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Standard economic analysis treats illness as imposing two kinds of costs on society: the direct cost of caring for the ill and preventing further illness and the indirect costs of human assets lost through morbidity and mortality. Economic research examines both the magnitude of these costs and their distribution among members of society. These estimates are then used to assess the effects of disease on the vitality of the economy and to measure the cost-effectiveness of programs of disease prevention and treatment.

HIV/AIDS infection is a very costly disease in an economic sense. Although the direct costs are similar to those of other serious illnesses, the indirect costs are greater because HIV affects predominantly working-age adults. The high direct and indirect costs suggest that the HIV epidemic may pose a threat to the economic well-being of severely affected regions.

The direct costs of illness comprise costs of medical care and funeral expenses and of research and prevention. Estimates of medical care costs are highly sensitive to the stages of disease and care settings included in the calculations. In principle, the costs of care should include all costs incurred from the moment of infection until death, regardless of the setting in which they occur. In practice, most researchers have, of necessity, examined costs only from the time of diagnosis with an AIDS-related opportunistic infection until the end of a fixed study period. These estimates typically exclude the early costs of HIV infection, which can account for as much as 40 percent of the lifetime medical care cost of the disease; they may also underrepresent expenses in the later, most costly stages of illness. Most studies have collected data from only a few care settings, often only inpatient hospital facilities. Even where the full range of paid medical services is included in a study, care provided by unpaid caregivers, whether volunteers or family members of people with AIDS (PWAs), is often unmeasured.

Despite these limitations, several conclusions can be drawn. In most countries, the annual cost of treating a PWA is between one and two times per capita income. Costs of treatment vary with treatment patterns, particularly with the use of expensive drugs and the rate of hospitalization, but they do not differ systematically according to sex, race, or mode of transmission. Although the introduction of new, expensive drugs for the treatment of HIV might have been expected to increase the costs of treatment, costs have generally declined since the mid-1980s, as providers have become more experienced in treating the disease and, in many countries, HIV care has been shifted to less costly settings outside hospitals. In developing countries, funeral expenses constitute a substantial portion of direct costs. The HIV epidemic has also led to increases in the direct medical care costs associated with the treatment of HIV-related opportunistic infections, particularly tuberculosis, in the non-HIV-infected population.

In addition to the costs of treatment, the epidemic diverts resources that might be used otherwise to the prevention of new infections and the development of more effective treatments. At the national level, these costs are incurred primarily through testing blood and heat-treating blood products, improving sexually transmitted disease treatment, implementing safety precautions in health care settings, tracking the disease, and educating the public about the risks of the disease. Individuals may also incur costs through behavioral changes such as personal HIV testing or condom use. The nature of HIV transmission and the long latency period of the virus mean that nations incur substantial costs for HIV prevention before they observe many AIDS cases. Although these expenditures may be cost-effective, more than paying for themselves in the form of future infections prevented, they constitute a significant share of the economic costs of the epidemic. In the early 1990s, prevention costs in most affected countries ranged between 20 and 40 percent of total direct costs, with only a few countries spending more on prevention than on medical care.

The morbidity and mortality of the populations who develop AIDS account for the bulk of the costs of the disease. These indirect costs are typically measured by the value of earnings forgone through illness and premature death, which does not account for the pain and suffering of those who develop AIDS and of their families. Costs are computed by summing the annual earnings of individuals whose labor market characteristics are comparable to those of PWAs, adjusting for the probability of survival to each future age and discounting to adjust for the difference in the value of earnings received today and those forgone in the future. Calculation of indirect costs uses information on labor market participants, but these calculations are also used to represent the costs of individuals, such as mothers of young children, not employed in the formal labor market. Although medical care costs of up to twice the per capita share of the gross national product (GNP) are incurred annually during the course of symptomatic illness, indirect costs of approximately once per capita GNP are incurred both during periods of severe illness and for every year of life lost owing to disease. Thus, even with discounting, indirect costs typically amount to three to ten times lifetime direct costs per case.

The indirect costs of the epidemic vary with certain characteristics of those affected. In practice, most estimates adjust only for the age and sex of PWAs but do not account for their education, training, and labor market experience. The labor market qualifications of PWAs vary among affected areas. Some epidemiological evidence suggests that in African countries, those with more education have higher rates of HIV prevalence than do the less well educated. In these countries, the indirect costs of AIDS will be disproportionately high. In developing countries, however, HIV infection is increasingly found among less-educated segments of the population.

The distribution of payment for both direct and indirect costs of the epidemic depends on the institutional structure of each country's health care and social welfare systems. Expenses for prevention and research are usually paid by all taxpayers through national governments. In countries with universal public health insurance, medical care costs are dispersed among all taxpayers. Social insurance systems provide disability and welfare payments that disperse the burden of indirect costs. Where PWAs own private health, disability, or life insurance, the costs of their illness are spread among others with such coverage. In countries with less comprehensive health and social insurance systems, PWAs and their families bear much of the cost of treatment, morbidity, and mortality. In many communities, extended families bear the burden of caring for the children of those who have died of AIDS.

PWAs and their families pay the costs that they bear either by reducing their savings, selling their assets, or increasing the work effort of healthy family members. In developing countries, increasing family work effort may mean sending children to work rather than to school. Families that lose adult members may also stop producing labor-intensive export crops for cash and instead produce less labor-intensive subsistence crops for food.

Nations pay the costs of the epidemic by reducing national savings (or by borrowing), by raising taxes, or by diverting money from other government programs, often from other health care programs. In poor, severely affected African countries, the medical care costs of AIDS may consume over 50 percent of the national health budget by 2000. The direct cost of AIDS will be manifested in the form of reduced care for those with other diseases.

The AIDS epidemic will slow the growth of the economies of all affected countries by increasing the consumption of medical resources and through morbidity and mortality. The impact of the epidemic on the growth of per capita income is less obvious. Although AIDS will destroy productive human assets, it will also reduce the number of people among whom remaining income is divided. The net effect will vary depending on three factors: the number of cases in a country, the characteristics of those affected, and the method of financing the direct and indirect costs of the disease.

In developed countries, these factors all suggest that the epidemic is not likely to affect per capita income growth at the national level. In many developing countries, however, AIDS is projected to affect a substantial percentage of the population. If the epidemic in these countries disproportionately affects groups whose labor market characteristics are better than average, per capita income growth may decline because of a reduction in the supply of skilled workers. If the costs of the epidemic are paid through reductions in personal and national savings, per capita income growth will slow because of a decline in the supply of capital.

Economic models suggest that in those countries where all three of these factors work to diminish income growth, the AIDS epidemic may reduce per capita growth by as much as 0.3 percent per year. The effects will be much smaller in most developing countries, where the three factors typically work in different directions. Data available through the mid-1990s did not show evidence of declines in per capita income as a consequence of the epidemic.

The AIDS epidemic may also slow income growth through its effects on investments in education and training. Education levels will fall if children of PWAs and orphaned children leave school and begin work. Investments in schooling may also decline if uncertain life expectancies reduce perceived returns on such investments. Similarly, employers are less likely to invest in improving the skills of employees who may contract AIDS. The magnitude of these effects is unknown.

Related Entries:

Health Care Reform; Insurance; International Organizations; Legislation, U.S.; Migration; National AIDS Programs; Poverty; Public Assistance; Workplace Issues

Key Words:

direct cost, economics, indirect cost, per capita income

Further Reading

Ainsworth, M., and A. M. Over, "The Economic Impact of AIDS on Africa," in AIDS in Africa, edited by M. Essek, S. Mboup, P. J. Kanki, et al., New York: Raven, 1994

Bloom, D. E., and G. Carliner, "The Economic Impact of AIDS in the United States," Science 239 (1988), pp. 604-610

Bloom, D. E., and J. V. Lyons, eds., Economic Implications of AIDS in Asia, New Delhi, India: United Nations Development Program, 1993

Fitzsimmons, D., V. Hardy, and K. Tolley, eds., The Economic and Social Impact of AIDS in Europe, London: Cassell, 1995

Philipson, T. J., and R. A. Posner, Private Choices and Public Health: The AIDS Epidemic in an Economic Perspective, Cambridge, Massachusetts: Harvard University Press, 1994

World Bank, World Development Report: Investing in Health, New York: Oxford University Press, 1993

The Encyclopedia of AIDS: A Social, Political, Cultural, and Scientific Record of the HIV Epidemic, Raymond A. Smith, Editor. Copyright © 1998, Raymond A. Smith. Carried by permission of Fitzroy Dearborn Publishers.

Encyclopedia of AIDS $25 US/832 pp/Illustrated

For more about this book, or to order, click here.

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It is a part of the publication The Encyclopedia of AIDS.