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Economía 7.1 (2007) 29-72

Assessing Health Reform in Colombia:
From Theory to Practice
Alejandro Gaviria
Carlos Medina
Carolina Mejía

Colombia implemented an ambitious health reform in 1993. Its key component was a radical transformation in the financing of health care provision, particularly for lower income individuals. Historically funding had flowed through supply-side subsidies in the form of direct transfers to public hospitals. The reform attempted to redirect resources to demand-side subsidies (that is, transfers targeted to poor citizens) through a system of health care vouchers. The basic assumption of the reform was that after a transition period, public service providers would cover their costs through the sale of services (partially in exchange for these vouchers), and competition would force them to become more efficient.

This paper describes the institutional aspects of the reform and discusses the difficulties that transferring funding from supply- to demand-side channels entailed. While the reform substantially increased health insurance coverage, progress was slower than forecast and entailed a substantial increase in expenditure. A central reason for the latter was that the introduction of voucher financing was not accompanied by an equivalent reduction in supply-side funding; the net result was nearly a doubling of expenditure. Additionally, competition has not resulted in the exit of seemingly inefficient public providers.

The second part of the paper evaluates the impact of the subsidized regime that the reform introduced to benefit the low-income population. We explore [End Page 29] the subsidized regime's effect on four areas: health outcomes measured through self-reports on health status and on the number of days that individuals were unable to perform regular activities; the use of medical services (specifically, preventive consultations, illness-related consultations, and hospitalizations); household consumption of nonhealth goods; and labor force participation. Assessing these impacts is difficult because of the endogeneity of enrollment in the subsidized regime, an issue we address using an instrumental variables strategy. Enrollment in the subsidized regime is administered by municipalities, and it seems to depend on social and political connections. We therefore use measures of the length of time the household head has resided in his or her current municipality as an instrument for enrollment.

Our results suggest that the subsidized regime has a positive effect on self-reported health and on the use of both preventive and illness-related consultations. Enrollment also seems to lessen the frequency of hospitalizations. Finally, it appears to have an adverse effect on consumption and labor market participation.

The remainder of this paper is organized as follows. The next section describes the reform and analyzes its implementation problems. The paper subsequently presents our evaluation exercise, summarizing relevant literature, outlining our empirical strategy, and presenting results. The final section concludes.

Colombia's Health Reform: Background, Assumptions, and Results

This section presents a description of the main institutional innovations introduced by the reform, the assumptions behind these changes, and their results. The discussion emphasizes the differences between the expected and the actual results of the reform.

Institutional Aspects

Prior to the reform, the Colombian health care system consisted of three independent subsystems: public, private, and social security. The public system served individuals from the low and medium-low economic strata, who were not protected by any kind of medical insurance (about 70 percent of the population in 1985). The private sector catered to the high-income population (about 15 percent of the total) through direct charges or private insurance. [End Page 30] The social security system included two types of institutions with different target populations: the Social Security Institute (Instituto de Seguridad Social) covered formal private sector workers and was financed by employer and employee contributions, while the social security funds (cajas de previsión social) covered public sector workers and were financed directly by the state.

This system was perceived to have three types of problems: widespread inefficiencies, particularly in the public sector; low levels of coverage; and inequities in the access to services and low levels of cross-subsidization...


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