Course 5: Health Spending at the Base of the Pyramid

Demand at the Base of the Pyramid(1)

The base of the economic pyramid is made up of four billion low-income consumers, a majority of the world’s population.   Data from national household surveys reveals that the base of the pyramid makes up an overwhelming majority of the population in Africa, Asia, Eastern Europe, and Latin America and the Caribbean.  “Base of the pyramid markets are often rural and poorly served, dominated by the informal economy, and, as a result, are relatively inefficient and uncompetitive.” (2)

How much do those at the base of the pyramid spend on health care?  Spending on health is low, and a typical rural household in Uganda spends $183 per year. The measured base of the pyramid health market in Africa, Asia, Eastern Europe, and Latin America and the Caribbean is $87.7 billion. This number represents annual household health spending in 35 countries and covers 2.1 billion of the world’s population.

The first response to illness in many base of the pyramid households tends to be self-medication.(3)  Pharmacies or other sources of medicines are often the first point of access to health care, especially in rural areas where access to clinics, hospitals, and physicians may be limited. In nearly every base of the pyramid income segment, pharmaceuticals account for more than half of all health spending. As a result, the base of the pyramid often dominates national pharmaceutical markets.

In fact, base of the pyramid households in Africa spend between 51% (Uganda) and 87% (Sierra Leone) of their health budget on pharmaceuticals. The %age tends to be highest in the lower income segments and to decline slightly as incomes rise. In Latin America, except in Mexico, base of the pyramid households spend between 50% (Colombia) and 74% (Brazil) of their health budget on pharmaceuticals. The pattern is also found in most countries of Eastern Europe (69% in Russia) and in India (76%).

Supply at the Base of the Pyramid

When conceptualizing health spending at the base of the pyramid, it is important to remember that utilization of services is dependent on availability.  Thus, the statistics above are dynamic, as supply and demand form a two-way street.  For example, a lack of accessible health care services in developing countries may affect levels of health spending.  In other words, improving access to health care has the potential to increase rates of utilization.   

Historically, the base of the pyramid market has been largely ignored due to a perceived lack of entrepreneurial opportunities.  For example, pharmaceutical corporations have been hesitant to supply this market with new drugs, as many people are too poor to pay even the lowest prices needed to ensure profit.   However, this trend is beginning to change, as many are recognizing that there are innovative ways to reach this large underserved market.   In fact, the aggregate purchasing power of the bottom billion suggests significant opportunities for market-based approaches to improve their quality of life and “empower their entry into the formal economy”. (4)

“The focus on entrepreneurial activities as an antidote to the current malaise must focus on an active, underserved consumer community and a potential for global growth in trade and prosperity as the four to five billion poor become part of a system of inclusive capitalism.”(5) 

For example, health care models that can tap higher income segments to cross-subsidize services to lower income segments show promise as a way to extend even expensive services such as surgery to those at the very bottom of the pyramid.  One such model is Aravind Eye Care Hospitals in India. “The Aravind Eye Care Hospital system in India has standardized and streamlined cataract surgery to lower the cost so that everyone can afford the procedure.  The Aravind system relies on intensive specialization in every part of the work flow to generate efficiencies.  A surgeon, for example, typically performs 150 cataract surgeries every week, six times the number common among Western specialists.  To further lower costs, Aravind has created a sister organization, Aurolab, to manufacture intraocular lenses locally at prices one-fiftieth of U.S. prices, as well as the sutures and drugs used in surgery. An important part of its business model is multi-tiered pricing or cross-subsidization: fees from paying patients range from $50 to $330 per operation, including the hospital stay, but it performs 65% of its operations free of charge—for those, including patients from most BOP households, who cannot afford to pay."(6)

Free vs. Subsidized Care: The Debate over User Fees

In attempts to reach the underserved market at the base of the pyramid, policymakers have entered into a debate over whether user fees are ethical or effective.  User fees are small amounts of money that are charged upon utilization of health services.  National policymakers cite raising revenues as their main objectives for introducing user fees, a desire relating to concerns over the sustainability of health systems.  International analysts have also suggested using revenues from user fees to improve the quality of services and discourage over utilization, thereby generating efficiency and equity gains. (7)  In addition, user fees provide the potential for profit, which is often necessary in order to encourage innovative methods for reaching the poor.

Opponents of user fees attack them as a political strategy for shifting health care costs from the better off to the poor and the sick, pointing to the tradeoff between this method of raising revenue and maintaining access to care based on need rather than ability to pay.(8)  These policymakers argue that user fees contribute to unaffordable cost burdens imposed on poor households.  At the level of primary care, they say that such fees can deter poor patients from seeking care, encouraging self treatment and use of partial drug doses.(9)  In addition, they state that fees add to the other immense barriers that poor people face when seeking health care. (10)  In summary, these fees have the benefit of generating much needed revenue and discouraging unnecessary utilization, but have the potential negative effect of excluding low income individuals from necessary medical care.

National Health Insurance in Developing Countries

In the past twenty years, several developing countries have begun to implement national health insurance programs. National health insurance schemes are usual compulsory for certain segments of the population.  They are generally government sponsored, and premiums are not usually based on individual risk assessments.

A national health insurance scheme was proposed in Ghana in 1985 after a feasibility study was completed.  Consideration for this option arose out of the difficulties to finance health care.  Earlier attempts to recover government health care expenses through user fees produced less revenue than hoped and led policy makers to consider a national option.  In 2004 Ghana launched this national insurance program designed to offer affordable medical care, especially to the poor among Ghana’s 19 million people.(11)  Although health sector expenditure has risen over the years under the national program, health services remain poor, there is inequality in access and quality, and much of the population remains uninsured.

Although not a fully functioning national health insurance program, the government of Mexico has recently launched Seguro Popular, a major new effort to improve access to health services. Seguro Popular is a simple insurance scheme where poor families pay a small premium to cover health care.(12)  This program is one of the largest health reforms of any country in the last two decades and covers an additional 14% of the population every year.  Evaluation of this program is currently underway.

Footnotes

(1) Statistics from http://pdf.wri.org/n4b_chapter2.pdf.

(2) Hammond, AL. The Next 4 Billion. Market Size and Business Strategy at the Base of the Pyramid. WRI / IFC, Washington, 2007.

(3)http://pdf.wri.org/n4b_chapter2.pdf pp. 39.

(4) Hammond, et. al. "The Next 4 Billion." March 2007.

(5) Prahalad, C.K. and Hart, S.L. (2002) ‘The fortune at the bottom of the pyramid’, Strategy and Business 26(First Quarter): 2–14.

(6) Case study adapted from http://pdf.wri.org/n4b_chapter2.pdf pp.39.

(7) Gilson L. The lessons of user fee experience in Africa. Health Policy and Planning 1997;12:273-85.

(8) A. Creese, User fees. British Medical Journal 315 (1997), pp. 202–203.

(9) McIntyre D, Thiede M, Dahlgren G, Whitehead M. What are the economic consequences for households of illness and of paying for health care in low- and middle-income country contexts? Soc Sci Med (in press).

(10) Tibandebage P, Mackintosh M. The market shaping of charges, trust and abuse: health care transactions in Tanzania. Soc Sci Med 2005;61: 1385-95.

(11) GHANA: National health insurance scheme launched. Accessed 6 January 2010.

(12) Frenk et al., "Evidence-based Health Policy: Three Generations of Reform in Mexico," Lancet 362, no. 9396 (2003): 1667–1671.