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Improving Efficiency: Cutting the Fat
BOX 5.1 The Costs and Benefits of Health Spending There are two types of social cost and two benefits associated with government health expenditures, as identified in public finance and health economics. The first cost is that of raising revenues to pay for the program (that is, the marginal cost of public funds), and the second is the moral hazard cost of excess health care utilization. On the benefit side, there are the value attached to improved health outcomes enabled by the spending program that would otherwise have been forgone for financial or behavioral reasons and the value of protection against financial risk caused by unpredictable out-of-pocket spending (depending on how “risk-averse” a person is and on the variability of health spending). These costs and benefits are shown in table B5.1.1. As long as the total social benefit exceeds the total social cost, health spending is on average “worth it.” Additional spending is worth it if the same holds true on the margin. Otherwise, the spending may be justified on some other grounds, such as equity motives. In practice, this calculation is difficult to carry out, as all four items are hard to measure. Some estimates have been made for the U.S. Medicare program in the years following its launch in 1965, suggesting that nearly half the social costs were recouped through the benefit of financial protection, although the health benefits were uncertain (Finkelstein and McKnight 2008). As discussed in chapter 2, the value of better health (measured as the willingness to pay for it) is very high, and rates of return for specific conditions well over 100 percent are not uncommon (table 2.1). As a result, health spending that is translated into a meaningful impact on outcomes will tend to have a favorable benefit-to-cost ratio. But if spending has no impact on health, or if it affords minimal financial protection, then the dual burden of the revenue raising and moral hazard will tend to dominate the equation, and the result may be significant waste. Overall, the evidence from richer countries is that while health spending has been worth it on average (that is, benefits have exceeded costs), there is also enormous waste on the margin (Cutler 2003).
TABLE B5.1.1
The Social Costs and Benefits of Government Health Spending Costs
Benefits
Marginal cost of public funds
Value of better health
Moral hazard
Value of financial risk protection
Source: World Bank staff.
the cost-benefit calculus can be very favorable in health due to its high value, even in the presence of significant waste. The cost-benefit framework can also help put some of the foregoing discussion into context. The growth of health spending per se is not a cause for concern as long as the benefits exceed the costs. The efficiency agenda is
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