User charges and priority setting in health care: balancing equity and efficiency

User charges are the major source of finance for many health care systems. However, traditional approaches to health care priority setting, such as cost-effectiveness analysis, usually assume there are no user charges and therefore may ignore important implications for equity and efficiency. This paper therefore develops a rudimentary model of priority setting in which the fixed health care budget can be augmented by user charges. The paper uses methods analogous to models of optimal commodity taxation to develop a set of rules for the inclusion of a health technology in the subsidized health care package, and the calculation of its associated copayment rate. The results indicate that optimal levels of subsidy depend on the cost-effectiveness of the intervention, its price elasticity of demand, the epidemiology of the associated disease, and the policy maker's attitude towards equity. The model has important implications for policy making in three domains: health care priority setting, evaluation of health care technologies, and charging policy.