Mismatch of need, demand and supply of services : picturing different ways health systems can go wrong

Human Capital Development and Operations Policy HCO Working Papers Mismatch of Need, Demand and Supply of Services: Picturing Different Ways Health Systems can go Wrong Philip Musgrove August 1995 HCOWP 59 Papers in this series are not formal publications of the World Bank. They present preliminary and unpolished results of analysis that are circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Mismatch of Need, Demand and Supply of Services: Picturing Different Ways Health Systems can go Wrong. by Philip Musgrove This paper derives from a discussion at the conference on Health Sector Reform in Developing Countries, organized by the Harvard School of Public Health, Durham, New Hampshire, September 1993. 1 am most grateful to Julio Frenk for urging me to write it, and to Jos6-Luis Bobadilla for extensive and helpful comments. Howard Barnum and Randy Bulatao also offered interesting suggestions, most of which have not been incorporated. Any remaining faults are my own. Abstract As with other sectors, imbalances between demand and supply can occur in the market for health services. But there are also needs for these services, leading to two other potential failures: imbalance between need and demand and between need and supply. Such imbalances can characterize the health sector as a whole, or can occur for particular health problems or interventions. Moreover, it is not possible to suffer only one imbalance; without complete coincidence of need, demand and supply there must be at least two problems at once. Each of the classical market failures in health causes one or more of these imbalances, with incomplete information contributing to all of them. Competitive private markets readily ignore needs; public, non-market provision often ignores demand. Minimizing imbalances requires the right private/public mixture. Table Of Contents Three Possible Imbalances........................................................................................................... Causes of Inequalities.................................................................................................................. 4 M arkets and Incentives................................................................................................................6 Examples of M ismatches.............................................................................................................9 References ................................................................................................................................12 Three Possible Imbalances In an ideal health system, every genuine need for medical care would generate a demand for the appropriate service, and the supply of services would meet every demand. There would be no difference between giving people what they need and giving them what they want, and also no under- or over-supply of services. In real health systems, unfortunately, need, demand and supply often do not coincide. This leads to three possible kinds of failure: mismatch of needs and demands, of need and supply, and of supply and demand. What constitutes a "failure" depends, of course, on the definition of the three concepts (Donabedian, 1973). If every possible health problem is thought to generate a need, then it is to be expected that supply will be inadequate, because there are some problems about which nothing can be done. It makes sense therefore to restrict the term "need" to those health problems for which some services exist that are at least partly effective in protecting or restoring health (Jeffers, Bognanno and Bartlett, 1971). This is a matter for expert medical judgment. It should also be clear that need refers to services, not to health status. Demand and supply also refer to services, because however much people may desire good health and providers may want to meet that desire, all that anyone can actually ask for or offer are health services. Demand is distinct from wants because it has to be expressed by people, as shown by their willingness to go to where services are offered, or wait for them, or pay for them. And supply is not whatever is theoretically possible, but what can be and is produced with the resources devoted to health care. How much is demanded and how much is supplied usually depend on the price(s) 2 of medical care and the way it is paid for; so unlike needs, they do not depend only on biology and technology. To go further and say that needs correspond to requirements for health care means judging that those services represent a "reasonable investment", either for society's resources generally or for the use of public funds. It also means that someone requires or at least wants the services (Frankel, 1991). To avoid any confounding of needs and wants, the notion of requirements is not used in what follows. Figure I represents the three concepts of need, demand and supply as the vertices of a triangle, with the length of each side corresponding to the inequality between two of them. The direction of each imbalance is indicated in the first instance by which vertex is above the other, and secondly by which one lies to the right of the other. In the figure, need exceeds (lies above) demand, and demand is greater than (to the right of) supply: need therefore also exceeds supply. The shape of the triangle-the relative lengths of the sides-illustrates which of the three possible mismatches is most severe, as discussed further below. For a given shape, a larger triangle describes a system with greater imbalances. With this representation, the perimeter of the triangle corresponds intuitively to the sum of the health system's problems. The area of the triangle, in contrast, has no such interpretation: in fact, the area disappears if any two of the vertices are brought together, but the system still suffers from mismatches because the third vertex does not coincide with either of the other two. It is evident from this way of looking at it, that a health system can suffer from two or three inequalities at once but cannot have only one such problem at a time: a triangle can have one short 3 Figure 1. Causes of Mismatch among Need, Demand and Supply NEED Lack of Information Supplier-Induced Lack of Information Demand High Cost Poverty Market (Profit) Incentives High Cost (Price) Public Goods Externalities SUPPLY DEMAND Lack of Information Other Barriers to Competition Non-Market Incentives 4 side and two long sides, but it is not possible to have only one long side--one mismatch--and two short sides. Of course, two problems can arise from a single source, such as inadequate supply: the number of mismatches in the system does not have to equal the number of things to be corrected, and correction of one element might solve two mismatches at once. Causes of Inequalities What causes the inequalities or failures ? Figure 1 also indicates some of the principal sources. For all three problems, ignorance or lack of information is a potential cause of trouble. Needs are not expressed as demands because people do not know what they need. They may be unaware of health problems such as hypertension, or even when they recognize ill health they may not know that an effective treatment is available. Ignorance is particularly likely to cause mismatch between need and demand for preventive services, where the need does not depend on being already sick or hurt. Providers generally know more about what people need, but ignorance on their part may still keep supply from matching needs. The combination of asymmetry in information between providers and patients, financial incentives to providers, and third-party payment can also lead to supplier-induced demand for services of little health value which do not correspond to needs. And in an imperfectly competitive market, lack of information can keep supply and demand apart. This is also the effect of other kinds of barriers to competition, such as government prohibition or over-regulation of private service provision. Aside from ignorance, mismatches arise from health care services being expensive relative to people's ability to pay for them. This can happen for two distinct reasons-because people are 5 poor, and all but the very cheapest services represent a serious financial burden, or because particular services are so costly as to imply financial catastrophe even for people who are far from being poor. So far as demand is concerned, it is the cost or price to the patient that matters, not the total cost of providing a service. Needs do not automatically lead to demands when the price is too high-whether this occurs because people cannot afford to buy medical care out of pocket, or insurance is too expensive, or it takes too much time to obtain care. Cost affects what is and is not covered by insurance, so it affects demand even when people do not pay out of pocket. When medical care is free, the corresponding level of demand can be thought of as what people "want", but because of ignorance, wants do not have to correspond to needs (Jeffers, Bognanno and Bartlett, 1971). Even in this case, the needs of the rich are more fully expressed than those of the poor, so a mismatch between need and demand reflects inequity as well as aggregate imbalance. This mismatch is greater if the poor have to pay the same price for services as the rich (Gertler and van der Gaag, 1990). When the supply of care is determined by non-market forces rather than responding to demand, total costs and the costs of individua' services can also keep supply from matching needs because it is decided, by whoever is financing the services, that some interventions are too costly to offer or because of limits to total expenditure. Imbalances between need and demand also arise because some services are public goods: vector control and the guarantee of safe food and water are common examples. Everyone may want such services to be provided, but no one is willing to pay for them individually because there is no way to capture all the benefits and exclude those who do not pay. A similar but less severe problem arises for those services which provide substantial positive externalities, such as the 6 control of tuberculosis or other communicable disease. Individual benefits from prevention or treatment are large enough to lead to some demand, but demand will still be less than need because infected individuals do not take account of the benefits to others from disease control, and those other beneficiaries, who are protected from infection, do not pay for the protection they receive. Each side of the triangle corresponds to one or more kinds of market failure, with information failures being the commonest element. It is notable that both moral hazard and adverse selection, the forms of market failure associated with private third-party health insurance, can cause need and demand to diverge even more than they would simply because of poverty or high costs of care. Moral hazard means that people may demand more services than they really need, if the costs to them are low and providers induce that demand. More seriously, moral hazard means that people may take poorer care of their health, and therefore increase the need for services beyond what it would be if they had to pay the full cost. Adverse selection means that some needs are not expressed, because high-risk people are explicitly excluded from insurance or priced out of the market for it, and may not be able to pay for services out-of-pocket. Markets and Incentives A competitive market is the standard solution to imbalances between demand and supply; competition will even generate some of the information, the lack of which prevents supply from equaling demand. However, when needs differ from demands, a system which relies on market incentives will fail to meet needs because it will try to meet demands. In general, it is the 7 existence of needs which makes a competitive market an incomplete solution to the problems of the health care market: if only demand were relevant, a competitive market could come much closer to eliminating imbalances. Such a system will of course still fail entirely to deliver public goods, and will produce too little of services with positive externalities. Customers who obtain care may be satisfied with the result, but they will get less health benefit than they might, and even less care than they would be willing, collectively, to pay for. Much of the debate over the limitations of private markets in health and the appropriate type and degree of state intervention is, implicitly, a debate about whether there are such things as objective needs, and whether they should be taken into account. Conversely, a system guided by non-market incentives, as is typical of government provision of services, will fail to equate supply to demand insofar as it tries to match supply to needs. Where needs do not have to be expressed as demand, as is the case for many public health measures, supply can bypass demand and go directly to needs, so public goods can be adequately produced. However, where the patient has to demand the service in order to receive it, the attempt to match supply to needs and ignore demand will lead to excess supply for some services such as those with positive externalities and to shortages and consumer dissatisfaction in other cases. Whenever need and demand do not coincide there will be conflict between ethical (need- based) and economic (demand-based) criteria for the supply of services. The distinction between market and non-market incentives for supply corresponds, in the simplest case, to the difference between purely private and purely public financing of care (assuming that public finance is directed at needs and does not simply mimic private finance in 8 responding to demand.) Neither approach can eliminate all the potential imbalances in the system, which is why the appropriate way to pay for health care and the appropriate degree of public intervention in the market for services are such contentious issues. It also explains why only a mixed health system can deal, even imperfectly, with all three imbalances, and therefore why all real health systems are a mixture of private (market) and public (nonmarket) elements. Each kind of mismatch arises from specific causes, and each can in principle be corrected by the right policy. The difficulty is that what causes-or cures-one problem may have nothing to do with the cause or cure of another, and a policy to reduce one mismatch may be ineffectual or even perverse with respect to one or both of the others. And just as there cannot be only one inequality, there is seldom just one solution to large health sector imbalances: to shrink the triangle it usually is necessary to work on two or even all three problems together. Reducing the imbalance between need and demand is partly a matter of changing people's knowledge and perception of their health needs and their behavior in seeking care. Both general education and specific information about health and health care can have this effect. Making demand and need equal may also involve suppliers, to the extent that providers create superfluous or questionable demand. Finally, subsidizing care (or insurance through which people can pay for care) brings need and demand together by reducing the cost barriers which otherwise keep demand low relative to needs. On the other hand, a government which wants the supply of health services to meet people's needs, with less attention to their demands, can pursue this goal in two quite different ways. It can provide services directly aimed at satisfying needs (and hope, but hardly guarantee, that they will be utilized), or it can leave it to the private market to match 9 supply and demand but finance services and educate the public so that need and demand move closer together. No amount of education and behavior change can be expected to close the breach between need and demand for public health measures, so part of supply will have to be directed to needs even if clinical services are aimed more at meeting demand. Examples of Mismatches Depending on the state of people's knowledge and wants, and on the incentives, degree of competition and other factors which determine supply, a health system may exhibit roughly equal imbalances on all three sides, as in Figure 1, or it may be characterized by just two large mismatches, as illustrated in Figure 2. In one extreme case, needs and demands are (almost) the same, but supply does not satisfy them; in another, demand and supply coincide, but needs go unmet; and in the third case, supply is consistent with needs but these are not expressed in demand for services and so the supply is not utilized. As with imbalances generally, each of these extreme cases can also characterize needs, demand and supply for particular services as well as for the whole health care system. Trauma, for example, is very likely to generate demand for emergency care, but supply may be excessive or inadequate. In contrast, demand may fall far short of need for preventive interventions. The examples in Figure 2 are not universal-it is not always the case that many unnecessary caesarean sections are performed, or too few immunizations-but illustrate situations which clearly exist in one or sometimes in many countries. 10 The fact that the same health system can display quite different kinds of imbalance for different kinds of services underscores the importance of adapting policy to the specific mismatch which keeps the system from working properly in each instance. In one instance it may be necessary to increase, reduce or improve supply, in another to modify demand, and in another to take preventive actions to reduce needs which the system cannot otherwise meet. At the same time it may be necessary to make markets more competitive in some respects (by reducing public provision of private services) and less competitive in others (by subsidizing and regulating insurance). Health sector reforms intended to reduce imbalances are therefore likely to include a mixture of quite general measures to make the market work better or correct its failures, and of measures specific to particular diseases, conditions or interventions (World Bank, 1993). 11 Figure 2. Extreme Examples of Imbalance for Specific Health Problems or Interventions 1. Need and Demand (Almost) Equal, Inadequate Supply NEED SUPPLY DEMAND Example: Emergency Attention for Trauma, when hospitals are overuatilized (World Bank 1993) 2. Supply and Demand (Almost) Equal, in excess of Need S PLY- DE NEED Example: Caesarean Sections in Brazil (McGreevey, 1988) 3. Supply Planned to Equal Need, both exceeding Demand NEED DEMAND SUPPLY Examples: Preventive Interventions (mmunization, Family Planning Services) 12 References Donabedian, Avedis. Aspects of medical care administration: specifying requirements for health care. Cambridge, MA: Harvard University Press, 1973: 58-69. Frankel, Stephen. 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