The Economic Impact of Health

University Degree Business and Administrative studies

September 2007

Prepared by

Rowena Buan-Yost

Contents

Section Page

Introduction.........................................................................4

II. Health and Poverty.................................................................4

III. Migrant Labor on Health..........................................................6

IV. Importance of Economic Data...................................................8

V. The Economic Valuation of Health.............................................9

A. The Cost of Illness (COI) Approach....................................11

B. The Contingent Valuation (CV) Approach............................11

C. Valuation of a Statistical Life (VSL) Approach......................12

D. Benefits Transfer (BT) Approach........................................13

VI. Economic Impacts of Disease Outbreaks...................................13

VII. Cases of Outbreaks that Impacted the Global Economy

A. The SARS Outbreak in East Asia........................................15

B. The Dengue Fever Epidemic.............................................16

C. The Avian Flu Pandemic...................................................17

D. The Economic Impact of HIV/AIDS....................................18

VIII. Conclusion............................................................................20

Appendix A: The Philippine Health and Income Statistics.................... 21

Ten Leading Causes of Morbidity................................... 22

Section Page

Appendix B: The Philippine Health and Income Statistics.................... 23

Appendix C: The Philippine Health Expenditure Statistics for 2003 and 2004......................................................................... 26

Appendix D: Sources of Health Benefits in the Philippines................... 27

References ..................................................................................29

Introduction

Considering the country’s economic growth and development, better health status could have been attained. Rapid industrialization without preparations for environmental and occupational health and safety threatens communities and thousands of workers. Health promotion must be strengthened to improve the general health status of the population, thereby assuring the continuous growth of our economy.

It is important to look at economics in health because of several reasons. Health resources are finite. Health impacts are the most important and the ones that should receive the most attention when it comes to shaping a better economy. Given the primary concern with human well-being, this paper will focus on the valuation of health impacts. Because, it is often easier to estimate economic costs of health outcomes; this information is useful in getting the attention of decision makers.

Health and Poverty

In its recent analysis of poverty, the World Bank describes the "multi-dimensional" character of poverty in developing countries. Poverty is determined by income, access to education and health services and exposure to political insecurity. In the dimension of remote health in developing countries, poverty is often experienced as the inability to purchase or access basic health services and public health infrastructure. Persistent low incomes of rural dwellers limit purchasing power, particularly for catastrophic life events such as injury or obstetric emergency. Based on statistics (Appendix A), in 2003 the average annual Filipino family income is P147,888 or equivalent to P410.80 per day. This amount is not enough to feed an average family of five for a day. However, poverty is not only a characteristic of the household’s ability to purchase health services.

Poverty is also a characteristic of the capacity of local and national governments to fund basic health services. Low public sector investment in health exacerbates household poverty. It increases the requirement to purchase health services from unregulated local private providers or to expend social and economic cost on accessing services more distant from local villages in provincial or national capitals. Poverty of both household incomes and public health sector investment are major determinants of limited access to health services and resources in remote areas of the Philippines and Cambodia.

Surveys associated with health development projects in both countries indicated that the rural population's lack of capacity to pay for transport and medicines is the major reason for delayed referral to higher levels of care. In the Philippines, the share of health expenditure to GNP is 3.4 percent in 2004. The Philippines is still far below the 5% standard set by the World Health Organization (WHO) for developing countries. Around 47% of total health spending is out of pocket expenses. The financial burden on individual families is heavy. On the other hand, Government’s share was only 30% (16% national and 14% local).

Migrant Labor on Health

The Philippines continues to be one of the largest exporters of migrant labor, as well as the top supplier of migrant health and care workers in the world. This study draws from fieldwork investigating the impact of British health care recruitment and receiving country policy on the Philippines, which has long been considered among multilateral circles as a model sending country.

Regional economic integration has become a dominant feature of the world economic environment, particularly in the last decade. The European Union (EU) enlarged its members from 15 to 25, steadily expanding its free trade networks with Mediterranean, African and Middle Eastern countries. Members of the North American Free Trade Agreement (NAFTA) have been attempting to achieve a Free Trade Area of the Americas, incorporating 34 Latin American countries. Similar trends are evident in almost all over the world.

Although the Philippines has long specialized in labor export, the increased demand for nursing and care work in the developed world has resulted in a rapid and drastic restructuring in academic and private institutions focused on careers in health care, a shift in the nature of the labor market, and a rapid state response, which has included the drafting of a state-to-state agreement overseeing the recruitment of care workers to the UK.

The following observations were noted during the course of fieldwork in the Philippine capital Manila, drawn from interviews and local literature:

State level responses: State-to-state agreement between the Philippines and the UK; the Philippines encourages migration and facilitates remittance delivery.
A restructuring of the academe: Exponential increase in privately funded schools offering health-related diploma courses with curricula specifically tailored around foreign health systems; deans of established nursing schools are being aggressively courted by recruitment agencies and pirated by newly-formed nursing colleges.
A demand-driven, market-oriented culture of migration: Billboards advertising nursing and care work courses line every street corner and are alongside highways; Sunday classified ads in all major broadsheets are dominated by nursing and care work ...

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State level responses: State-to-state agreement between the Philippines and the UK; the Philippines encourages migration and facilitates remittance delivery.
A restructuring of the academe: Exponential increase in privately funded schools offering health-related diploma courses with curricula specifically tailored around foreign health systems; deans of established nursing schools are being aggressively courted by recruitment agencies and pirated by newly-formed nursing colleges.
A demand-driven, market-oriented culture of migration: Billboards advertising nursing and care work courses line every street corner and are alongside highways; Sunday classified ads in all major broadsheets are dominated by nursing and care work vacancies in the United States and the UK.
A restructuring of skills within the local labor market: Unprecedented numbers of students are enrolled in nursing and health-related courses; groups of doctors have re-trained as nurses in order to gain easier entry into the U.S. labor market.

Importance of Economic Data

The aim of economics is to ensure that the chosen activities have benefits which outweigh their opportunity costs or the most beneficial activities are chosen within the resources available. Economics is concerned with more than just efficiency. Efficiency is not the only objective in choosing how health care resources should be allocated. Another objective should also be emphasized on equity or the fair distribution of resources and benefits, which is very important in decision-making. Economics provides an information framework in which the objectives of both efficiency and equity may be pursued. Economics also provides a framework which aims at maximizing benefits within available resources.

The use of data and its economic analysis are important for several reasons:

To compare benefits and costs. The use of cost-effectiveness Economic analysis, in the form of either benefit-cost analysis or areas where benefits cannot be measured (or are not measured), allows one to compare the benefits and costs of alternative projects and programs.

To set priorities. If one can compute the expected benefits of different actions, and then compares this to the costs of each action, this information is a critical aid to setting priorities for action. Sometimes, the problem that receives the most attention may in fact be a relatively minor problem compared to other issues. Economic analysis can help set priorities rationally, and help ensure the effective use of scarce resources.

To get the attention of decision makers. Decision makers, especially those in the Finance and Planning Departments, often respond better to quantitative analyses of alternative, competing investments. The use of numbers can indicate when the health impacts of certain problems are large and can be addressed in a cost-effective manner. To merely say, when asked how important is a specific environmentally-related health threat, "It is very important!" is usually less persuasive than being able to quantify the numbers of people adversely affected, the health outcomes, and the costs associated with these outcomes.

The Economic Valuation of Health

Rapid progress in the economic "art" of valuation means that many environmental impacts can now be valued and placed within the framework of a more traditional economic analysis. In general, the more direct and immediate the impact, the easier it is to identify monetary values. Health and productivity effects are in this category. The actual economic analysis of health effects does not need to be complicated. In fact, most of the work involved is the estimation of exposure levels and the changes in health outcomes. Once these health outcomes are identified and quantified, a number of approaches can be used to assign economic values.

For sickness (morbidity), the most commonly used approaches rely on information on loss of earnings and medical care costs. Local data on these costs can be easily collected, and can also be presented to decision makers to get their attention on economic and social costs of poor health.

For death (mortality), the problem of valuation is more complicated. No good technique exists -- information on the cost-effectiveness of preventing deaths is useful but says nothing about the value of a life. When the cost of preventing an excess in death is low, there is no need to go further with the analysis.

Ideally, valuation of health impacts should include both the out-of-pocket expenses of illness such as medical costs, lost income and averting expenditures, and the less tangible effects of illness on well-being such as pain, discomfort and restriction in non-work activities. There are several methods of estimating unit economic values of health effects among these are; the cost of illness, contingent valuation, value of a statistical life, and benefits transfer.

The Cost of Illness (COI) Approach

One widely known approach to estimate the "value" of a human life is the human capital or cost of illness (COI) approach. This approach includes direct medical costs associated with an illness (medicine, physician, medical tests and hospitalization) and indirect costs to society resulting from lost earnings (loss of wages due to illness, opportunity lost due to absence from school, etc).

The COI, however, has serious limitations as it does not account for pain and suffering, the value of lost leisure time, or the costs and benefits of preventive measures.

The Contingent Valuation (CV) Approach

This approach is preferred based on information on the willingness to pay (WTP) of individuals to avoid premature death. The CV approach is a survey method wherein respondents are asked how much they would be willing to pay to reduce the occurrence of disease and to reduce the risk of death. The CV technique, when properly designed, should capture direct treatment costs, indirect costs, and costs associated with pain and suffering. CV is often referred to as a stated preference model, in contrast to a price-based revealed preference model.

However, a limitation of this method is that the results are dependent on respondents understanding and ability to visualize the circumstance of the good being considered. Some argue that it results in individual rather than social evaluations about the importance of different options, and that it can only be used for environmental goods and services that can be charged for.

Valuation of a Statistical Life (VSL) Approach

A statistical life is not any individual person's life; it represents the change in premature mortality across a population from any given cause. This method is usually applied to mortality effects. The VSL is estimated as the discounted value of expected future income at the average age. It involves determining the willingness to pay for the amount of risk reduction required to avoid one fatality. The VSL is estimated using Hedonic Wage Analysis (HWA). Hedonic valuation studies use regression analysis to estimate the relationship between environmental improvement or reduced worker risk and other independent variables. The HWA determines how much workers are paid more for more risky jobs (i.e., what is the premium required to compensate workers for the added risk they incur from their occupation).

The weakness of the hedonic approach is based upon the difficulty in separating illness effects from other independent variables.

Benefits Transfer (BT) Approach

The CV and HWA are time-consuming and expensive to do and thus the BT may seem to be more advantageous to apply in the Philippines because of incomplete data sets. The BT approach is a method by which unit economic values estimated in a developed country (e.g. USA) are transferred to a developing country such as the Philippines. It involves the transfer of estimates adjusted for income differentials between the countries.

The BT has several drawbacks such as preferences of people may differ between countries; cultural factors affect perceptions of illness and differences in health and educational status as well as the extent of availability and cost of health services.

Economic Impacts of Disease Outbreaks

There are three main categories of economic impacts associated with outbreaks of infectious diseases:

The economic consequences and costs of sickness or death resulting from the disease outbreaks;

Increased sickness and mortality on the size and productivity of the world labor force would have the most direct impact on output. A general decline in labor productivity due to illness and sick leave among the labor force would be at large. Other long-term impacts which should also be considered are the increased costs of preventing and treating disease and reduced savings and investment.

The economic consequences and costs associated with public and private efforts to prevent the emergence or spread of the disease and to treat its effects;

Private individuals will take action to avoid infection, based on their perceptions of factors such as the disease’s transmission mechanism, the probability of infection, the probability of death once infected, and the availability of preventive or curative measures (Economic Impact of Avian Flu).

The government’s policy efforts to prevent the start of an epidemic, to contain the epidemic once it has begun, and to mitigate its harmful effects on the health of the population.

All these public policy measures entail economic costs. Even though the human and economic benefits of preventing or containing an epidemic or disease are overwhelming, governments may still be daunted by the cost of various policy measures, especially when these measures are in the nature of global public goods that benefit many more than just the citizens of that nation.

Cases of Outbreaks that Impacted the Global Economy

The SARS Outbreak in East Asia

Severe acute respiratory syndrome or SARS is a respiratory disease in humans which is caused by the SARS coronavirus. This major pandemic occurred between November 2002 and July 2003. The epidemic of SARS appears to have originated in Guangdong Province, China in November 2002. There were 27 countries affected by the outbreak, including the Philippines with 14 cases of the disease and 2 deaths.

There were 8,096 cases of the disease and 774 deaths (a mortality of 9.6%) - and thus no discernible impact on output - but actual economic losses were estimated at 0.5 percent of annual East Asian GDP in 2003, concentrated in the second quarter of the year, when there was a much sharper loss of around 2 percent of quarterly GDP. Given the spread of the disease through droplet transmission, people tried to minimize face-to-face interactions. The result was a severe demand shock for services sectors such as tourism, mass transportation, retail sales, hotels and restaurants. Business costs no doubt also increased due to workplace absenteeism, disruption of production processes and shifts to more costly procedures.

The Dengue Fever Epidemic

Dengue fever (DF) and dengue hemorrhagic fever (DHF) are acute febrile diseases, found in the tropics, with a geographical spread similar to malaria. Dengue is transmitted to humans by the Aedes aegypti mosquito, which feeds during the day. In the Philippines DF is now one of the ten leading causes of morbidity (Appendix B). As of August 2006 the Department of Health has reported 13,468 cases of DF with 167 dead.

It is difficult to measure the economic impact of epidemic DF/DHF on a community because they do not measure the total cost of large epidemics of ‘flu-like illness on the economy in, for example, lost work and productivity, absence from school, lost tourism and social disruption. Moreover, the disease burden caused by this virus during inter-epidemic periods has been completely ignored because of the poor surveillance. The World Bank has developed a non-monetary composite index called ‘disability-adjusted life years’ (DALYs), which attempts to measure the total impact of both morbidity and mortality of a disease on the population. Recent studies using this approach to measure the impact of DF/DHF have shown that, in addition to the epidemic periods, there is considerable disease burden during inter-epidemic periods, mostly in the form of unreported indirect costs such as lost productivity and time away from work or school owing to illness. These studies have shown that DF/DHF has a total impact of the same order of magnitude as many of the major infectious diseases such as malaria, tuberculosis, hepatitis, bacterial meningitis and others.

The Avian Flu Pandemic

A worldwide influenza pandemic could have a major effect on the global economy, including travel, trade, tourism, food, consumption and eventually, investment and financial markets.

The present spread of Highly Pathogenic Avian Influenza (HPAI) of the H5N1 strain involves transmission between animals and (so far) a limited incidence of transmission between animals and humans; as such, given the lethal nature of the virus, especially in poultry, it is principally an animal health crisis. HPAI is now endemic in parts of South-east Asia, where Cambodia, Indonesia, Laos, Thailand and Indonesia are the worst-affected countries. The continuing outbreaks that began in late 2003 and early 2004 have been disastrous for the poultry industry in the region; by mid-2005, more than 140 million birds had died or been destroyed and losses to the poultry industry are estimated to be in excess of US$10 billion (Economic Impact of Avian Flu). The costs so far incurred are mostly related to the death of poultry from the disease itself, the culling of poultry to stem its spread, and the costs to governments of containing the epidemic in terms of equipment, transport and personnel.

In Vietnam, one of the most seriously affected countries, some 44 million birds or 17% of the total population of poultry, were culled at an estimated cost of US$120 million (0.3% of GDP). Fortunately, there has been only a small impact on tourism so far; the number of tourist arrivals in Vietnam increased by 20.5% in 2004 and rose further by 23% in the first seven months of 2005. Overall real GDP growth in Vietnam accelerated to 7.7% in 2004.

The Economic Impact of HIV/AIDS

The world is so concerned about AIDS simply because it is destroying the twin rationales of globalization strategy: cheap labor and fast-growing markets. Because it erodes those rationales, the epidemic is forcing businessmen to think twice about investing in countries where people are heavily affected by HIV/AIDS. AIDS has a devastating impact on developing economies because, unlike other diseases that primarily affect young children and old people, it kills young and middle-aged adults in their most productive years as employees and customers. As a result, the epidemic both adds to companies’ labor costs and slows growth rates in many developing economies. Many corporations derive a competitive advantage from the low cost of labor in developing countries. AIDS is eroding that advantage by adding, both directly and indirectly, to wage bills.

The disease not only drives up health care costs and benefits payment, it also reduces productivity for years—not weeks or months as other illnesses do. Rising absenteeism and higher employee turnover due to AIDS have forced companies to employ and train more people than usual. AIDS has also forced executives to spend more time coping with lower morale in their organizations and addressing the difficult legal, social, and political issues that stem from the epidemic. For instance, companies in many developing countries face considerable pressure from governments and non governmental organizations to spend more on tackling AIDS and to provide jobs and additional money for victim’s families.

The rising cost of labor is not the only reason executives should worry about AIDS. The epidemic is also reducing the demand for goods and services in developing markets. Often, the virus strikes the only breadwinner in a large family, and the family is forced to spend its mere savings on medical treatment for the victim and is left impoverished. In addition to creating a generation of orphans, the epidemic forces many children to drop out of school, which erodes the country’s skills base. As more and more families drop out of the economy, it slows down. According to the recent report AIDS and Macroeconomic Impact, from the Botswana Institute of Development Analysis, AIDS could reduce GDP growth rates by 0.5% to 2.6% a year in several African countries. When AIDS mixes with poverty, the humanitarian problem becomes an economic crisis as well.

Conclusion

Emphasis on good health will benefit younger people and the boomers permitting them to live better in the years ahead. A healthy community promotes income growth via higher labor productivity, educational attainment and cognitive function, savings and investment. The healthier the population is, the more prosperous the nation’s economy will be.

A rapid economic growth over a sustained period would result from the convergence of multiple factors, one of which is a deep and early commitment to improving health -- "healthier means wealthier." The country as a whole benefits from a healthy community. With fewer infected individuals, a disease is less likely to spread and healthier people can work more effectively and could avoid the possible financial costs of disease.

Appendix A

The Philippine Health and Income Statistics

TEN LEADING CAUSES OF MORBIDITY
No. & Rate/100,000 Population
PHILIPPINES, 2005

Source: 2005 FHSIS Annual Report

Appendix B

Selected National Health Accounts Indicators for the Philippines and Other Asian Countries, 20021/

1/ The World Health Report 2004, WHO website (http://www.who.int/whr/2004/annex/topic/annex5.xls, Date: June 21, 2005).

2/ 2004 PNHA, NSCB.

3/ 2005 Budget of Expenditures and Sources of Financing (BESF) for total government expenditure

4/Exchange rate from Bangko Sentral ng Pilipinas (http://www.bsp.gov.ph/statistics/sefi/P$MonAnn.htm), Date: Feb. 24, 2005 and National Accounts Link Series, Annual, Link Series, Annual, Economic Statistics Office, NSCB.

n/a - not available

Source: World Health Report 2001, WHO website ()

In 2002, the share of total health expenditure to GDP in the Philippines reached 3.4 percent. Countries like Cambodia, India, Japan and Mongolia allocated more than 6 percent of their GDP to health expenditure.

On the other hand, the proportion of the country's general government expenditure on health to total health expenditure was 30.3 percent. In comparison, more than half of the selected Asian countries showed higher proportions than the Philippines.

In the case of private expenditure on health in the Philippines, its share to total health expenditure remained at more than 50 percent. Half of the Asian counterparts reflected lower proportions than the Philippines, namely, Bhutan, Brunei Darussalam, Japan, Lao People's Democratic Republic, Malaysia, Maldives, Mongolia, Papua New Guinea, Republic of Korea and Thailand (WHO).

Appendix C

Philippine Health Expenditure Statistics for 2003 and 2004

Source: National Statistical Coordination Board

Total health expenditure grew by 6.2% in 2004.
The total health expenditure of the country reached P165.2 billion in 2004, indicating an 11.2 percent annual increase from a 14-year high of 25.3 percent growth registered in 2003 at current prices. In real terms, total health expenditure increased to P41.3 billion from P38.9 billion the previous year, which translates to a 6.2 percent growth.
Per capita health spending increases.
With the total health expenditure growth surpassing the population growth, per capita health spending at current prices was P162 higher, from P1, 817 in 2003 to P1, 979 in 2004. Health expenditure per capita at constant prices showed a P19 increase or 4.0 percent from last year’s P475 to this year’s P494.

Appendix D

Sources of Health Benefits in the Philippines

Source: National Statistical Coordination Board

Health benefit payments from private insurance and medicare show biggest growth. Health benefit payments from both private insurance and medicare outpaced all other sectors at 21.3 percent growth. Health benefit payments from private insurance increased from P3.4 billion in 2003 to P4.1 billion in 2004. Likewise, medicare benefit payments grew from P12.8 billion in 2003 to P15.5 billion in 2004.
Slight improvement in the social health insurance, but still far from the HSRA target. The share of social insurance payments improved only slightly from 8.7 to 9.5 percent. However, this is still way off the 30 percent target in the Health Sector Reform Agenda (HSRA). On the other hand, out-of-pocket expenditures remained at 47 percent of total health expenditures, more than double the 20 percent HSRA target.

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See Appendix B

See Appendix D

Baby Boomers is the name given to the generation of people who were born in a "baby boom" following World War II. The Boomers were born between 1944 and 1964. The oldest wave of the Baby Boomers is currently considering retirement options and looking at ways to make their elder years meaningful.