Estimating the Health Effects of Expansions in Health Expenditure in Indonesia: A Dynamic Panel Data Approach

The marginal productivity of a country's healthcare system refers to the health gains produced per unit change in the level of spending. In budget-constrained settings, this metric reflects the opportunity cost, in terms of health gains forgone, of committing additional or existing resources to alternative uses within the healthcare system. It can therefore assist in evidence-based decisions on whether different interventions represent good value for money.

The aim of this paper was to estimate the marginal productivity of the Indonesian healthcare system using subnational data, and to use this to inform health opportunity costs in the country.

We define a dynamic health production function to model the stream of effects of current and prior public health spending decisions on population under-five mortality. To estimate the model, we use data from the 33 Indonesian provinces for the 2004-2012 period. The estimated elasticity is then translated into gains in terms of cost per DALY (disability-adjusted life-year) averted. We use dynamic panel data methods to address potential endogeneity issues in the model.

Our base-case estimates suggest that a 1% expansion in the level of health spending reduces under-five mortality by 0.38% (95% CI 0.00-0.76), which translates into a cost of averting one DALY of $235 (2019 US$).

With Indonesia aiming for universal health coverage, our results support these efforts by highlighting the associated benefits resulting from increases in public health expenditure and have the potential to inform the decision-making process about a suitable locally relevant cost-effectiveness threshold.