Jeffrey S. Hammer

This paper applies to the health sector a method of project analysis advocated recently by Devarajan, Squire, and Suthiwart-Narueput. A health project evaluation should establish a firm justification for public involvement; establish the counterfactual—what would happen with and without the project; and determine the fiscal effect of the project and the appropriate levels of fees in conjunction with project evaluation. The evaluation should also acknowledge the fungibility of project resources and examine the incentives both for high-level public servants to shift government resources away from project-funded activities to those that have not been evaluated and for lower-level contractors and civil servants to provide good or bad service. Market failures in health services and insurance markets should serve as a starting point for economic analysis, not as a reason to ignore economics in health projects. Project outputs should be predicted after taking into account the reaction of consumers and providers in the private sector as well as market structures of supply, demand, and equilibrium for health services.