Academic journal article NBER Reporter

Subsidies for Health Products

Academic journal article NBER Reporter

Subsidies for Health Products

Article excerpt

Adoption of health products could lessen the burden of infectious disease in developing countries. In a series of studies using experimental data from Kenya, my colleagues and I have explored the role of subsidies in both short- and long-run adoption of such products, and studied how subsidies might be targeted.

Full Subsidies Increase Adoption in Both the Short and Long Run

Three studies examine the role of subsidies in the adoption of preventative health technologies. Subsidies for such products can be justified in two ways: first, because the diseases they prevent are often infectious, these technologies generate public health benefits. Second, people may be more likely to know the health effectiveness of a product if they or others around them have had an opportunity to try it out cheaply in the past.

For subsidies to successfully generate such health and learning effects, households need to make effective use of the products they receive at a highly subsidized price. However, they may not do so for two reasons. First, households that are unwilling to pay a high monetary price for a product also may be unwilling to pay the non-monetary costs associated with daily use of the product, or may not actually need the product at all. In other words, indiscriminate subsidies may undermine the screening or allocative effect of prices. Second, subsidies could reduce the potential for psychological effects associated with paying for a product, such as a "sunk cost" effect in which people, having paid for a product, feel compelled to use it.

In a first study, Jessica Cohen and I use a two-stage randomized design to estimate the distinct roles of the screening and psychological sunk-cost effects in the use of long-lasting anti-malarial bed nets in rural Kenya. (1) These nets cost $7, and they prevent bites from malaria-carrying mosquitoes while sleeping. We randomize the price at which prenatal clinics offered nets to pregnant women, who are particularly vulnerable to malaria. The clinics charged either nothing (free distribution), or 15, 30, or 60 U.S. cents. A random subset of women who had purchased a net for either 30 or 60 cents subsequently received a surprise rebate. We find that the rate at which pregnant women used the net (measured through home observation visits two months later) was relatively high (60 percent) and was completely independent of the price they paid for the net, either initially or after the surprise rebate. In other words, there is no evidence of either a screening or sunk-cost effect of prices in that context. On the other hand, our take-up results show that demand is very sensitive to price: the likelihood that pregnant women acquired a net fell from 99 to 39 percent when price increased from zero to 60 cents. Thus the effect of the subsidy on coverage, and hence its potential for public health outcomes, decreases very rapidly as the subsidy level declines.

In a second study conducted on a sample of households with school-aged children, also in Kenya, I find that demand becomes slightly less price sensitive if subsidies are in the form of vouchers that households have three months to redeem at local retail shops. Overall price remains the primary driver of demand, with the purchase rate dropping from 73 percent when the price is $0.60 to around 33 percent when the price reaches $1.50 (still an 80 percent subsidy) and to 6 percent when the price reaches $3.50 (corresponding to a 50 percent subsidy). Various marketing strategies (for example, making the morbidity burden or treatment costs salient, targeting mothers, or eliciting verbal commitments to invest in the product) fail to change the slope of the demand curve. (2) Here again, the price paid does not matter for usage. In fact, home observation visits show that the usage of bed nets acquired through a subsidized voucher was extremely high, rising from 60 percent at a three-month follow-up to over 90 percent after one year, and thus across all price groups, including recipients of fully subsidized net. …

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