An institutional retrospective on South African and American health sectors.

ABSTRACT

Economists have rediscovered how social institutions shape the structure and performance of economic activity. Institutional economics is especially useful in understanding the complex health sectors of the world. This paper examines health sector institutions in South Africa and the United States with an emphasis on how they shape the balance between private and public sectors, and how they promote efficiency and equity. The poor showing of both countries in the World Health Report 2000 is also discussed.

1. INTRODUCTION

In 2001, the Journal of Health Politics, Policy and Law produced a special issue focusing on a classic article written by Nobel Prize winning economist Kenneth Arrow in the early 1960s (Arrow, 1963). This article has become a classic because it stresses the importance of institutions in the health sector and how they shape its structure and performance. The late 50s and early 60s was a period of dissatisfaction with the medical profession in the United States, at least within the economics community (Kessel, 1958). Many economists felt that restrictions on physician supply and the economic practices of the medical community were a serious and detrimental departure from the competitive norm. But Arrow intervened in the debate and asserted that information asymmetries were responsible for shaping many of the institutions, not nefarious conspiracies. Arrow asserted that the institutions of deference accorded physicians, occupational licensure and the nonprofit status of much of the health sector were all at least partially the result of information asymmetries between providers and consumers. These institutions served public welfare and were an adaptation to market imperfections, especially the information asymmetry between providers and consumers, so he argued. Forty years have elapsed since Arrow's noted article and perhaps it is time to reassess the economic institutions that shape the US health sector. Mark Pauly, in the forward, suggests that such economic institutions will be the new frontier of health economics in coming years (Pauly, 2001).

In an article reflecting on his earlier American Economic Review contribution and constituting the concluding article in the special issue of the Journal of Health Politics, Policy and Law, Arrow points out that many of his previous observations are still current though health services in the United States are much more business like than they were in the middle of the 20th century. The majority of hospitals in the United States remain not-for-profit organizations and many are affiliated with religious or philanthropic causes. This helps assure patients that their health is uppermost in the minds of management instead of shareholder profits. Though it should be pointed out that not-for-profit organizations maintain a focus on their "bottom line" too, and much of the "slack" afforded not-for-profits is the result of low returns on equity, equity that is held by the public at large.

By comparison, consumers do have more information now than they did in the mid 20th century. Advertising is more widespread than in the past and this helps provide information about new products and occasionally enlightens consumers about prices. The internet has empowered consumers to more easily acquire information about health conditions and treatments than ever before. Complementing improved access to information is a much more educated population that is more comfortable with medical literature. This reduces the extent of the information asymmetry, a point Arrow recognizes, but it is not eliminated either.

Physician supply is still tightly controlled by medical schools and occupational licensure. In fact, the annual supply of new allopathic physicians from United States medical schools has scarcely increased in over 20 years. But much has changed. More than 80 million Americans were insured with HMOs in 2000, which for the most part, are for-profit organizations listed on Wall Street (United States Census Bureau, 2001). HMOs integrate the financing and delivery of health services that are typically separate functions in fee-for-service health care. HMOs are often characterized by constraints imposed on providers and beneficiaries. The evidence suggests that market driven managed care did curb growth of health spending, at least in the 1990's (Heftier, Levit, Smith, Smith, Cowan, Lazenby and Freeland, 2001). There has been the perception that these constraints have also resulted in the enrichment of HMOs with adverse effects on quality of care and patient satisfaction. However, investors have not always prospered with equity investment in HMOs. Few managerial strategies seem to be rewarded on Wall Street, save the generation of monopoly power and geographic diversification as well as, to a lesser extent, enrollment growth and constraining choice of primary care physicians (Pauly, Hillman, Furukawa, McCullough, 2001). And the quality of care, while difficult to measure, has not unambiguously deteriorated with HMOs though patient satisfaction has (Miller and Luft, 2002) In addition, the growth of HMOs and for profit health care has further eroded access to health services. Millions of Americans remain without health insurance and this issue, not information asymmetries or anything else, led to one of the most important institutional changes of the last 50 years, the establishment of Medicare, Medicaid and CHAMPUS by Lyndon Johnson in the 1960's.

In his reflections, Arrow emphasizes the role of technology. It is recognized as the driving force behind the rapid increase in health spending that occurred in the last 40 years. New technology has resulted from National Institutes of Health (NIH) sponsored research as well as from widespread health insurance including Medicare and Medicaid. The rather unconstrained nature of this health insurance has led to a preponderance of technical change emphasizing new and expensive products and procedures instead of higher productivity and lower cost alternatives. Health care commands so much of the country's resources that it impacts decidedly on aggregate growth and employment. It is estimated that health spending will account for approximately 18 percent of United States GDP by 2012 (Heftier, Smith, Keehan, Clemens, Won and Zezza, 2003).

Just as in the early 1960's, it is fair to ask whether our current health care institutions serve the objectives of efficiency and equity that economic policy seeks to achieve. The purpose of this paper is to examine the evaluation of economic and social institutions characterizing the health sectors of the United States and South Africa. Key parameters are assessed in the context of each country.

2. THE INSTITUTIONAL LANDSCAPE OF THE HEALTH SECTOR

There are a variety of features that differentiate the health sector from most other parts of the economy. The feature that most interested Arrow is the role of information and how market institutions adapt to asymmetries in information. Much has been made in recent decades of imperfect information and its effect on market efficiency. The assumption underlying perfect competition that information is widely available and costless is clearly unrealistic. This is especially the case in health care where providers are typically much more empowered with relevant information than consumers. And while it is certainly true that not every party in the economy needs to be perfectly informed to achieve a semblance of efficiency, it is necessary that a significant and critical mass of consumers are able to differentiate and assess appropriate valuation of goods and services. This state of affairs is more likely to prevail when markets are characterized by homogeneous output such as in some agricultural markets rather than heterogeneous output as is found in automobiles or higher education. When heterogeneity prevails, the nature of competition tends to focus on quality as opposed to price. Quality is often much harder to gauge than price and is open to a myriad of marketing strategies. A favored strategy in both South Africa and the United States is reliance on the perception of state of the art technology to signal quality. Consumers are generally ill equipped to differentiate between technologies and rely on providers to help make important decisions. Physicians and other providers are also commonly ill-prepared to make important resource allocation decisions. Physicians, sworn to the Hippocratic Oath, may emphasize the benefits of health care interventions without adequately considering costs. This creates a bias toward excessive quantities of care and more importantly a bias toward new technologies, many of which offer only marginal improvements at considerable cost. It is noteworthy that economic analysis generated from the Rand health economics experiments of the 1970s and 80s concluded that most of the increase in healthcare costs in the United States resulted from new technologies and not increased population, increased wealth or increased levels of health insurance.

Regulation is often closely related to information asymmetries, especially in the health sector. Regulation is commonly introduced to protect consumers with respect to quality of care. Health providers are often regulated with occupational licensure. Physicians, dentists and nurses, to mention a few, are all regulated in this way. This regulation is said to assure the public of properly trained and qualified providers. But others argue that such regulation often is of greater value to those being regulated because it serves to limit competition. It has been argued that professional standards can be set at higher levels than is optimal. What good is it to have a few extremely well trained providers that only a few can afford? Perhaps average quality of care is better served by greater numbers of lesser trained professionals that offer better access at lower prices. This idea was raised by Milton Friedman, another Nobel prize winning economist at about the same time as Arrow's now classic article.

A second topic of institutional variation in health is the mechanism of financing and delivering health care. In some countries these functions are combined either in public health services or private HMOs. In other countries they are separate with organizations that pay for health services and other organizations that provide health services. A related and important feature is how physicians are reimbursed. In some countries there is an emphasis on use of salaries, in others, fee-for-service predominates and yet in others, there is substantial use of capitation where physicians accept a fixed amount of money and in exchange accept the risk of providing whatever care is necessary. Each of these approaches has different financial incentives. Of great concern is over-utilization of care with fee-for-service reimbursement and underutilization of care with capitation. Salaried physicians may not have adequate productivity incentives.

A third issue is the "public good" nature of the output. Health services are different than say automobiles or appliances. Few would argue that citizens of any country have an entitlement to these goods. Health services on the other hand generally evoke a different attitude. Most people believe, with varying degrees of passion, that all citizens (and possibly non-citizens) are entitled to at least a basic level of health care regardless of their means. This creates a major role for governments around the world. Countries differ with respect to the way this entitlement is met, the level of the benefits provided, and the depth of social commitment to this objective. Health insurance is not merely a financial mechanism to distribute risk, such as with home insurance or auto insurance, but rather, is also a means of meeting a social entitlement.

In addition to meeting a social entitlement, some health services fall at least partly under the classic definition of a public good where consumption in nonexclusive. National defense consumption is nonexclusive in that no member of society can be excluded from the fruits of national defense. Some parts of the health sector are similar. Public health measures affecting sanitation and environmental quality are examples, as are immunization programs.

A fourth issue is the role of special interests in health policy formulation. Political processes differ from country to country and this has a profound impact on the structure and performance of health systems. South Africa and the United States have pluralistic democracies and considerable influence of various interest groups is brought to bear on policy makers. Some of the most important interest groups include insurers, pharmaceuticals firms, hospitals and physicians.

3. ARROW AND INSTITUTIONAL ECONOMICS

Kenneth Arrow is well-known for his contributions to welfare economics, social choice, his command of mathematics and its application to economics. His work in health economics is probably not his most widely known contribution and he has published primarily outside of health economics since the mid 1970 (Fuchs, 1987). His classic Uncertainty and the Welfare Economics of Medical Care is also a contribution to Institutional Economics, though this has not been widely recognized (Williamson, 1987). But its principle observation that economic and social institutions can develop because of transactions costs associated with information asymmetries is very consistent with the agenda of institutional economics. Along with an interest in transactions costs, institutional economists have had a focus on behavioral assumptions of humans as consumers and producers. In recent years, institutional economics as a school of thought is often divided into the old and new schools. The old school, commonly thought to have commenced with Thorstein Veblen and carried forward by John Commons, Wesley Clair Mitchell, Clarence Ayres and others is generally acknowledged to have died out by the early 1980s. A diagram from Rostow showing institutional economics in comparison to other schools is shown below in Table 1 (Rostow, 1990). The new institutional school focuses on many of the same issues but has a generally more conservative orientation and has sought a more constructive role by complementing existing neoclassical economics. The old school, by contrast, seemed to revel in rejection of mainstream economics and thereby alienated much of the profession.

The study of economic history and economic development, including the health sector, are avenues of inquiry that often rely on institutional approaches. An American economist, Walt W. Rostow, employed an institutional approach to economic development in his well-known work, The Stages of Economic Growth first published in 1960 (Rostow, 1990). Though he employed institutional approaches, Rostow was not comfortable being included in the "School of Institutional Economists" even though he worked under Wesley C. Mitchell in the 1940s and spent over 30 years of his career at the University of Texas, known for its institutional tradition at least until the 1980s (Hilsenrath, 1993). Perhaps this is because Rostow also relied quite heavily on economists not associated with institutional economics, most notably Joseph Schumpeter of the Austrian School and empirically orientated Simon Kuznets (Rostow, 1990).

4. SOUTH AFRICAN ECONOMIC HISTORY AND THE DEVELOPMENT OF HEALTH INSTITUTIONS

Hobart Houghton, an economic historian of the mid 20th century employed a Rostovian methodology to account for the development of South Africa's economy (Houghton, 1965) This approach uses at least five stages of economic growth. The first is a traditional stage where technology is relatively stagnant and societies are often organized on a tribal basis. This describes much of African society, though there was considerable variation in technical sophistication among different tribal groups. It also may be applicable to the majority of the Afrikaans population that had spread out beyond Cape Town in the 17th and 18th centuries. Houghton argued that there was an "economic retrogression from the highly-developed market--oriented economies of Holland and France to the semi-subsistence farming of the trekboere". He felt that much of the Afrikaans population of that era was best classified as "traditional" in their level of economic development. The next stage of economic development, Preconditions for Take-Off, is critical for the formation of economic institutions.

Houghton argued that South Africa did not move into the Preconditions stage until arrival of the British in the early 19th century. The British brought rapid change with emancipation of slaves and rule of law throughout the Cape Colony and later, Natal. Local government, schools and hospitals were established in areas under British sovereignty. Social and economic institutions were slower to develop in the interior Afrikaans regions of 19th century, but discovery of diamonds and gold in the latter part of 19th century catalyzed development even there. Investment and immigration rapidly changed the Afrikaans republics and modern institutions quickly took root.

Rostow's third stage, Take-Off, is characterized by high rates of industrialization and lateral spin-offs from a few leading sectors to other parts of the economy. Houghton dates this stage in South Africa as having occurred from 1933 to 1945. Since then, South Africa has been in the fourth stage, the Drive to Maturity. This is marked by the spread of modern methods and perspectives throughout the economy, an active role in the international arena and an economy marked by diversity with high and rising levels of productivity. Houghton predicted that South Africa would pass in the fifth stage, the era of high mass consumption in the 1990s. This has probably not occurred but South Africa remains one of the continents most prosperous countries.

Houghton believed that by the mid-20th century South Africa had established impressive health service institutions and he cites the number of hospitals, doctors, nurses and patients. To some extent South African health services were modeled on those of the United Kingdom where the state both finances and provides care. In South Africa however, the pernicious institution of apartheid undermined the coherency of national health services and relegated most health services to provincial or homeland authorities. This led to substantial variation in expenditures in aggregate and per capita in different parts of the country. As in the UK, private health services existed side by side with public health services. But the private sector in South Africa has grown to command the majority of resources serving a minority able to afford private insurance.

The collapse of apartheid corresponded with the rapid advance of managed care in the United States. Many South Africans, especially whites, abandoned use of public hospitals in favor of private ones as government sought to equalize public health expenditures across the population. This contributed to the growth of private health services in South Africa and also led to exploration of various managed care technologies, many of which have been pioneered in the United States.

Information asymmetries in health characterize South Africa as they do elsewhere and the public sector serves in a variety of capacities to address this issue. First and foremost is in education. Public education is a priority of government and is even a priority with the Department of Health. Identification of cost-effective pharmaceuticals with the Essential Drug List helps to educate decision makers. This identifies least costly pharmaceutical options for various ailments and is an example of public intervention to address information asymmetries. And while targeted for the public sector, this information can be used in the private sector as well.

South Africa now has a health system with provincial health services and a large private sector that has embraced managed care, somewhat like the USA. It is now reforming its institutions to take better account of the previously disenfranchised population. Regulation regarding occupational licensure has come under scrutiny and there is movement toward better utilization of traditional healers, perhaps with some training in western sciences. South Africa also has competition policy enforced by the Competition Commission. Antitrust enforcement in South Africa has historically been weak, both under National Party and African National Congress administrations. But the possibility of using this policy tool to improve both health sector efficiency and equity exists. Legislation has been enacted which has sought to improve efficiency and to some extent, equity in the health sector. These include measures targeting reform of medical schemes (health insurance) and the marketing and distribution of pharmaceuticals.

Institutions have evolved in South Africa to accommodate public goods in health but many of them, such those that provide for water and sanitation, are outside of the purview of the Department of Health. Primary care is commonly thought to be a "public good" and health care is specifically identified in the new constitution as an entitlement (McIntyre and Glison, 2002) The public sector provides primary care at the provincial level but the adequacy of current levels of service is in doubt. Another concern is financing and the distribution of resources between private and public sectors. South Africa's private sector as a share of the total health sector (57.8) is especially large by international standards, even larger than that of the United States (World Health Organization, 2003). This, it can be argued is a major source of both inefficiency and inequity in South Africa.

Equity remains of paramount concern for post-apartheid South African health services. Private insurance provides for an estimated 17.1 percent of the population (Goudge Cornell, McIntyre and Mbatsha, 2002). The remainder relies on out-of-pocket payments or the public sector. Public health service expenditures have been constrained by a national commitment to fiscal discipline. And even though leading economists such as Joseph Stiglitz and other students of macroeconomic policy have questioned the "Washington Consensus" there is little serious prospect of change in South Africa's fiscal posture.(Stiglitz, 2002; Hilsenrath, 1999). Consequently, post-apartheid South Africa focused on redistributing public resources to meet the needs of the formerly disenfranchised, with mixed success. The Western Cape and Gauteng remain over-resourced and Mpumalanga, the Northern Province and other rural areas remain under-resourced. Public services which a large majority of South Africans depend on are further undermined by migration of health providers and other health sector workers to the more lucrative private sector. Compounding matters is the loss of private reimbursement at public hospitals to private hospitals. This undermines the public sector's ability to benefit from cross subsidies from the private sector, an important financing mechanism that has not been addressed with specific policy.

An important and current feature of South Africa is the HIV/AIDS epidemic. It rapidly evolved to infect 20.1 percent of the adult population at the end of 2001 and has substantially reduced life expectancy (United Nations. 2003). It threatens to overwhelm the health system even with lower priced retroviral drugs. Public policy has received international attention, especially President Mbeki's skepticism of the role of the HIV in causing AIDS. The epidemic is certain to keep health issues at the top of the public policy debate.

Finally, a pluralistic democracy such as South Africa is subject to special interest politics. South Africa's health sector commands a substantial amount of resources, especially in the private sector, and an active agenda of special interest pleading should be expected. An important test of sound government is the ability to receive valid information from lobbyists without undue prejudice that undermines the ability to effect policy in the public interest. Without sound institutional safeguards, public policy is all too often captured by special interests that exert more influence than the anonymous public. Post-apartheid South Africa has disappointed some who believe that not enough has changed.

5. THE UNITED STATES AND THE DEVELOPMENT OF HEALTH INSTITUTIONS

The United States achieved the fifth, and fully industrialized stage of high mass consumption, according to Rostow in the early 20th century. It was the first country to achieve this status though the UK was first to experience an industrial take-off with its iron and textile industries in the early 19th century. The US has now had nearly a century for its health sector institutions to evolve in the context of a fully developed society. Yet health care institutions in the United States differ sharply from those in Europe. In some respects the traditions of a formerly feudal society have carried over to Europe's health sector. Beginning with Bismarck in later 19th century Germany, European leaders sought to insure workers and society from the costs of illness. This form of social insurance is widely accepted as an important function of the public sector. The United States has a weaker commitment to health care entitlements than Europe. This helps explain why no coherent policy has yet emerged addressing needs of the uninsured.

The US health sector in the early 20th century was an unregulated market characterized by competing medical ideologies and largely financed through out-of-pocket payments and philanthropy. The advent of a host of new technologies that transformed health services from one that emphasized care to one that could provide cures was a fundamental change that shaped the evolution of health sector institutions in the US and elsewhere. One of the first casualties was the eclectic approach to medical education. Abraham Flexner led a campaign to shut down medical schools not adhering to scientific principles and that could not adequately train students in the sciences of radiology, pathology, pharmacology, modern surgical techniques and other facets of contemporary medicine (Levey and Associates, 1997). It was a so the case that the infrastructure required for medical schools was much more costly to establish and operate than those that marked the 19 h century, and many medical schools were forced to close because of economic pressures. For these reasons large numbers of medical schools in the United States shut down by the middle of the second decade of the 20th century and the "allopathic" approach to medicine emerged as dominant. The only nonallopathic perspective to survive was osteopathic medicine. Today, US allopathic medical schools outnumber osteopathic ones by a margin of 6 to 1. In many respects the changes wrought by Flexner addressed information asymmetries. The public was ill-equipped to determine the scientific competence of physicians. Regulating medical schools combined with medical licensure stepped in where market mechanisms were deemed inadequate.

By the 1920s, the health sector had evolved into something of an industry with substantial sums of money spent on hospital and physician services. An important economic study found that health spending accounted for about 4 percent of the economy by 1929 (Starr, 1982). The Depression was another catalyst for health institutions in the United States. By 1933, one out of four American workers was without a job, and the other three were worried they would be next. Many bills went unpaid and often hospital and physician bills were the first to face delinquency since hospitals still had a tradition of philanthropic financing. This situation soon became unacceptable to hospitals and physicians and they moved to address the problem. The solution was health insurance, an institution that they had initially opposed because of the monopsony power that it confers, but at times such as prevailed in the 1930s, the potential problems of dealing with insurers seemed to pale to the difficulties then in existence. The efforts of the hospital and physician services industries were complemented by the rising power of unions that marked the administration of Franklin Roosevelt. Unions sought health benefits for workers, especially after wages were constrained during the Second World War.

The institutions that evolved by the 1940s proved fairly durable for the remainder of the 20t" century. Private health insurance financing private care dominated the landscape. The principal aberration to this scenario was the establishment of Medicare and Medicaid. But even these public institutions were integrated into the private framework with integration of Medicare reimbursement through private intermediaries for hospital and extended care. The insurers, both public and private remained largely passive and simply passed the costs of health care on to employers and government.

Rising health care costs became a greater source of national concern in the 1970s when inflation and economic stagnation became central issues of public policy. Health spending accounted for 7 percent of the economy and was rising rapidly, faster than the inflation prone economy. President Nixon and Congress decided that the health system needed institutional change that introduced incentives to conserve expenditures but relied on the private sector. The HMO Act was passed in 1973 and HMOs and managed care took off by the 1980s. The use of capitated payments to providers in HMOs and elsewhere in managed care was seen to be a major change that would facilitate more efficient use of resources. Other approaches emerged to complement capitated payment. These include use of utilization review for inpatient care, gatekeepers for use of specialist services, provider profiling to incentivize and even discipline providers, and the widespread use of computers to provide more information about costs and quality of care.

In the early 1960s, health professions, like all the professions, were not subject to antitrust enforcement and the professions were considered to be separate from commerce, which was governed by antitrust law. A series of rulings in the 1970s and 80s changed this interpretation and the health sector has since been subject to litigation and sometimes vigorous federal enforcement. This is a somewhat under-recognized facet of institutional change that some economists believe has had a profound effect on the health sector in the United States.

By the early 1990s, there was no consensus that managed care had yet significantly constrained costs. Moreover, a recession led to rising unemployment and concern about equity, especially the rising numbers of uninsured. Under the stewardship of Hillary Clinton, the Clinton administration sought a wholesale reform of health care institutions to achieve greater levels of efficiency and equity. But like most preceding efforts earlier in the century, this attempt at sweeping health care reform failed. Yet, in the wake of the Clinton reform effort, health care costs remained at a fairly constant level of GDP for the remainder of the 90s. This was driven in part by the brisk economic growth of the mid and late 1990's, but also by more effective managed care that appears to have reached a critical mass enabling it to constrain spending, particularly when the national will was there.

Most recently there has been a backlash against managed care as well as a marked deceleration of economic growth since 2000. Though the data lags, data is available through 2001. This shows a very sharp increase in the share of GDP allocated to health. It jumped from 13.3 percent in 2000 to 14.1 percent in 2001, one of the sharpest increases ever (Centers for Medicare and Medicaid Services, 2003). Many expect the combination of rapidly rising health care costs and a sluggish economy in 2002 to show a similar surge. Such economic pressures are not sustainable and are expected to result in labor, social and political unrest in the near future. In addition the events of September 11th 2001 cast light on the inadequacies of the public health infrastructure and led to increased spending to address threats such as bioterrorism. These developments place reform of health care institutions in the United States at the center of public policy attention, once again.

6. COMPARATIVE HEALTH SYSTEMS: SOUTH AFRICA AND THE UNITED STATES

South Africa and the United States share a substantial reliance on the private sector, more so than most other nations of the world. This has driven up health spending as a share of GDP, as shown in Figure 1, as private competition financed by third party insurers has focused on new technology and resource intensity, instead of price. South Africa and the United States both share ambiguity over the role of insurance in the health sector, especially its role in providing a national entitlement. Some see this lack of clarity as symptomatic of fundamentally flawed, inequitable societies while others see it simply as the result of a high degree of cultural, social and economic heterogeneity. Ultimately, how equity in health services is addressed constitutes a paramount challenge that will help define each country for years to come.

[FIGURE 1 OMITTED]

The World Health Report 2000 found both the South African and American health systems wanting with respect to measures of technical efficiency and performance. South Africa ranked near the bottom of the 191 country list for both measures along with many other African nations. This was driven in large part by low life expectancy in the wake of the AIDS epidemic. The United States ranked 37 in performance and 72 in technical efficiency (World Health Organization, 2000).

Neither of these rankings is especially impressive and they result in part from high levels of health spending without proportionate improvements in levels of disability adjusted life expectancy. The United States allocated 5,039 dollars per capita to the health sector in 2001 (Heftier, Smith, Keehan, Clemens, Won and Zeeza, 2003). This is projected to rise to 9,972 dollars in 2012, assuming an average economy-wide inflation rate between 2 and 3 percent.

Table 2 provides a comparison of key parameters describing South Africa and the United States. The United States has a population that is six and a half times larger than South Africa. The AIDS epidemic will keep this gap from appreciably narrowing in coming years. The population of the United States is about 3.5 times more prosperous on average than that of South Africa. The purchasing power parity measure of per capita income converts South African per capita income in rands to dollars based on purchasing power rather than the prevailing market exchange rates. Prevailing exchange rates typically "undervalue" currencies of emerging countries. The Gini index is a measure of income inequality. An index of 0 represents perfect equality whereas an index of 100 implies perfect inequality. South Africa has a particularly high Gini index. In fact, only a few countries such as the Central African Republic (61.3) and Brazil (60.7) have higher Gini indices. In South Africa, the highest 10 per cent income earners receive 45.9 percent of the total. By contrast, the highest 10 per cent in Sweden and Japan receive 20.1 and 21.7 per cent of the total respectively. The lowest Gini indices and most equally distributed incomes, according to the World Bank, are the Slovak Republic (19.5) and Belarus (21.7). The United States has a much lower Gini index (40.8) than South Africa. But this is high for developed countries. The highest 10% of United States income earners garner 30.5 percent of the total. Life expectancy at birth in the United States is 60 percent higher than in South Africa. This gap has widened substantially in recent years as a result of the devastating impact of AIDS in South Africa. Infant mortality is nearly nine times greater in South Africa than the United States, a statistic that indicates both the level of development and a skewed income distribution. Finally, adult illiteracy is 15 percent in South Africa compared to a negligible share in the United States.

Critics of South African and American health care often focus on what they believe are unacceptable levels of equity. This is no doubt an important and legitimate economic and policy issue. But these same critics are also quick to dismiss the importance of dynamic efficiency of health sectors. Dynamic efficiency refers to the ability of economic systems to adapt to changing circumstances and develop new technologies that offer improved productivity or new and useful products and services. The United States and to some extent, South Africa, have private sectors that have shown a high degree of dynamism and have developed, or at least, absorbed new medical and management technologies. This affords a degree of responsiveness that is not readily apparent when focusing narrowly on costs, outcomes and equity. The World Health Report 2000 had some of this shortcoming, although a responsiveness component was used as part of the ranking methodology employed (Coyne and Hilsenrath, 2002). Development of new technologies offer tremendous benefits to citizens not only of the South Africa and the United States, but around the globe, and progress in this regard should not be slighted in assessing the efficiency of health systems. Moreover, such progress has important effects on growth and employment. The health sectors in the United States and South Africa provide for much of the job growth that exists now and is expected to occur in the future. The history of economic development is to a very great extent, the history of new technology, and this era is no exception. Developments in health care technology, within limits, will shape employment, growth and human welfare for the foreseeable future, and the contributions of the United States and South Africa should be appreciated.

7. CONCLUSION

Arrow acknowledges in his Reflections piece that there is tremendous variation in health institutions around the world. These have evolved for historical reasons and many may have outlived there usefulness. For example, there is no particularly compelling reason to link health insurance to employment, yet this notion underpins much of health finance in both South Africa and the United States (Arrow, 2001). Or consider reliance on equity markets for finance in the health sectors of these countries. Other nations make greater use of public funds or bank finance. Debt is used extensively in the United States too, but largely in the form of bond finance.

For South Africa and United States, employment-based health insurance and extensive use of equity markets for capital formation, stand out as differentiating characteristics. Many economists in the United States have questioned whether employment-based health insurance is efficient or equitable. Policy recommendations have been made to roll back or at least cap the deductibility of employer health insurance contributions. But such recommendations have been met with substantial political resistance. Equity finance has not received as much attention as an institutional characteristic, perhaps because outside of pharmaceuticals and medical supply, it is a relatively new phenomenon. The benefits of equity finance include robust capital formation leading to more vigorous technical change and the introduction of useful new products and services, a high degree of responsiveness to consumer demand, and more broadly, economic growth. The costs include the high and rising resource consumption of the health sector and the opportunity costs that this entails, as well as concerns about equity for lower and even middle-income groups. The weighing of costs should take into account costs of social instability that may arise from creation of medical technology that falls outside of what a society can, or at least is willing to finance. South Africa is currently subject to increased social pressure to provide costly treatment for the HIV positive population. The government has so far been unwilling to provide a broadly responsive program and the social costs to this resistance are mounting. This kind of social instability may become much more widespread in the future not only in South Africa, but in the United States and throughout the world.

Ten years prior to Arrow's article, Clarence Ayres published a piece, also in the American Economic Review, asserting that neoclassical economics with its emphasis on price, output and equilibrium was unable to adequately address technical change (Ayres, 1953). Ayres argued that technical change was the defining feature of modern economics and that it ultimately had a determining role in shaping institutions. Eventually, after substantial social stress, institutions yield to new ways of producing and distributing health services. This notion is consistent with Arrow's view but Arrow never explicitly entertained this facet of how circumstances shape institutions. Yet, over the long run, the rapid advances in health technologies that appear to be outpacing our ability and willingness to finance their dispersion throughout society may well shape health institutions much more dramatically than have information asymmetries.

Changing institutions such as employment-based health insurance or equity-financed health products and services would undoubtedly entail large costs and generate substantial political resistance. But the benefits of change may eventually be of sufficient magnitude to justify systematic change of this nature. This will no doubt be attended by the increased attention of economists, health policy analysts and the public at large to determine not only how much and what we can afford, but even if we should retard the pace of technical change to keep it in pace with what is deemed affordable. In this respect perhaps South Africa is leading the way as it grapples with how to confront the AIDS epidemic in a health sector characterized by a high degree of private sector participation.

TABLE 1: FIVE MAJOR SCHOOLS OF ECONOMISTS

Austrian School
Carl Menger (1840-1921)
Fredrick von Weiser (1851-1926)
Eugen von Bohm-Bawrk (1851-1914)
Ludwig von Mises (1881-1973)
Joseph Schumpeter (1883-1950)
Fredrick von Hayek (1899-1992)

Stockholm School
Knut Wicksell (1851-1926)
Gustav Cassel (1866-1945)
Erik Lindahl (1891-1960)
Gunnar Myrdal (1898-1987)
Bertil Ohlin (1899-1979)

Lausanne School
Leon Walras (1834-1910)
Wilfred Pareto (1848-1923)
Wassily Leontief (1906-1999)

Cambridge School
Alfred Marshall (1842-1924)
Arthur Pigou (1877-1959)
John M Keynes (1883-1946)
Denis H. Roberson (1890-1963)
Joan Robinson (1903-1985)

American Institutionalists
Thorstein Veblen (1857-1929)
Herbert Davenport (1861-1931)
John Commons (1862-1945)
Wesley C. Mitchell (1874-1948)
Walton Hamilton (1881-1958)
Clarence Ayres (1891-1972)

TABLE 2: COMPARATIVE DESCRIPTIVE STATISTICS

                                         South Africa     United States

Population 2001                          43.2 million     284.0 million
Purchasing Power Parity Per              $9,510           $34,870
  Capita Income (2001)
Gini Index                               59.3 (1993-94)   40.8 (1997)
Life Expectancy at Birth (2000)          48               77
Under 5 Mortality Rate Per 1000 (2000)   79               9
Adult Illiteracy Rate (2000)             15               --

Source: The World Bank, World Development Report 2003: Sustainable
Development in a Dynamic World, Transforming Institutions, Growth
and Quality of Life, Oxford University Press, New York 2003.

8. REFERENCES

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Williamson, O., "Kenneth Arrow and the New Institutional Economics", in Arrow and the Foundations of the Theory of Economic Policy, edited by Feiwel, G., New York University Press, New York, 1987.

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Dr. Peter Hilsenrath is Professor in the Department of Health Management and Policy at the University of North Texas Health Science Center. He earned his Ph.D. in economics from the University of Texas at Austin and has since held positions at the University of the Witwatersrand, the Center for Naval Analyses and the University of Iowa.

Dr. Fernando Trevino is Dean and Professor of the School of Public Health at the University of North Texas Health Science Center. He earned his Ph.D. in Preventive Medicine and Community Health from the University of Texas Medical Branch at Galveston and later served as Executive Director of the American Public Health Association.

Dr. Karan Singh is Professor and Chair of Biostatistics and has been serving as Acting Chair of the Department of Health Management and Policy. He earned his Ph.D. at Memphis State University and was with the University of Alabama at Birmingham before coming to the University of North Texas Health Science Center.

Dr. Samuel Levey is Gerhard Hartman Professor of Health Management and Policy at the University of Iowa. He obtained his Ph.D. in Hospital and Health Administration from the University of Iowa and held previous positions with the State of Massachusetts as its first Medicaid Director and with the City University of New York.