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  • Brendan Shaw

The economist, the activist and the epiphany: an argument about efficiency in health spending

Brendan Shaw

"Don't think money does everything or you are going to end up doing everything for money"

- Voltaire

Soon after arriving in Geneva some years ago to start work with the international pharmaceutical industry association, I was invited to a two day retreat held in the French Alps.

It was held at a beautiful winter location, a rather nice hotel with commanding views of the nearby crystal clear French lakes and snow-capped mountains. Experts in the global health policy community were invited to discuss the price of medicines and options for how to improve access to medicines for people around the world.

All the usual suspects were invited, including the NGO activists from various groups who oppose the pharmaceutical industry and often criticise the industry for the world's ills.

Despite the genteel environment, towards the end of the event I was in a workshop with various people, including one activist from Medicins Sans Frontieres. We were debating the price of vaccines, the viability of the vaccines market and what to do about improve access to vaccines.

This person was making the not unreasonable argument that many people in the world who needed vaccines weren't getting them. They then went further, however, complaining that the prices of vaccines were too high and that we had a moral obligation under principles of human rights to ensure a 'fair' market for everyone.

For some reason, this statement got under my skin.

Perhaps it was my less-than-diplomatic approach to grandstanding, my fundamental upbringing as an economist, or perhaps just because I was tired and grumpy after listening to all of this for two days. Whatever the reason, at this point I turned to my learned colleague from MSF and said "Perhaps what you mean is that we need an efficient vaccines market."

The truth is I knew this statement would elicit a reaction.

My MSF colleague recoiled slightly and stared at me for a few seconds whilst I continued to explain further:

"Well, look at it. We have buyers who want to buy the product and sellers who want to sell the product, but they can't agree on a price. Economics tells us that this means the market is inefficient and we need to find ways to get to an efficient equilibrium in the market."

It was like a red rag to a bull.

My learned colleague looked at me and scoffed in disgust with one of those scoffs they must learn at activist school. Unsurprisingly, this person then proceeded to lecture at length about how efficiency was not an end in itself, questioned what the hell it meant and said that health shouldn't be obsessed about efficiency.

Needless to say, the two of us parted company without contributing to the greater good of humanity .

It wasn't one of my finest moments in public-private partnerships or breaking down silos in healthcare.

But is efficiency that simple?

I regret to confess that years later, while lecturing masters students in my university course about ethics and the economics of efficiency in healthcare, I was suddenly hit by a moment of clarity. An epiphany, if you will.

The MSF activist might have been right.

I was in the midst of explaining to the students about the different types of efficiency, how they relate to ethics in health policy and the arguments about what is an efficient level of health spending when it suddenly occurred to me.

In spite of all my years of experience in pharmaceutical economics and the time I'd spent in the politics of health care and health policy, I realised that what I was saying to the students and what the MSF activist had been saying years earlier in the rarefied atmosphere of the French Alps were essentially the same. Efficiency wasn't all it was cracked up to be.

It was a humbling moment.

It was one of those moments where you realise that the people you had been arguing with for so long may actually have agreed with you.

Theories of efficiency in the economics of health

At one level it is simple.

Efficiency can be broadly defined as the allocation of scarce resources that maximises the achievement of aims.

But, as is often the case in economics, once you get past the simple it can become more complex. In fact, there are at least three definitions or types of efficiency.

There is technical efficiency, which can be used to analyse the production of health and health care and is about the relationship between resource inputs and outputs. Production is technically efficient when the most output possible is produced from a given set of inputs, or where the fewest inputs possible are used to produce a given amount of output. This is the most common definition of efficiency that people understand. In healthcare an example might be how many knee surgeries a surgeon can get done in one week or how many days a patient stays in hospital. The more knee surgeries performed per week or the fewer days a patient needs to stay in hospital, the more technically efficient the outcome

Then there is allocative efficiency, where the appropriate share of resources is devoted to health care versus other goods in the economy or where health care spending is allocated efficiently to different uses. Some economists argue that the health system cannot allocate resources efficiently without first being technically efficient and that therefore one should place a higher priority on technical efficiency. Examples of allocative efficiency in healthcare might include questions about whether a health service should spend more on medicines and medical devices and less on hospitals, should an aged care facility call an ambulance when a resident needs medication management, or should preventative health measures take more of the budget at the expense of training.

Then there is dynamic efficiency which is concerned with the level the technical or allocative efficiency over a period of time. Dynamic efficiency is concerned with the optimal rate of innovation and investment to improve production processes which help to reduce long-run costs. It considers the effect of changes over time. Dynamic efficiency may involve investing in new technology and capital equipment, or implementing better working practices and management to increase productivity. Dynamic efficiency involves a trade-off where investing now may involve higher costs in the short run, but in the long run may be the most efficient outcome. In healthcare, an example might be whether a hospital should invest in new medical scanners or a health funder should pay higher prices for new cures for cancer or new antibiotics. Innovation and technology can increase dynamic efficiency by reducing costs or replacing high-cost service providers with lower-cost manufactured alternatives.

Many arguments in health policy about the level of funding and where to spend it usually revolve around these three types of efficiency.

Is there an 'efficient' level of health spending for a country?

Just to complicate things even more, there is an ongoing argument about whether there is an efficient level of health spending for an economy.

The issue of raising more money for health generally has received recent attention from the likes of the World Health Organization and the World Bank.

But much of the discussion about health spending, certainly in high-income countries, is often couched as a concern that countries spend too much on health, or that the growth in health spending seen in many countries is a real problem.

The fear in some quarters is that countries will be bankrupted by health’s every-growing share of the pie.

You can almost hear the fear in some economists’ voices as they tell of a future doomsday scenario where health spending will consume an entire countries’ national income, like some cancer infecting the national balance sheets.

But this view is open to criticism using what is termed ‘Baumol cost disease’.

Named after the economist William Baumol who, among other things, developed an economic theory that explained why some low productivity, labour-intensive service sectors of the economy, including health care, take up a greater share of the economy over time.

Baumol identified that these sectors including health care would become larger parts of the economy because their productivity levels were not as high as in parts of the economy more amenable to automation and standardisation, like manufacturing. For example his conclusion for the US, at least, was that by the 22nd century – in 2105 – healthcare might account for 60% of the US economy.

The key point here is that while your average government finance department economists might have a coronary at hearing this, Baumol argued that this was actually okay.

He argued that the rising productivity and wealth in some sectors of the economy meant that society could afford to pay for health’s rising share of the economy.

Baumol’s real concern was (wait for it) that panicked knee jerk reactions to predictions that services like health will bankrupt the economy could lead to unnecessary and damaging budget cuts, cost-shifting and rationing that would, in the long-run, actually slow development and lead to society being worse off.

Someone may need to gently tell the officials in government finance departments about this and be ready to hold their hand when they pass out in shock.

Back to the French Alps

It is true that efficiency is not everything.

While it is an important concept that has helped our lives by improving a range of human activities, including looking after each other's health, it is not the be-all and end-all. In fact, I have written on this elsewhere, but it is important to remember.

And if the opportunity were to present itself that I could again meet my learned friend from MSF, this time around I would probably say "Oui, c'est un peu vrai".

134 views3 comments


Aug 14, 2020

thought-provoking as ever - thanks Brendan


Brendan Shaw
Aug 04, 2020

Thanks, t.eumatsu. Well spotted. I corrected it. (Although, it begs the question whether 'illicit' was the wrong word to use after all. :) )


Aug 04, 2020

"The truth is I knew this statement would illicit a reaction." I think you mean "elicit".

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