Costs, Spillover

When producing, selling, buying, or consuming a good or service affects people other than those directly involved in the market exchange—for example, when a factory emits smoke that pollutes the air breathed by those in the vicinity—the economic activity is said to “spill over” and impose costs (or confer benefits) on people other than those directly involved in the transaction. Economists call spillover effects externalities. The extent of spillover effects in healthcare is one of several features that contribute to the failure of private markets to achieve efficient results and health-related outcomes relative to their costs. Externalities serve as one rationale for public-sector involvement in healthcare.

Spillover effects must be taken into account when evaluating the impact of healthcare services, their financing, and their delivery in cost-benefit or cost-effectiveness analyses and when making decisions about how healthcare resources should be invested. The level and distribution of health status and longevity within a population can also have economic impacts (both financial and in terms of well-being) beyond the individual level.

Classic examples of spillover effects in public health and health services are the transmission and control of communicable diseases and immunization, cases for which untreated disease or services to the individual have costs or benefits for others. Because communicable diseases impose costs (spread of disease to others) beyond those borne by the individual infected, the willingness of the individual to pay for the disease's prevention or treatment may be less than the total value to the community of taking action to prevent the spread of the disease. This circumstance justifies public provision or subsidy of services to prevent disease transmission.

Another spillover effect in healthcare stems from the value individuals place on others' access [Page 239]to and use of needed healthcare. In this case, the rationale for public financing or provision of healthcare is that the welfare of individuals who are taxed or otherwise support health services provided to unrelated others is increased because this subsidy satisfies a moral sentiment of altruism or justice. The provision of healthcare or health coverage to others in a community (local or national) is deemed a “merit good.”

The ability to identify and measure spillover effects of an activity or policy depends on what is encompassed by an analysis and the perspective that is adopted in conducting it. A study of the overall use of medical services by Medicare end-stage renal disease (ESRD) patients exemplifies this point. Providers of routine dialysis services receive a capitation payment from Medicare for outpatient services only. The cost of each dialysis treatment depends on its intensity, measured in terms of the rate of urea removal during the procedure. Avi Dor found that less intensive dialysis treatments resulted in higher rates of hospital admissions among Medicare ESRD patients. From the perspective of the outpatient dialysis provider, the cost of lower intensity of outpatient treatments on hospitalization rates accumulates—this cost is manifested by the outpatient provider and is most pronounced in the worse health of patients receiving the less intensive treatment and higher overall Medicare costs for ESRD care. The full impact of the Medicare outpatient ESRD capitation rates and provider treatment decisions can be captured only when a broader analysis is undertaken.

...