The Economic Impact of Health Care Provision: A CGE Assessment for the UK

The paper presents the results from a CGE model of interactions between public and private health care, outputs of non-health goods and national welfare in a small open economy applied to the UK. The effects on welfare of higher provision come through direct gains, affecting the well-being of households, and indirectly, through increases in the effective (i.e. ‘able to work’) endowments of skilled and unskilled labour for use in non-health activities. The paper is innovative in that there have been few applied studies on the multi-sectoral general equilibrium effects of health provision on the non-health economy, in particular the working time effect, and few studies where the endogeneity of labour supplies is not modelled on a wage response function. Evidence, however, suggests that, although the health sector is small, there are strong linkages between health care, other product and labour markets, and policy making. We find that an increase in public health provision leads to higher overall welfare levels through increased worker incomes and direct increases in the well-being of the population, which are reduced if health care specific skilled labour and capital is accounted for. Also, a rise in the price of pharmaceuticals has adverse overall welfare effects, which are mitigated if the health budget grows so as to maintain previous treatment levels in the public sector. Distributional effects are shown to differ across sectors, labour types and households. JEL Classification: D58, H51, I18, J21