Trade and Investment

The importance of investing in health

Stefan Kapferer
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This article is published in collaboration with the Bill and Melinda Gates Foundation.

Investing in the health system not only saves lives, it is also a crucial investment in the wider economy. This is because ill-health impairs productivity, hinders job prospects and adversely affects human capital development. There has been a strong political and historical commitment to treating health as a social goal either through legislation or mandating and prioritizing expenditure on health. For instance, the governments of Brazil, Costa Rica and Thailand have established social security and health insurance systems for the entire population. The key question is while it is universally accepted that health is a noble and worthwhile investment, how can we demonstrate value for money, especially in areas that compete for government funding?

India spends very little on health: $215 in terms of purchasing power parity per person, which is lower than comparable middle-income countries such as China, Brazil and South Africa. Further, the majority of this spending is made directly by Indian households. Much of this expenditure is at the point of health services being offered, which can also affect the health-seeking behaviour; such out-of-pocket payments for healthcare can cause severe financial hardship and impoverishment.

The push by the Indian government for universal health coverage in recent years is commendable. But while spending more on health is essential in India, value for money also needs to be demonstrated. OECD’s experience is that additional expenditure places pressure on scarce resources. With only so many doctors, nurses, health workers and physical facilities at a moment in time, higher spending means higher prices as well as more services.

Some of the most successful examples of expanding coverage among middle-income countries in recent years have addressed this challenge by defining a limited set of essential, cost-effective services. For example, Mexico’s Seguro Popular programme provided an explicit package of cost-effective interventions, including pharmaceuticals. Chile identifies about 70 essential services that are fully covered by public and private insurance.

Given India’s federal structure, special attention needs to be given to ensure that health remains a priority for states and Union territories. In the backdrop of the 14th Finance Commission’s recommendation wherein the state’s share in the central divisible pool has been enhanced from 32% to 42%, a key challenge is to ensure that a sufficient level of funds transferred from the centre to states and Union territories is spent on health.

To this end, state governments should be incentivized to expand health coverage to the poor, focusing on cost-effective interventions. For example, financing to states in Mexico was linked to the number of additional persons that signed up to the Seguro Popular programme, with states providing a contribution. In Brazil, district governments received a fixed per capita amount for new families enrolled in the health programme and a variable per capita component that varied according to socio-economic characteristics of particular areas.

As well as incentivizing states to expand healthcare to the poor, such policies also offer higher prospective rewards for those states with low health coverage. This provides scope to achieve fiscal equalization between richer and poorer states in the form of appropriate transfer schemes from the centre aimed at reducing interstate disparities in health spending. Indeed, what is crucial is to move away from historical or incremental budgeting (which is linked to supply rather than need), to a more needs-based funding approach.

In addition to the Mexico and Brazil examples, a number of OECD countries use funding formulae to allocate resources across geographic localities based on need. For example, in the UK, a weighted capitation formula that accounts for a locality’s socio-economic characteristics is used to equitably allocate funds to clinical commissioning groups (the units responsible for health services in specific localities). The underlying principle of the weighted capitation formula as demonstrated in the National Health Service is to distribute resources based on the relative needs of each area. This is to enable similar levels of healthcare for populations with similar needs, with the further objective of helping to reduce avoidable health inequalities.

Governments also need to work closely together so that minimum quality standards are maintained, and specialist resources are used efficiently. The central government defining the minimum standards of care is an important first step. The 2010 Clinical Establishments (Registration and Regulation) Act offers the core legislative framework for registering health facilities and developing standards in India. However, the implementation of minimum standards requires coordinated political will at both the central and state levels. For this, lessons from OECD countries suggest accountability mechanisms for healthcare outcomes matter more than the degree of decentralization or type of provision. In particular, balancing responsibilities across central and local authorities is important.

The central government plays a stewardship role, and has a key planning and oversight role, with a consolidated national information infrastructure necessary to adequately monitor health outcomes, while the states are responsible for the implementation of programmes. This is the case even in more decentralized countries such as Australia, Canada, Germany and the Scandinavian nations. For example, in Canada and Sweden, a performance measurement framework and open comparison system, respectively, allow easy comparison of quality of care across localities.

Effective policies can ensure that states and Union territories’ incremental spending goes to health, but also enhances value for money. This is because funding can be linked to cost-effective interventions, such as preventive and primary care activities, rather than less cost-effective (but more visible, and therefore more politically attractive) interventions, such as construction of new hospitals.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Stefan Kapferer was appointed Deputy Secretary-General of the OECD on October 6, 2014.

Image: A woman holds her newborn baby in a nursery in the Juba Teaching Hospital in Sudan. REUTERS/Andreea Campeanu.

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