User Fees and Fee Exemption Mechanism in Public Health Facilities : the Case of Quang Ngai Province

UNIVERSXTY OF ECONOMICS
HO CHI MINH CITY

INSTITUTE OF SOCIAL STUDIES
THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM-THE NETHERLANDS PROJECT FOR M.A. ON
DEVELOPMENT ECONOMICS

USER FEES AND FEE EXEMPTION MECHANISM IN PUBLIC
HEALTH FACILITIES: THE CASE OF QUANG NGAI PROVINCE

The thesis submitted in partial fulfillment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
BY
PHAM VAN TRONG

SUPERVISORS: Dr ARDESHIR SEPEHRI
Mse TRAN THANH SON

HO CHI MINH CITY- MAY 20th, 2002


CERTIFICATION
“I certify that the substance of this dissertation has not already been submitted for any degree and
is not being currently submitted for any other degree.
I certify that to the best of my knowledge any help received in preparing this dissertation and all

sources used have been acknowledged in this dissertation”.
Pham Van Trong
Date: May 20th, 2002

i


ACKNOWLEDGEMENT
This thesis is done under the Vietnam-Netherlands Project for MA on Development Economics. I
would like to thank The Netherlanđs for Her aid and scholarship.
I am grateíul to all project teachers and staíĩ. Especially, gratefulness is sent to Mr Tran Vo Hung
Son- the Project Leader. Many thanks are also released to Ms Nguyet- the Project Secretary and
Ms Chi- the Project Librarian.
High appreciations are given to Dr. Haroon Akram-Lodhi and Dr Youdi Schipper for worthy
academic teaching and encouraging me on my thesis draft.
I would like to express my deep appreciations to Dr. Gabrielle Berman- member of Project
Scientific Committee- and Msc. Tran Thanh Son- my supervisor- who gave me lots of valuable
academic advise to improve the quality of the paper.
From the bottom of my heart, I would like to give many deep appreciations to Dr Ardeshir
Sepehri who guide, support and going witìi me throughout the process of doing this thesis.
Especially, his mental encouragement is a great support for me to finish this thesis. Again, I
would like to give deep appreciations and best wishes to him and his íamily.
Finally, I would like to express my respectíul gratitude to everyone in my family who has been
untiringly contributing their mental and íínancial support for me to complete my thesis and
looking for my success.

Pham Van Trong
Date: May 20th, 2002

ii

TABLE OF CONTENT
List of figures
List of tables
Abstract
CHAPTER 1: INTRODUCTION-----------------------------------------------------------Pdge 1
1. Problem statement--------------------------------------------------------------------------

1

2. Objectives, research questions and hypotheses ofthe study-------------------------

2

2.1 Objectives-----------------------------------------------------------------------------

2

2.2 Research questions-------------------------------------------------------------------

3

2. 3 Hypotheses of the study-------------------------------------------------------------

3

3. Data source and research method--------------------------------------------------------

4

3. 1 Data source----------------------------------------------------------------------------

4

3.2 Research method---------------------------------------------------------------------

4

4. Rationale of the study---------------------------------------------------------------------

4

5. Structure of the thesis----------------------------------------------------------------------

4

CHAPTER 2: LITERATURE REVIEW---------------------------------------------------

6

I. Theorical framework------------------------------------------------------------------------

6

1. User fees---------------------------------------------------------------------------------

6

2. Potential benefit of user fees------------, --------------------------------------------

6

2.1 Efficiency enhancing potential of user fees----------------------------------

6

2.2 Revenue raising potential ofuser fees----------------------------------------

8

2.3 Equity enhancing potential ofuser fees--------------------------------------

9

3. Price elasticity of demand for health care------------------------------------------

13

4. Willingness to pay and ability to pay-----------------------------------------------

14

5. Russell's argument on the inequity of user fees-----------------------------------

14

6. Willis and Leighton's argument on the ineffectiveness of
fee exemption mechanism----------------------------------------------------------

15

7. Gilson and Russel's theory on the ineffectiveness of fee
. mechantsm--------------------------------------------------------------.
exemption

15

11. Empirical evidence------------------------------------------------------------------------

19

111


CHAPTER 3: USER FEES AND FEE EXEMPTION MECHANISM

IN HEALTH SERVICES IN VIETNAM-------------------------------------------------Page

27

1. Overview of health sector in Vietnam---------------------------------------------------

27

1.1 Before renovation ( 1989)------------------------------------------------------------

27

1.2 After 1989-----------------------------------------------------------------------------

27

2. User fees and fee exemption mechanism in health services--------------------------

28

CHAPTER 4: FEE EXEMPTION MECHANISM, EQUITY AND WILLINGNESS
TO PAY: RESEARCH METHODOLOGY AND DATA ANALYSIS--------------

34

1. Research methodology--------------------------------------------------------------------

34

1.1 Method of data analysis-------------------------------------------------------------

34

1.2 Analytical framework----------------------------------------------------------------

34

1. 3 Data collection------------------------------------------------------------------------

36

2. Overview of main economic activities and health care system

in Quang Ngai province------------------------------------------------------------------

37

3. Data analysis-------------------------------------------------------------------------------

40

3.1 Definition of the poor and the non-pu-:r------------------------------------------

40

3 .2 Data analysis and discussion-------------------------------------------------------

44

3. 2. 1 Commune health centers-----------------------------------------------------

44

3 .2.2 Ba To district hospital--------------------------------------------------------

45

3 .2. 3 Quang Ngai provincial hospital --------------------------------------------

51

CHAPTER 5: CONCLUSION AND SUGGESTION-----------------------------------

57

"''

iv


LIST OF FIGURES
Figure 1 : Equity enhancing potential of user fees---------------------------------------Page

11

Figure 2 : Affect ofuser fees to the poor--------------------------------------------------

16

Figure 3 : Conventional model--------------------------------------------------------------

35

LIST OF TABLES
Table 1 : Econometric estimates of own price elasticities of the demand
for medical care in developing countries---------------------------------------

20

Table 2 : Mobilizing resources to pay for care - survey in Sierra Leone-------------

22

Table 3 : Mobilizing resources to pay for care (%)---------------------------------------

23

Table 4: User fee exemption for occupational groups: Cross country experience---

25

Table 5 :Health service contacts per person following per capita
expenditure quintiles, 1998-------------------------------------------------------

31

Table 6: Percent ofusers who are exempted from payments for a visit to
a governmental health facility, 1998--------------------------------------------

32

Table 7 : Variable framework---------------------------------------------------------------

36

Table 8: Income:per capita following income quintiles---------------------------------

43

Table 9: Payment and exemption for outpatients in district hospital------------------

47

Table 10: Payment and exemption for inpatients in district hospital------------------

48

Table 11: Inpatient care costs and health financing sources----------------------------

49

Table 12: Payment and exemption for outpatients in provincial hospital-------------

52

Table 13: Payment and exemption for inpatient in provincial hospital----------------

53

Table 14: Inpatient care costs and health financing sources----------------------------

54

v


ABSTRACT
User fees have come to play a significant role in the financing and delivery of public health
services in many developing countries since 1980s. It is considered as a way of rationalizing the
use of care, raising revenue and improving the coverage and quality of health services. While
many have been written on the revenue-raising potential of user fees, little is known about the
equity-enhancing potential ofuser fees.
In Vietnam, user fees were introduced since renovation in health sector in 1989. Although there is

formal fee exemption mechanism for the poor in public health services, it doesn't work well in
practice. My paper tries to examine the equity impact of user fees by coming to know the fee
exemption mechanism in public health facilities in Quang Ngai province. On that purpose, my
study tries to examine whether the poor patients receive exemptions in health services, there is a
correlation between household income and level of exemption, and the poor has to sell their
productive assets to pay for care or not. From that, some conclusions and suggestions are given to
the policy-makers to improve the equity of user fees in health services.

Vl


CHAPTER 1: INTRODUCTION
1- Problem statement
One of the objectives of governments around the world is the promotion of human
development in general and the health of the population in particular. So, the provision of
health care is the great concerns for many countries in all over the world. Since the early
1980s, many governments of developing countries have been restructuring the financing
and the delivery of publicly provided health services. Due to the serious imbalances
between demand and supply of health services and the budget constraints, many low and
middle-income countries have introduced user fees or user fees in health services as an
essential policy to finance publicly provided health services. According to de Ferranti
(1985), Griffin (1987) and World Bank (1987), user fees have been considered as a way of
rationalizing the use of care, mobilizing sources within the health sectors, encouraging
community participation and making the delivery of health care services more efficient and
equitable. Revenues from user fees are used to expand the coverage and the quality of
services. The improvement in coverage and quality of health care services combined with
the exemption of user fees for the poor are argued to enhance equity because it creates
chances for the poor to access the high quality health services. But in reality, the
introduction of user fees in some aspects is not good for some people in society, especially
the poor. Theoretical models suggested that the price elasticity of demand of health

services is to be higher for the low-income groups than the higher income groups (Me
Pake, 1993). So, user fees combined with no policy to exempt the poor are unlikely to
promote equity and harmful for the poor. Many poor patients, who face difficulties in
finding funds to finance medical care, has to transfer funds from payment for foods and
other necessity goods or selling off productive assets to payment for care (Russell, 1996).
Before doi moi (economic reforms), the government of Vietnam provided medical care free
of charge. The user fees were introduced in the late 1980s when the "doi moi" policy
encouraged private sector's participation in health services. Public hospitals began charging
patients for consultations and drugs. In 1989, a fee system was introduced in three levels
(district, provincial and national) of the health care delivery system. In 1995, the Ministry

1


of Health issued formal user fee schedules for each kind of consultation and each kind of
diagnostic test and procedure in clinics and hospital (Vietnam-Public Expenditure Review
2000). However, as it is noted by the Vietnam-Public Expenditure Review 2000, although
there is a formal fee exempting mechanism for the poor, handicapped, war veterans,
orphans and individuals suffering from certain ailment, it doesn't work well in practice.
The research of Ensor and San ( 1996) showed that there is no correlation between fee
exemption and household income.
Quang Ngai was chosen because it is a poor province located in the middle of the central of
the country. In 1999, GDP per capita in Quang Ngai is equal to USD 174, whereas GDP per
capita in Vietnam as a whole is USD 363 at that time (Quang Ngai statistical yearbook,
1999). Main cultivations here are rice, sugar-cane, casava. The livestocks include buffalo,
cow, pig, chicken. The health care system here is underdeveloped including one provincial
public hospital, district health centers, and commune health centers. In 1990, user fee
system in health services was introduced and applied. But it is seemly that it operated
ineffectively. Many poor patients didn't receive any exemption from payment for treatment
and some had to sell their assets to finance their costs of treatment.

Crucial to the equity-enhancing potential of user fee argument is the assumption that the
poor need to be exempted from paying user fees. While many have been written on the
revenue generating potential of user fees, little is known about their equity enhancing
effects. The purpose of my research is to fill this gap by examining (i) the exemption
mechanism as practiced in Quang Ngai province and (ii) the extent to which the households
rely on selling their asset to pay for the medical expenses.
2- Objectives, research questions and hypotheses of the study
2.1 Objectives

Some previous research (Russell and Gilson, 1997) indicated that there is no policy to
exempt the poor from user fees in health services in some developing countries. And if
having, it didn't operate well in practice. My study tries to examine how the fee exemption
mechanism operates in health care system in Quang Ngai province; whether the poor

2


receive fee exemption in health services; and in the case of receiving no fee exemption in
health services how they pay for their treatment. From that, some suggestions on user fee
mechanism in health services are given to policy-makers to make it better.
2.2 Research questions

The main research question in my study is:
•

Do poor patients receive an exemption or reduction of user fees in public health
facilities including: commune health centers, district health centers and provincial
hospitals?

Besides that, the sub-research questions in my study are:

•

Is there a correlation between household income and fee exemption level in health
services?

•

Do the poor households with illness have to sell their assets in order to pay their
cost of treatment?

2.3 Research hypotheses

The main hypothesis of my study is:
•

That not all poor households receive fee exemption from public health services.
There are some poor households who don't receive any fee exemption.

The sub-hypotheses of my study are:
•

That there is no correlation between household income and fee exemption in health
care. It means that exemption doesn't increase from highest income quintile to
lowest income quintile. It may be that the poor receive exemption equal to or less
than the rich do.

•

That some poor households have to resort to selling their assets in order to pay
hospital fees. Selling productive assets such as machines, buffaloes, land etc. will

3


decrease household's income generating capacity. It leads to a decline in their
standard of living and welfare.
3- Data sources and research method
3.1-Data sources

The primary data was collected through a household survey by direct interview in 3
mountainous villages: Ba Thanh, Ba Dong and Ba Cung in Ba To district, Quang Ngai
province. Choosing observations is random. 150 households were interviewed directly in 3
weeks. The interview was implemented by asking the household heads and then filling in
the questionnaires.
3.2- Research method

From above collected data, method of descriptive statistic will be used to measure
qualitative variables. This method will produce output tables that results are expressed in
number and percentage relative to income quintiles that are easy for us to access and
discuss.

•,

4- Rationale of the study

Quang Ngai is the poor province including 7 plain districts, 5 mountainous districts and 1
island district. The purpose of my study is to examine how the fee exemption mechanism
for the poor operates in health services. So, I chose the Ba To district is the one of 5
mountainous districts, where the ethnic people with the low standards of living takes a
large amount of the population in the district, to do the survey. Choosing the villages in Ba

To district to do the survey is also important. To do that, I chose 3 villages: Ba Thanh, Ba
Dong and Ba Cung in relative to the district lowest per capita income in Ba Thanh, the
average in Ba Dong and the highest in Ba Chua. Doing so will help me to collect suitable
observations, including the poor and the rich, in order to do my research.
5- Structure of the thesis

4


My thesis will be divided into 5 chapters. Chapter 1 is the chapter introduction. Chapter 2
is the literature review. First of all, I summarize some theorical amd empirical arguments
relating benefits and disavantages of user fees. Then, in analytical framework, some
empirical arguments highlighting disadvantages of user fees and fee exemption mechanism
are presented that they are considered as basis for my analysis later. Chapter 3 is user fees
and fee exemption mechanism in health services in Vietnam. Some general overview of
health sector in Vietnam are introduced first. Then some benefits and disadvantages of user
fees are assessed. Whereas, I especially stress disadvantages of user fees and fee exemption
mechanism to the poor. Chapter 4 is fee exemption mechanism, equity and willingness to
pay: research method and data analysis. This chapter will analyze the fee exemption
mechanism, equity and willingness to pay in public health services in Quang Ngai
province. First of all, research methodology is introduced. Whereas, method of descriptive
statistic is used in my study. Next, some general features about Quang Ngai main economic
and health care system are introduced to help readers to have some general thinkings about
Quang Ngai province. Finally, data analysis will give out results collected from the
research. Chapter 5 is conclusions and suggestions. From the analysis in chapter 4, some
conclusions and suggestion are issued to make the user fee policy and fee exemption
mechanism operate more effectively in Vietnam now.

1'

5


CHAPTER 2: LITERATURE REVIEW
I. Theorical framework

1. User fees
Since the 1980s, due to budget constraints and government expenditure crises in social
basic services in some low and middle- income countries, the introduction of user fees was
considered as the government's important and essential policy to finance social basic
services: health, education, transportation, energy, etc. Dor and Van Der Gaag (1991)
highlighted that some countries, such as the countries of Sub-Sahara African, that had
traditions in supplying health services free of charges had now introduced fees. User fees
were introduced as a primary policy response to health sector resource constraints.
The term of user fees was defined by Kamal Malhotra (1999) referring to the social
economic policy obtaining direct financial contributions from individual users of social
basic services as health, education, energy, etc. Besides that, to avoid the confusion
between user fees or cost-recovery and 'cost sharing or community financing, he also
introduced four important definitions referring to four of the above concepts. He suggested
that cost- sharing and community financing are normally expressed in labor or other kinds,
not in cash, and involve some forms of participation, management or control over the use
of contributions and revenues. By contrast, cost recovery and user fees mainly involve the
contribution in cash without community participation, management or control. He also
added that user fees are normally imposed on individuals based on a form of charge per
unit of used service and revenues obtained are returned to higher administrative levels of
either government or private sector.
2. Potential benefit of user fees
The potential benefits of user fees are often analysed related to efficiency-enhancing,
revenue-raising and equity-enhancing potentials.
2.1 Efficiency-enhancing potential of user fees

6


2.1.1 Arguments for efficiency-enhancing potential of user fees
There have been many arguments for efficiency- enhancing potential ofuser fees.
Griffin (1987), in his study, wrote about efficiency-enhancing potential of user fees. He
said that the application of user fees would encourage rational utilization of services among
users by limiting the use of services for 'frivolous' or 'unnecessary' reasons. He argued
that if users of health services have to pay partially or fully for services, they will have
more responsible attitudes toward the use of services because they have to pay for their use
on health services from their pocket. This will limit the use of services for 'frivolous' or
'unnecessary' reasons.
Next, he also argued that a well-designed fee structure at public facilities will reflect the
relative costs ofthe services and reduce patients' inappropriate use of referral care. Prior to
user fees, most patients go to hospital to treat their illness freely. Now, patients have to
consider their financial ability and level of their illness before they go to hospital. And in .
some cases, some patients whose illnesses can be sufficiently treated in lower level health
facilities will do so. It will reduce the overcrowding in hospital.
Mwabu ( 1997) also spoke about user fees and encouraged the rational utilization of
services among users. He said that a system of moderate user fees can be considered as a
mechanism for curbing moral hazard behavior. Previously, patients are treated freely in the
health facilities. Therefore, they don't have precautionary attitudes to their health and
illnesses. Now, most of patients have to pay for their treatment at health facilities. Hence, it
may be difficult for them when they get illnesses or diseases because it takes them a large
amount of money for their treatment. So, everyone now has an appropriate attitude to
health to avoid unnecessary visits to health facilities.
2.1.2 Arguments against efficiency-enhancing potential of user fees
Besides the arguments for efficiency-enhancing potential, there have been many arguments
agaisnt efficiency-enhancing potential ofuser fees.

7


Abel-Smith and Rawall (1992) argued that user fees deter 'unnecessary' or 'frivolous' use
of health services is based on the assumption that people know enough about their own and
family needs of health and potential benefit of some health services. In fact, this
assumption is rarely true because many patients are not in position to judge the serious
level of their disease symptoms and how much they will pay for suitable treatment.
In addition, user fees are only one component of the total cost of obtaining health services.
Indirect costs, including costs in time (traveling, waiting and treatment time), efforts,
money lost, money spent on travel and sometimes unofficial payments for health personnel,
often take a large share of total costs of treatment. Therefore, if the indirect costs are high
enough, most of unnecessary use will be reduced due to the indirect costs, not due to user
fees. So, user fees play no role in curbing the 'frivolous' or 'unnecessary' use of health
services.
Yoder (1989) suggested that the introduction of user fees is argued to do little to curb the
'frivolous' or 'unnecessary' use of wealthier groups in society. The rich already accept
spending on services with the purpose ofbetter health. So, user fees will not influence their
behavior on their health.
Barer (1994) said that there are always existence of informational asymmetry and
incomplete agent relationships between the providers and the users of health services. So,
user fees will punish patients for decisions made by providers about which patients have
little or no understanding. Hence, in some cases even though they spent much money on
their treatment, the effectiveness of their treatment may be not equal to the amount that
they spent.
2.2 Revenue-raising potential of user fees
2.2.1 Arguments for revenue-raising potential of user fees
There have been many arguments for revenue-raising potential of user fees.
Griffin (1987) suggested that user fees are considered as a way of increasing the financial

resources of the health sector and through that help to alleviate governments' budget

8


constraints in developing countries. Greater reliance on user financing helps to reduce the
public health costs by shifting part of health costs to recipients of service and thus reducing
economic burden for government. Moreover, user fee mechanism will curb 'frivolous' or
'unnecessary' use of services as mentioned above. Therefore, more sources will be freed.
In addition, part of the collected fee revenues is retained at the public health facilities. It
can be used to improve the coverage and quality of services. The improved quality of
services, in turn, will increase fee revenues and thus increase revenue potential from fees.
WHO (1988) admitted that the introduction of user fees in health services can be
considered to encourage community financing and participation in health sector. In other
words, fee collection is aim to mobilize private resource in health sector. It creates high
revenue-raising potential of user fees.
2.2.2 Arguments against revenue-raising potential of user fees

There have been many arguments against revenue-raising potential of user fees
Nolan and Turbat (1995), in their research in developing countries, found that the revenuecollecting ratio is in practice very low. It's often under 10-20 per cent of total government
recurrent health expenditure. This affects directly the revenue-raising potential ofuser fees.
Gilson (1995) found that the revenue-raising potential of user fees is in reality constrained
by some of the following factors: weak administration and management capacities,
seasonality in the availability of cash and lack of flexible credit system. Clearly, in
developing countries, there is the fact that the administration capacities are very weak and
are often corruption with substantial costs of cumbersome administrative mechanisms.
Therefore, they cause large resource waste and limit revenue-raising potential in health
sector. Moreover, the formulation and implementation of a system of differentiated user
fees by different income groups require the various community members and health
personnel to have the administrative and managerial skills to set up affordable fee levels in

compliance with households' ability to pay. Unfortunately, these requirements are rarely
met in practice. Besides that, the poor have little availability of cash for treatment and a

9


lack of flexible credit system as a payment intermediate, which serves to partially
constraint the revenue-raising potential of user fees in health sector.
Sepehri and Chernomas (2000) argued that the revenue-raising potential of user fees is also
limited by the fact that the collected fees revenue are in practice rarely fully retained at
local hospitals to improve the coverage and quality of the health services. A large
proportion of fee revenue is often transferred to local treasury and government's budget for
other purposes that it is sometimes used ineffectively.
Mwabu (1997) stressed that the revenue-generating capacity of user fees and its
sustainability have also been constrained by limited community participation. The reason is
that user fees are often imposed by relevant authorities on the use of people or communities
without the prior consultation or with

litt~e

consultation. This may cause the isolation and

opposition of users to the introduction of user fees and partially limit community
participation. In the case of limited community participation and considerable opposition to
the introduction of user fees, the collection of fees may then face some difficulties such as
non-payment, delayed payment or a decrease in patient quantities. All partially limit the
revenue-generating capacity of user fees.
2.3 Equity-enhancing potential of user fees
2.3.1 Arguments for equity-enhancing potential of user fees

There have been many arguments for equity-enhancing potential of user fees.
Griffin (1987) argued for the equity-enhancing potential of user fees. He said that equity
here is understood to be better served by charging the user fees and using the retained fee
revenues to expand the coverage, especially to under-serviced areas, and improve the
quality of the health services, such as a better supply of drugs and other essential medical
equipments, better working condition for health personnel, the upgrading/restraining of the
health personnel and better maintenance of buildings and equipments.
Moreover, Leighton (1995) issued that when the user fee collecting mechanism is applied,
the health sector self-finance sufficiently. The result is that more freed government

10


budgetary resources are launched and used for further improvements in availability and
quality of the services as these resources are redirected toward under-funded programmes
that provide public benefits and toward increasing the coverage and quality of the services
that is used by disadvantage groups in society. Besides that, these improvements also
provide benefit to the poor by making the public health centers more affordable and
reducing total cost of treatment to the poor in public health centers in comparison with
traditional care.
Besides that, Gilson (1995) added that it is administratively feasible to formulate and
implement an effective pricing and collection mechanism in health sector that protects the
poor. This will set up equity for all income-groups in accessing public health services. The
fee exemption mechanism will help the poor to avoid full cost of care and create more
chances for them in getting quality public health services.
In general, the arguments for equity-enhancing potential of user fees focus on the fact that
fee revenue needs to be used to benefit the poor and the poor need to be exempted from
payment for care. All have the same purpose of increasing the chances of accessing the
quality health services for the poor. And they are express in the following figure:

Figure 1: Equity-enhancing potential of user fees

Equity

I

Better
health

User
~harges

v
~

exempted

The
poor

...

~ncreased

Utilization
H.

The
non-poor

r-.

Resource
use to
benefit the
poor
11

...
~

Revenue is
retained and
spent on health
service

r--------.

Expand coverage &
improve quality of
health services


2.3.2 Arguments against equity-enhancing potential of user fees

Arguments against equity-enhancing potential ofuser fees are as following.
Gilson (1995), in his findings, said that the equity-enhancing potential of user fees is
limited due to only small part of fee revenues is retained at local health facilities and used
for small improvements in perceived quality, such as maintaining adequate drug supplies
and supplementing staff salaries. Most of revenues are often transferred to the central

treasury for other purposes. So, there is a lack of resource to expand the coverage and
improve the quality to benefit the poor in the local health facilities.
He also said that the introduction of user fee mechanism often do little to improve the
health status of the poor, especially the poor in rural areas, because the existing fee revenue
allocation mechanism is inequitable and often skewed towards urban, not rural areas. And
even though governments receive external aids to reform the health sector, the allocation of
governments' public health expenditure still continue towards urban sector rather than rural
sector.
Mills (1991), issued that user financing may lead to a deepening of regional inequity in
health sector. Some regions and districts with low living standards, low proportions of
population able to pay and few health facilities are often less able to raise the fee revenues
than in some regions and districts with people's high living standards, high proportions of
population able to pay and many health facilities. So, the resources for improvement in
quality and coverage of health services to benefit the poor in these regions and districts are
less than in better-off regions. To achieve equity in health sector under such circumstances,
governments have to either redistribute revenue from user fees towards the less-favored
localities or reallocate budgetary subsidies towards the locations with lower fee revenue per
capita. In practice, experience from developing countries show us that the budget allocation
is often towards the better-off regions rather than the worse-off regions.
According to Russell (1996), the demand for health services by low-income households
are more sensitive to price changes than the demand by high-income households. So, an
increase in prices or an application of user fees to health services will decrease greater the

12


demand for health care in low- income households than in high-income households. So,
users charges are likely to hurt the poor.
He also added that the willingness to pay and demand studies do not examme how
households obtain resources to pay for care and how the health status and the overall

welfare of household's members are affected when they face difficulties in payment for
their treatment. To solve difficulties in paying, the poor households have to divert funds
from the purchase of food and other basic necessity goods or selling off their productive
assets to the payment for care. Diverting funds from the purchase of food and other basic
necessity goods to payment for care will affect badly the hea1th status of household's
members in long term. Selling off productive assets to pay for care will decrease
household's livelihood and income generating capacity. The result is that household's
welfare is decreased.
Willis and Leighton (1995) in their study said that the effectiveness of equity-promoting
mechanism in health care is known little and some factors are likely to constraint the
effectiveness. These factors are definitions and measurements of household income to issue
exemptions. Even if we are able to identify household income, the effectiveness of
exemption mechanism are also hampered by other factors including social and cultural
factors. Those are information about exemption option, cost of travel, the fear of
stigmatization and other non-monetary cost of access (socio-cultural barriers associated
with age, gender and race). On the other hand, although many governments recognize the
need to exempt the poor who are unable to pay, the policy guidelines and frameworks on
exemption are often left to health facilities and local communities. Thus, the
implementation is ineffective.
3. Price elasticity of demand for health care

For a long time, people in developing countries have been used to using public health
services freely. So, the introduction of user fees will affect their demand for care. Malhotra
(1999) researched the affect of user fees on price elasticities of demand. He said that in
general when the price of goods or services goes up or when a previously free good or
service needs to be paid, it will affect the demand for care of different income groups in

13

society in different ways. He suggested that the poor and vulnerable person has high and
negative demand elasticities in social basic services, such as health, education, energy, etc.
So, when user fees are introduced, it will diminish their demand by an amount larger than
amount of increase in price. On the other hand, the rich have a low demand elasticity or
inelasticity in social basic services. So, the significant increase in price will not affect or
affect inconsiderably their demand for these services. In other words, the rich will have
both willingness to pay and ability to pay for their demand in social services, unlike the
poor who has willingness to pay but not be able to pay.

4. Willingness to pay and ability to pay
The introduction of user fees in health services in many developing countries means that
people are expected to contribute to the cost of health care from their own pocket. So, user
fees are related closely to the people's willingness to pay (WTP) and ability to pay (ATP)
for health services.
Malhotra (1999) considered 'willingness to pay' measures for demand for a good or service
based on the assumption that families or individuals will have sufficient resources to cover
all their needs and therefore not need to manage their needs in advance. By contrast, ability
to pay is directly related to the size of household's limited resources in relation to a variety
of competing basic needs, such as water, food, health care, education, housing, etc, which
needs to be prioritised to important needs. He also said that the poor and vulnerable people
who may have a willingness to pay but clearly lack ability to pay in their daily
consumptions and access to other social basic services. So, he argued that the two concepts
of willingness and ability to pay are different.
Moreover, Russell (1996) analyzed more clearly the difference between WTP and ATP. He
said that some poor families, even though they face many great difficulties in paying for
the health services, still persist in using the services because they don't have any other
choices. The money, which they used to pay for health services, can be used to serve other
needs, such as food, education or agriculture investment, etc. Hence, payment for health
care is made at considerable social cost to these families. And so, this payment is rarely
said to express 'willingness to pay' in compliance with the normal meaning of this word.

14


He also argued that WTP is not synonymous with ATP because health expenditure may
impose considerable cost on consumption and investment to the poor households. And in
the case that they haven't got enough cash, it may cause them start a process of asset
depletion and impoverishment to pay their treatment. In summary, ATP is related to ability
of mobilizing resources to pay. In which, cash income is not the only determinant of ATP
for health care and thereforce is not the only resource available to household. Potential
resources include cash, assets, education, consumption and investment, etc.
5. Russell's argument on the inequity of user fees.
According to Russell (1996), the demand for health services by low-income households are
more sensitive to price changes than the demand by high-income households. So, an
increase in prices or an application of user fees to health services that they are free before
will decrease the demand for health care greater in low- income households than in highincome households. A large decrease in demand for health services also means a large
decrease in health care for the poor and it's likely to hurt the poor.
He also added that the willingness to pay and demand studies do not examme how
households obtain resources to pay for care and how the health status and the overall
welfare of household's members are affected when they face difficulties in payment for
their treatment. To solve difficulties in paying, the poor households have to divert funds
from the purchase of food and other basic necessity goods or selling off their productive
assets to the payment for care. Diverting funds from the purchase of food and other basic
necessity goods to payment for care will affect badly the health status of household's
members in long term. Selling off productive assets to pay for care will decrease
household's livelihood. It means that household's income generating capacity is decreased.
So, household's welfare is decreased.
In summary, Russell's argument is expressed in following figure

15

Figure 2: affect of user fees to the poor

User
charges

.

~

The
poor

Diverting funds
from purchasing
...
foods or other
necessities and
selling off assets

..

~

..

~

Decreased

health
status and
livelihood

v

Inequity

...

.....

Decreased
utilization

6. Willis and Leighton's arguments on the ineffectiveness of fee exemption mechanism
Willis and Leighton (1995) in their study said that the effectiveness of exemption
mechanism in health care is known little and some factors are likely to constrain its
effectiveness. The implementation of this mechanism is hampered by some difficulties.
First of all, it is the definition and measurement of household income to determine
exemption levels. In developing countries, most of people's income is in cash and the large
is in informal sectors, not in accounts in the banks as in some developed countries. So, to
give correct definition and measurement of household's income is very difficult. Next,
even if we are relatively able to identify household income, the effectiveness of exemption
mechanism is also hampered by social and cultural factors, such as lack of information
about exemption options, cost of travel, the feat of stigmatization and other non-monetary
cost of access (socio-cultural barriers associated with age, gender and race). On the other
hand, although many governments recognize the need to exempt the poor who are unable to
pay, the policy guidelines and frameworks on whom to exempt are often vague and left to
health facilities and local communities. Thus, the accuracy and appropriateness of

exemption scheme become dependent on health personnel and .community leaders and on
whether patients or facilities bear the burden of the inability to pay user fees. It may lead to
the ineffectiveness of fee exemption mechanism.
7. Gilson and Russel's theory on the ineffectiveness of fee exemption mechanism
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7.1 Identification of target groups

According to Gilson and Russel (1995), the vital step in developing the exemption
mechanism is to identify the target groups. He highlighted two kinds of targeting
mechanisms including direct targeting and characteristic targeting.
~

Direct targeting is based on income level.

~

Characteristic targeting is a method using the general characteristics of groups of
people to identify who are eligible for protection. Three main types of characteristic
are used:
•

Geographical characteristic. It means that people living in a given area and
they have the same some characteristics, such as ethic people living in
mountainous areas that have low incomes, low standards of living and lack
of health care, etc. So, they need subsidized care.

•

Demographic characteristic. It means that subsidized care are given to group
of people on the basic of age or sex. For instance, children under five yearolds or the elderly receive subsidized care.

•

Specially-health or medical condition of the person. For example, children
and pregnant mothers will receive subsidized care and services such as
immunization or chronic diseases (tuberculosis, leprosy) will also receive
subsidized care.

7.2 Effectiveness of exemption

In an assessment of effectiveness of exemption mechanism, Gilson and Russel (1995) said
that, in general it is ineffective.
*Direct targeting

The ineffectiveness of direct targeting scheme in promoting equity m health care is
expressed by the "leakage" of coverage to the non-poor. The main reason leading this

17


situation is that the lack of information about people's income. This makes local exemption
administrators face huge difficulties in assessing household's income. Even if the relevant.
information is available, the income eligibility criteria may not accurately reflect ability to
pay. In developing countries, the majority of population are living in rural areas and their
incomes from informal sectors are relatively large. Therefore, data on earnings are often
scant and it is difficult to locate a household above or below an "arbitrary poverty line".
Even where it is possible to use "poverty lines" to identify the poor, it doesn't indicate
accurate targeting of benefit to the poor because:

•

Household income changes seasonally and annually

•

Households transfer income to other kinds

•

Household data indicate little about differences in income and access to health
care (e.g. a woman in a non-poor household may not have money and little
chances to access quality health services)

•

There is considerably distortions in living conditions among households living
under poverty line

•

Households may be classified as wealth because they have assets even if they
do not cash. But, the main determinant of ability to pay for health care may be
cash availability rather than assets

•

The high levels of illiteracy of respondents make the reduced accuracy of
information on the diversified sources of household income

*Characteristic targeting

'·

The ineffectiveness of characteristic targeting in promoting equity is obviously due to the
fact that targeting free care to the poor following geographical areas creates high "leakage"
of coverage to the non-poor and that reason explain why geographical targeting is rarely
used in developing countries. Moreover, targeting following occupation leads exemption
eligibility to the non-poor who are health employees and other civil servants. Detailed
evidences from Nigeria showed that people who are exempted at least part of health care
18