Family health care spending in Latin America

Journal of Health , ~ n o m i ~ 2 (1983) 245-257. Norf.h-Ho~A~'l

FAMILY HEALTH CARE SPENDING IN LATIN AMERICA* Philip MUSGROVE* Pan American Health O r g ~

Washin~oa. DC 20057, USA

Received May 1983 Homchold budget data from surveys in six Latin American ¢ountrie~ 1966-75, are used to estimate income elasticities ¢tf private health care spending. For ten cities in five countries the elasticity is constant at 1.5; for metropolitan, other urban, and rural areas of Brazil it is constant at 1.17. The B ~ data also show 30 percent higher spending in small than in |arg¢ citif~ and 50 percent higher in the countryside. The~e results are cona,istent with supposing that private care is a luxury compared to public care. and that more is spent on the former when the latter is not available. Geographic differences may be eamggerated by dilfcrences in payment lnechanixmf., since reported out-of-pocket e..xpcDditur~ is not net of public reimbursement. Different components of spending such as drugs and h:~'pi ~tafization show very different behavior from the total.

Expenditures by consumers on health care are in many respects like any other kind of expenditure; they are directed toward particular goods and services in order to satisfy wants for a more general good ('health'), and the process by which health is built up by investment or lost by depreciation or accident can be described by models of utility maximization under a variety of constraints and suppositions I'Grossman (1982), Rapaport et al. (1982)]. In other respects, spending on health care is diffexcnt from any other element of the consumer budget, because a large share of it is provided publicly although it is neither entirely a public good nor is it something required by law (such as education). In consequence, in order to understand how much health care households demand and buy, one needs to analyze the determinants of total health care expenditure and also the interaction between public and private spending. Previous analyses ['Kleiman (1974), Newhouse (1977), Maxwell (1981)] have typically relied on highly aggregated data, and have concentrated on understanding total health spending. They indicate that health care is relatively elastic with respect to income across countries, with the elasticity declining toward one as income rises; that income and spending are much *The opinions expressed are the author's, and do not necessarily reflect those of the Pan American Health Or~ni-~ion or of its member governments. I acknowledge with thanks the help of Louise Fox and William McGreevey of the World Bank in obtaining the Brazilian data used in the analysis, and that of Mark Crowley of PAHO in the regressions t~orted in table 4. 0167-6296/83/$3.00 • 1983, Elsevier Science Publishers B.V. (North-Holland)

246

13. Mu.Tgro~ He~Ith cw~ spcrufing in Latin Anm~'~

less related within countries; and that inter-country differences depend not only on income but on relative costs of rk~xticular medical services, the age structure and health problems of the population, the m e c h a n i c s of payment and other factors. Private expenditure, as a share of the total, depends not only on the factors determining demand for health care but on the availability and cost of public services Bud on the coverage and operation of private insurance. Most of the analyses cited above h a ~ been limited to high-income countries, in part because of the limitations of data, especially data on private spending and its deterufinants. Studies of health care financing in poor countries have been based almost exclusively on national accounts estimates [Pan American Health Or~n;ration (1982), Zschock (197~)'1 which give little more than a disaggregation of public financing by major source and a rough estimate of total private spending. More detailed studies, as for example of the social security system ~¢Iesa.Lago (1978), Zschock (1983)] make use of the disaggregated information collected by public institutions, but still provide very little analysis of out-of-pocket spending by consumers. This situation is beginning to change, as surveys are undertaken with the specific objectives ~ofmeasuring private expenditures and their causes [World Bank (1982)] or the use by consumers of the public health system [Selowsky (1979)]. Data of this type are still limited to very few countries and have so far been subject to relatively little analysis. Meanwhile, given the preponderance of public sector data and of aggregated estimates, it may be valuable to make use of standard household income and expenditure surveys to study private health care spending. Data of this sort are also relatively rare in Latin America, but not nearly so rare as information collected specifically to study how health care is demanded and financed. Without adjustments for subsidies and transfers, such data are also likely to give biased measures of net expenditure and of the amount of medical care actually obtained; this problem is discussed further below. However, family budget data have the great advantage of covering a wide range of incomes and of other relevant variables, including detailed geographic and demographic information. In the long run, there may be no reason to expect much association between income and health care spending, or between the latter and actual health status, because of the great changes in medical technology and in living conditions generally [Fuchs (1979)], but in a cross-section at a given time it may be possible to measure a definite income elasticity. This is all the more likely if private spending only is studied, since the choice between private and public care may be highly income-dependent once public care is available to a consumer. This reasoning suggests that a family's income and its access to publicly-provided services - - perhaps indicated by where it lives - - should be worth studying in household budget data, even if other features which influence the need for

P. Musgrove. Health care spending in Latin America

247

health care and which belong in a full model of family decision-making are not considered. This paper uses such data from several household surveys in six Latin American countries between 1966 and 1975, primarily to estimate income elasticities and - - for the one survey with substantial geographic variation - to investigate how the availability of public services and the way they are provided and paid for appear to affect family expenditures. Other sources are used to provide some information on these public services, but it should be empb,~7~l that these data are not available in the same detail as private expenditures: some of the findings, while plausible and perhaps easy to confirm with more disaggregated public sector data, should therefore be regarded more as hypotheses than as conclusions until more thorough research is conducted. In a previous study of household incomes and expenditures based on data from ten South American cities in five countries [Musgrove (1978a)], I estimated expenditure elasticities for total family health care spending and also for spending on insurance other than social security contributions, of which health insurance is a component. The results, shown below, give fairly precise estimates of the health spending elasticity, which however differ among countries by more than 50 percent (from 0.81 to 1.34). Much of this variation may be due to differences in the cost and availability of public services, on which the surveys contained no information. Health and other insurance elasticities vary even more and are less precise. In the case of Chile, there is some evidence that the health care elasticity converges toward one as income rises, but the errors of estimate are quite large. The regressions from which these elasticities come also show health care spending to be influenced by family size, age of head and employment of spouse, but these variables do not have consistent effects across countries. See table 1. Table 1 Elasticitieswith respect to total expenditure(standard errors in parentheses). Chile (Santiago)

Colombia Ecuador (4 dries) (2 dries)

Peru Venezuela (Lira.) (2 cities)

Total health care sp..nding, except prlmte health insurance

0.844 (o.o52)

1.171 (o.o4o)

0.904 (o.o5o3

0.808 1341 (o.os5) (o.o63)

Total in.~arance, including health insurance, excluding sodd security

NA

1.116 (0.7.04)

1.205 (0383)

0.756 1.253 (0.033) (0.090)

Chile, total health care spending, elasticity by stratum

Low 1.2S3(O.7O9) High 1.071(0.166)

248

P. Musgrotw., Health care ~onding in Latin America

In the case of spending on education - - which like health care includes a great many zero values, and much variation due to factors besides income elasticities estimated from the individual observations appear to be understated. When I used as observations the means of spending on education and of total spending by income quartiles, eliminating any transitory income effects within quartileg the elasticities rose from about 1.0 to nearly 2.0 ['Musgrove (1978b)'1. I have therefore applied the same procedure to the data on health spending, combining observations for all ten cities. The results appear in table 2, quartiles being defined by income per person in households and compared in dollars of equal purchasing power. The data are also shown in fig. I, yielding an estimated elasticity of 1.5, higher than any of the individual countries' values for disaggregated data. In one city (Caracas) a second survey was taken nine years later, permitting an analysis of how spending changed as real income rose. I have calculated quartile-specific price indexes and used them to compare incomes and expenditures in real terms in the two years rMusgr~ve (1981)]; the results for health care spending also appear in table 2. In the top three quartiles, the shifts imply an elasticity of about 0.9, but in the poorest quartile family Table 2 Estimated total family expenditure per person and private health care expenditure, by quartile 1 (low) to 4 (high) of total spending per person, in ten South American cities (1968 dollars per year)? 1

2

3

4

Total Health Total Health Total Health Total Health Cali Barranquilla Medellin Quito Guayaquil Maracaibo Santiago Bogota Lima Cataca~

174 201 146 156 160 192 220 229 220 320

0.96 2.77 1.02 3.67 2.18 1.31 1.96 2.89 4.36 4.64

293 339 247 320 266 330 421 384 394 677

2.81 5.93 3.80 11.10 5.83 2.81 5.14 3.80 6.54 19.84

531 504 421 586 512 494 714 586 631 1162

8.87 12.55 6.69 17.76 9.42 5.04 9.00 11.25 13.88 45.32

961 20.66 924 36.87 915 29.19 1236 35.97 1044 27.14 924 20.70 1483 27.58 1227 40.73 1290 34.06 2050 129.56

Caracas, Venezuela, on/y, in 1966 and 1975 (expenditures in bolivars per person per month; 1966 bolivars, 1975 deflated by a variable index) 1966 122 3.57 217 8.10 384 26.46 835 51.60 1975: nominal 126 2.32 265 8.88 505 28.91 1114 59.46 real 2.72 9.99 31.84 62.75

"Cities are ordered by ascending median family income, in 1968 dollars, at purchusing-powcr-parity exchange rates. Values of total spending are medians within quartiles (12.5, 37.5, 62.5 and 87.5 percent of the cumulative distribution). 1975 real health spending in Caracas includes an adjustment for differential inflation of medical prices.

P. Musgrove, Health care spending in Lmin America

249

g

e

] J

100

150 200 250300 400 500600700 1000 1500 2000 Total Expenditure per Person. 1968 Dollars per year (PCE)

Fig. I

health care spending declined, the implicit elasticity being about -0.5. It is not clear whether this is due to expansion or free public services, which would have reduced the need for private spending, or whether it reflects other factors such as better nutrition and sanitation which would have improved the health of the poorest families. The largest household expenditure survey yet taken in Latin America was conducted in Brazil in 1974-75 L'FIBGE (1978)]. Published tables show

250

P. Mvs~,~rove,Health care spending in Latin America

means of total family spending (on several slightly different definitions) and of spending in total on health care and o n several components such as doctors, hospitalization and surgery, drugs and mech'cines, etc., by region of the country, metropolitan/other urban/rural location, and class of total expenditure (nine classes are distinguished for most regions and locations). The Brazilian public health care system has recently been extensively analyzed [McCrreevey (1982)], but there has been little ff any previous analysis of spending by.f~milies although some such research is now planned rPrograma de Investigacao em Servi~os de Sadde (1982)]. I have used the data on total health care spending, shown in table 3 and fig. 2, for the same

E

W

g 0

g W

2 3 4 5 6 7 10 20 30 40 506070 100 200 Total Family Expenditure(PCE),thouunds of August 1974cruzeirosper year

Fig..2

P. Musgrove, Health care spending in Latin America

0

251

~

o~.~ ~.~

o ,~

~

.~.~

i~

~

0

NNN

~

I

-

"°~" .~

o

¢.

~

.

~

~

~ ~ ~ ~ _ ~¢)

o

0

Q

o

t~.

0%

~

oo

. 0 O00

J.H.E.-- C

~

0000

252

P. Musgrooe, Health care st,ending in Latin America

Table 4 Brazil, 1974: private family health care spending as a function of total family expenditure, region and metropolitan/other urban/rural differences. Variables: HEA PCE URB

=logto health care expenditure =logso total expenditure = non-metropolitan urban area

R UR

=rural area

PEG 1, 3, 4, 5=region (Rio de Janeiro; P a r a ~ Santa Catarina, Rio Grande do Sul; Mina¢ Gerais and Espiritu Santo; nine northeastern states) Regres.6on results ( ~ e n t standard errors in parentheses) (I) H£AffiI.1728 PCE-2.2745 PEG 1--2.2149 PEG 3-zig73 KEG 4 (0.0162) (0.0740) (0.0738) (0.0715) -23339 KEG 5+0.1100 URB+0.1633 RUR, R2=~0.9992,F=21499

(0.O678) (0.0177) (0.0188) (2) HEA ffi 1.1446 P C E - Z 0 7 0 0 REG 1-",.0255 REG 3-1.9787 PEG 4

(0.0203)

(0.0908)

--2.1653 PEG 5, (0.O836)

(0.0910)

Ra=0.9986,

(0.0870)

Fffi 17996

(3) HEA=--2.2841 +I.1994PCE +0.1270URB +0.1885RUR,

(o.o8o5) (0.0186)

(4) HEAffi--2.1945 +I,1736PCE,

(0.0210)

(0.0223)

R2ffi0.9711, Fffi 1422

R2=0.9522, Fffi2572

(0.0982) (0.0231) Marginal F-tests: Adding all binary variables to (4) Fffi1414 Adding regional variables to (3) F ~ 1057 Adding URB and R U R to (2) F ~ 43 N = 131 observations

analysis as that discussed above, with one difference: the much greater number of observations makes it possible to estimate the effects of region and location as well as an elasticity with respect to total expenditure. As fig. 2 makes clear, the relation of household income to private health spending shows approximately constant elasticity. Moreover, at' any level of total spending, rural families spend the most on health care, families in smalland medium-sized cities spend less and households in the largest urban areas (seven of which are distinguished in the four regions studied) spend the least. These relations are tested by regression analysis, the results of which appear in table 4. Regional differences as a whole are significant, because spending is higher in Region 5 than in Region 4, but most pairs of regions do not differ. The metropolitan/other urban/rural differences are significant and of the order of 30 percent (urban) and 50 percent (rural) with respect to metropolitan areas. The estimated income elasticity is 1.17, and differs insignificantly among the four specifications tested. There is no evidence, in

P. Musgrove, Health care spending in L a ~ America

253

the range of total expenditure studied, either of saturation at high incomes or of a threshhold below which families show a much higher elasticity. All three of these results ~ the high income elasticity, the regional differences and the differences by location - - are consistent with the following simple model: total health care spending is a normal good, with an income elastidty declining toward one [Newhouse (1977)], but private care is a luxury relative to publicly-provided free or subsidized services. Therefore private health care spending can have an elasticity above one even at very high incomes, because as household incomes rise, private services replace public services; and at a given level of income private spending will be higher where fewer public services are available. In BraziL. most public health care is provided through the, Institute Nacional de Asistencia M~dica da Previdencia Social (INAMPS), which is part of the social security system. Expenditures by INAMPS are high relative to government tax revenues (including the payroll taxes which finance much of the system) in the poorer regions of the country [McGreevey (1982, lX 54)] so that there is some net transfer from richer to poorer regions; but expenditures per capita are still lower in the poorer regions [McGreevey (1982, tables 8 and V.14)]. Private expenditure is higher in Region 4 (Center-West), where INAMPS spending per head of population is 95 percent of the national average, than in Regions I and 3 (South and Southeast) where INAMPS spending runs 20 percent above the average. This relation breaks down, however, for Region 5 (Northeast, the poorest part of the country), where INAMPS spending is only half the national average and private spending is also lowest; in this comparison, private and public spending appear to be complements rather than substitutes, perhaps because the relative importance of different components of medical care changes. (This point is considered further, below.) As for the metropolitan/other urban/rural differences, coverage of the population by INAMPS is more complete in urban areas, although Brazil is one of the relatively few Latin American countries in which there is substantial rural coverage [Zschock (1983, pp. 35-37)]. Much of the urban/rural difference might be due to the difficulties of providing publ~ health care to agricultural workers, so I repeated the analysis in table 3 using an agricultural/non-agricultural classification. Private expenditure is higher, for a given total expenditure, in the agricultural sector, as expected; there is also no significant difference among the three agricultural occupations distinguished in the survey, or among the eight non-agricultural occupations. However, the way in which INAMPS provides care probably exaggerates the real differences in private spending by location: in the metropolitan areas, most health care is provided directly, with little or no out-of-pocket cost to the consumer, whereas in smaller cities and rural areas INAMPS often reimburses consumers for private expenditures, as well as paying other

254

Is. Mu,g, rov¢, H t a h h care spending i8 ~

public-sector institutions for services provided. Since the household budget data do not show m~lical spending net of reimbursmncmts, private costs are somewhat overstated in non-metropolitan areas [Zschock (1983, IX 6)]. Data do not sccm to have bccn assembled showing the distinction between direct provision and reimburscmemts for urban and rural areas; but 'complemeatary services paid by IlqAMPS', which include re~burseanents, are available by state and region [McGrccvey (1982, IX 116)]; these are a slightly higher share of total outlays in the more rural Northeast, and a notably low share in the more urban South of the country. The simple constant-e!asticity relation characterizing toIal private health spending does not apply to all somponents; regional and locational differences in spending also vary according to which component is studied. Table 5 shows mean expenditures on the two items which diverge most from the pattern for the total - - drugs and medicines, and hospitalization and surgery. The data for the former are also displayed in fig. 3, which shows that expenditure on drugs tends toward saturation, irrespective of region and location. Rural spending is higher than in metropolitan or other urban areas

!

J .i a

8

J I

u. 3 4 5 6 78910 20 30 40 50607080100 Total Family ExixmdRum(PCE),I~hou~ds of August 1974 cnJzeirm per year

Ft~ 3

200

P. Musgrove, Heahh care sptnuling in Latin America

255

~. ~ .~_

g.~.~

~ ~

~--

I I~ ~

~,~ ~.~~

o~ ~ ~ ~

.~-~.~.~ ~ ~ ' ~ ' ~ ' ~

.7.36

P. Musgrove, Hea/~ care spewing/v Latin

at high levels o f total household spending, but at low levels, rural families a p p e a r to spend less on drugs and medicines; this ~-aay reflect a distribution of the poorest rural families in areas where even pharmacies are rare, so th~-t the explanation again turns on the availability of the goods and services. Hospitalization and surgery, in contrast, shows an explosive growth with increasing income: this is undoubtedly the category for which private care is most d e a r l y a luxury c o m p a r e d to public hospital services, so that the poorest families spend essentially nothing in this category. Metropolitan/other urban/rural differences do not seem to be stable across regions, but there are pronounced regional differences, with especially high expenditure in Region 3 (South) in all three locations. Brazil is unusual a m o n g Latin American countries in having a high share of private hospital beds [Zschock (1983, table 2)], which m a y be concentrated in the relatively urban, high-income South of the country. O f course, to the extent that private hospital care is reimbursed to consumers, net expenditures m a y be exaggerated much more than net total private health care ~pending.

References Fuchs, Victor, 1979, Economic~ health and post-industrial society, Milbank Memori~ Fund Quartedy / Health and Society 57. 153--182. Fundac~o lnstituto Brasileiro de Gcografia e Estatisfica, 1978. Estudo nacional de clespesa familiar, Dados preliminar¢~ Despesas da$ famillas, Regi~ I, III, IV, V, VI. VII (FIBGE, Rio de Janeiro). Grossman, Michael, 1982, The demand for health after a dec~de, Journal of Health Economics I, 1-3. Kleiman, Ephraim. 1974, The determinants of national outlay on health, in: Mark Perlman. ed., The economics of health and medical care (Wiley, New York). Maxwell. Robert J.. 1981. Health and wealth (Heath, Boston, MA). McGrcevey, William, 1982. Brazilian health care financing and health policy:. An international perspective (World Bank, Population. Health and Nutrition Department, Washington, DC). Mesa.Lagn, Carmelo, 1978, Social security in Latin America (University of Pittsburgh Press, Pittsburgh, PA). Mnsgrove, Philip, 1978a, Consumer behavior in Latin America (Brookings Institution, Washington, DC). Mnsgrove, Philip. 1978b, La contribucibn familiar al financiamiento de la educacibn en America Latina, in: Mario Brodersohn and Maria Ester Sanjurjo, eds., Financiamiento de la educacibn en Am&ica Latina (Fondo de Coltara Econbmica, Mexico). Mnsgrove. Philip. 1981, The oil price increase and the alleviation of poverty: Income distribution in Caracas, Venezuela, in 1966 and 1975, Journal of Development Economics 9, 229-250. Newhouse, Joseph, 1977, Medical-care expenditure: A cross-national survey, Journal of Human Resourc~ 12, 115-124. Pan American Health Organization. XXI Sanitary Conference. 1982. Plan de acci6n para la instrnmentacibn de Ins estrategius de salud para todos en el afio 2000: Implicaciones financieras y presupuestarias. Document CSP 21/21 (PAHO, Washington, D ~ . Programa de Investiga~o em Servi~;os de Safide, 1982, Acordo MECfldS~tPAS/OPAS, Termos de Refer~ncia (BrasJlJa). Rapaport, John. Robert L. Robertson and Bruce Stuart, 1982, Understanding health economics (Aspen, Rockville, MD).

P. Mus~'ove, ttea~h care spending in L a ~ America

257

S¢.lowsky, ~ o , 1979, W!~ benefits from public expenditure? A case study of Colombia (Johns Hopkins, Baltimore, MD). World Bank, 1982, Colombia: H',:alth sector review (World Bank, Population, Health and Nutrition Department, W-~hinston, DC). Zschock, Dieter, 1978, Health care financing in developing countries (American Public Health Association, WAshington,DC). Zsc.hc~.~ Dieter, 1983, Me~J~l care under soc~d insurance in Latin America: Revlew and ~.~lysis (Stony Brook. NY) forthc13ming.