Public Intervention in Health Insurance Markets: Theory and Four Examples from Latin America

This article examines rationales for public intervention in health insurance markets from the perspective of public economics. It draws on the literature of organizational design to examine alternative public intervention strategies, including issues of contracting, purchaser provider splits, and regulation of competition. Health insurance reforms in four Latin American countries are then considered in light of the insights provided by the theoretical literature. Health care expenses and lost labor earnings due to illness—not to mention the direct effects of feeling lousy and dying young—represent a major source of risk for individuals and families. Exposure to such risks is costly in itself (if individuals are risk averse), but can also have long-term effects, especially on the poor. Selling assets, withdrawing children from school to care for ill parents, and exiting the labor market can leave low-income families trapped in poverty. This article addresses the role of government in spreading and reducing health risks with particular emphasis on the design and organization of the relevant institutions in Latin America. Faced with wide disparities in both health needs and access to medical care across regions and income groups, and with continuing pressures on public finances arising from the macroeconomic crises of the 1980s and 1990s, a number of countries in the region have adopted wide-ranging health sector reforms that continue today (Greene, Zevallos, and Suarez 1999). Generally, among the higher-income countries, there has been a move toward extending explicit insurance coverage to those outside the formal labor market. At the same time, these countries have examined the ways in which insurance and health care have been delivered and have instituted reforms that are meant to improve allocative and production efficiency in the sector. Lower-income countries in the region have not proceeded as far in terms of explicit health insurance reform, which requires a certain administrative capacity, and have tended to concentrate on running public hospitals and clinics better.