Are user charges efficiency‐ and equity‐enhancing? A critical review of economic literature with particular reference to experience from developing countries

User charges have come to play a significant role in the financing and delivery of publicly provided health services in many developing countries. As a response to health care financing crises, user charges are often promoted as a way of rationalizing the use of care, raising revenue, and improving the coverage and quality of services. The primary purpose of this paper is to provide a critical review of the main arguments for the efficiency- and equity-enhancing potential of user charges. The extent and scope of welfare gains from user charges are found to be very limited in practice. Using a less restrictive theoretical choice model and estimation technique, the most recent demand studies' findings indicate that household's utilization of health services are more responsive to changes in price and income than was initially reported by the early demand studies. Response to price changes are also found to be greater among the poor than the rich. These findings, combined with modest retained fee revenues and the failure of exemption mechanisms to protect the poor tend to cast doubt on the net benefits of user charges policy, particularly in the area of equity. Copyright © 2001 John Wiley & Sons, Ltd.