Economic Analysis of the Public Health Reform——The Mechanism and Policy Design for the Optimal Resource Allocation between Prevention and Treatment

With an aging population, regular epidemic prevention and control, and increased health awareness among residents, the reform of the public health system has been put on an influential agenda. To analyze the economic mechanism that leads to the insufficient resource allocation to the overall health system and the unbalanced resource allocation between prevention and treatment, we build a general equilibrium model which includes a prevention sector, a treatment sector, and a general consumer goods sector. We find that in the market equilibrium, the prevention externality will lead to an under-allocation in the prevention sector and an over-allocation in the treatment sector; the social welfare loss increases with prevention externality and treatment efficiency and decreases with prevention efficiency and residents’ health awareness. When local governments aim at maximizing GDP, the resource allocation distortion within the overall health system is more serious, and the over-expansion of the general consumer goods sector exacerbates the deficiency of resources in the overall health system; the social welfare loss is increasing in prevention externalities, prevention efficiency, and people’s preference for health. Hence, adjusting the incentives of local officials is also an essential issue in reforming the public health system.