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Zero Prices Are Special for Providers Also – But Not in a Good Way
June 16, 2009
Over the last few years there have been a series of articles emphasizing how special the price of zero might be for consumers. In 2004 Michael Kremer and Ted Miguel published a CGD working paper (later published in the QJE) showing that eliminating altogether the price parents would have to pay for de-worming medicine for their children had an extraordinarily stimulating effect on uptake compared to even a very small non-zero price. Michael Kremer’s MIT colleague Dan Ariely co-authored with Kristina Shampan’er the paper “Zero as a special price”, which with Nina Mazar has since been published here, and applies behavioral economics to model this seemingly irrational consumer preference for zero in comparison to prices so small as to be seemingly indistinguishable from zero. And Jessica Cohen and Pascaline Dupas are actively engaged in research on the demand for bed-nets and other merit goods, which can be used by advocates of free distribution to support the elimination of user fees in the health sector in poor countries.
This week the CGD launches a new book entitled Performance Incentives for Global Health: Potential and Pitfalls by Rena Eichler, Ruth Levine and the Performance-Based Incentives Working Group which suggests that a zero price is special for providers also, specially depressing. The analysis and case studies in this book show that a positive price received is an important stimulus to provider effort in the health sector, even if the amount of the incentive is quite small relative to the total reimbursement package. In the best examples, the incentive system rewards for quality as well as quantity of service delivery, surpassing what user fees paid by the medically uninformed can hope to achieve. This effect is exactly analogous to the effect on the consumer side. Just as small costs discourage, small rewards encourage.
So suppose we accept that a zero price is specially stimulating to demand and specially depressing to supply. What is the implication for user fee policy in poor countries? Although user fees may disproportionately discourage utilization, they directly and immediately reward providers for effort. They are a “performance incentive.” Therefore, their abolition should only be proposed in tandem with an institutional mechanism like several discussed in this book which will substitute for the fee in providing equal or greater rewards for effort. But it’s not fair to the patients to abolish the fees with only vague promises that an effective performance incentive system will someday be installed. Launch the system, THEN abolish the fees.
3 Responses to “Zero Prices Are Special for Providers Also – But Not in a Good Way”
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June 17th, 2009 at 9:10 am
I would like to ask about the long-run goal of the incentives-based system discussed in the book. What is the vision (which, to me, necessarily implicates political deliberation) of the type of society in the least developed countries which the system’s political economy imagines and aims to construct? Don’t the authors find particularly worrisome the extent and depth of dependency by recipient countries (on both supply and demand sides) that this system is bound to generate, even if practiced by local governments yet fueled by international donors? Besides, I would remind a number of anthropological-sociological studies carried out lately in the specific domain of HIV/AIDS implementation by scholars D. J. Smith and Ann Swidler who highlight the failure of eroding gross unequalities among parties involved (foreign donors and their contractors, on one side, and local practicioners and their communities, on the other) through financialization of relations which work .
June 17th, 2009 at 10:05 am
The long run goal is consistent with what should be the long run goals of any health system- to ensure the maximum health benefits in an equitable way. The issue of dependency on donors is not specific to performance incentives, nor is the issue of long term sustainability. I have heard comments from some people with experience working within systems that incorporate performance based incentives argue that the approach strengthens the health system and the institutions within it so that they are better positioned to deliver services when donor support ends.
It also may be helpful to clarify that performance based incentives do not necessarily have to be designed, financed, implemented and driven by donors.
• We know of cases that are fully government designed, implemented and financed (e.g. JSY in India).
• We know of cases that began with donor funded pilots that contributed to a national approach that is owned and led by the Government (e.g. Rwanda).
• We know of cases where donors fund and help implement an approach that strengthens the leadership and steering role of the Government (e.g. Afghanistan).
• We know of cases where the Government is pushing donors to move forward with an approach the Government wants to initiate (e.g. Tanzania).
These are just a few examples to give a sense that this is not a simple case of an externally driven approach.
Health providers need to be paid using some mechanism- it is possible to alter payment so that a portion is linked to results while still remaining within the existing budget envelope. When current incentives lead to dysfunctional behavior, this book argues that changing incentives so that a portion of pay is linked to results may be one way to encourage behavior that is more aligned with social goals.
June 19th, 2009 at 10:29 am
To a large extent, I believe, similar incentive-based systems can be proposed to any other field of developmental activity. My questioning had a primary concern with political economy, which goes beyond the technical advice advanced in your book. That is why I posed my questions in terms of envisaged future society and political consensus necessary to obtain in order to assure long-run sustainibility.
If there is such quantity of evidence that the incentives-based system is promising with regard to the improvement of health care to the population, what then would be the major perils undermining this project and can be done to prevent it?