The Things Money Can’t Buy: The Distinction between Cost and Cost-Effectiveness

BY AMBER TANG

Health care is now considered a “luxury” good, in part due to its high income elasticity. For every 10% increase in income there exists a 15% increase in demand for health care.1 However, despite increases in spending, policymakers have failed to improve the quality and accessibility of health care. The United States spends more resources on health than any other country, yet its health outcome, measured in factors of morbidity and mortality, continues to lag behind in comparison to many other industrialized countries.2 The same holds true for developing and low-income countries where poorly targeted health expenditure results in few tangible gains in health outcome.

A community health worker in India vaccinates a child. Only 44% of children ages 1 to 2 are fully vaccinated in India. Source: Pippa Ranger, UK, DFD

A community health worker in India vaccinates a child. Only 44% of children ages 1 to 2 are fully vaccinated in India. Source: Pippa Ranger, UK, DFD

In the 1990s, several studies found no statistically significant correlation between public health expenditure and actual health status when using infant and child mortality as a measure of health.3 For example, in India no association was found between public spending and health, but rather, health was correlated with per capita income, female literacy and the percentage of the population below the poverty line.4 One cross-country study published in 1999, found that increases in public spending in the health sector accounted for less than a seventh of the 1% differences in child mortality. However, once again, income and female education were strongly associated with improvements in health.5 In urban areas of low income countries, the most significant factor of child mortality was access to electricity, while in rural areas, the most significant factor was vaccination within the first year of birth.6

However, several other cross-country studies found that increased public spending did in fact decrease child and infant mortality rates. One such study, published in 2002 by the International Monetary Fund, showed a significant, albeit weak, correlation between increased health spending and reduced infant and child mortality rates. Other more recent studies have also found similar results, indicating an improvement in health with more public health expenditure.

This could be attributed to the fact that, historically, public health spending has tended to benefit the upper and middle class, but has since begun to target increasing accessibility to the lower class. Additionally, aggregate health benefits are most visible with reforms targeted to the poor.3 Regardless, variations in the correlation between expenditure and health may be an indication that health outcome is influenced by external factors such as skill level of physicians and specific health interventions rather than merely monetary expenditure.7

Children march for clean drinking water as part of the Indian Government's Total Sanitation Program. Source: UNICEF / Gov't of India

Children march for clean drinking water as part of the Indian Government’s Total Sanitation Program. Source: UNICEF / Gov’t of India

A large part of the discrepancy between public health spending as a quantitative figure and actual health outcome can be accounted for by poor resource allocation. Ineffective public spending in the health sector draws attention to a need for policymakers and donors to prioritize in terms of cost effectiveness. For example, according to the 2012 Center for Global Development Brief, national public hospitals in India subsidize open-heart surgery, yet only 44% of children ages 1 to 2 are fully vaccinated. Likewise, Avastin, a treatment banned by the FDA in 2011 for its ineffectiveness and severe side effects, is subsidized in Colombia8, while only 58% of children are fully vaccinated. Recent reports also suggest that cost-effectiveness analysis is crucial in determining components of health expenditure. For instance, some new treatments for patients with cancer or HIV/AIDS have cost-effectiveness ratios of under $100,000 per each increase in quality-adjusted life-year, suggesting these treatments to be cost-effective investments.7 On the other hand, some of the least effective programs for HIV/AIDS reduction have less than 0.1% as much potential value as some of the most effective programs that target improvements in disability-adjusted life years.9

Public health interventions for basic public goods, especially safe water and immunizations, have been found to result in the most significant improvements for overall health. These types of reforms also tend to help the poor, while increased spending in higher level reforms that include specialized intensive curative treatments tend to only benefit the rich. An investigation of thirteen countries found that 50% of public health subsidies, but only 29% of hospital subsidies, benefitted the bottom 40% of the population.1

In 2011, researchers tracked local public health agencies in the United States over a thirteen year period and found that a 10% increase in local public health spending resulted in a 6.9% decrease in infant mortality. The study concluded that spending on public health by local agencies led to significant improvements in health outcome, a result that was especially noticeable in low-resource communities.2

Although studies indicate that increased expenditure in the public health sector yields strong benefits to overall health outcome, public health programs are typically underfunded. This is because funding is predominately directed towards tertiary care, which tends to be heavily funded as it targets wealthy and middle class interest groups. In developing and low-income countries, only $1 per capita is spent on public health, and only 25% of government spending is allocated to primary health care and public health services.1  

It is becoming increasingly clear that money, on its own, does not necessarily lead to improved health for the general public. Cost-effective analysis and reforms that target public health must be coupled with increased expenditure in the health sector to expand accessibility of primary care, especially to the lower class. In other words, it’s not all about spending, it’s about spending wisely.

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  1. Pradhan, Sanjay. Evaluating Public Spending: A Framework for Public Expenditure Reviews. May 1996, Washington, D.C. Washington, D.C.: International Bank for Reconstruction and Development, 1996.
  2. Mays, Glen P., and Sharia A. Smith. “Evidence Links Increases In Public Health Spending To Declines In Preventable Deaths.” Health Affairs 30.8 (2011): 1585-593.
  3. Gupta, Sanjeev, Marijn Verhoeven, and Erwin R. Tiongson. “The Effectiveness of Government Spending on Education and Health Care in Developing and Transition Economies.” European Journal of Political Economy 18.4 (2002): 717-37.
  4. Kumar, Kaushalendra and Singh, Abhishek and Ram, Faujdar and Subramanian, S. V., Public Health Spending and Infant and Child Mortality in India: A State-Year Panel Analysis (September 6, 2013). Available at SSRN:http://ssrn.com/abstract=2371024
  5. Filmer, Deon, and Lant Pritchett. “The Impact of Public Spending on Health: Does Money Matter?” Social Science & Medicine 49.10 (1999): 1309-323.
  6. Wang, Limin. “Determinants of Child Mortality in LDCs.” Health Policy 65.3 (2003): 277-99.
  7. Weinstein, Milton C., and Jonathan A. Skinner. “Comparative Effectiveness and Health Care Spending — Implications for Reform.” New England Journal of Medicine 362.5 (2010): 460-65.
  8. Pollack, Andrew. “F.D.A. Revokes Approval of Avastin for Use as Breast Cancer Drug.” The New York Times. N.p., 18 Nov. 2011.
  9. Glassman, Amanda, and Kalipso Chalkidou. “Priority-Setting in Health : Building Institutions for Smarter Public Spending.” Center for Global Development Brief (2012): n. pag.
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