Health and the Economy

We are at a critical juncture in efforts to promote development around the world. If we are to meet the challenges of our times we need new forms of thinking and acting. The key to deal with a changing and increasingly complex reality is integration, and the starting point for integration is the acknowledgment of the crucial notion that social and economic policy are really two sides of the same coin.

The recent evolution of global health epitomizes this idea. Indeed, many observers have remarked that the past decade can be seen as a new era in global health. The most important feature of this is the fact that health matters have stopped being the exclusive concern of domain experts. Instead, health has come to occupy a central place in the most pressing dimensions of the global agenda: economic development, national security, democratic governance, and human rights.

In this context of growing global visibility for health matters, their relationship with the economy has become the object of intense scrutiny. For decades, the connection between health and economic growth was viewed as a simple, unidirectional relationship: economic growth promotes health through better living conditions, including investments in sanitary infrastructure and housing, improved nutrition, and increased access to education and health services. However, we now know that good health is not only a consequence but also a condition for sustained and sustainable economic development.

Amartya Sen includes health in the group of what he calls “essential capabilities,” or essential requirements for a life lived with dignity. Therefore, improvements in health are justified in their own terms. However, there is no contradiction between this statement and the observation that, in addition to its intrinsic value, health also has an instrumental value in contributing to other socially worthy objectives. Thus, good health reduces poverty, protects family assets, improves educational performance, increases labor productivity, enhances the investment climate and, through all of these things, stimulates economic growth.

This point has been proven by several influential initiatives led not by health professionals, but by development economists. Almost 20 years ago, the World Development Report 1993 was devoted to the topic of ‘Investing in Health’. This was probably the first major effort at making the case that health is an investment more than a mere item of expenditure. This landmark document was followed in 2001 by the Report of the Commission on Macroeconomics and Health, which concluded that a 10 percent improvement in life expectancy at birth is associated with an annual increase in economic growth of 0.3 to 0.4 percent.

Yet things become yet more complex. The aforementioned figures refer to the direct effects of improved health on economic growth. But a substantial part of these effects are mediated by the way health systems get organized and financed. And this opens up a whole new dimension of interactions between health and the economy: the institutional dimension.

Above and beyond the direct effects of better health on economic growth, the health industry itself has become a major sector of the economy. Globally, health-related goods and services constitute 10 percent of the world economic product, around 6.5 trillion dollars.

The OECD countries account for 84 percent of this expenditure, but even in the poorest countries health concentrates a large share of economic activity, with huge implications for the performance of the rest of the economy, including key variables like inflation, employment, and competitiveness.

The relationship between health and the economy can lead either to a virtuous or a vicious cycle. Productive investment in equitable, efficient, and high-quality health services has a positive effect on all economic activity, because it raises the quality of human capital, improves productivity and competitiveness, creates jobs, encourages scientific research, and stimulates technological innovation. Besides, good health is a necessary condition for equal opportunities. This makes health care an essential element in the fight against poverty. In contrast, unproductive health spending has a negative effect on the economy, because it increases inflation, reduces productivity and competitiveness, depletes savings, propagates bankruptcy, gives rise to inequalities, and diverts funds from better social uses.

There are two compelling conclusions from this logic. First, it is necessary to end the artificial divide between social and economic policy. As I said before, these are really two sides of the same coin. If we do this, economic decision makers will be persuaded that investing in health is not only the right thing to do on ethical grounds, but it is also the smart thing to do in order to achieve economic prosperity.

The second conclusion is straightforward: policies do matter. Although health systems are somewhat idiosyncratic and reflect the specific circumstances of each nation, there is one generalization that we can make when we compare countries: There is huge variation in the performance of national health systems, even at the same level of income per capita and at the same level of health expenditures per capita. So policies do matter.

This is probably why during the past few years there has been a growing realization about the importance of health systems and the need to strengthen them as a key strategy to accelerate progress towards the health-related Millenium Development Goals (MDGs). If we are to achieve those goals, we need, in the words of the legendary Professor Ramalingaswami of India, more money for health, but also more health for the money.

Awareness about the importance of health and health systems for economic prosperity have undoubtedly contributed to the impressive expansion of development assistance for health (DAH), which increased from less than US$11 billion in 2000 to over US$28 billion in 2012. In light of this increase, a large part of the discussion around financial reforms has been focused on external assistance. Important as this source of funding has been, especially to accelerate progress towards the MDGs, we should not lose sight of the fact that the vast majority of health financing comes from domestic sources.

Thus, in 2010, government expenditures for health from its own sources reached US$521 billion in developing countries, which is 15 times larger than all DAH. Even in Africa, assistance for health represents barely 11 percent of the funds spent on health.

Historical experience makes it possible to predict that as developing economies continue to grow they will inevitably face a rise in health expenditures. The challenge, then, is to assure that those increased investments yield the best possible results.

The imperative to improve health system performance is underscored by the fact that we are living in a time of unprecedented change. Low and middle-income countries are witnessing a particularly complex epidemiological transition. Setting priorities has become tougher because problems only of the poor, like malaria or maternal mortality, are no longer the only problems of the poor, who also suffer from higher rates of non-communicable diseases, injury, and mental disorders.

In dealing with this complex picture, business as usual will not do. The world as a whole requires a new generation of innovations, not just in technologies but also in the way we organize and finance health systems. In the search for these innovations, evidence must be the driving force in the formulation of public policies.

Two recent innovations in the design, implementation, and evaluation of social policies in Mexico illustrate the uses of evidence to improve health. The first example is a comprehensive initiative implemented in the late 1990s to enhance basic capabilities of families living in extreme poverty. This program, called Oportunidades, creates incentives for families to invest in their children’s human capital through “conditional cash transfers” (CCTs), that is to say, targeted income supplements that are conditioned on the fulfillment of certain elements of co-responsibility, including sending children to school rather than work, attending a clinic in order to receive a package of health promotion and disease prevention interventions, and providing a nutritional supplement to pregnant and lactating women, and all children aged 6 to 23 months.

An initial assessment carried out in 2000 showed that CCTs were associated with better outcomes in most domains. For example, children in communities with the program were on average 1.1 cm taller than children in control communities at 2 years of age. A more recent study demonstrated that larger cash transfers were associated with better outcomes in height-for-age, prevalence of stunting, and haemoglobin concentration, among other indicators.

However, in health matters we are always victims of our own success. Even as Oportunidades was proving its value in reducing poverty and improving health, the beneficiaries were experiencing new disease burdens, while their expectations for higher quality of care were growing. Ironically, a substantial proportion of the cash transfer received by poor families was being used to finance care that was not included in the initial basic package of interventions.

On the basis of the successful platform provided by Oportunidades, social protection for poor families needed to be expanded by taking the next bold step: universal health coverage. This was the focus of a structural reform initiative that was implemented in 2004. This reform could be considered a textbook case of evidence-based policy, since it was designed and implemented making use of the best available knowledge. Thus, the careful calculation of national health accounts revealed that more than half of total expenditure in Mexico was out-of-pocket. This was a direct result of the fact that approximately half of the population lacked health insurance.

These findings were unexpected as it was generally believed that the Mexican health system was mostly publicly funded. Instead, the analysis revealed an unacceptable paradox: As mentioned before, health is one of the most effective ways of fighting poverty, yet medical care can itself become an impoverishing factor for families when a country does not have the social mechanisms to assure fair financing that protects the entire population. According to WHO, 150 million people in the world face catastrophic expenditure annually and 100 million are pushed below the poverty line due to health payments. This is one of the clearest examples of the strong link between social and economic policy.

In Mexico, the realization that more than 3 million households were paying catastrophic sums every year forced policy makers to extend their focus to include financial issues that proved to have a great impact on the provision of health care and on levels of poverty. Thus, detailed analyses showed that catastrophic expenditures were concentrated among poor and uninsured households. Such analyses generated the advocacy tools to promote a legislative reform establishing a System of Social Protection in Health, which was approved by a large majority of the Mexican Congress in 2003. This system has reorganized and increased public funding by over a full percentage point of GDP over the past eight years in order to provide universal health coverage. The vehicle for achieving this aim is a public insurance scheme called Seguro Popular.

Like its predecessor, the new reform was also subject to a rigorous evaluation that showed greater access to appropriate treatment and significant reduction in catastrophic and impoverishing expenditures.

This last finding underscores once again the ties between health and the economy, most notably the ties between health policies and policies to combat poverty. Financial protection against large medical bills reduces the risks of financial collapse, and shields household assets and savings. When a large number of families benefit from these policies, their increased economic activity stimulates economic growth.

In conclusion: if we leave behind the divide between health and economic policy we will make a major contribution not only to the health of the world population but also to the prosperity and stability of our global community.

About Author

Julio Frenk

Leave a Reply