The Need to Change Health Care Priorities in LDCs

International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Almost a fifth of the world’s population lives in poor countries where average life expectancy is 54 years, 22 years lower than in the industrialized world. Much of this persistent difference is due to poverty, but it is exacerbated by public health policies that fail to control adequately preventable parasitic and infectious diseases, malnutrition, unhealthy environmental conditions, and related problems. In Latin America, infectious and parasitic diseases cause approximately as many deaths as do circulatory diseases; in Asia, they cause 1.6 times as many deaths; in the Middle East, the ratio is 2.4; in Sub-Saharan Africa, it is 3.7. In industrialized countries, it is only 0.2. The disease patterns plaguing poorer countries can for the most part be solved through public health interventions or simple curative services. But the patterns of public expenditures stand in the way of such a change.

Ministries of health in developing countries face some well-documented problems, largely because of heavy public spending on hospitals and other curative services from which individuals, rather than the country as a whole, are the primary beneficiaries (see also “Financing of Health Services in LDCs,” by John Akin and Nancy Birdsall, Finance & Development, June 1987). In Bangladesh, for example, recurrent costs for a single hospital bed serving about 27 patients per year are roughly $2,700, about the same as a rural health clinic serving 10,000 patients a year. Pilot projects have shown that if another $1,300—half the cost of a hospital bed—were spent on each rural clinic annually, attendances would nearly double. Thus, at the margin, hospital resources devoted to 13 urban hospital patients would allow rural clinics to treat another 7-10,000 patients. In practice, governments have found it difficult to make such reallocations. This article explores how private sector involvement in delivering curative services, especially hospital services, could release funds for such reallocations.

High hospital spending

While it is true that hospitals are needed under any circumstances, when does spending on them become exorbitant? First, consider the range of health expenditures in the world. The United States spends the most, with total (government plus private) spending of $1,926 per person in 1986. In the United Kingdom, health care expenditure was $711 per person. Among middle-income countries, per capita spending in Brazil was about $85; in the Republic of Korea, about $150; and in Malaysia, about $50. Among the poorest countries, spending per capita in China was about $11; while in Bangladesh, Ethiopia, and Zaire, about $3 (0.2 percent of the US total).

This article is draum from “Strengthening Health Services in Developing Countries through the Private Sector,” by Charles C. Griffin, International Finance Corporation Discussion Paper Number 4.

A comparison between industrialized and developing countries is instructive. The industrialized countries—which have high spending, older populations, and disease patterns dominated by cancer and circulatory diseases—allocate slightly less than 50 percent of total health expenditures to hospital services. Developing countries tend to spend at least this fraction of public budgets on hospitals. Typically, the least developed countries spend 60 to 80 percent of public health budgets on urban hospitals even though only a small fraction of the population will ever need hospital services, and despite the fact that 80 percent live in rural areas, well beyond the reach of the costliest facilities. In some African countries, where improvement in health indicators has lagged well behind other world regions over the last two decades, a single national hospital may consume 75 percent of the government health budget.

Myanmar (formerly known as “Burma”), a country that devotes an extraordinarily low 33 percent of its public budget to hospitals, spends about half that amount to treat patients with preventable infectious and parasitic diseases. At least 2.5 percent of the national health budget in 1986 was spent to treat malaria patients in hospitals, the most expensive and least effective way to solve that health problem. In Brazil, a country that has made tremendous advances in health over the last two decades but still faces serious public health problems, 70 percent of government spending is for hospital care.

In Bangladesh, where 12 percent of new-boms die before age 1, the government spent a little over $1 per capita on health care in 1987, at least 56 percent of it through hospitals. Little or none of that spending reached vulnerable infants and their mothers; the bulk went to 700,000 hospital patients, mostly adults, accounting for only about a half percent of the population.

What has been done?

Governments have attempted to reduce the relative burden of hospitals by raising total spending on health and allocating most of the increment to primary health programs in rural areas. This strategy has, at best, met with mixed success. Between 1972 and 1983, central government expenditure on health actually fell as a percent of total expenditure in developing countries. But the resulting constrained budgets were skewed toward hospitals and other curative services. Adjustment policies in the 1980s put even more pressure on this strategy.

In Indonesia, for example, central government spending on health fell in real terms by 32 percent between 1985 and 1988. Real spending on hospitals fell by 23 percent; on health centers, by 27 percent; and on communicable disease control, by 72 percent. Recurrent spending on curative services through hospitals and health centers was maintained by cutting investment budgets; in contrast, communicable disease control cuts came out of services. Of 20 disease programs funded in 1986, only 3 (malaria, schistosomiasis, and child immunizations) received any funding in 1988, and those programs covered only selected provinces. The commitment to maintain curative services distorted government priorities.

“Privatizing” hospitals

Developing country governments, particularly the poorest ones with the worst health conditions, cannot afford to spend more than 40 percent of their budgets on hospitals (that is about what the United States spends), and substantially less than that fraction would make sense for redirecting government resources toward public health measures. One way to allow governments to concentrate on public health is to privatize hospitals and remove them from government budgets. Other curative services also could be handled in this way. In health, privatization means turning hospitals over to both for-profit and not-for-profit entities, the latter being more common. How can this be done? In some cases, hospitals are such a large drain on the public budget that giving them away would be less expensive than keeping them. Alternatively, part or all of the government capital tied up in hospitals could be sold or rented to private firms, charitable organizations, or hospital trusts. Governments could remove themselves from the hospital business to some degree by closing old and inefficient public hospitals and encouraging the private sector to absorb the burden.

Developing countries have yet to experiment systematically with these options. However, there has been a recent surge of interest in them based on the experiences of some countries. China’s health miracle has been almost exclusively attributed to social and political changes, but little attention has been paid to the manner in which its health system is financed. Almost all curative care is financed through private payments, even if delivered by public entities. Public hospitals are largely self-financing and behave for all practical purposes as if they were private institutions. Government subsidies are provided primarily for indigents; insurance and individuals pay for the rest. The government’s priorities have been to create risk-sharing institutions to pay for inpatient care, to train health workers, and to solve public health problems. Despite per capita income of $330 per year, almost 60 percent of China’s population is covered by some type of health insurance. China’s approach does not eliminate hospital spending by any means—it is high and growing partially because of the country’s success in raising life expectancy—but it does make individuals and social insurance bear the largest share of the burden, leaving the government to pursue other, more “public” activities.

In the late 1980s, Kenya converted Kenyatta National Hospital into a parastatal, a move that holds great promise for controlling Kenyatta’s previous pre-emptive claim on the health ministry’s budget. In Chile, the national health service was converted into 26 public corporations in the late 1970s, with continuing public subsidies to them only partially covering their costs and keyed to performance. Sri Jayewardenapura Hospital in Colombo, Sri Lanka, was opened in the mid 1980s as an independent government institution operated almost as a self-financing joint practice by its staff and attending physicians, with fees for all services and all patients.

Contracting from the private sector

Removing hospitals from the government budget is possibly too radical a proposal for some governments. Realistically, governments will continue to finance hospital services for some people. But they need not deliver the services directly. In fact, one of the main hindrances to the development of the private hospital sector in developing countries, apart from the competition of free public hospitals, is the lack of a payment mechanism that covers large bills. Governments can help solve these problems by reducing the direct provision of free services and helping to construct some form of hospital insurance or social financing for patients in the private sector.

This approach is well developed in the industrialized world. In the United Kingdom, the National Health Service contracts with general practitioners to provide clinic services and pays them on a prepaid capitation basis. Recent proposals by the Government suggest extending this approach to the provision of inpatient care, with the newly independent public hospitals competing with private hospitals for contracts to provide services to district health authorities. Both Australia and Canada already have comparable systems, in which almost all care is provided through the private sector, but virtually all payments come from the public sector.

Similar practices are common in the social security institutions of Latin American countries, many of which provide a payment mechanism but do not provide all health services directly. Uruguay’s social security system provides medical care to 45 percent of its population, largely through 23 nongovernment health maintenance organizations (HMOs) that are closely regulated by the social security agency. Chile’s recent reforms have allowed workers to use their social security health premiums to purchase insurance in private markets, contributing to the development of a private sector that competes with public facilities that previously enjoyed monopoly status.

Up to 1981, Brazil’s social security agency took this approach a step further by allowing firms to contract directly with HMOs using a portion of their social security contributions. Over 200 HMOs were organized to meet the demand. By the mid-1980s, HMOs or other prepaid systems covered an estimated 17 million people (about 12 percent of the population). Brazil’s social security system itself contracted with private hospitals and physicians to provide 67 percent of hospitalizations in the late 1980s, at about a third of the cost per hospitalization as in the public sector. Although some of this huge difference can be explained by more serious illnesses and sicker patients in the public sector, neither accounts for more than a small fraction of it.

When government or social security systems choose to finance hospital care in this manner, they can adjust their contributions by altering covered services, changing copayment or deductible requirements, adjusting eligibility requirements, or revising reimbursement rates. They do not have to maintain costly hospitals and staff directly, and the institutions in turn are free to seek other revenue sources. The Republic of Korea, for example, provides assistance to patients based on need, forces doctors and hospitals to accept lower-than-standard fees for such patients, and offers low-cost loans to individuals for parts of the bill not covered. Such an approach gives the government many more policy levers to control costs and target subsidies than if it simply provides all services for free from government hospitals, rationing care by queue.

The same principles extend to curative services provided through clinics. A number of African countries have long experience in contracting with charitable or religious organizations to provide both clinic and hospital services in areas where the government system does not reach or where their services would prove redundant. In Zaire, health services in rural areas are provided by government, charitable, and private sector providers through loosely organized “health zones.” Primary responsibility for some zones is delegated to mission facilities, with the government playing only a minor financial role. In principle, there is no reason that for-profit groups could not enjoy the same status, competing for government contracts to manage health zones.

In Papua New Guinea, the government has contributed to the capital costs of mission facilities and provides substantial support for recurrent costs. A recent analysis found that this practice improved redistributive aspects of government health spending because mission facilities tended to be located in poor, high mortality areas. A separate study of 73 randomly selected rural facilities, about evenly divided between government and mission institutions, gave the mission facilities about a 15 percent higher quality rating than government facilities on average, yet outpatient costs in the mission facilities were about 43 percent lower per patient. Both types of facilities used comparable labor inputs. The Government has not considered the possibility that the same relationship it has developed with the mission sector could be used to privatize inefficient government clinics.

Improving public sector efficiency

Although these examples offer considerable scope for removing a large share of curative care costs from government budgets, there are many intermediate measures governments can use to take greater advantage of the private sector. Such activities can reduce costs to the government and raise the quality of services. Government contracts can build up private sector institutions that will eventually be able to absorb large-scale operations like a hospital. In Jamaica, for example, the Ministry of Health began contracting out housekeeping, janitorial, catering, and laundry services in three Kingston hospitals in 1987. In the first year, the government saved about 50 percent of the previous cost, in combination with significantly improved services. In 1986, the Costa Rican social security system began privatizing some ancillary services, such as lenses for vision correction and hospital laundry services. It is also exploring privatization of many other activities, including subsidies for clinics housed within large companies and capitated payments for “lists” of patients to private sector physicians (on the British model).

Underdevelopment of the private sector can impose hidden costs. Spending by individuals and insurance companies on private services is often greater than spending by the government for health care. Goods or services from the private sector are expensive because firms are too small to purchase in bulk. Governments can reduce private sector costs either by providing contracts for large purchases or by using their market power to supply lower cost goods. Papua New Guinea, for example, operates a bulk-purchasing operation that is able to obtain many drugs on world markets at about a 50 percent savings over the wholesale price paid by small private pharmacies. An arrangement through which private pharmacies use the public sector as a wholesaler holds potential to reduce drug costs, regardless of whether patients use the public or private sector.


Governments face serious problems in the health sector, especially in the area of curative health services. Exploitation of the private sector to provide high-cost curative services will allow governments to divert their meager health resources to activities that are more appropriate to the health problems faced by their citizens. The major constraint is the development of appropriate financing mechanisms for private hospital care and contractual relationships for some aspects of outpatient or clinic care. The private sector has a demonstrated ability to respond in countries that have created such mechanisms or incentives. Greater involvement of the private sector will not entirely relieve the government of the burden of curative care, but it should allow governments to better focus their efforts and to create more effective and fairer health care systems.

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