Are more resources always the answer? A supply and demand analysis for public health services in Brazilian municipalities

The aim of this paper is to determine whether it is necessary to increase available resources to local governments or if better use of these funds is sufficient. The paper contributes to the literature by looking both at the supply and demand for public health services. If the demand is estimated correctly, one can compare its expected value to actual health expenditures. Even if actual expenditures are lower than the estimated demand, it is not certain that additional spending is necessary. If the efficiency scores (supply side) indicate that local governments can simply “save” resources to make up for the difference, then it is possible to reduce (or bring to zero) new resources only by requiring local governments to efficiently manage their expenditures. Since municipalities in Brazil are very heterogeneous, we estimate their efficiency using the metafrontier approach (O’Donnell et al., 2008), while we estimate the demand through an equation derived from the median voter theorem model. Using 2010 data, we find evidence that efficient management of spending is sufficient to meet excess demand for goods and services in the health sector.