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Spending
Wisely
Buying
Health Services
for the Poor

Editors
Alexander S. Preker
John C. Langenbrunner
Spending Wisely
Buying Health Services for the Poor
Spending Wisely
Buying Health Services for the Poor

Edited by

Alexander S. Preker and John C. Langenbrunner

SWEDISH INTERNATIONAL
DEVELOPMENT COOPERATION
AGENCY
Stockholm

Canadian Agence
International canadienne de
Development développement
Agency international
Gatineau, Quebec

THE WORLD BANK

Washington, D.C.
© 2005 The International Bank for Reconstruction and Development / The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone 202-473-1000
Internet www.worldbank.org
E-mail [email protected]

1 2 3 4 08 07 06 05

The findings, interpretations, and conclusions expressed herein are those of the author(s) and
do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the
governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The
boundaries, colors, denominations, and other information shown on any map in this work do
not imply any judgment on the part of the World Bank concerning the legal status of any terri-
tory or the endorsement or acceptance of such boundaries.

Rights and Permissions

The material in this work is copyrighted. Copying and/or transmitting portions or all of this
work without permission may be a violation of applicable law. The World Bank encourages dis-
semination of its work and will normally grant permission promptly.
For permission to photocopy or reprint any part of this work, please send a request with com-
plete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA
01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com.
All other queries on rights and licenses, including subsidiary rights, should be addressed to
the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax
202-522-2422, e-mail [email protected].

ISBN 0-8213-5918-5
eISBN 0-8213-5919-3

Library of Congress Cataloging-in-Publication Data

Spending wisely : buying health services for the poor / Alexander S. Preker, John Langenbruner.
p. cm.
Includes bibliographical references and index.
ISBN 0-8213-5918-5
1. Poor—Medical care—Finance. 2. Poor—Medical care—Economic aspects. I. Preker,
Alexander S., 1951– II. Langenbruner, John, 1951–

RA418.5.P6S67 2005
338.4′33621—dc22
Contents

Acknowledgments xiii
Acronyms and Abbreviations xv

Introduction 1
Part I: The Conceptual Framework 2
Part II: Making Strategic Purchasing Pro-Poor 7
Part III: Purchasing Health Services 9
Part IV: Purchasing Inputs 12
Part V: Supply, Demand, And Markets 15
Part VI: Legal And Regulatory Issues 18

PART I. THE CONCEPTUAL FRAMEWORK 21

1. Managing Scarcity through Strategic Purchasing

of Health Care 23
Alexander S. Preker
The Evolution of Health Systems and Collective Financing
of Health Care 23
Reform Trends in Public Spending on Health Care 29
Continued Need for Strong Public Policy in Managing
Scarce Resources 30
The Purchaser-Provider Split 33
Getting Value for Public Money Spent on Health Care 38
Forthcoming Books on Resource Allocation and Purchasing
in the Health Sector 39
References 39

2. For Whom to Buy? Are Free Government Health Services

the Best Way to Reach the Poor? 47
Davidson R. Gwatkin
The Beneficiaries of Government Health Service Expenditures 48
Focusing Government Services on the Poor 52
Encouraging the Better-Off to Pay for Their Own Services 55
Conclusions 58
Notes 58
References 59

v
vi Contents

3. What to Buy? Revisiting Priority Setting in Health Care 61

Katharina Hauck, Peter C. Smith, and Maria Goddard
Some Approaches to Priority Setting 61
Economic Evaluation 62
Equity Issues 64
Practical Constraints 67
Conclusions 73
References 73

4. From Whom to Buy? Selecting Providers 79

Fernando Montenegro-Torres and Cristian Baeza
Defining and Identifying Eligible Providers and Matching
the Intervention 79
Can the Purchaser Buy the Desired Intervention from
the Eligible Providers? 83
References 87

5. How to Pay? Understanding and Using Payment Incentives 89

John C. Langenbrunner and Xingzhu Liu
Payment System Types and a Conceptual Framework for Incentives 89
Which Payment System Should Be Chosen? 91
Discussion 102
Notes 104
References 104

6. At What Price? Affordable and Realistic Fees 107

Hugh Waters and Peter Sotir Hussey
Overview of Provider Payment Methods 107
Calculating Costs—Methods and Information Available 110
Characteristics of Purchasers and Providers 114
Conclusions 115
Notes 116
References 116

PART II. MAKING STRATEGIC PURCHASING PRO-POOR 119

7. The Equity Dimensions of Purchasing 121

Paolo Carlo Belli
The Evidence 121
What Does An “Equitable Distribution of Health
and Health Benefits” Mean? 123
Defining Variables: Resource Allocation and Purchasing Reforms 126
 Contents vii

Conclusions and Recommendations 134

Notes 135
References 139

8. Reversing the Law of Inverse Care 143

Finn Diderichsen
The Inverse Care Law At Work in Rich and Poor Countries 143
The Infrastructure of Inequity 144
Methodological Issues: How to Construct Resource Allocation
for Equity in Access 145
References 151

9. Risk Pooling and Purchasing 153

Peter C. Smith and Sophie N. Witter
Approaches to Risk Pooling 154
Practical Issues 159
Conclusions 165
Note 166
References 167

PART III. PURCHASING HEALTH SERVICES 169

10. Paying for Public Health Services: Financing

and Utilization 171
Xingzhu Liu and Sheila O’Dougherty
Who Should Pay for Public Health Services? 171
How Should Providers Be Paid? 178
Toward Better Financing and Payment Policies 183
References 187

11. Buying Results: Contracting for Primary Health

Care Delivery 195
Benjamin Loevinsohn and April L. Harding
Why Contract—Ideology or Pragmatism? 195
Approaches to Contracting 197
Study Methodology 197
Results: Contracting Can Quickly Improve Service Delivery 199
Methodological Limitations of This Review 205
Is Contracting a Sustainable Approach? 206
Recommendations 208
Note 210
References 210
viii Contents

12. Purchasing Hospital Services: Key Questions

for Policymakers 213
Eric de Roodenbeke
Key Criteria for Effective Purchasing Decisions 213
For Whom to Buy? 214
What to Buy? 218
From Whom to Buy 222
How to Pay? 225
At What Price? 227
Moving Forward 230
Notes 232
References 232

PART IV. PURCHASING INPUTS 235

13. Paying for Health Care Labor 237

Pascal Zurn and Orvill Adams
Purchasing Health Care Labor 237
Framework for Purchasing Health Labor 237
Conclusions 246
Note 247
References 247

14. Purchasing Pharmaceuticals 251

Ulrika Enemark, Anita Alban, Enrique C. Seoane-Vazquez,
and Andreas Seiter
Pharmaceutical RAP in Developing Countries 251
Core Policy RAP Strategies to Increase Access to Drugs 253
Organizational and Institutional Arrangements 260
From Passive to Active Purchasing of Pharmaceuticals 263
Notes 264
References 264

15. Paying for Capital 267

Jon Sussex and Sandra Sosa-Rubi
The Commercial Model 267
Capital Financing 268
Capital Charging 269
New Assets or All? 271
Notional Versus Real Capital Charges 272
Time Profiles of Capital Charges 273
Asset Valuation 274
Conclusions 276
 Contents ix

Notes 276
References 277

16. Paying for Knowledge and Research 279

Dean T. Jamison
Priority Areas for R&D 280
RAP for R&D 281
Notes 286
References 286

17. Using Resource Profiles 287

Anders Anell
Classification of Resources and Typical Imbalances Data 288
Construction of Health Care Resource Profiles 290
Discussion 295
References 296

PART V. SUPPLY, DEMAND, AND MARKETS 299

18. Single-Payer Health Insurance 301

Gerard F. Anderson and Peter Sotir Hussey
Differences Between Single- and Multiple-Payer Systems 301
Two Options for Reforming Single-Payer Insurance Systems 312
Considerations Specific to Low- and Middle-Income Countries 314
Conclusions 316
Notes 316
References 316

19. Multiple Payers in Health Care: A Framework

for Assessment 319
Peter Zweifel
Theoretical Background 320
Complementary Agents: Their Objectives and Constraints 325
Conclusions 335
Notes 336
References 336

20. Influencing the Demand Side of Purchasing 339

Tim Ensor and Stephanie Cooper
Demand-Side Barriers 340
Policy Discussion and Research Implications 348
Notes 351
References 351
x Contents

PART VI. LEGAL AND REGULATORY ISSUES 357

21. Law and Regulation 359

Frank G. Feeley
A Typology of RAP Arrangements 360
Regulating What Is Purchased 361
Regulating the Choice of Providers 366
Regulating the Purchasing Transaction 369
References 373

22. Quality-Based Purchasing in the United States:

Applications in Developing Countries? 375
Peggy McNamara
Call to Action for U.S. Employers 375
Quality-Based Purchasing By Employers 375
Barriers to Quality-Based Purchasing 377
Employer Activists 378
Generic Employer Strategies to Promote Health Accountability
for Quality 380
Impact of Employer Strategies on Quality 383
Conclusions 384
Notes 386
References 386

About the Coeditors and Contributors 389

Index 401

TABLES

2.1 How Much Do the Poor Gain from Government Health Service
Expenditures in Africa? 49

2.2 Financial Subsidy from Government Health Services Accruing

to Poorest and Richest 20 Percent of the Population 50

2.3 Distribution of Benefits of Three Government Maternal

and Child Health Programs across Socioeconomic Classes 51
4.1 Modalities between Purchaser and Provider Market Structures 85

5.1 Basis for Allocating Resources by Line Items in Former Soviet

Union Republics 93

5.2 Impact of Selected Payment Incentives 102

 Contents xi

7.1 Intracountry Disparities in Mortality of Children under

Five Years of Age 121

7.2 Equity and (Re)distribution of Health Resources 124

7.3 Components of Resource Allocation and Purchasing Reforms 128

7.4 The Impact of the Municipal Common Fund (MCF) in Chile 131

7.5 Average Change in Service Coverage Indicators in Cambodia

(first 2-1/2 years of reforms) 133

8.1 Mortality and Full Immunization for Children under Five Years
by Income Quintile, In Selected Low- and Middle-Income Countries 143

11.1 Some Service Delivery Arrangements 198

11.2 Summary of Contracting Experiences 200

12.1 Hospital Inpatient Utilization within Regional Facilities 216

12.2 Regional Outpatient Activity 217

12.3 Care Delivery Matrix 223

13.1 Types of Purchasers 238

17.1 Selected Health Care Expenditures and Resource Measures

in Five Middle-Income Latin American Countries 290

17.2 Selected Health Care Expenditures and Resource Measures

in Five Low-Income African Countries 291

18.1 Single-Payer Health Insurance Systems, Four Models 302

19.1 Complementary Agents: Objectives and Examples 327

19.2 Complementary Agents and Single- vs. Multiple-Payer Systems 330

20.1 Reasons for Not Seeking Care in Obstetric Emergencies

in Bangladesh 340

20.2 Types of Intervention to Correct Demand Barriers 345

22.1 Framework for Conceptualizing Employer Quality-Based

Purchasing Strategies 381

22.2 Leapfrog Group Strategies 382

BOX

1.1 Contractor versus Government Performance in Industrial

and Middle-Income Countries 31
xii Contents

FIGURES

1.1 Functional Differentiation of Health Systems 24

1.2 Incidence of Spending on Public Services 28

1.3 Outcomes Are Worse for Poor People 29

1.4 Recent Reforms 33

5.1 Dimensions of Developing a Payment System 95

5.2 How to Calculate per-Diem Payments 95

5.3 Case-Mix Adjusted per Case Payment 96

5.4 Economics of per-Case Payment 97

5.5 Economics of Capitation Payment 99

6.1 Traditional Accounting versus ABC 111

7.1 Share of the Public Subsidy for Curative Care by Income Group 122

7.2 Beneficiaries of Public Subsidy by Type and Level of Care 123

9.1 The Integration Pyramid 159

9.2 The Tradeoff between Equity and Efficiency Gains and Declines
in Managerial Efficiency 162

11.1 Double Differences (in percentage points) in Coverage Rates

from Studies with Controlled, Before-and-After Methodology 202

12.1 Where Best to Buy What? 232

13.1 Framework for Purchasing Health Care Labor 238

13.2 Terms of Purchasing and Health Services 240

14.1 Pharmaceutical Spending 252

14.2 Countries with a National Essential Drugs List, December 1999 256

14.3 Competition as a Price Inhibitor: The Example of Antiretrovirals 259

15.1 Depreciated Replacement Cost Valuation of Assets 275

17.1 Selected Health Care Expenditures and Resource Measures

for Five Middle-Income Latin American Countries 292

19.1 Health Outcomes Due to Provider Effort 321

20.1 Supply and Demand for Health Care 341

Acknowledgments

he editors are grateful for the inspiration provided by the following individ-

T uals who pioneered earlier work on resource allocation and purchasing in

developing countries: Brian Able-Smith, Howard Barnum, Robert Evans,
William Hsiao, Jerry LaForgia, John Øevretveit, Helen Saxenian, George Schieber,
and Jeffrey Hammer.
The editors thank Hon. Dr. Kwaku Afriyie, former Minister of Health, Ghana,
for his insights on practical application of strategic purchasing to a low-income
context.
The following individuals provided valuable reviews of the early drafts of the
volume: Michael Joseph Borowitz, Jan Bultman, Mukesh Chawla, Rena Eichler,
Varun Gauri, Pablo Gottret, Loraine Hawkins, William Jack, Joe Kutzin, Akiko
Maeda, Philip Musgrove, William Savedov, Agnes Soucat, Adam Wagstaff, and
Abdo Yazbeck.
Important access was provided to parallel and ongoing research undertaken
by the World Health Organization, the European Observatory, and close collab-
oration with Josep Figueras, Elke Jakubowski, Elias Mossialos, Jean Perrot, and
Ray Robinson on resource allocation and purchasing in Central and Eastern
Europe.
Valuable insights were provided by regional reviews of resource allocation and
purchasing carried out by Enis Baris, John Fiedler, Daniel Kress, Jack Langenbrun-
ner, Benjamin Loevinson, Akiko Maeda, Tonia Marek, Philipp Schnabl, and Edit
Velenyi and country case studies undertaken by Enis Baris, Sarbani Chakraborty,
Philip G. Cotterill, Maria Hofmarcher, Kees Klostermans, Joe Kutzin, Xingzhu Liu,
Anne Mills, Eva Orosz, and Oscar Picazo.
Others who contributed in various ways to reviews and inputs to the volume
include Laszlo Balkanyi, Mark Bassett, Karl Carol, Cheryl Cashin, Robert Dredge,
Maureen Lewis, Matthias Lundberg, Tatyana Makarova, Sheila O’Dougherty,
Mead Over, Andreas Seiter, Agnes Soucat, Dennis Streveler, Zhenya Symushkin,
Robert Taylor, Marko Vujicic, and Olga Zus
The editors are grateful to the Governments of Sweden, Canada, and the
United States for providing direct or indirect financial support, through the Cana-
dian International Development Agency (CIDA), the Swedish International Devel-
opment Cooperation Agency (SIDA), and the U.S. Agency for International
Development (USAID), for the research and leadership in the field of health care
reform.

xiii
Acronyms and Abbreviations
ABC Activity-based costing

AN-DRGs Australian National Diagnosis-Related Groups

BNHI Bureau of National Health Insurance, Taiwan (China)

BINP Integrated Nutrition Project

CABG Coronary artery bypass graft

CBD Community-based distribution

CHST Canada Health and Social Transfer

CPR Contraceptive prevalence rate

CRHCC Central Florida Health Care Coalition

DHS Demographic and health-survey

DOT’s Directly observed therapy short course

DRC Depreciated replacement cost

EDL Essential Drugs List

EOC Essential obstetric care

EU European Union

FFS Fee for service

FONASA Fondo Nacional de Salud, Chile

FSU Former Soviet Union

GFHR Global Forum for Health Research

HALE Health-adjusted life expectancy

HC Historic cost

HMO Health care management organization

xv
xvi Acronyms and Abbreviations

HPAR Health promotion accountability region

ICD International Classification of Diseases

ICU Intensive care unit

IDO Integrated delivery organization

ILO International lending organization

IMCI Integrated management of childhood illnesses

IMR Infant mortality rate

INCLEN International Clinical Epidemiology Network

LSMS Living Standards Measurement Survey

MHI Mandatory Health Insurance, Russia

MCH Maternal and child health (care)

MEA Modern equivalent asset

MSA Medical savings account

NBCH National Business Coalition for Health, United States

NGO Nongovernmental organization

NHS National Health Service, United Kingdom

NRV Net realizable value

ORT Oral rehydration treatment

PBGH Pacific Business Group on Health

PC Provider consortium

PCA Principal component analysis

PRSP Poverty Reduction Strategy Paper

QUALYs Quality Adjusted Life Years

PRP Performance-related pay

RAP Resource allocation and purchasing

R&D Research and development

RBRVS Resource based relative value scale

RFI Standardized health plan Request for Information

SWAp Sector Wide Approach Prevention of Maternal Mortality

TBA Traditional birth attendant

Introduction
Alexander S. Preker and John C. Langenbrunner

romoting health and confronting disease challenges requires action across

P a range of activities in the health system: making improvements in the pol-

icy-making and stewardship role of governments; obtaining better access
to human resources, drugs, medical equipment, and consumables; and encour-
aging a greater and deeper engagement of both public and private providers of
services.
Great progress has been made in recent years in securing better access and
financial protection against the cost of illness through collective financing of
health care. Managing scarce resources and health care effectively and efficiently
is an important part of the story. Experience has shown that without clear
spending policies and effective payment mechanisms, the poor and other disad-
vantaged people often get left out.
The shift from the passive budgeting of in-house staff within the public sector
to strategic purchasing or contracting of services from nongovernmental
providers—that is, outsourcing—has been at the center of a lively debate on col-
lective financing of health care during recent years. The premise underlying the
change is that it is necessary to separate the functions of financing from the pro-
duction of services to improve public sector performance and accountability.
This publication—Spending Wisely: Buying Health Services for the Poor—is the
latest in a series of World Bank books on getting better value for money spent on
health care. The book reviews how knowledge gained from recent experience of
strategic purchasing in other sectors of the economy is now being extended
effectively to the health sector in many developing countries. Many of the con-
tributing authors demonstrate how the interest of the poor would often be bet-
ter served through the fundamental shift in the way public money is spent on
health services.
The book is divided into six parts, which cover the conceptual framework,
transformation of strategic purchasing so that it is pro-poor, purchase of health
services, purchase of inputs, the supply/demand/market behavior of purchasers,
and legal and regulatory issues. The following summaries provide a roadmap for
the book.

1
2 Spending Wisely: Buying Health Services for the Poor

PART I: THE CONCEPTUAL FRAMEWORK

The chapters in part 1 present a conceptual framework that will help the unini-
tiated reader get familiar with the basic concepts and language used in strategic
purchasing of health services for the poor. It highlights the need for policy mak-
ers to ask five fundamental questions: for whom to buy, what to buy, from
whom to buy, how to pay, and at what price? In coming to grips with these ques-
tions, different authors throughout the book emphasize the important role of
organizational, institutional, and management issues to the performance of pub-
lic spending on health care.
In chapter 1, “Managing Scarcity through Strategic Purchasing of Health
Care,” Alexander S. Preker provides a rationale for collective spending on health
care. He argues that the increased complexity of health care that has occurred
over time has made it impossible for individuals to buy health care in the same
way that they might buy groceries or other consumer goods. Furthermore, the
cost of catastrophic care requires some form of insurance mechanism to avoid
impoverishment when illness strikes. For this reason, most developed countries
no longer rely on direct user charges to finance expensive health care. Many
developing countries are slowly moving in the same direction, although at very
low income levels direct fees still predominate.
At first sight, the relationship between the principal (patient) and the agent
(purchaser) that has evolved under collective financing of health care helps
resolve the problem of individuals having to deal with complex health systems.
Similarly, associated pooling of resources helps spread risks across larger popula-
tion groups.
In reality, things are not that simple because purchasers serve as multiplici-
tous agents for several different powerful principals, not just as agents for
patients and their interests. Three important agency relationships are predomi-
nant: the relationship between the purchaser and health care providers (doctors,
nurses, allied health care workers), the relationship between the purchaser and
various institutional actors (policy makers, regulators, insurance and other fund-
ing agencies), and the relationship between the purchaser and health care orga-
nizations (hospitals, clinics, ambulatory services).
The interests of these stakeholders differ widely. For example, tension often
arises between health care providers that act on behalf of individual patients and
policy makers and institutions that focus more on national and population-level
issues. The purchaser may be pressured by health care providers to finance the
most recent and best-quality care for its patient. At the same time, the institu-
tional actors in the ministry of health may be more concerned about aggregate
health outcomes while those in the ministry of finance may be more concerned
about the overall fiscal affordability of the health sector. This leads to an irrec-
oncilable situation for the purchaser, which has to act as an agent on behalf of
two or more principals, each of which has a very different agenda.
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