Abstract
Compared to its neighbors, Sri Lanka performs well in terms of health. Health care is provided for free in the public sector, yet households' out-of-pocket health expenditures are steadily increasing. We explore whether this increase can be explained by supply shortages and insufficient public health care financing or whether it is rather the result of an income-induced demand for supplementary and higher quality services from the private sector. We focus on total health care expenditures and health care expenditures for specific services such as expenses on private outpatient treatments and expenses on laboratory and other diagnostic services. Overall, we find little indication that limited supply of public health care per se pushes patients into the private sector. Yet income is identified as one key driver of rising health care expenditures, ie, as households get richer, they spend an increasing amount on private services suggesting a dissatisfaction with the quality offered by the public sector. Hence, quality improvements in the public sector seem to be necessary to ensure sustainability of the public health care sector. If the rich and the middle class increasingly opt out of public health care, the willingness to pay taxes to finance the free health care policy will certainly shrink.