Supply-side subsidies

Supply-side subsidies, which cover some or all of the costs of health services inputs (infrastructure, staff, drugs, equipment, nonmedical consumables), provide litde incentive to attract patients or increase productivity. As a result, despite relatively low wages, publicly operated services have remarkably high unit costs, and utilization rates are often low. The absence of targeting (restricting benefits to a certain subset of the population) gready dilutes the impact of public expenditure on health care. Middle-class people pay less than they can afford, while the poor often pay more. 

DEMAND-SIDE VERSUS SUPPLY-SIDE SUBSIDIES... 

Subsidies can be divided into two main groups supply-side subsidies and demand-side subsidies. Supply-side subsidies are linked to inputs demand-side subsidies are linked to outputs (figure 1-1). Each type of subsidy has advantages and disadvantages. The two can be used in combination to take advantage of the benefits each has to offer. 

Supply-side subsidies cover some or all of the costs of the inputs to health services. They fall into two broad categories cash subsidies and in-kind subsidies. 

The publicly owned and operated national health systems of many countries are examples of in-kind supply-side subsidies. In-kind subsidies are often provided for a more limited range of goods and services, including drugs, donations or loans of premises for health facilities, training, and payment of staff salaries. 

Supply-side subsidies are usually relatively simple to introduce and inexpensive to administer, and they can provide benefits to broad population groups. They are appropriate where the subsidized good or service can be used only by the target groups. Examples include immunizations drugs used to treat communicable diseases, such as tuberculosis, and health facility infrastructure and staff costs in poor areas. 

There are several disadvantages to providing supply-side subsidies ... 

Difficulty targeting. There is no guarantee that supply-side subsidies benefit those for whom they are intended. One way of restricting benefits to target groups is to subsidize the providers they use, but target populations may not use the facilities that receive assistance. Another option is to subsidize inputs that can be used only for specific health... 

Figure 1-1. Demand-Side Versus Supply-Side Subsidies in Health Care...

Lack of patient empowerment. Supply-side subsidies are often associated with low-quality service. Because assistance flows from the government to the provider rather than to patients, supply-side subsidies create no incentives for service providers to provide good service or offer patients anything beyond the bare essentials in terms of comfort and privacy. 

Lack of incentives to improve efficiency. Since supply-side subsidies do not normally link payment to the provision of service, they may be dissipated in salary increases and inefficiency rather than used to improve the quality and increase the quantity of services provided. 

Providers must compete for limited places in a subsidy scheme. This scenario goes a step beyond accreditation, effectively introducing an additional competitive process. Limiting places in a subsidy scheme limits choice for patients, but in many cases it lowers administrative and monitoring costs. This form of competitive subsidy may be used to avoid duplication in the supply of services that require high initial investments and services for which the number of potential beneficiaries is relatively low. Like accreditation, competition for limited places in a subsidy scheme can be used to improve quality in areas that patients are unable to perceive. It can also drive down costs. With supply-side subsidies, there is probably a stronger incentive to compete for places in the scheme than with demand-side subsidies, because once selected the provider is sure that it will receive the subsidy (with demand-side sub-... 

Contracting can be hugely beneficial, because it forces each party to a contract to specify its expectations. Contracts thus force health planners to consider precisely which services they want from providers and to identify them through detailed patient management protocols and quality specifications. At the same time, the contracting process forces providers to understand purchasers priorities. This helps them reconfigure the care they provide based on purchasers demands. Contracts can be more explicit about desired outputs and quality of care specifications under demand-side subsidies than under supply-side subsidies. 

Figure 3-1. Decision Tree for Supply-Side Subsidies... 

In a donor-sponsored voucher scheme designed for the prevention of HIV/AIDS in Honduras, failure to secure political support from the outset meant that although funding was secured, the project was eventually abandoned in favor of a traditional supply-side subsidy approach. 

Voucher schemes can be administratively onerous compared with traditional supply-side subsidies, and there are significant transaction costs associated with negotiating and monitoring contracts. A detailed discussion of this topic appears in chapter 5. 

In addition to these advantages of voucher schemes, policymakers should also consider the advantages of demand-side subsidies generally, if the alternative to the voucher scheme would be a traditional supply-side subsidy. These advantages include the fart that remuneration is based on productivity that subsidies can be restricted to evidence-based, cost-effective services that output-based monitoring and evaluation is possible and that the incentives to improve productivity and client satisfaction are greater for demand-side subsidies than for supply-side subsidies. 

The World Development Report 2004 reviews traditional approaches to public service delivery and discusses how they have often failed the poor. Whether in health, education, or infrastructure, supply-side subsidy strategies to fund inputs—such as staff costs, equipment, and buildings used in delivery—have not improved the access to quality services among the poor. An important question remains for developing countries and the international development community on how to deliver and target public subsidies in ways that promote efficiency and innovation, increase accountability for performance, and leverage public resources with private participation and financing. 

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