Income Distribution and the Public-Private Mix in Health Care Provision: The Latin American Case

Recent literature on Latin-American countries shows that private expenses as a share of the total expenditures in health tend to be higher the lower the level of economic development of the nation. This paper explains this fact by considering a discrete choice model of product differentiation, where consumer choice is based on a price-quality tradeoff. Physicians are involved in a dual-job holding structure, working as agents in the official sector while they maximize profits in a fragmented private sector. The model -which characterizes a significant number of systems within Latin-America-, shows the linkages between consumer choice and physician behavior, and the interaction between public and private systems in the face of external macroeconomic shocks and investments in health. The paper concludes that the lack of incentives in the public sector generates a decline in health coverage. It not only reduces the quality of public services but also generates negative spillovers in the rest of the system, provoking a loss of quality in the entire health care sector. In addition, the model simulates how changes in income distribution affect the selection of quality and prices in the private sector, determining individuals= choices among different providers. © 1998 Inter-American Development Bank 1300 New York Avenue, N.W. Washington, D.C. 20577 The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. The Office of the Chief Economist (OCE) also publishes the Latin American Economic Policies Newsletter, as well as working paper series and books, on diverse economic issues. Visit our Home Page at: http://www.iadb.org/oce. To obtain a complete list of OCE publications, and to read or download them, please visit our Web Site at: http://www.iadb.org/oce/32.htm