There are perceptions that government spending on health in India, which is low by international standards, has been further undermined during the period of economic liberalisation since the early 1990s. In the first of a two-article Macroscan on this subject, C. P. Chandrasekhar and Jayati Ghosh examine the relative significance of public and private expenditure on health and the trends in Central Government expenditure. The next edition will analyse health expenditure by State governments in the recent past.

C. P. Chandrasekhar
Jayati Ghosh

It is well known that health expenditure in India is dominated by private spending. To a large extent this is a reflection of the inadequate public spending that has been a constant if unfortunate feature of Indian development in the past half century.

This is particularly unfortunate because of the large positive externalities associated with health spending, which make health spending a clear merit good.

The greater reliance on private delivery of health infrastructure and health services therefore means that overall these will be socially underprovided by private agents, and also deny adequate access to the poor. This in turn has adverse outcomes not only for the affected population but for society as a whole. It adversely affects current social welfare and labour productivity, and of course harms future growth and development prospects.

The two main characteristics of healthcare which lead to market failure and thus necessitate state intervention are the presence of externalities and information asymmetries.

An externality results when an action of an agent has an effect not only upon the agent but also upon others. If a good or service not only benefits those who purchase these but others as well, then there is said to be a positive externality in its consumption.

In such cases, the operation of market forces alone would lead to sub-optimal consumption and production of the relevant good or service. State intervention 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 overall conditions of nutrition and sanitation that determine health, as well as communicable diseases which are passed either directly among humans or indirectly through the physical environment.

An action taken by one person (example, ensuring clean, safe water, immunising oneself against, or seeking treatment for, a communicable disease) generates direct health benefits for other individuals, through reduced rates of disease.

However, even general healthcare services that apparently affect only individuals have positive externalities, not only because of the social costs of morbidity, but because inequalities in healthcare create other social concerns.

These positive externalities make government intervention essential. Such intervention can take the form of price subsidies to encourage or spread the consumption of healthcare 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 patient, pervade the health sector and cause market failure in both healthcare and healthcare insurance markets. For example, in any society, patients know best how improvements in the health affects their own well-being, while providers have better information regarding both the causes of ill-health and the effectiveness of alternative healthcare 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 healthcare provider need 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 of healthcare providers, limits on advertising, insistence on some professional norms that prohibit low quality, etc. Such regulation has to ensure balance between the need to increase welfare by improving or ensuring quality, and the welfare reducing effects of inadvertently granting monopoly powers to providers.

Therefore from both the efficiency and equity grounds, there is no alternative to the public provision of healthcare. Even for the success of an insurance system based on private provision, increased public health spending and reforming of public health facilities are necessary. This is what makes the theoretical case for health expenditure by the government.

The international experience

Health expenditure is highly unequal across the globe. As is to be expected, developed countries spend the most on health per person. OECD countries accounted for less than 20 per cent of the world's population in the 2000 but were responsible for almost 90 per cent of the world's health spending. Therefore 80 per cent of world's population spent only 10 per cent of the total expenditure on health. This includes people in the Asia-Pacific as well as African and Latin American countries. Africa accounts for about 25 per cent of the global burden of disease but only about 2 per cent of global health spending. (World Health Report, 2003).

Similarly, health expenditure, both in terms of percentage of GDP spent on health and per capita health expenditure, is much higher in the developed countries, as evident from Table 1. The share of GDP spent on health ranges from a low of 1.6 per cent in Azerbaijan to 13.9 per cent in the US. Similarly, there is a very wide variation of per capita health expenditure across countries, which is typically extremely low in developing countries compared with most of the developed countries. The range in 2001 was from $14 in Ethiopia to $4,877 in the US.

What is also notable from Table 1 is the much higher ratio of public health spending to private spending in the developed countries. By contrast, in middle developed and low developed countries, either private expenditure dominates or there is very little difference between the shares of private and public expenditure, although in general both tend to be low.

It is notable that India has the lowest ratio of public to private health expenditure among all the countries described in this table, including the poorest countries. Further, all the private expenditure in India (as in some other countries) is constituted by out-of-pocket expenses. This is inherently regressive and puts a disproportionate burden for healthcare on poor households.

Public health expenditure in India

The first systematic analysis of the distribution of health spending in India by source of funds was published in the National Health Accounts of India, 2001-02.

The results are shown in Chart 1, and confirm the widespread perception that private households account for the bulk of health expenditure.

According to this estimate, households accounted for more than two-thirds of health spending in the country, and around three times the amount of all government expenditure taken together, by the Central, State and local governments.

Employers (firms) account for only 5 per cent, but what is especially notable is the negligible role played by both external sources and others, including NGOs.

Despite the reported increase in foreign aid for dealing with HIV/AIDS 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 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.

The exceptionally high burden placed upon households in the Indian context reflects the inadequate quantity and quality of public health service delivery.

As Chart 2 shows, even in the mid-1980s, health expenditure of Central and State governments taken together was more than 1 per cent of GDP, but now it is only around 0.9 per cent. Further, it has fallen as low as around 0.8 per cent in 2001-02.

It is also significant that a greater proportion is taken up by revenue expenditure (essentially, the payment of salaries) rather than capital expenditure for creating much-needed basic physical infrastructure.

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 GDP, with a small downturn in the mid-1990s and a small increase in the very recent period. Within this, expenditures on health alone have been completely flat at only 0.1 per cent of 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 relatively constant as share of GDP.

This in turn has been associated with a trend of gradually increasing household expenditure on healthcare. Chart 3 reveals that spending on health has been gradually increasing as a proportion of total household consumption.

The increase has been especially notable in rural areas, where health now accounts for nearly 7 per cent of total household consumption expenditure.

This, in turn, probably reflects three separate trends: the greater valuation placed on health such that even poor households are willing to spend and incur debt to ensure minimal healthcare; 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.

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.

And, as noted earlier, employers (both public and private) account for relatively little in terms of spending on health, and in any case with more than 90 per cent of Indian workers having "informal" or unorganised status, there are few possibilities of ensuring that employers bear at least part of the costs of medical treatment.

Therefore instances of accident or severe illness requiring hospitalisation have drastic effects upon the households of the affected persons, even among 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. For example, 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.

In the next edition of

Macroscan

, we will examine some of the State-level evidence of public expenditure on health, and see how it has affected some basic indicators of health outcomes.

(This article was published in the Business Line print edition dated September 19, 2006)
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