Economics of free healthcare: Key trendsetters and sustainability of public health expenditure in Sri Lanka

Self-responsibility and preventive healthcare can reduce the demand pressure on both public and private health sectors substantially and alter the PHE trajectory considerably

In Sri Lanka even those who get ample physical exercise from their hard labour do not seem to care much about prevention. For example, burning plastic is a common sight in both urban and rural areas. Many are not aware of the carcinogenic effects of plastic fumes. Workers who cut concrete and metals do not wear masks. Traffic police breathe polluted air without masks. Examples are many

Introduction

Universal free healthcare has been the hallmark of the Sri Lankan public healthcare system. This has been part of the broader agenda of the Sri Lankan welfare state that acclaimed a name for the country in the 1960s and 1970s for being a good outlier among the low-income countries. The Sri Lankan welfare state was, however, not built on sustainability principles. Persistent budget deficits since 1956 financed through borrowings led to a huge buildup of public debt.

Against this background it is highly policy relevant to understand the trendsetters of different public expenditure categories and figure out how to alter these trends to ensure financial sustainability. In a recent study we examined the public healthcare sector, and a summary is provided in this article. (The full article can be obtained from the first author upon request.)

From an economic theoretic angle, we usually select predictors by looking at demand and supply determinants. For example, the price taker assumption (price determined by other forces) leads to specifying either a demand or a supply function, not both. However, the process is not that clear in a free healthcare system. 

It is well known that in a market driven healthcare system there is a problem of ‘supplier induced demand’ (the physician can generate additional demand through extra tests, prescriptions, and repeat visits). In a free healthcare system, however, it is the other way around, it is ‘demand induced supply’. This is not a problem though. The Government’s role is more accommodating to meet the changing demand and cost conditions. Obviously, the price mechanism does not operate here to curtail excess demand. Nevertheless, various supply bottlenecks such as over-crowding, poor facilities and long delays for specialist care arise to curtail the demand.

Results summary

Contrary to common thinking, elderly population shares (60+, 65+, 70+) do not show a stable relationship with per capita public health expenditure (PHE) after controlling for non-communicable diseases (NCDs). The latter is a strong predictor of PHE. Import cost of medical products is another key driver of PHE. The major contributor to import cost escalation is the secular depreciation of the Sri Lankan rupee. The persistence of PHE is another key predictor. This is primarily because healthcare is highly labour intensive and cannot easily be automated to cut costs.

If these trends continue, PHE is likely to grow by 13% per annum over the projection horizon till 2040, which is very much like the continuation of the past. The PHE share of GDP was on average 1.6%. If the country could come out of the post-pandemic economic crisis soon and return to growth trends, the PHE share of GDP may increase to above 2.8% by 2040. Although this is not staggeringly a large number relative to OECD countries, the past shows the difficulty of financial sustainability because of the weak public revenue side.

 

Policy implications

Financial sustainability of the public health sector involves two aspects to consider: 1. Demand-induced cost containment, and 2. Revenue generation within the sector. Two key demand shifters we examined are the elderly population share and the incidence of NCDs. It is difficult to reverse the population aging trend unless the fertility rates pick up. However, getting old does not necessarily have to be getting sick. In other words, the relationship between health expenditure and aging depends on health. Unlike population aging the trend of NCDs can be altered. As the adage goes ‘prevention is better than cure’; what is needed to decelerate the demand for healthcare is prevention.

Preventive healthcare

Usually, medical professionals refer to preventive healthcare as direct interventions to provide medical services such as vaccinations. Sri Lanka has achieved a lot in this respect. However, preventive healthcare goes well beyond this. Singapore is a good example. Singapore spends very little relatively on healthcare directly. Household expenditure on healthcare in 2017/18 was 5.5% of total household expenditure. Government healthcare expenditure is less than 3% of GDP. In contrast, OECD countries spend about 9% of GDP on average; the USA alone is about 17%. Yet, Singapore excels in health outcomes (WHO, 2000; Haseltine, 2013). Health adjusted life expectancy in Singapore around 74 years is the second highest in the world (after Japan, WHO). The secret is preventive healthcare.

One way to assess preventive healthcare in action is to make a comparison of health-related risk behaviours among the people of different countries. The first author studied this with one of his students few years ago to examine how health-related risk behaviours changed over successive generations (birth cohorts) in four countries, Australia, England, Hong Kong and Singapore.

After controlling for age and income effects, the results showed that smoking in all the four countries had a declining pattern over successive birth cohorts with Hong Kong and Singapore showing steeper drops. This is not surprising given the restrictions on smoking in many countries. Interestingly alcohol consumption does not show a systematic drop over different birth cohorts across the four countries. This is understandable because alcohol is likely to be both a tonic and toxin. 

What was most interesting were the results on physical inactivity, the lack of sufficient physical exercise within a defined period like a week. Quite often people start to engage in physical exercise only after excessive weight gain. We need to remove this effect for a better assessment. It was interesting to observe that the downward trend of the physical inactivity index (or the increase in physical exercise) in Singapore over successive birth cohorts was not related to obesity. In contrast an upward trend in physical inactivity levels was observed in Australia and England. What these indicate is that people resort to physical exercise largely because of over-weight problems. (Hong Kong results were not very informative.) 

There are many factors that contribute to preventive healthcare both directly and indirectly and much can be learnt from Singapore’s preventive healthcare landscape. The most important is educating the public on self-responsibility on healthcare. In Sri Lanka even those who get ample physical exercise from their hard labour do not seem to care much about prevention. For example, burning plastic is a common sight in both urban and rural areas. Many are not aware of the carcinogenic effects of plastic fumes. Workers who cut concrete and metals do not wear masks. Traffic police breathe polluted air without masks. Examples are many. The root causes of many chronic diseases are socio-economic. Therefore, the study of social epidemiology plays a critical role in designing preventive healthcare measures. 

Revenue generation

Singapore is again a good example to learn from. As a British colony Singapore inherited the British-style free healthcare financed by general taxation. Singapore, however, deviated from this very early and established self-responsibility and medical savings account system as a corner stone in healthcare. Affordability and sustainability are the key considerations. Singapore has a thriving private healthcare sector. However, the ward-class system in public hospitals is designed to divert money from rich spenders to public hospitals. In Sri Lanka despite the perception that professional care in public hospitals is better, rich people go to private hospitals because of other amenities. While Sri Lanka retains its free healthcare system, measures can be taken to divert some funds from private healthcare sector to public hospitals. Three suggestions are the following: 1. Introduce high quality paying wards in public hospitals, 2. Establish hospital run pharmacies within hospital premises, 3. Introduce a small user fee for each patient. Although we can elaborate on each of these points, we will leave it for evaluation by the policy makers.

Conclusion

As discussed above, self-responsibility and preventive healthcare can reduce the demand pressure on both public and private health sectors substantially and alter the PHE trajectory considerably. Moreover, with sufficient internal revenue generation the public health sector can be made very healthy even with 2-3% PHE share of GDP.

(Tilak Abeysinghe was a professor in economics (currently attached to Institute of South Asian Studies) at the National University of Singapore and Research Advisor to Marga Institute. He can be contacted via email: [email protected]. Nethmini Gunarathna is a researcher at Marga Institute.)