Health Economics Series: Cost Efficiency and Allocative Efficiency

A government can be cost-efficient but have poor allocative efficiency. Cost efficiency achieves the maximum health benefit at a given cost while allocative efficiency maximizes the health of society by achieving the right mixture of health goods and services according to preferences.

Say for example the government wants to produce more midwives under a national scholarship program to address the lack of health care professionals in community health care settings, particularly in BEMONC facilities. The choice of producing more midwives gained traction because it was perceived as relatively cheaper than producing medical doctors. If the cost of producing one midwife is 150,000, the cost of producing one doctor is 200,000 and the budget is 100,000,000, the government will have to look for a combination of inputs that results in the maximum output at minimal costs in order to be cost-efficient.

The red points in the first graph (Figure 1) shows different combinations at which the production of midwives and doctors are technically efficient. The green point shows the maximum number of midwives and doctors that can be produced at the given budget of 100,000,000. In this example, the government is cost-efficient if it produces 400 midwives and 200 doctors.

While producing these numbers of midwives and doctors are said to be cost-efficient, it would not immediately mean that the action depicts allocative efficiency. This type of efficiency occurs when goods (midwives/doctors) are distributed or allocated according to consumer preferences. Usually, allocative efficiency is seen as an output level where price (P) is equal to the marginal cost (MC) of production because the willingness to pay is equivalent to the marginal utility derived from the good consumed. Thus, the optimal distribution is achieved when marginal utility (MU) equals marginal cost.

At an output of 100, the marginal cost of the good is roughly 100 (Figure 2). But at is this output, society is willing to pay a price of 600. Therefore, society is said to be under-producing midwives. At an output of 500, the marginal cost is 600, but society is willing to pay only 100. Thus, society is said to be over-producing midwives. In this example, allocative efficiency will occur at a price of 350 with an output of 300. This is the point where the marginal cost is equal to marginal utility.

Health Economics Series: Average Productivity and Marginal Productivity

Average productivity (AP) is simply the quotient of the total output (O) divided by the number of units of a certain input (I) [i.e. AP = O / I]. Marginal productivity (MP), on one hand, is the additional output derived from an additional unit of a certain input [i.e. MP = ∆O / ∆I].

Example: Suppose that the Philippine Congress is currently deliberating on a bill that seeks to convert the Aparri District Hospital to Aparri Regional Hospital. One of the factors considered in this type of hospital conversion is the increase in the hospital’s authorized capacity which entails the creation of new plantilla positions. We take nursing personnel in the Out-Patient Department as the focus of this example. Table 1 shows the relationship between the nursing input (number of nursing staff), and the desired output (measured in the number of patient visits / attended).

Table 1. Input, Output, Average Productivity and Marginal Productivity for a Proposed Staffing Complement
Input

(Nursing

Staff)

Output

(Patient

Visits)

Average

Productivity

(O/I)

Marginal

Productivity

(∆O / ∆I)

0 0 0
5 10 2.0 2
10 30 3.0 4
15 45 3.0 3
20 50 2.5 1
25 55 2.2 1
30 60 2.0 1

The average productivity provides an insight into the “production process”. This product simply presents the average quantity of service (in this case, nursing services) produced by a nurse. With five nurses, a nurse can attend an average of two patients. Ten and 15 nurses tend to produce the same average productivity per nurse which happens to be the highest among the other averages. At first glance, decision-makers are given the option to choose whether to allocate funds for ten or 15 nurses. Choosing the latter would mean more nurses employed in the government nursing service.

Since decision-makers want to maximize total product, they will look at how adding extra nurses affects marginal product which contributes to the total product. The table shows that adding more nurses generates fewer services in that it demonstrates the law of diminishing marginal productivity. The incremental nurses become less productive due to constraints imposed by other fixed inputs. Thus, at higher levels of output, the marginal productivity of nurses begins to decline. In order for the government to get value for money, decision-makers will look at options where the marginal product continues to rise. In this case, it is at option 3 (ten nurses). While the average productivity of 15 nurses is the same as that of ten nurses, the marginal productivity actually decreased when five more nurses were added to the nursing pool.

Health Economics Series: Uncertainty and Asymmetric Information

Uncertainty is a situation where it is impossible to know the likelihood (unknown probabilities) of an event occurring while information asymmetry is a situation in which one party has more / better information than the other party.

Many Filipinos exhibit the first type of information failure: uncertainty. Filipinos are not keen on examining the financial implications of contracting a disease/illness. Because of the perceived uncertainty of acquiring the disease and its associated financial repercussions, many Filipinos do not know their need for health care. Two policy responses are widely accepted in the country (social health insurance and private insurance) to help address this. Through these insurance schemes, financial uncertainties directly connected to future disease or disability are minimized.

Information asymmetry is seen in the classic case of tobacco smoking. Smokers usually do not know the addictive properties and health consequences of tobacco use. As such, in 2014, the Graphic Health Warnings bill was signed into law. This law seeks to curb tobacco smoking by providing health information through graphic health warnings in tobacco product packages. The law is the government’s response to information asymmetry happening between tobacco manufacturers and tobacco smokers.

Pen Point 48

Good news if we’ve truly flattened the curve. But have we improved our health system’s surge capacity? Some hospitals lack manpower and PPE. Ending the ECQ may mean well for the economy. However, without health systems strengthening and evidence-based measures to control community transmission, we’ll continue to strain our overburdened health care system.

Pen Point 47

Duterte & his allies have mastered the art of deception and selective justice. Deception of people for the sake of the people is a contradiction in democracy. Indeed, politics is a dirty game. Remember that there are no permanent friends, or enemies, only permanent (sometimes selfish) interests.

Inaction is action. Our government is responsible both for the things they do and the things they don’t do, especially when they could choose otherwise. Not until the majority of us choose to side with true democracy, we will continue to fail as a society.

Haven’t you had enough?

Share the road

Due to the COVID-19 pandemic, the public transportation system was paralyzed to limit our mobility. Some government agencies, hospitals, and private organizations were quick to assist medical and non-medical frontliners in their day-to-day travel to and from work by providing other means of transportation such as free shuttle services. Notably, more bike riders are now seen on the streets due to various bike programs. Many of whom are health care workers, myself included.

However, even with the enhanced community quarantine, private vehicles continue to swarm the roads. Some of these vehicles deliberately disobey traffic rules (e.g. beating the red light) which increases the probability of road accidents. This makes it more difficult for bike riders or cyclists to navigate their way to their homes or workplaces.

More health care workers are now opting to walk or ride a bike to work. Thus, it is imperative for the government to reemphasize the importance of respecting traffic rules to avoid unnecessary accidents and deaths. With the growing interest in bike riding and road sharing, we hope to see more bike lanes and road sharing policies in the future to ensure the safety of people choosing alternative modes of transportation in the post-pandemic world.

Health Economics Series: Provider Payment in the UHC era

The country is considering several options for provider payment reform that will help achieve universal health care. Population-based interventions will be primarily offered by the government. As such, provider payment mechanism for these interventions will include salary and capitation. Philhealth considers primary health care capitation to promote integrated care through the service delivery network; thus, ensuring efficiency resulting to better health outcomes and financial protection. Moreover, funds in provincial and city-wide service networks for both population- and individual-based interventions will be pooled into a special health fund intended for health services. Sources for this fund include grants and subsidies from the national government, income from Philhealth payments, and other financial grants or donations.

For individual-based interventions, several payers are likely to use various payment mechanisms. The country’s social health insurance (SHI) will continue to use case rate payment system and capitation while transitioning to diagnosis related groups (DRG) for contracted networks and apex hospitals. Private companies, such as HMOs and PHIs, will likely continue to offer case rate payment and/or fee for service payment for their customers.

HPS 252 Provider Payment

The diagram sends us a message that various provider payment mechanisms will continue to exist in the country’s health care system. Emphasis is placed, however, on the current movement towards using performance-driven, prospective payments based on DRGs. At the end of it all, “mixing” of provider payment mechanisms can be complementary or compensatory. It is promising how incentives will come into play when these mechanisms align themselves during the implementation of the UHC law.