Two-tier issues in low income countries’ health systems

Presenter: Barbara McPake, Queen Margaret University

Abstract

This paper considers of those instances of two tier provision where a single provider offers both services, for example, where a ‘private’ or ‘high-cost’ service co-exists with a standard one or where a provider in the public, for-profit or not-for-profit sector seeks to tailor services to particular client groups to maximise producer surplus or to achieve specific cross-subsidies. These are interesting because the services are not substitutes in competition with each other, but part of the strategy of a single provider who will consider the implications for profit from one service when developing strategy for the other.
A model of two-tier strategies operating within a public hospital environment suggested that the implications for allocation of resources between the two tiers could be regressive given levels of cross quality and price elasticity between the two services of unknown plausibility (McPake et al., 2007 ).

This paper explores the broader implications of the model for the wider range of scenarios crossing public and private sectors, reviewing relevant literature for instances of analytically similar market situations, evidence of cross-price and quality elasticity and analyses of impact in terms of resource allocation.
Analytically similar market situations arise in insurance, where alternative packages are offered in competition with each other by the same and competing insurance agencies. Choices made by consumers between alternative insurance packages reveal risk information (Rothschild and Stiglitz, 1976 ). They also reveal consumer preference information in ways that allow insurers to maximise producer (insurer) surplus through price discrimination. Insurers’ reactions to the information revealed in both respects have implications for resource allocation and the equity of outcomes.

Other analytically similar situations arise in the pricing strategies of not-for-profit providers seeking to manage exemption systems in a manner that aims to cross-subsidise from richer to poorer users and in the ‘Ramsay pricing’ strategy argued to be operated by the pharmaceutical industry in pricing pharmaceuticals for different national markets.

Cross-price elasticities can be inferred from some studies of demand for health services and pharmaceuticals, hence can be identified at some points in relation to level of health service demanded (pharmacy shop, primary, secondary etc.); market structure (more and less competitive), and shares of public and private in total expenditure.

However, implications of the pricing strategies of market players, including public sector ones for resource allocation and equity are rarely evaluated except for in the cases of a few public policy areas such as changing basic fee levels in the public sector and to a limited extent with respect to the pharmaceutical pricing debate.

This paper argues that there is significant scope to gain better understanding of the scope and strategies for cross-subsidy of poorer health system users by developing better models with wider applicability of inter-dependent demand functions and focusing empirical research on the testing of these models.