Evaluating Efficiency in the Portuguese Health and Education Sectors
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1 Evaluating efficiency in the Portuguese health and education sectors Miguel St. Aubyn1 ISEG – UTL [email protected] February 2002 1 The author wishes to thank the referees, and Prof. Manuela Arcanjo, Prof. Gouveia Pinto and Dr. Manuel Teixeira for their very useful suggestions. They are not in any way responsible for anything written in this paper. 2 1. Introduction Portuguese public expenditure weight on GDP has grown recently and attained levels that are close to the European Union average. According to the European Commission AMECO database, these figures were, 46.2 and 46.5 percent, respectively, in 2001. Growth in public expenditure since 1995 resulted, in a functional classification, from growth in the social functions. They grew 4.9 percent in real terms per year, the economic functions having declined (-4.4 percent per year). Among the social functions, the more important in 2001 were "education" and "health" (5.4 and 4.8 percent of GDP, respectively). These were precisely the items that grew at a higher rate in the last 6 years (5.5 and 4.8 percent, respectively)2. Growth of expenditure on education and health has been accompanied by growth in public employment in those sectors. From 1997 to 2000, the percentage of new subscribers to the Caixa Geral de Aposentações related to these sectors varied between 44,1 and 53,6 percent3. The quantities of public provision of health and education have a direct impact on welfare and are important for the prospects of growth of the Portuguese economy4. The efficiency in spending on health and education becomes a relevant topic because there is no necessary connection between spending levels and provision levels. Increased spending levels may lead to very little improvement in provision if inefficiency predominates. If there are important inefficiencies, higher provision is best attained by eliminating them. This paper is a contribution to the evaluation of efficiency in the health and education sectors in Portugal. It is structured as follows. After this introduction, section 2 summarises some methods to be used in measuring efficiency. Section 3 reviews some recent trends in the health sector, provides some new results concerning efficiency, and establishes some policy implications for health. Section 4 is devoted to education and similar in structure to section 3. Even if both sections have their own conclusions and are independent from each other, the paper ends with some final remarks. 2 The author computed these figures from the Contas Gerais do Estado and from the last Orçamento Geral do Estado. Nominal values were deflated using the GDP deflator. 3 See Caixa Geral de Aposentações (1998, 1999, 2000, 2001). 3 2. Evaluating efficiency - methodology Results presented in this paper concerning efficiency evaluation in education and health sectors are based in an estimation of efficiency frontiers. We follow a non-parametric method known as "free disposal hull analysis" (FDH). Some results from an alternative parametric method – corrected least squares (CLS) to health expenditures and outcomes are also included. Also, previous results from other authors and to whom reference is made here are based in similar methods. It is therefore important to have a grasp of this methodology before proceeding5. Suppose that under efficient conditions, health or education status of a population i, measured by an indicator I i , the output, depends on health or education expenses per habitant, the input, and on other variables (controls), C1i , C2i ,..., Cni : = I i F(Di ,C1i ,...,Cni ) . < If I i F(Di ,C1i ,...,Cni ) , it is said that country i exhibits inefficiency. For observed expense level and controls, the actual output is smaller than the best attainable one. FDH and CLS are two different methods of estimating function F, the efficiency frontier. In a simple example without controls, three different countries display the following values for indicator I and expense level D: Table 1 Fictitious values for countries A, B and C Indicator Expenditure Country A 65 800 Country B 75 1000 Country C 70 1300 4 Most recent theoretical and empirical research on growth emphasise the importance of human capital. Temple (2001) reviews this literature. Bassanini, Scarpetta and Hemmings (2001) provide empirical evidence that low levels of human capital have hindered economic growth in Portugal in recent years. 5 The interested reader may refer to Fried, Lovell and Schmidt (1993), a book with several contributions on efficiency frontier techniques and applications. Gupta and Verhoeven (2001) apply FDH analysis to education and health spending in Africa. Clements (1999) applies it to Portuguese education. Evans, Tandon, Murray and Lauer (2000) include a discussion of different techniques and their application to health spending. 4 Expenditure is lower in country A (800), and health or education level is also the lowest (65). Country C exhibits the highest expenditure (1300), but it is country B that attains a better level of education or health (75). Graph 1 FDH frontier Country C may be considered inefficient, in the sense that it performs worse than country B. The latter achieves a better status with less expense. On the other hand, neither country A nor country C shows as inefficient using the same criterion. In FDH analysis, both countries A and C are supposed to be located on the efficiency frontier. This frontier takes the following form in this example: 65, 800 ≤ D <1000 I = F(D) = 75, 1000 ≤ D ≤1300 This function is represented in graph 1. It is possible to measure country C in two different ways: 5 i) Inefficiency may be measured as the vertical distance between point C and the efficiency frontier. Here, one is evaluating the difference between the level of health or education that could have been achieved if all expense was applied in an efficient way, and the actual level of health or education. In this example, the efficiency loss equals 5 – country C should, at least, achieve the same indicator level as country B, under efficient conditions. ii) If one computes the horizontal distance to the frontier, the efficient loss is now 300, in units of expense. It can be said that efficiency losses in country C are about 24 percent (=300/1300) of total expense. To attain an indicator level of 70, it is necessary to spend no more than 1000, as shown by country B. FDH analysis is a non-parametric method, as frontier F is not previously specified. Suppose now that, a priori, frontier F is considered to be linear and its parameters estimated in a second step. One possibility is to adjust a least squares line to points A, B and C. This line, depicted as a dotted line in graph 2, is not yet an efficient frontier, as it has necessarily a point above it. Nevertheless, it is possible to shift the line upwards, adding to it the symmetric of the smallest of the residuals. This method is known in the literature as "corrected least squares", also represented in graph 2. In this case, one country only is on the frontier (country B), and country A is now deemed inefficient. Vertical and horizontal distances to the border can again be computed with the same economic interpretation. 6 Graph 2 CLS frontier As we do not have any particular reasonable assumption concerning the functional form of the frontier function, we apply the FDH analysis to health and education data. We also present some CLS results for health, for the sake of comparability. 7 3. Public expenditure with health 3. 1 Some recent trends in expenditure Table 2 Public expenditure on health 1995 1996 1997 1998 1999 2000 2001 In 1000 euros6 34806,1 37759,0 40188,1 43131,1 49236,3 52715,0 57942,0 % of total public 9,6% 9,6% 9,7% 9,7% 10,3% 10,4% 10,3% expenditure % of GDP 4,3% 4,4% 4,3% 4,3% 4,6% 4,6% 4,8% Real change 5,3% 2,6% 3,3% 10,2% 4,4% 5,4% Source: CGEs, OGE 2002. Graph 3 Source: OECD (2001a). As mentioned before, public expenditure with health has clearly increased, both as a percentage of GDP and as a percentage of total public expenditure. In 2001, health expenditure accounted already for a bit more than a tenth of public expenditure, and this amounted to 5 percent of GDP. 6 Does not include regional and local government expenditure. 8 Considering the last 6 years, expenditure on health grew at a real rate of 5,2 percent (table 2). Nevertheless, and despite its recent progress, Portuguese public expenditure on health is below the EU average as a percentage of GDP, as shown in graph 3. Portuguese private expenditure on health is high in international terms. Namely, its weight on GDP is above EU average (graph 47). Private expenditure on health in Portugal amounted to approximately a third of total expenditures, compared to a figure close to a quarter in the EU. Graph 4 Source: OECD (2001a). Due to the recent increase in both private and public health expenditure, total expenditure on health as a percentage of GDP in Portugal was close to average values in the EU (7.7 and 7.9 percent, respectively). These two time series are plotted in graph 5. 7 The drop in Portuguese data in 1989 is probably due to a break in the series. 9 Graph 5 Source: OECD (2001a). Since Portuguese GDP per capita measured in purchasing power parities is clearly below EU average, it results that total health expenditure in per capita terms and purchasing power parities is also below EU average values. This expenditure is depicted in graph 6. In less than 30 years, expenditure on health per capita grew from 27.1 percent of EU average to 67.9 percent in 1998.