Some countries couple more or less universal public insurance with private provision of medical care. Examples include the U.S. insurance programs for the elderly (Medicare) and the poor (Medicaid) and the Australian, French, and German health care systems. In much of the developing world, universal health care translates into government financing and provision along with parallel out-of-pocket costs and insurance purchases from the private health sector, mandatory wage taxes, or general revenue that underwrites health care costs. Transition countries, with their history of generous government financing and provision, now combine public provision and finance with some private sector activity and informal, under-the-table payments to public providers.

Relatively open-ended public insurance coverage, in conjunction with strong profit motives in the private sector, can often lead to inefficient levels of care, such as overprescription of drugs and unnecessary procedures. Not facing the (marginal) cost of their decisions regarding the use of services, physicians order and patients opt for excess testing, treatment, and other benefits. Even if there is no agency problem between provider and patient, insurance leads to overconsumption. To control costs, these moral hazard effects have led to the introduction of provider payment arrangements that reward performance and discourage overspending (for example, prospective payments systems), rationing of care, and other cost-control measures.

Physician agency, adverse selection, and moral hazard together suggest that health care services will be provided excessively to people with insurance and deficiently to people without. In practice, however, the failures of the medical care market are more nuanced. While spending might be excessive in some countries, the actual delivery of useful services does not always follow suit: far from spending and getting too much, society spends too much and gets too little. Similarly, the theory of adverse selection implies that the bad (risks) will drive out the good (risks), but policy makers usually express exactly the opposite concern: that people with high risks will not be able to afford insurance. Publicly financed insurance is then likely to appear expensive, precisely because it covers relatively expensive, high risk individuals.

# **_Cross-Country Evidence on Health Care Spending and Health in Developing and Transition Countries_**

Cross-country evidence on the link between health care spending and health status is not encouraging. Both market _and_ government failures combine to complicate the design of health policy, in general, and the financing and delivery of health care, in particular. Indeed, considerable debate continues over what effect, if any, public spending on health care has on health in developing and transition countries. At first, this ambiguity seems surprising: surely spending on widgets should produce widgets?

The reasons why public spending on health care might not improve health, as set out by Filmer, Hammer, and Pritchett (2000), are economically straightforward. First, if there is a functioning private market for health care, public spending may simply replace private activities, rather than adding to the aggregate supply of health care. Second, public purchase of health care services does not necessarily assure their delivery to patients: doctors who are paid but do not show up to work, drugs that are procured but are siphoned off, and diagnostic equipment that lies idle for lack of maintenance or complementary inputs, such as electricity or skilled labor, all contribute 25