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easily exceed the number of observations. Thus in past applications, the available output information was usually condensed into a small number of output categories such as the number of cases in the various hospital departments or just the number of inpatient and outpatient cases. In the latter case, often a scalar case-mix index (such as the average DRG weight) is added to control for output severity.

(iv) A further problem is the availability of information on factor prices which ideally should be used in the estimation of a cost function. This information is difficult to obtain in the health care sector.

SELF ASSESSMENT EXERCISE

Discuss econometric issues that need to be addressed in estimating hospital cost function.

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3.3.1 Health Goods, Market Failure and Justice

If only unequal personal effort were responsible for the differences in ability to pay, then there would be no reason to call the distribution of ability to pay unjust. A different verdict obtains if unequal initial opportunities and luck in life are predominant. In reality, it is likely that all three factors play a role, justifying a policy of redistribution in principle. But this does not imply that the access to health care services should be made completely independent of ability to pay.

Rather, it seems more appropriate to treat ability to pay as such the primary target variable of social policy by paying transfers to the lowest income groups. To get political support from taxpayers, tying these transfers to the purchase of (social) health insurance may be advantageous, which guarantees access to health care services. On the other hand, if ability to pay is to be completely disregarded as a criterion for access, there are only two ways to accomplish this. First, one can try to completely equalize ability to pay. But this alternative seems hardly desirable because it involves high efficiency losses through taxation and transfers that cause important distortions in economic decisions, particularly with respect to labor supply and capital formation. Furthermore, it can be argued that enforcing an equal distribution of income and wealth gives rise to injustice to the extent that differences in income reflect differences in effort and services provided to other members of society, rather than the other two factors cited above. Secondly, one can attempt to suppress willingness to pay and thus ability to pay as a determinant of access to health care services. This idea of specific egalitarianism has been advocated by Williams (1962). A consequence of this view is that personal effort does not serve to obtain more health care services. A key argument in favour of specific egalitarianism is that in emergency situations involving life and death, ability and willingness to pay often coincide. In the face of death, however, citizens should be equal. Another situation calling for specific egalitarianism is an incident of a scale so large that available resources do not permit all victims to be treated. In such a situation, only an allocation of scarce resources according to medical criteria, in particular urgency and chance of survival, is deemed ethically acceptable.

Failure to enforce specific egalitarianism would result in ability to pay only to decide who obtains treatment. An important question is how frequently such ‘life or death’ situations occur.

More importantly, resources available for health care are not exogenously given, but determined

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by demand and supply. For example, if the demand for physiotherapy by people with high ability to pay rises, the market mechanism will lead to increase in supply of physiotherapeutic services, through more services provided by existing physiotherapists or entry of new providers.

The quantity of services and with it consumer surplus rises. These beneficial effects cannot be achieved if willingness to pay is excluded as a determinant of the allocation of health care.

3.3.2 Justice as an Argument in Favour of Government Intervention in Health Care

There are additional arguments against the concept of specific egalitarianism with respect to health care,

(i) Copayments create incentives for health-related behaviour. However, they are more easily borne by individuals who have a high willingness to pay. This means that copayments are not compatible with specific egalitarianism and must be ruled out if willingness to pay is to be excluded from the criteria determining access to health care services. As a consequence, people will ignore the financial consequences of their nutrition, exercise, smoking and drinking habits. To avoid an explosion of health care expenditure, the government would have to control health-related behaviour through compulsion, thus risking a conflict with basic values of a liberal society.

(ii) Medical services are not the only goods that have an impact on health. Other things such as adequate nutrition and housing play a comparable role. Thus, they should be allocated free of charge according to specific egalitarianism. Withdrawing such a wide spectrum of goods from the discipline of market mechanisms, however, would jeopardize the allocative efficiency of the economy as a whole.

(iii) The freedom of patients to decide on their own matters would be curtailed since decisions to treat would be based solely upon criteria emanating from a collective decision.

For these reasons, proposals to exclude willingness to pay as a criterion governing the access to health care services appear to be misguided. Only in emergencies where it is impossible to treat everybody in an adequate way does willingness to pay constitute an ethically questionable criterion for the allocation of health care services. In all other situations, the health care system is not a zero-sum game in which the well-to-do impose their demands at the expense of the

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poorer members of society. Therefore, if ability to pay is inequitably distributed, it is a better strategy to influence it directly through taxes and transfers in order to guarantee an adequate provision of health care services for all citizens.

SELF ASSESSMENT EXERCISE

Write short not on willingness to pay as a criterion for access to health care.

4.0 Conclusion

Hospital output consists of improving or maintaining the patient’s state of health on the one hand and the capacity to satisfy an option demand on the other hand. The former part of output is particularly difficult to operationalize and can only partially be attributed to the hospital. A hospital’s ‘output’ can be described as the outcome of a multi-stage process, with each stage being assigned its specific concept. Patient classification systems try to do justice to the heterogeneity of the hospital output while making comparisons between hospitals possible. All systems seek to describe hospital output in some detail, if not with regard to treatment outcomes, that is, the improvement of health status, at least with regard to the difficulty of the task. The stochastic frontier approach to measuring hospital efficiency is adequate if the data is subject to measurement error and stochastic influences. As hospital output and quality are difficult to measure, it is problematic to simply equate the error term of this estimation with inefficiency.

A general exclusion of ability to pay or even willingness to pay from the criteria governing access to medical services is not desirable as it runs counter to the principles of a liberal society and would lead to an important loss of efficiency. Differences in ability to pay due to factors that are deemed unjustified can be addressed by taxes and income transfers. Only in emergency situations where a fixed amount of resources is available which is insufficient to treat everyone affected should willingness to pay be neglected in the allocation of health care services.

5.0 Summary

Hospital is a key element in the economic problems of health care due to the quantitative importance of the hospital industry. In many countries, hospital services account for the largest single chunk of health care expenditure. To determine the efficiency of a hospital, the inputs and

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outputs need to be defined and measured. Inputs comprise the use of productive resources such as human labour, energy and raw materials. In order to measure hospital output, it is not enough to describe the tasks that are carried out (surgery, radiotherapy, medication, wound dressing, and accommodation, etc.) or bundles of tasks such as medical, nursing or hotel services. This unit takes a look at hospital as a productive unit, the heterogeneity of hospital output, hospital Efficiency, hospital cost functions, willingness and ability to pay and access to health care, health goods, market failure and justice.