The Suntory and Toyota International Centres for Economics and Related Disciplines

Public Health and Development: A New Analytical Framework Author(s): Morton Paglin Source: Economica, New Series, Vol. 41, No. 164 (Nov., 1974), pp. 432-441 Published by: Wiley on behalf of The London School of Economics and Political Science and The Suntory and Toyota International Centres for Economics and Related Disciplines Stable URL: http://www.jstor.org/stable/2553354 . Accessed: 17/12/2013 10:14
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[NOVEMBER

Public Health and Development: A New Analytical Framework

By MORTON PAGLIN The traditional theory of public health was developed from the Dublin-Lotka (1946) concept of the money-value-of-a-man, and has now become rather firmly entrenched as a part of the general theory of human capital. From this viewpoint, health expenditure is considered mainly as an investment in conserving or enlarging a resource (labour) by reducing disease, disability, and premature mortality. Consequently, public health projects are typically evaluated in terms of the net capitalized value of the augmented earnings stream resulting from the reduction in morbidity and mortality rates. The works of Weisbrod (1961), Mushkin (1962), Pyatt and Rogers (1962), Rice (1966) and Barlow (1967) are representative of this approach. When, however, the theory is applied to underdeveloped areas, its deficiencies become especially apparent. In such areas the rate of return on health purely as an investment may be trifling or even negative if we allow for the effect of reduced mortality and morbidity on the supply of labour and its marginal productivity. Under these circumstances the traditional approach to health as an investment may be hard put to explain why health expenditures are made at all. Yet to call such expenditures completely irrational, despite their often dramatic effect in improving the human condition, seems specious. Conspicuously omitted from the usual analysis of benefits is the value of health services as a consumer good. The reason for this is clear: while productivity effects can be reduced to measurable economic dimensions, the economic value of better health and improved life expectancy as an end in itself has remained elusive. The main purpose of the model presented here is to correct that deficiency by integrating public health as a consumer good into the theory of consumer choice and welfare, thus making life expectancy gains comparable to gains in real product. While frequent reference will be made to public health work, the theory presented here encompasses all types of health expenditures. However, as the model is applied to the evaluation of health programmesin underdeveloped areas, we emphasize the public health component of health expenditures, since a large part of the population in these countries receives health services mainly from medical and para-medical public health workers. There is also an extensive literature on the economic evaluation of public health programmes, and hence stress is placed on the differences between the dominant "public health as an investment" approach and the theory of health as a consumer good which is developed here.
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What is the nature of health as a consumer good? The demand for health services represents an expenditure to relieve pain and suffering and to reduce the risk of dying. We thus consider better health and longer life expectancy as a want, and health services the good which satisfies this want and thereby generates utility. This view of health services as a consumer good which reduces the risk of mortality fits into the general approach taken by E. J. Mishan (1971) in his stimulating article on the evaluation of human life. While Mishan focuses on individual risks and their evaluation in a probability-Paretian framework, this paper attempts to integrate life expectancy gains into the traditional
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consumer choice model, and to develop a framework for evaluating such gains in a manner comparable to increases in national income. Other consumer goods compete with health services in two ways: these "other goods" also contribute to improved life expectancy (especially in poorer countries) as well as directly satisfying other wants. In Figure 1 we have a series of production-possibility curves with public health services per capita on the Y axis and all other consumer goods on the X axis. (For the present we may ignore the dashed lines.) It is assumed that a prior decision has been made as to the resources to be devoted to investment, and the remaining resources are free to vary between the two specifiedgroups of consumer goods; and, likewise, that health services are dispensed in a roughly equal manner as experi-

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enced in various state-operated health systems. As we move outward from the origin, the P-P curves illustrate the situation of the more prosperous economies. We now impose on this diagram a series of iso-life-expectancy curves (I-L-E). These curves show that life expectancy is a function of both health services and the general level of living (that is, other consumer goods). A given set of mortality rates (or life expectancy) can be maintained by various combinations of these two types of consumption. (Life expectancy is used as an indicator of health benefits in place of a more general index which would include morbidity as well as mortality rates.) Higher life expectancy is positively correlated with greater consumption of both types of goods, but only up to a point: additional consumption in the form of excess food, cigarettes, alcoholic beverages, automobiles, etc. eventually has a deleterious effect which can only be offset by higher expenditures for health services. Hence, in Figure 1, the iso-life-expectancy curves flatten and then begin to turn up. We should note, however, that they do not level out and turn up at a fixed level of consumption. The lower the level of health services, the sooner they turn up-on the assumption that increased public health education and medical care lead to a pattern of consumption expenditures more favourable to health, whereas a large expansion of consumption with low levels of public and private health services tends to produce individual and environmental effects detrimentalto health.1We also show diminishing returns from both health services and other consumer goods (jointly) in so far as a given shift of the I-L-E curve from the origin results in a smaller increase in the indicated life expectancy-thus in our diagram the successive I-L-E curves are spaced equally but the life expectancy gain (in years) gets smaller. If we now connect the tangency points of the P-P curves with the iso-life-expectancy curves we get a new function which may be designated the maximum life expectancy function. In Figure 1 this is labelled O-R. The O-R function becomes asymptotic to the Y axis at point R, because additional consumption (even at higher levels of health services) would have a zero or negative effect on life expectancy. At the low end the function originates at the subsistence level A-O, where any
1 There is a substantialpublic health literaturewhich has analysed the increases in mortality due to excessive caloric intake, cigarette consumption, use of the automobile, etc. In an article (which I came across after the model describedhere was completed) Auster et al. (1969, pp. 411-12) provide striking statistical confirmation of the above hypothesis regarding the shape of the iso-life-expectancy curves: "High income is associated with high mortality when medical care and education are controlled for. This may reflect unfavorablediets, lack of exercise, psychologicaltensions, etc. The positive association of mortalitywith income may explain the failure of death rates to decline rapidly in recent years. Adverse factors associated with the growth of income may be nullifying beneficialeffects of increases in the quantity and quality of [medical]care." (The authors develop a multiple regressionmodel, using data from the United States, to determinethe relationship of mortality to medical care and environmentalfactors.) In underdeveloped countries there is of course a reduction of mortality with increasing income.

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shift out of food and other necessities would result in higher mortality. Most moderately developed countries are operating at a point on their P-P curves well below and to the right of the O-R tangency points, while poor countries being closer to the subsistence level have only a limited option of movement, and some may find the subsistence line also cuts the O-R function-indicated by the P-P curve closest to the origin. However, it is clear that in most countries consumers don't act, either through their governments or by their own expenditures, to maximize life expectancy at any cost. If all consumers were single valued life-maximizers this would result in a shift of resources to health services so as to push each country up towards its highest possible I-L-E curve; the O-R curve would then represent existing equilibrium points. But in reality good health and long life are only two of many competing values. Therefore, to determine the actual equilibrium allocation requires the imposition of community indifference curves on the same diagram. Before doing this, however, it would be well to consider the meaning of the individual indifference curves (as between health services and other consumer goods), and the relationship of health expenditures to improvements in life expectancy. Consumers demand health services as they do other goods because they yield utility. The specific utility is in the form of a greater sense of well-being, reduction of anxiety about illness and death (especially through preventive medical services such as immunizations, check-ups, etc.); in short, better health and the expectation of a longer life. As with other goods, the utility derived depends on the psychological attitudes of the consuming unit. At one extreme are the optimists who tend to brush aside consideration of low order probabilities of an unpleasant nature, and who might therefore be expected to minimize expenditures for preventive medicine, safety belts, etc. At the other end of the spectrum are the hyper-cautious, who go to extraordinary lengths to minimize the risks of mortality, and who derive considerable utility from preventive medical services. Let us, however, employ the convenient simplification of the community indifference curves, a family of such curves labelled i-i being shown in Figure 1. The indifference curves have the usual shape because as we move along the X axis more and more goods would be required to compensate for the greater risk of ill-health which results from lower levels of health services. As we move up the Y axis the marginal rate of substitution diminishes for two reasons: (1) given increments of health services produce much smaller increases in life expectancy, and (2) after a point, an increment of life expectancy itself may have diminishing appeal, though the reasons for this may differ with age. The young usually heavily discount the value of adding a couple of years of life expectancy in the seventy to eighty year age bracket, while many of the aged seem to experience a diminishing zest for enjoyment of life, and hence may not be willing to deny themselves some comforts and pleasure for a small increase in life expectancy. Finally, we may generalize that for most persons there is some trade-off

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between enjoyment (or intensity) of life and length of life, and frequently greater intensity involves consumption expenditures which bring added risks of mortality. But this trade-off is likely to be fairly limited, hence our community indifference curves rapidly become asymptotic to the X axis. The other end of the curves moves into the area of more medical care and less other goods, but here the curves have as their realistic upper bound the O-R function. The tangency points of the indifference curves and the P-P curves determine the equilibrium allocation of resources; connecting these points yields the function O-M which relates health expenditures to total other consumption expenditure. Since we assume that no nation accepts Ruskin's doctrine that there is no wealth but life, the O-M function lies below the O-R function. O-R indicates the technical optimum viewed as a goal by some public health enthusiasts; O-M represents the economic optimum which would be realized if all externalities are internalized-which they are in Figure 1 when using community indifferencecurves. The actual equilibriummay be above or below O-M. One set of factors pulls in the direction of the below-optimum level of health expenditures. For example, when health services are offered in the private market (or government services dispensed at cost) the individual consumes too little because he only considers the possible benefits to himself and neglects the benefits accruing to others if he undergoes treatment for a communicable illness. This is especially important in the less developed countries where the incidence of infectious diseases is still very high. Another factor frequently mentioned in the public health literatureis the lack of knowledge in backward areas as to the effectiveness of public health measures in combating endemic illnesses, and the effect of such measures on the energy and productivity of the labour force. This also leads to below optimum health expenditures. A second set of factors which may pull the allocation above the ideal O-M curve, and thereby generate too much expenditure on health, are those which through demographic externalities reduce the community's per capita consumption of other consumer goods. When families demand public or private health services which reduce mortality and increase population, they neglect marginal social costs imposed on others, typically in the congestion of free but limited public facilities, and the pecuniary externalityin the form of lower marginal productivity of labour and hence lower factor earnings imposed on other families. Inasmuch as the P-P and the I-L-E curves lend themselves to empirical derivation, policy planners may find Figure 1 useful in several ways. O-R indicates the limits of social policy in achieving health improvements at any level of resources per capita. But the life expectancy or mortality response to each factor separately could be shown by drawing parallel horizontal and vertical lines across Figure 1. The horizontal lines cutting across the I-L-E curves would show the effect of consumption on mortality (at given levels of health care) with

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the limit to improvement in life expectancy indicated by the I-L-E curve tangent to a given horizontal line. The vertical lines moving up the I-L-E map would show the effect of health expenditures (other consumption goods given) on life expectancy, with diminishing returns indicated by the smaller differences in I-L-E values for equal movements up a vertical line. No absolute limit to life expectancy is known, though it would be approachedas higherI-L-E curves registered negligible increases in value.
MEASURING THE BENEFITS OF PUBLIC HEALTH IN A DEVELOPMENTPROGRAMME

While health services in general are mainly consumer goods (which have some effects on output), public health programmes may in large part be viewed as collective consumption goods, in the sense that they are not individually packageable, or at least a larger part of the benefits are external to the individual utilizing the health service. Mosquitomalaria abatement programmes, water purification and sewage treatment plants, mass innoculation campaigns, and the treatment of persons with infectious diseases who act as vectors are all examples of pure or quasi-collective consumption goods. No one can predict who will be struck down by malaria, dysentery or a host of other communicable diseases, and therefore each person feels the benefits from disease eradication and control programmes in terms of a reduced risk of morbidity and mortality. This is the consumption good purchased in the typical public health programme, and it is an alternative view to the standard public health concept of benefits in terms of the "value to society" of the lives saved through such programmes. Conceivably, in over-populated countries the survivorscould be made better off in terms of real product per capita if the mortality remained high and the population was reduced, but we must consider the interests of all, not just the survivors, and hence the benefits to society should be expressed in terms of reduced mortality risks for all. Figure 1 enables us to make a major step forward in the evaluation of public health expenditures; this results from the addition of the iso-life-expectancy map to the traditionalP-P andi-i curves. Just as the latter curves are necessary to determine the optimum allocation of social resources between two ordinary consumer goods, the addition of the I-L-E curves provides the technical link necessary for both the consumer and the policy planner to make rational decisions in the area of public health. The reasons for this are twofold: (1) health, especially in low income countries, is a joint function of health services and other consumer goods. If the consumer is to make a rational choice between longer life (better health) and other consumer satisfactions, the contribution which health services and other consumer goods each make to life expectancy must be specified. (2) If the health expenditures on the vertical axis of Figure 1 represent a combination of collective and

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quasi-collective consumption goods such as anti-malarial operations, services of sewage and water treatment plants, control of rodents and other disease vectors, the consumer can only meaningfully specify his indifference map on Figure 1 if the impact of such collective health expenditures is translated into improvements in life expectancy and health, for the consumer cannot be expected to directly evaluate combinations of collective public health goods and private consumption goods. (This follows in so far as a large part of the public health benefits to the individual derives not from his own consumption but from others consuming the health service. The impact of these externalities on his life expectancy is a technical datum which must be provided before the indifferencecurves can be meaningfully drawn.) But, with the iso-life-expectancy curves added to the map, the i-i curves cut the I-L-E curves, revealing life expectancies associated with each bundle of goods and services. Thus the consumer can express his preferences in terms which are subjectively meaningful, namely life expectancy versus consumer good utilities, and these indifference curves will then also refer to the objective quantities of public health services and other consumer goods. Ordinarily, we expect the consumer to intuit or anticipate the satisfactions from consuming particular goods, but we cannot postulate that he intuit the technical relationships expressed in the I-L-E map any more than we can expect the firm subjectively to intuit its production function: both must be specified. We can now use Figure 1 to throw light on several issues touched upon above: (1) the classic public health argument that public health pays for itself; (2) the problem of integrating the benefits of public health as a consumer good into the index of development; and (3) the comparison of benefits from public health projects with other alternative projects. Even though we consider public health in underdeveloped countries as a consumer good, there is a sense in which public health and most other basic consumer goods are also productive inputs, namely if we move into the range of low consumption which may adversely affect the productivity of the labour force. This can be illustrated by re-casting Figure 1 in the following way: The production-possibility curves are now shown (dashed lines) as bending backwards as they approach each axis because both types of consumption goods below a minimum level also represent productive inputs. In the one case "other consumer goods" production would suffer if public health fell below a certain bare minimum, while in the other instance the delivery and efficiency of public health services are drastically impaired if food and other necessities drop below basic requirements. Hence the meaningful operating range of the P-P curves is indicated by the lines C-D and E-F. The upper line E-F is, however, logically outside the area of possible welfare equilibria since it is to the left of the O-R line which represents the maximum attainable life expectancy at various resource levels per capita. (The C-D and E-F lines are not drawn parallel to the axes because

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higher production levels in developed countries probably require a higher minimum health standard than in the less developed countries, and similarly the effective delivery of a more complex package of health services is assumed to require a higher level of other goods.) The often expressed public health argument that a health programme more than pays for itself clearly applies in the short run if an economy is operating below the C-D line, for moving up the P-P curve then gives us more of both types of goods. But it is doubtful whether very many countries are operating below the C-D line, and we cannot neglect population effects which we know are directly related to health expenditures. Once we are above the C-D line, the public health-demographic problem involves a trade-off between present generation benefits from reduced mortality, and the possible loss of future per capita output through a dampening of economic growth due to population increases. In terms of Figure 1, as we move up a P-P curve towards the O-R function, that is, the highest iso-life-expectancy curve, we slow down the expansion outward to a higher P-P curve, at least in the absence of an offsetting drop in birthrates. Finally, it is now possible to throw some light on the long unresolved problem of how to include the benefits of better health and longer life expectancy in both the evaluation of public projects and in the index of economic development. The objective is to make these benefits comparable in welfare terms to the more easily measurable increases in real per capita output. Typically, the benefits from public health work in underdeveloped countries have come through a transfer of medical and scientific knowledge, particularly by way of technical assistance missions. The effects of this transfer on morbidity and mortality rates have been truly striking, and the welfare benefits are very large compared to the direct costs of the drugs and the medical and para-medical personnel in the countries concerned. Yet it is only the directexpenditures,not the benefits through improvements in the quality of health services, which are included in the GNP estimates. (In some countries with a large subsistence agriculture sector, the index of development may simply be expressed in terms of the output of foodgrains per capita, with no attempt to evaluate health gains either on the input or the product side.) While the productivity gains from technological improvements in industry and agricultureare reflected in the increase in real product per man, technical improvements in the effectiveness of public health work can only be measured in terms of better health and life expectancy. Measuring the value of public health work on the cost side ignores significant welfare gains, especially in low income countries where major extensions in life expectancy have been effected at very low cost through transfers of technical knowledge. By way of illustration, the transfer of knowledge embodied in the "green revolution" resulted in a large increase in the output of food grains, and was soon evident in the index

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of agriculturaloutput. The comparable transfer of scientific knowledge which produced the revolution in mortality rates has not been included in any economic index because the output of the public health industry is measured at factor cost on the input side. Hence the enormous welfare benefits stemming from reduced mortality and morbidity rates have been neglected for lack of an appropriate conceptual apparatus for measuring such benefits. Our Figure 1 diagram now enables us to evaluate an improvement in life expectancy and make it comparable in welfare terms to an equivalent increase in material goods. For example, suppose that life expectancy has increased from 57 to 63 years as a result of a United Nations medical mission, while other consumer goods per capita are unchanged at level A-K. This would be shown by a move to a higher I-L-E curve, from point t to point s. The indifference curve which passes through point s indicates the new welfare level; thus the The welfare gain from gain is shown by the move from i3-i3 to i-i. better health can now be converted to an equivalent gain in material goods by moving down the i4-i4 indifference curve until it crosses the original iso-life-expectancy curve of 57 years at point u, from which a perpendicular line is drawn to the X axis at L. Our apparatus has thus enabled us to conclude that a six year improvement in life expectancy, in the circumstances illustrated, is equivalent in welfare terms to an increase in per capita consumption of K-L. Life expectancy can thus be integrated into the theory of welfare, and included in the index of economic development. The same diagram can also be used to compare the benefits from public health projects with alternative projects. Consider an Indian village as host to a technical assistance team with a given budgetary allotment that can be used for either a water treatment plant or a minor irrigation system. Which shall be chosen? The water treatment plant will reduce mortality and morbidity to a predictable extent, hence increasing the labour supply and perhaps increasing productivity also, especially if the community was below the C-D line. The irrigation facility will increase agricultural output by a predictable amount, and this will indirectly improve life expectancy as indicated by the I-L-E map. In the traditional analysis only the productivity effects of the water treatment plant (by estimating the value of the additional labour hours made available through the reduction of morbidity and mortality rates associated with water-borne diseases, cf. Pyatt and Rogers, 1962) would be compared with the productivity effects of the irrigation project. The gains in life expectancy were left out of the evaluation. Figure 1 allows us to compare projects in terms of both increments of consumption goods per capita and gains in health. As in the previous example movements from an initial point, but now in both vertical and horizontal directions, can be plotted for each project. The expected combinations of health levels and per capita consumption can then be evaluated in welfare terms. Portland State University, Oregon

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AUSTER,R., LEVESON, I. and SARACHEK, D. (1969). The production of health, an exploratory study. Journal of Human Resources, 4, 411-436.

R. (1967). The economic effects of malaria eradication. American EconomicReview,57 (Papers and Proceedings), 130-148. DUBLIN, L. I. and LOTKA, A. J. (1946). The Money Valueof a Man. New York: Ronald Press. MISHAN, E. J. (1971). Evaluation of life and limb: a theoreticalapproach.Journal of Political Economy,79, 687-705. MUSHKIN,S. J. (1962). Health as an investment.Journalof Political Economy,70,
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129-157. PYATT,E. E. and ROGERS, P. P. (1962). On estimatingbenefit-costratios for water supply investments. AmericanJournalof Public Health, 52, 1729-1742. RICE, D. P. (1966). The Direct and Indirect Cost of Illness. Washington, DC: US Dept. of Health, Education and Welfare. WEISBROD, B. A. (1961). Economicsof Public Health. Philadelphia: University of Pennsylvania Press.

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