarely pass comprehensive policies that tackle financing, organization, regulation and payment systems simultaneously.  Such periods of major health reform, though, generally occur during political and or economic crises.  Politically, a nation may experience regime change where power and cultural momentum drastically shift and allow health reform to pass.  Bangladesh, for example, experienced a military takeover of government in 1979 and was able to quickly implement pharmaceutical reform.  After a similar military coup in 1983, Chile pushed through comprehensive health reform.  In the late 1980’s, Taiwan began setting up a democracy after breaking away from China’s authoritarian rule; this political and social transformation resulted in systematic health reform by 1995 that now provides efficient, effective and universal health care.  Economic crises, such as major recessions and depressions, may also create momentum for health reform.  Governments and citizens, despite numerous setbacks, occasionally seek to expand coverage and improve the efficiency of their health systems.  We see this happen most often in developed nations (US, UK, etc) where GDP per capita is much higher and governments can run temporary deficits without severe repercussion.  However, even during instances of extreme change governments still encounter resistance.  In the aforementioned cases, Bangladesh ultimately failed to overhaul the entire health system almost a decade later due to interest group opposition; likewise, Chile required 5-10 years to successfully implement new policies due to poor resource capacity and political resistance.  The United States has encountered severe resistance due to high deficits and an economy that has yet to rebound.

For the majority of cases where less expansive health reform occurs, government structure and culture present the greatest obstacles in developed societies.  Evidence indicates that it is rarely possible to use a “cookie cutter” approach to transferring health policies from one nation to the next — every country is unique, and reform must be tailored to meet its individual needs and characteristics.  Thus, even though two nations share similar health care markets, their political and cultural differences may prove too disparate to conveniently swap health reform solutions.  That is not to say that such differences are impossible to overcome; political obstacles can be conquered with enough support and intellect, and evidence shows that changes in culture are actually quite elastic.  Nonetheless, these are critical issues that must be strongly considered.

Regulation Pt. II

By: Matthew Kukla

I intended for this post to be about the challenges of health reform; notably how government structure, culture and social differences, human and administrative resource capacity, corruption and other bureaucratic obstacles muddy the reform waters.  Theory and empirical evidence simply isn’t enough to get a health system effectively, efficiently and equitably implemented.  I planned to talk about the work of William Hsiao and other reformers with decades of real world experience dealing with such issues. Turns out I’ll get to that next week.  A family friend who has been running a successful business for over 30 years wrote to me after the last post and asked sincere, critical questions about why health care markets fail and what differentiates these problems from all other industries.  Because it’s a major economic topic, critical to understand and perhaps the most controversial, I’d like to devote one more post to it and other myths.

The first question is “What’s so different about information gaps between health care and all other goods, like cars?”  To begin, health care deals heavily with life and death, unlike most other industries — so people aren’t necessarily rational, economic actors when they or family members are extremely sick.  They’ll often do and spend whatever it takes to get cured, even when prices rise.  The concept was discussed in the 2^nd post and indicated that many (but certainly not all) health care procedures incite inelastic patient demand.  The economic evidence for this is overwhelming.  Now here’s where it gets important.  Third party payers, or insurance companies, are there to help us pay for services that we can’t afford.  When they foot the bill, patients don’t feel the full price tag and are more willing to buy additional services and spend more money that isn’t theirs.  Coupled with inadequate information, they’re even more likely to consume extra health services when the doctor tells them it’s necessary.  These two factors cause the price of health care to rise in a vicious cycle.

The second question is, “So why not have the insurance company pay a set fee to the doctor (ie capitation) and let the patients pay the rest?  Doctors should charge what they want, and patients can pay out of pocket based on quality.”  The answer: That’s a wonderful idea.  The Mayo clinic does this successfully, provides top quality care and only takes privately insured patients.  But throughout entire health care systems the quality and prices set by doctors and hospitals are very difficult to measure without transparent and sound information – which is why billions of U.S. dollars are actually being spent on this kind of research.

Regulation Pt. I

By: Matthew Kukla

Regulation – perhaps one of the most disliked words by businesses, fundamental economists and the average American citizen.  Most of us have grown to believe the market knows best; when left alone it operates more efficiently and produces better outcomes than the public sector ever could.  This may be true, under certain conditions, but the devil is always in the details.  Even where markets operate perfectly, government must still regulate to establish rules that present an open and honest playing field for consumers and businesses.  From an ethical standpoint, they also regulate, because these markets may provide inadequate equity and well-being among the population; in other words, perfect markets do not consider unbalanced distributions of income or differences in health care needs.  However, there are times when markets simply don’t function properly, thereby requiring governments to improve their performance.  Such is the case of health care.

In the first two categories, for instance, government may protect patients’ rights when dealing with health care providers and insurers, as the latter will risk select and take advantage of ill patients if left unregulated (even when their illness may be unavoidable).  Additionally, governments might reallocate recent medical graduates to rural areas where services are in low supply.  In the third group, several types of “market failures” exist.  Externalities, like immunizations, are goods that have unintended benefits or costs on society beyond the scope of transaction between an individual consumer and seller.  As more people are immunized to a given disease, the population is less likely to catch that disease – thus in order to convince individuals to purchase immunizations, governments may need to provide subsidies.  For bad externalities, like cigarettes, governments tax consumers or businesses to improve social welfare.  Regulation is also crucial when helping patients or consumers make informed choices, because there exists severe “asymmetric information” in the health care sector.  The knowledge gap between buyers and sellers in health care is enormous and wide-spread; we see this in pharmaceutical drug advertising, where patients often know very little about the product being marketed.  Providers know far more than patients about necessary treatments and quality of health care, thus it is crucial for governments to regulate by establishing quality indicators for hospitals and doctors as well as creating incentives to provide sound levels of care.  Finally, regulation can limit monopolies throughout the health sector.  Failure to regulate often leads to poor health outcomes, higher costs & inequity through mechanisms such as supplier induced demand and weak competition – i.e. the most crucial element of functioning markets.

In developed economies, like the United States, regulation is much easier due to greater resource capacity, laws and human capital (though political and cultural challenges abound).  Developing societies, however, lack such administrative resources and experience severe regulatory challenges – which are often the greatest cause of failing health care markets and high inequity among the population.  For instance, unqualified practitioners and clinics in addition to poor medical supplies and ineffective drugs run rampant in parts of rural India, because it is impossible for all levels of government to enforce licensing, maintain transparency and reduce corruption.

Payment and Organization of Health Care

By: Mathew Kukla

As we examined financial mechanisms for health care systems in the previous post, we’ll continue by discussing payment and organizational methods.  While hospitals and doctors can be paid via numerous methods, we’ll stick to the four primary ones: fee-for-service (FFS), capitation, salary and salary plus bonus.  Most developing nations and few developed ones use fee-for-service, the former because it’s impossible to regulate more complex payment systems due to inadequate resources and laws.  In the latter, political pressure from physicians and hospitals make it difficult to do otherwise.  Think about the United States briefly; physicians must pay exorbitant amounts for medical schools and (perhaps rightly so) argue that they must make up these costs in practice by charging a set fee for every service provided.  Fee-for-service also enables providers to maintain autonomy in a profession that has historically operated independent of large organizations and regulations.  The downside is that FFS encourages overuse of services by doctors – a term economists call “supplier induced demand.”  Consequently, health care costs for the population rise and risk is shifted to insurance companies, the government and or patients.

Capitation and salary do just the opposite.  The former pays doctors a pre-arranged, lump sum of money for a given group of patients, and physicians must see these patients whenever they need care; as one expects, salary is nearly identical except doctors do not receive patients in groups.  Insurance companies and governments pass on the financial risk to providers, thereby reducing overall health care costs through fewer unnecessary services.  However, set revenues mean that providers must keep costs low and have less financial incentive to see sick patients, another term for “risk selection.”  Moral objections aside, providers may actually under provide health care services to those most in need.  A remedy for all three methods is salary plus bonus, whereby doctors may be given additional income when they meet high quality or outcome standards.  This reduces costs yet also provides incentives for physicians to effectively treat patients.  Economically speaking, hospitals behave similarly when given identical payment schemes, though they are usually reimbursed by DRG methods (ie. based on the cost of specific patients) or set to global budgets.  When considering these payment methods and their effect on individuals, it is crucial to understand that, in the developed world, most health care services are demand inelastic and price will minimally alter patient behavior.  In other words, for necessary services patients will continue demanding similar levels of care despite an increase or decrease in price.  Conversely, charging higher prices for elective and unnecessary services can reduce wasteful demand, because patients are more responsive to them.

Individuals rightly think of three main, organization styles for hospitals, doctors and insurance companies: private (for-profit), private (non-profit) and public.  It is fair to assume that the managerial and operational efficiency of private entities generally outweigh their public counterparts due to greater incentives and flexibility.  Nonetheless, it is critical to realize that if too much competition spurs low prices and fewer profits, providers may be more willing to induce patient demand for additional services and less willing to subsidize the poor.  Too little competition means that quality of care may decline and prices rise.