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Session: Sub-National Health Expenditure
Room: Meeting Rooms 25+26
Time: Thu 10:15-11:30

Presenter: Massimiliano Piacenza (University of Torino. Department of Economics and Public Finance "G. Prato")

Abstract

As shown by Bordignon and Turati (2009, JHE), in Italy (as in other federal countries) health expenditure stems from the strategic interaction of different levels of government: the Regions (entitled of the power of spending) and the Central Government (that defines the amount of financing). The historical experience has shown this system to generate huge deficits, that the Central Government generally bail-outs after some years and in a certain amount. Clearly, this kind of situation can easily degenerate in soft budget constraint (SBC) problems. In other words, a given region - knowing that in case of financial difficulties will be bailed out by Central Government - can adopt an opportunistic behaviour, and spend more that in the case of no-bail out policy by Central Government, inefficiently inflating expenditure. It is the expectation of an intervention in case of financial distress that increase regional spending and inefficiencies.
Of course, in the policy debate Regions are always suggesting that deficits are generated because funding from the Central Government is not enough to guarantee health services to all citizens. On the other hand, Central Government is claiming that expenditure can be controlled better by cutting inefficiencies in the production of services. Who is right? How much of the expenditure is due to inefficiency? And are these inefficiencies influenced by expectations of future bail outs?
We exploit the history of the Italian NHS to test whether expectations of future bail out impacted on the inefficiencies in health expenditure. We apply Bordignon and Turati (2009, JHE) methodology to identify expectations. These authors showed that future bail out expectations had a sizeable impact on (total) expenditure, but did not separate efficient and inefficient expenditure. As the SBC is a problem of opportunistic behaviour, bail out expectations should have an impact only on inefficiencies, and not on the efficient part of health expenditure. Following the stochastic frontier approach proposed by Greene (2004), we estimate a regional efficiency index to identify the inefficient component of health expenditure. We then study the role of expectations in influencing both components of regional spending. Results suggest that bailout expecations affect only inefficiencies and have no real effects on citizens' health.

Key Terms

Health expenditure, bailout expectations, inefficiencies, citizens' health

Authors:

Massimiliano Piacenza (University of Torino. Economics and Public Finance) and Gilberto Turati (University of Torino. Economics and Public Finance)

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