Module 4: Identifying Supply of Health Services

Special features of health care services pose challenges to the typical supply model for other products. Three notable aspects include the complexity of product, complexity of organization, and specialization of input markets.(1) Specifically, product complexity involves the joint combination of goods and services that have interdependent effects on health outcomes. Furthermore, difficulties in objective evaluation of health care occur because assessments of health quality may be subject to provider and consumer opinions. Complexity of organization stems from the overlap of institutions and markets that act as health care suppliers, and the specialization of input markets is suggestive of the supply-side barriers to market entry from professional regulations.

As a result, economic analysis more frequently interprets supply behavior according to the inputs of health production function. Input bundles may include traditional costs of labor and capital (physical or human), with information limited to the amount of such data available from developing countries.

Financing Health Services

Despite the identification of health supply according to costs of inputs, an appropriate review of supply requires the evaluation of the financial aspect of the health care market, as “methods of financing affect the supply or provision of services.”(2) Public or private payment systems may favor certain types of services (i.e. focusing on preventive or curative care, technology, personnel, investment, or maintenance), or they may concentrate resources on certain types of recipients (i.e. the elderly or the economically disadvantaged). To assess the operation of health care and distribution of services accurately, it is crucial to consider the sources that make health care available and affordable.
Specifically, financial mechanisms originate from:(3)

Additionally, sources generally come from one of two categories: public and private financing. One common public source is general tax revenue, claimed from duties on imports, exports, and sales tax. Taxation systems can be progressive (heavier burden on the rich) or regressive (heavier burden on the poor), thereby influencing the equity of collection and redistribution of benefits. In terms of impact on financing health services, taxation schemes are limited in how much can be collected and allocated to health in the midst of competing political and social objectives. Another source is deficit financing, or the use of borrowed funds with repayment and interest over time. Typically, deficit financing is used for short-term construction projects to expand physical infrastructure like building hospitals and irrigation systems. Such modes of financing, however, suffer from a lack of revenue-generating means to “service the debt.”(4) Earmarked taxes are specifically collected for marked purposes. Although they are unpopular among politicians and tax collectors, an advantage is the ability to prioritize funding of specific programs according to the intended tax objective.

Amidst the debate over health care reform in the United States, the phrase “social insurance” has generated significant buzz among proponents and critics of public policy initiatives. Although concerns have focused on implications for health rights and equity, social health insurance is fundamentally a method of financing. Conventionally involving mandatory insurance payments for employed workers or a tax on employers, social insurance schemes may also involve government participation to collect “unconventional” payment based on other measures of wealth. The theory behind social insurance is to finance health care according to the “pooled risks of a large population,” thereby collecting a standard proportion of individuals’ income even if the resulting benefits are not equal.(5)

In contrast, private health insurance schemes comprise the bulk of private sources of finance. Unlike social insurance, private plans charge individuals according to personal risks of illness, and thus vary in terms of coverage, cost, revenue, and structure. In the United States, private health insurance has also utilized a scheme with health maintenance organizations (HMOs), which are contracted health care providers that cover all needs in exchange for an annual payment. Cooperation between insurance agencies and providers helps to contain costs, while the consumer option among different providers ensures market competition and efficiency. While private schemes benefit from resistance to political influence, they are costly, selective, and contribute to disparities in care.

Other private sources of funding include employer-financed schemes, where employers may completely fund health services, employ medical personnel, or maintain medical facilities for employee use. However, such mechanisms face issues in quality, reliability, and sustainability of care. Financial support can also be derived from charitable or voluntary contributions, though problems may arise due to the discrepancy between donor and recipient priorities and the threat of unsustainable long-term finances; a reliance on charitable contributions may slow a country’s individual economic development and replace other sources of finance. Conversely, community financing attempts “to develop new types of local institutions that can coordinate and systematically utilize the community resources.”(6) Although unlikely to generate sufficient resources when used as an isolated financial mechanism, community finance is a sustainable framework that promotes self-reliance and “culturally appropriate delivery systems.”(7)

Thus far, we have presented various schemes of public and private health care financing. Whether a mechanism involves the government or private insurance agencies, the ultimate source of most financing is still patient household income to be used toward health care. Specifically, out-of-pocket expenses are payments made directly from the patient to the provider, expressed in payments for fees, goods, or services, sometimes in conjunction with other forms of coverage, such as copayments or payments in excess of insurance premiums.

Financing in Developing Countries

Reviewing the Options

In the field of international development, it has been suggested that developing countries need to increase the excess of imports over exports in order to achieve economic growth. However, such a balance of receipts is not simple. Developing countries are challenged by increased competition against their primary commodities, as developed countries continue to advance production and supply of food and materials. Markets for developing countries are prone to fluctuations in supply and demand of their own products, due to influence from external markets and global prices. Any combination of lowered demand or increased oil prices from developed countries will decrease exports, thereby shortchanging a major consumer base for developing countries.

The instability of markets similarly extends into the health care market. As a result, the various options for financing health care services in developing countries are prone to specific challenges. In a review of the public and private mechanisms described above, we discuss how some options may or may not be viable as stand-alone sources of funding.

Among public mechanisms of finance, general tax revenues in developing countries are not always dependable sources of funding, as political priorities do not always align with public health objectives. Even if taxation schemes are in place, the instability of imports and exports means that an uncertain influx of revenue may contribute to disparities between the limited funds budgeted to health care and the actual expenditures made. In terms of equity, taxation also brings unique challenges, since the “poorest sections of society fall outside the formal economy and indirect taxes may be levied primarily on luxury items consumed predominantly by the wealthier population groups.”(8) Use of tax revenue may also target technologically advanced care – delivery systems that often do not reach rural demographics. As another option imposed by the government, deficit funding may be inhibited by high inflation rates and a general lack of confidence in the governments of developing countries. Because deficit funding is often used for short-term construction projects, borrowing from foreign banks lends only short-term support. A history of excessive deficit financing in the past has now created a burden of debt repayment problems for emerging economies.

Problems with the publicly provided social insurance plan are mainly related to equity in financial contribution and benefits received. The argument that “social insurance reinforces the maldistribution of resources between rural and urban areas in developing countries” stems from the fact that social schemes support urban, employed workers while leaving rural, informally employed workers at a disadvantage. It is also suggested that a socially insured health care delivery system would compete with already limited medical resources and personnel. Nevertheless, the hope of funding organized health services devoid of private interests lends popular support to social insurance plans.

In developing countries, private sources of financing health care remain underdeveloped. However, lessons learned from the institution of private health insurance in developed countries show that elements of high cost, risk exclusion, and inequitable coverage render private insurance schemes generally unsuitable for developing countries.(9) Several countries do offer obligatory first aid or occupational health services as part of their employer-financed schemes. Still, these plans are limited in breadth of coverage, and the quality of services may be difficult to control. In the past, charitable contributions have comprised a large portion of service development and health care infrastructure in developing nations. Some countries still rely heavily on voluntary foreign aid as a financial resource. Although helpful in emergencies, these contributions are neither steady nor predictable, and should not be depended on as an adequate source of financial support. In recent years, many governments have gradually replaced foreign missions and international aid services, increasing autonomy over the health care provisions in their countries.

As a capacity-building method, community financing has been praised as an effective and sustainable way to mobilize national and local resources in developing countries. Communities are encouraged to participate in the market, including the health care market. With increasing involvement, health care initiatives can fall under the use and direction of the immediate actors – the recipients and providers of care. Although critics note that community financing burdens the most vulnerable individuals who are unable to afford it, and that the build-up of such financial infrastructure requires excessive time and resources, there is hope that campaigns for community-led support take greater priority among developing countries.

One potential way to improve healthcare in developing countries is through a tax-funded healthcare system in which people are taxed according to their financial means (e.g. income and family size). Another solution is to pay for healthcare through informal contributions, also depending on available familial finances. However, developing countries often lack a trusted, central political authority with the command to collect and oversee taxes and donations. As a result, officials in developing countries have tried different strategies to finance healthcare for the impoverished and unemployed. Community-based health insurance (or a system of mutual health organizations)is non-profit and voluntary. This insurance scheme pools resources to cover healthcare for a target population. This approach was created to share the economic burden, but it can fluctuate in effectiveness depending on available funds and risk assessments. In addition, in developing countries where health facilities are often located far away from their benefactors, mutual health organizations often require transportation costs to ensure healthcare delivery.(10)

Case Study: Community-Based Health Insurance Schemes in Africa

Trust is one of the most important factors in establishing a viable mutual health organization with the financial and organizational wherewithal to care for large, impoverished populations. Mutual health organizations launched by trusted non-profit or non-governmental organizations in the area, for example, may observe more widespread membership in healthcare schemes. Similarly important aspects are contribution costs and patient satisfaction. For some community organizations, the contribution rate is a fixed sum, whereas others use a percentage of income and number of family members. Satisfaction often comes from heeding local suggestions and feedback. Enrollment rates in West and Central African countries have shown increases due to an established community-based health insurance presence as well as attractive membership contributions. In Uganda, for example, contributions are collected at monthly meetings to coordinate urban worker paychecks; in more agriculturally-dependent areas, contributions are timed with harvests.(11) These approaches have widespread appeal and create a larger pool from which to draw healthcare finances.

Private vs. Public?

In theory, the delegation to publicly or privately funded health care should not determine health provider performance. Instead, the use of incentives affects the style of management and subsequent quality of delivery. Economists suggest that the incentive of profit in private institutions is partly responsible for the market failure of health care. Specifically, this is due to two factors: first, health services produce externalities (additional benefits or consequences) that are not valued in the market transaction. In this “accounting misstep,” such externalities become under-provided in private markets. Second, an imbalance of knowledge and information relevant to health care transactions leads to inequitable product valuation. Moreover, the problem of incentives is not unique to the private sector. In the public arena, governments lack the appropriate incentives that might promote good performance, resulting in government-run facilities and services that are inadequate, inefficient, and of low quality.(12)

At first glance, the issue of incentives seems to tip the scale in favor of privately-funded care as a means of ensuring high-quality services. However, debates regarding health care financing sources raise another issue: bridging access to poor sectors. In low-income countries, private providers range from extremely advanced and sophisticated to rudimentary, unqualified facilities. Financial limitations render poor populations “more likely to use the lower-quality, highly dispersed, and fragmented end of this spectrum.”(13) However, even with this disparity among types of private health care services, there is still no evidence suggesting that private schemes will reach the poorest groups. Any community-based insurance schemes that have emerged as a private alternative also demonstrate limited scope.

Even public schemes, though a standard model of care for developing governments, do not ensure premium health care services for the poorest sector. A randomized control study in Ghana on a government prepayment scheme for children’s care revealed a slight improvement in health care utilization, but no significant change in health outcomes.(14) Although this was a singular study, findings point to the possibility that public schemes also face challenges of achieving adequate improvement in patient health.

It has been suggested that a combination of public and private sectors can contribute unique strengths that complement each other in the complex delivery of health care. Public schemes with privately funded initiatives have been used in China, Egypt, Lesotho, Mexico, and South Africa, among other countries, to “build infrastructure, provide staff and training, raise quality, improve productivity, undertake social marketing, enhance procurement, and much more.”(15) Specifically, studies on governments that contract private organizations in collaborative partnerships have shown positive findings, including large-scale services, cost-effective behavior, better coverage for rural areas, and higher quality of care.

Case Study: Mixed Systems in Developing Countries

Mixed healthcare systems consist of private investments and public government finances. Currently, governments in low-income countries spend less than US $34 per citizen for health each year, and some of these countries have the largest populations in the world. The haphazard healthcare services available in impoverished nations are due to unregulated private companies, an underfunded public sector, and a lack of governmental accountability. Health workers are underpaid with limited benefits to keep them working, and these workers often supplement their health sector duties with another job. The concept of “ghost workers” has also emerged, in which workers are on the payroll but do not work (and sometimes do not even exist), further burdening the health industry; this is made possible by a lack of administrative supervision and corruption. Patronage, the system of using federal resources to reward loyal businesses and individuals, is rampant throughout healthcare schemes in many developing countries, and must be replaced by a macroeconomic overhaul of national economies with the addition of employee protection, insurance, and accountability. By combining private and public healthcare services and insurance, national healthcare can become regulated, transparent, and more equitable. Global health organizations can aid in this endeavor by promoting reform through incentives, and nurturing awareness among the civilian population.(16)

Foreign Aid

Foreign aid, cumulatively collected from national governments, private individuals, corporations, and non-governmental organizations, remains a dominant presence in the health care field. Whether exchanged in the form of financial support, imported goods, or technical knowledge, foreign aid in health care can be considered development assistance for health (DAH). Data measured by the Institute for Health Metrics and Evaluation (IHME) at the University of Washington indicates that by the end of 2010, US development assistance for health had reached a total of over $26.8 billion.(17) Although this growth rate slowed due to worldwide economic downturn, US government contributions comprised almost one-third of total assistance in 2008.(18)

Government foreign aid through financial grants and cooperatives has long been under public scrutiny. One prominent issue has been the objective and purpose of aid. Although principally intended to facilitate foreign exchange, it is possible that donors will attempt to use designated aid to boost political prestige or commercial dominance over recipients, who may similarly accept funds with the hopes of developing international influence or raising additional funds outside of internal revenue activities. In the health care arena, issues loom larger. Aid assistance for developing countries may not be funneled directly into health care expenditures, instead diminishing in absolute value because of administrative fees. In bilateral assistance plans, substantial funding remains with donors as export guarantees, service payments, and the like; multilateral agencies also retain funds for organizational headquarters. Although the terms of exchange are specific to the countries involved, contributions are also subject to various biases that do not make funding available according to need. For instance, bilateral assistance “tends to be biased toward capital projects, which in the health services field means the building and equipping of hospitals and health centers.”(19) It is also easily influenced by politics, whereas multilateral aid is subject to exclusive rationales independent of the specific needs of the donor and recipient entities, but aligned with the shared agreement among funding countries.

Despite a long legacy of international aid that has been exchanged for the development of health care, current needs among populations in developing countries remain unmet. In the late 1970s, experts estimated that “the additional annual expenditure needed in the developing countries to achieve ‘Health for All’ (modestly defined) was on the order of US$20 billion for health services, and a similar amount for other health-related services.”(20) Although delivery systems, global health initiatives, and extension of services to resource-poor populations have made great strides over the past 30 years, barriers remain in the achievement of “Health for All.” According to IHME results, DAH assistance has partially replaced domestic health spending among fund recipients.(21) In contrast, recipients of aid from NGOs have seen increased domestic health spending.(22) The varying motivation for health care expenditure according to type of aid is unclear. There are fears that foreign assistance will thwart domestic healthcare efforts, and that the money usually allocated to healthcare would then be squandered by domestic leaders for warfare or personal gain. Some of these countries receive loans from international financial organizations such as the International Monetary Fund (IMF), and are required to spend the capital on specific government sectors. There are critics who fear that not only is international aid ultimately corrupted, but that it takes federal responsibility for healthcare away from domestic governments and puts it in the hands of foreigners. Others advocate for a Global Fund for Health that would provide permanent financial ventures that countries can contribute to and draw from to build up their national healthcare system.(23)

While there are complex political, economic, and social implications of foreign aid, great problems still burden the financing of the health sector. As seen through the institution of foreign exchange, the large discrepancy between funds available and funds necessary to deliver adequate health care means that financing health faces – above convoluted political regulation or social justice – the problem of inadequate funding. Absolute deficiencies in funding result predominantly from a lack of resources, in addition to rising costs, increased use, changing technological expectations, and shifting demography. Relative deficiencies indicate an inefficient use of resources due to poorly defined operations, inappropriate allocation, and limited distribution. Other problems include inadequate information that hinders proper decision-making for the health care market, as well as bureaucracies in organization and integration of a multiplicity of agencies.(24)

Case Study: Foreign Aid from the United States

The role of foreign healthcare aid has been continuously debated, both within the country of need and on behalf of the financial supplier. Since the 1990s, the United States has contributed to global health efforts that have reduced child mortality and increased uptake of vaccinations. In 2003, President George W. Bush began the US $15 billion President’s Emergency Plan for AIDS Relief (PEPFAR), which was followed by the 2005 President’s Malaria Initiative. While large financial contributions do not necessarily imply solutions, programs like the Global Health Initiative are proving to be efficient and wide-reaching. The United States has increased spending on HIV/AIDS by 12% since 2008, and has provided twice as many people with antiretroviral medication (ARVs) since that year, indicating a high level of effectiveness.(25) In 2010, President Obama authorized the Presidential Policy Directive on Global Development, which is a United States pledge to international development. This policy includes the Global Health Initiative, a six-year plan to elevate healthcare in specific countries, with a particular emphasis on HIV/AIDS, maternal care, and malaria. Critics of the program have spoken out against expensive and long-term commitments in light of economic instability and an ailing healthcare system within the United States.(26) 

Case Study: Millennium Development Goals 2000

The Millennium Development Goals were introduced due to the prevalence of developmental crises in the late 1990s and early 2000s, including health issues such as HIV/AIDS, malaria, tuberculosis, and increased infant mortality. Out of the eight goals, three were focused on healthcare, and involved collaboration with the World Health Organization and many African leaders. Nigeria hosted two summits - one on malaria in 2000, and another on AIDS in 2001. Institutions such as the Global Fund to Fight AIDS, TB, and Malaria were established to counter drug-resistant tuberculosis and other diseases. Furthermore, donor countries forgave debt owed by developing countries so that these nations could concentrate their finances on improving healthcare. At the start of the 21st century, developmental aid rose, resulting in global vaccination campaigns, lowered child mortality rates, and the near-eradication of polio. Though there are many critics of foreign aid for healthcare, significant steps by global health organizations, federal governments, and international institutions have shown positive global reductions in disease and preventable death.(27)     

The Question Remains

Delivering health care to the poorest populations will require an increase in the scale of preventive and curative care – but at what cost, and perhaps more importantly, at whose expense? In a look at the supply of health care services, it appears that the multitude of market actors, products, and specifications leads to various complexities in the web of financing. Government sources conflict with private insurance agencies, and direct expenditures supplement insurance schemes. As a result, it may be unclear how any payment plan determines health care supply. Still, there is hope that the path to building strong health systems in developing countries considers the needs of the world’s poorest individuals.

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(1) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(2) Ibid.

(3) Ibid.

(4) Ibid.

(5) Ibid.

(6) Ibid.

(7) Ibid.

(8) Ibid.

(9) Ibid.

(10) Carrin, Guy, Maria-Pia Waelkens, and Bart Criel. "Community-based Health Insurance in Developing Countries: A Study of Its Contribution to the Performance of Health financing Systems." Tropical Medicine and International Health 10.8 (2005): 799-811. World Health Organization. Blackwell Publishing Limited, Aug. 2005. Web. 22 Aug. 2012. <>.

(11) Ibid

(12) Hanson, K., et al. “Is private health care the answer to the health problems of the world’s poor?” PLoS Med 5.11(2008). Accessed 26 October 2011. <>.

(13) Ibid.

(14) Ansah, E., et al. “Effect of removing direct payment for health care on utilization and health outcomes in Ghanaian children: a randomized controlled trial.” PLoS Med 6.1(2009). Accessed 26 October 2011. <>.

(15) Hanson, K., et al. “Is private health care the answer to the health problems of the world’s poor?” PLoS Med 5.11(2008). Accessed 26 October 2011. <>.

(16) Nishtar, Sania. "The Mixed Health Systems Syndrome." Bulletin of the World Health Organization 88.1 (2010): 74-75. National Center for Biotechnology Information. Jan. 2010. Web. 22 Aug. 2012. <>.

(17) Norris, J. “Development assistance for health: a tale of two accounts.” The Center for Global Prosperity. Hudson Institute. Accessed 27 October 2011. <>.

(18) Ibid.

(19) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(20) Ibid.

(21) Norris, J. “Development assistance for health: a tale of two accounts.” The Center for Global Prosperity. Hudson Institute. Accessed 27 October 2011. <>.

(22) Ibid.

(23) Basu, Sanjay. "Does International Aid “Crowd Out” Government Funding for Healthcare?" Web log post. EpiAnalysis. N.p., 14 May 2012. Web. 23 Aug. 2012. <>.

(24) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(25) Emanuel, Ezekiel J. "Foreign Aid Is Not a Rathole." The New York Times: The Opinion Pages. N.p., 30 Nov. 2011. Web. 23 July 2012. <>.

(26) Ansah, Deidra. "The Future of International Health and U.S. Foreign Aid." Journal of the Student National Medical Association (2010-2011): n. pag. JSNMA. 27 Mar. 2011. Web. 23 Aug. 2012. <>.

(27) Sachs, Jeffrey. "Foreign Aid Works – It Saves Lives." Web log post. Economics Blog. The Guardian, 30 May 2012. Web. 23 Aug. 2012. <>.