Two-tier situations, defined as those in which a single provider offers two services or price discriminates in selling one service are commonplace in low income countries’ health systems. Examples include the provision of public and private wards in public hospitals, exemptions, and sliding scale charging systems and health facilities that negotiate separately with multiple third party payers.\ud Analysis of these situations and their outcomes for access, quality of care and equity for health services has under emphasised the importance of the supply side incentives created. These are complex because demands for the services involved are likely to be inter-related with respect to price and quality and a provider cannot alter price or quality levels of one service without considering the implications for the other. \ud A model (previously published) designed to better understand the implications of the offer of more than one quality level in public hospitals suggests that low quality users may not benefit, especially where there are strong inter-relationships between the demands for the two services. Only subsidy levels responding to the utilisation of the low quality service can protect low quality service users, to some extent.\ud The model raises concerns for the implications of exemption policy, informal charging, insurance reform and pharmaceutical pricing. The incentives for providers to reduce quality of services provided to exempted patients have generally not been considered. The role of market structure in ensuring that all demands are catered for in an environment of informal pricing has not been studied. Insurance reforms have taken little account of product differentiation incentives inherent in models designed to produce universal access. Strategies that determine international differences in pharmaceutical prices may be undermined by changes in the economic conditions in high income countries. In each area a number of important areas of further research are suggested. \ud A model of two-tier strategies operating within a public hospital environment suggested that the implications for allocation of resources between the two tiers could be regressive given levels of cross quality and price elasticity between the two services of unknown plausibility (McPake et al., 2007 ). \ud \ud This paper explores the broader implications of the model for the wider range of scenarios crossing public and private sectors, reviewing relevant literature for instances of analytically similar market situations, evidence of cross-price and quality elasticity and analyses of impact in terms of resource allocation. \ud Analytically similar market situations arise in insurance, where alternative packages are offered in competition with each other by the same and competing insurance agencies. Choices made by consumers between alternative insurance packages reveal risk information (Rothschild and Stiglitz, 1976 ). They also reveal consumer preference information in ways that allow insurers to maximise producer (insurer) surplus through price discrimination. Insurers’ reactions to the information revealed in both respects have implications for resource allocation and the equity of outcomes. \ud \ud Other analytically similar situations arise in the pricing strategies of not-for-profit providers seeking to manage exemption systems in a manner that aims to cross-subsidise from richer to poorer users and in the ‘Ramsay pricing’ strategy argued to be operated by the pharmaceutical industry in pricing pharmaceuticals for different national markets. \ud \ud Cross-price elasticities can be inferred from some studies of demand for health services and pharmaceuticals, hence can be identified at some points in relation to level of health service demanded (pharmacy shop, primary, secondary etc.); market structure (more and less competitive), and shares of public and private in total expenditure. \ud \ud However, implications of the pricing strategies of market players, including public sector ones for resource allocation and equity are rarely evaluated except for in the cases of a few public policy areas such as changing basic fee levels in the public sector and to a limited extent with respect to the pharmaceutical pricing debate. \ud \ud This paper argues that there is significant scope to gain better understanding of the scope and strategies for cross-subsidy of poorer health system users by developing better models with wider applicability of inter-dependent demand functions and focusing empirical research on the testing of these models
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