Principles of Health Economics for Developing Countries is an overview of health economics and its applications. It is aimed at students of economics and builds on standard economic theory, but it explains most of that as needed, assuming only elementary econometrics and microeconomics. While the presentation is rigorous, the technical details never obscure understanding and are always motivated — and the mathematics is mostly trivial or unessential.

Jack begins with measures of mortality and morbidity and their historical trends. Looking at determinants of health, studies have found a positive correlation with income, with the causality usually from health to income — though AIDS in Africa may be one exception.

Basic microeconomics offers a model for health care preferences and income and price effects. And several studies have attempted empirical measurement of demand and demand elasticity.

"the poor tend to have more price-elastic demand than the rich, and children's utilization suffers relatively more in response to a price rise than does that of adults."

Problems with standard insurance models include adverse selection (healthy people opting out), hidden information moral hazard (overconsumption), and hidden action moral hazard (disincentives to take precautionary action). The result is a wide variety of medical insurance systems, from health maintenance organisations (HMOs) which combine provision and insurance to informal insurance systems.

The supply of medical services is dependent on appropriate incentives and motivations for physicians and hospitals (and for drug research and production). Performance measurement is one challenge to controlling expenditures; another problem is provider-induced demand:

"A recurring question in health economics regards the ability of physicians to induce consumers to purchase more medical care than they otherwise would."

Manpower planning concerns include attracting enough doctors to rural areas.

"if demand inducement is significant, prices may be more effective in ameliorating shortages than quantity instruments."

Reasons for market failure include externalities, public goods, and merit and information goods. There are several approaches to intervention to correct for these — Jack analyses immunization as an example — and public provisioning is an alternative. Issues in financing include optimal taxation, user fees, and the earmarking of funds.

"There appears to be little reason for the revenues derived from health care service charges to match the costs of provision of those services."

Getting from Pareto-optimality and a choice of welfare function (utilitarian, iso-elastic, or Rawlsian) to full cost-benefit analysis of health projects is difficult, if not intractable. But easier cost-effectiveness analysis has major limitations, being usable only where outcomes are directly comparable:

"CEA may provide guidance on the best way to spend a given health budget to attain some exogenous goal, but it provides no information on whether the attainment of the goal is worth the resources spent."

Broader use of cost-effectiveness analysis requires standard measures of utility that can be compared across health projects, thus the use of QALYs — quality adjusted life years — and DALYs — disability adjusted life years. These have their own limitations, however, and their definitions are controversial.

In practice, most governments "intervene in the health sector much more actively and to a greater extent" than economic theory would suggest. One explanation for this comes from equity arguments for public provision as a redistributive instrument. The public provision of medical insurance faces similar problems to private insurance schemes: one result is the presence of hospital waiting lists and other shortages.

Few health professionals are likely to find Principles of Health Economics for Developing Countries of immediate relevance to their work, since it remains abstract and focused on economics. Jack does an excellent job of making the economics accessible and situating it in its broader context, though he refuses to look at political issues directly. Little of Principles is specific to developing countries: I found it much more useful in understanding debates over health insurance and medical provision in Australia and the developed world than in understanding the problems getting basic medical care to rural Indonesia or India.

April 2004

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