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monitor effort and quality in its provision, which poses a challenge for contracting out. But while it is easy to enumerate these sources of inefficiency, it is far harder to overcome them. Nor is the measurement of efficiency straightforward, particularly when we try to move from outputs (for example, number of hospital admissions) to outcomes (mortality rates, for instance). How do we know if a particular procedure was necessary or not? If a patient’s condition takes a turn for the better (worse), was it because of the care provided or just the underlying disease taking its course? Common techniques for measuring efficiency are problematic and should be approached with caution (Newhouse 1994; Hollingsworth 2008). On the system level, it is easier to identify static inefficiency at any point in time, but it is more difficult to say whether it is getting better or worse over time (Chernew and Newhouse 2012). Fiscal sustainability is a much broader issue, embracing taxation, debt, and other sectoral expenditure policies and is not readily addressed on a sector-by-sector basis. In many countries in ECA, health is the second-largest spending category, albeit a distant second behind pension spending, and thus it has a large impact on the government’s fiscal position. Clearly, the trend whereby growth in health spending exceeds overall economic growth cannot go on forever. But the point at which health expenditures become “too much” may be very high, since, as we saw in chapter 2, the trade-off between health and other goods will increasingly favor health as countries grow richer. For example, it has been argued that the optimal health share of total GDP in the United States may exceed 30 percent by 2050 (Hall and Jones 2007). But assessing fiscal sustainability in all its dimensions is beyond the scope of this report. If the goal of policy were to limit government health expenditure to some target level, the solution would be relatively easy. For example, hard spending caps could be imposed on all facilities, above which no reimbursements would be made. But improving welfare is an altogether more difficult task, and thus a full assessment of health budgets must move beyond how much is spent and how efficient it is. Applying a cost-benefit framework can help.
Weighing the Costs and Benefits of Health Spending As with any other government expenditure priority, it can be helpful to apply a cost-benefit analysis to health spending, even if only in abstract terms. Box 5.1 has further details. As discussed in chapter 2,
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