Review article Ability to pay for health care: concepts and evidence

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222 Steven Russell200Source: adapted from Hancock 11Figure 1.Health expenditure/consumptionHHealth careexpenditure launaifordabte(> 5% of Income)The ratio approach to ability to payexacerbated because monthly income is oftensimply multiplied by 12 to arrive at an annualfigure. Inaccuracies could have serious consequences,since a small mistake could shift ahousehold's expenditure:income ratio across athreshold, for example from 4.9% to 5.1%. Theproblem of reliable income measures wasdemonstrated by Pannarunothai and Mills, 29 whofound that only 4 of 14 households gave estimatesof annual household income in a re-interview thatwere within 5% of the first interview's estimate.For 10 households the re-interviews elicited valuesthat were up to 62% higher.The ratio numerator: for a particular household,health expenditure data are less problematic thanincome data, but data aggregation raises difficulties.Although useful for planners, it 'standardizesthe diverse' and excludes the complex anddiverse realities of households. 33 This may be aparticular problem with respect to health expendituredata, because health expenditures vary considerablybetween households; most spend only asmall proportion of income on health, while a fewmay face considerable burdens. 34 As the frequencyand severity of illness are key factors likelyto influence ATP, the use of averages mayunderestimate the economic burden for 'sickly'households (such as those with nutritional problemsor with many children), or for atypicalhouseholds which experience catastrophic accidentsand serious illness.Conceptual problemsThe use of expenditure:income ratios to examine affordabilityis based on concern that health care expenditureshould not impose an 'unreasonable burden'on household budgets. This reflects concern about theopportunity cost of health expenditure: if a householdspends more than X percent of its budget on health,the ratio approach warns that the household's commandover other commodities will be reduced. Theopportunity costs of health care expenditure decisionsunderpin the ATP question, 12 but the ratio approachdoes not answer two important questions about theseopportunity costs:• the opportunity costs incurred by a householdwhich spends X percent of its income on healthcare remain undisclosed. A well-off householdmay simply forego 'unnecessary' expenditures,while an income-poor household may have tomake damaging cutbacks to food consumption andeducation or may be forced to sell assets;• who judges, and how does one judge, whetherthe commodities, investments and assets foregoneare 'necessary' or 'discretionary';These questions are explored in greater detail below.2.2 Opportunity costs, bask needs and affordabilityin the short runThe costs of accessing health care (e.g. transportcosts, health charges) can be considered affordablewhen utilization is not deterred for financial reasons,and when the opportunity costs incurred do not causelevels of consumption and investment (e.g. on education)to go below minimum needs in the short run.From this perspective, certain levels of health care,and a certain quantity of non-health care commoditiesand investments, are considered merit goods - orbasic rights and needs defined by society. 12 Figure2 illustrates a simple opportunity cost approach to affordability.For the moment the diverse and complexdecisions open to households are simplified down totwo consumption or expenditure dimensions, healthcare commodities and non-health commodities. HIrepresents a household's minimum health care needsand Y1 its other minimum commodity consumptionneeds - minimum needs externally defined bysociety or professionals. Point E represents aminimum need consumption bundle for a household;the household is, for the moment, taken as the unitof analysis. For abstract analytical and presentational
Ability to pay for health care223200b«b«Y1Budget constraintHealth expendrrure/coraurnptkxiHHealth axpendRure/consurnptionHSource, adapted from Hancock 11Healthcareexpenditure isunaffordabteFigure 2. Approaching ability to pay through basic needs andopportunity costspurposes, the difficulties of establishing a person'shealth 'need' are put to one side.Consumption patterns in Region A indicate that healthcare expenditure is unaffordable: the household canafford neither the minimum level of health care itneeds (HI) nor a level of other goods and servicesconsidered socially necessary (Yl). Conversely,Region B indicates expenditure on health care isaffordable, since nowhere in this region is thehousehold forced to lower its consumption of othergoods and services below a minimum level.This approach exposes the logical flaws in the ratioapproach. A household which spends under 5% ofits income on health care (point a in Figure 1) mightnot be spending enough to obtain minimum levels ofhealth care and other commodities needed (point ain Figure 2). Conversely the ratio approach definespoint b as unaffordable (Figure 1), but from theperspective of opportunity costs point b in Figure 2is affordable: the household has a consumption bundlelarge enough to consume levels of health care andother commodities deemed socially necessary.Regions C and D are more problematic. 12 Thehousehold consumes sufficient quantities of one commoditybut insufficient quantities of the other. If thehousehold is located in Regions C or D because ofSource, adapted from Hancock"Figure 3.Healthcareexpenditure IsunafrordabieAbility to pay with an income constraintan income constraint, then health care can still be consideredunaffordable. A simple income constraint canbe added to the scenario using the consumptionpossibility (budget constraint) line SS (Figure 3),which is enough to allow the household to purchasethe minimum consumption set E. The position of thebudget constraint is determined by available income,and the slope of the curve by the relative prices ofY and H. A household within the shaded area but noton the line SS cannot reach the minimum consumptionset E. As a result of the income constraint,therefore, the two triangles Y1SE and H1SE are additionalareas representing inability to pay for healthcare. For example, at point c the household does notconsume the health care externally defined asnecessary for a given health problem, and it couldonly purchase the health care it needs (HI) by movingalong its own consumption possibility line to pointcl, cutting expenditure on other goods and servicesto a sub-minimum level, cl is a situation where thehousehold is willing to pay for necessary health care,but unable to pay if opportunity costs are taken intoaccount.Households whose consumption lies in the dottedportions of Regions C and D in Figure 4 makejudgements about affordability far more complex.They have enough income to shift to Region B, buthave not done so. To judge whether the householdis able to pay for care or not, the reasons why the
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