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Viewpoint (April 2004)

Author: William Hisao , K.T. Lee Professor of Economics, Department of Health Policy and Management, Harvard University, Cambridge, Mass, USA  

One of the most urgent and vexing problem around the world is how to finance and provide basic health care for the two billion low-income rural residents in low and middle-income countries. Most of the residents are poor. Most countries try to serve this population by directly operating tax financed public clinics, organized on a traditional centrally planned model where the governments operate health center down to the sub-district level that covers 5,000 or more people, staffed by physicians and nurses. This form of financing and organization is a primitive version of the British National Health Service.

Under this model, equity is assured for health care when every citizen is eligible to receive "free" care at the public facilities. Unfortunately, most developing countries lack the tax base to produce sufficient revenues to adequately fund the public facilities, pay the staff with a reasonable compensation, and assure the availability of drugs and supplies (CMH/WHO 2001). As a result, the patients have to pay drugs and/or supplies, user fees and/or under the table payments when they seek services from the public facilities, while theoretically these services are free. Alternatively, peasants go to private practitioners and hospitals and pay out-of-pocket.

Moreover, governments often have difficulty to get qualified physicians to staff the clinics. Physicians often simply evade or refuse, or do not attend regularly, and/or they provide poor customer service. These facilities often lack drugs and supplies due to inadequate public funding and poor management.

On the other hand, peasants demand their basic primary care and drugs at the village level. Distance has significant effect on where and when peasants seeking treatment outside of home. (Hjortsberg, 2002; Diop et al, 1998; Liu et al, 2002). People resort more to home-remedy when no public sector primary care is located near by. Unsuccessful self-treatment leads to the extensive use of services from traditional healers, private practitioners and pharmacists. When a serious illness strikes, they flood into, and overcrowd the public and charity hospitals.

This prevailing model of rural health care created the following reality. Most rural households rely on self-care and purchase drugs locally for minor illnesses (or see indigenous practitioners), when people are seriously ill, they have to pay for supplies, drugs and/or inpatient hospital services at the sub-district and higher levels. Studies consistently found that the poor households pay a significant part of their income for health care, even when the government theoretically providing free or nearly free services . Many patients have to bankrupt their family to pay for the expensive services or forgo the treatment (Mugisha, 2002; Gottlieb, 2000). Studies found higher proportion of women and children have to forgo medical treatments.

Studies in many countries, including China and India found high medical expenditure is a major cause of poverty. The high expenditures usually arise from inpatient hospital services and costly outpatient drugs. Wagstaff (2003) found a significant percent of Vietnamese falls below the poverty line in 1998 due to health expenditure. Chinese studies found that 5% of the household in low income areas go into bankruptcy each year (Liu et al, 2002). Peters (2002) found similar result in India.

In sum, government funded public facilities have not been able to provide reasonable health care to the farmers. Two major factors caused this result -- inadequate funding and inability of most governments to deliver effective and efficient health care to the village and sub-district levels. Both causes must be addressed if we wish to provide reasonable basic health care and risk protection to the two billion people.

Rural Mutual Healthcare-- A horizontal program to achieve multiple purposes

In recently years, community financing has gained worldwide attention as a potential method in financing and delivering health care for the rural residents. Unfortunately, this term "community financing" has become a journalistic jingo that is used loosely to label any financing scheme that may involve some community contribution or involvement, generating vast confusion as to the nature, purpose, and success and failures of community financing schemes. Community financing has been used to label schemes ranging from drug revolving funds to private hospital sponsored and managed insurance schemes that residents buy; from village level community managed funds to government managed prepayment schemes that require residents to contribute to fund public facilities; from health card for outpatient services to micro-insurance. These schemes are very different in many aspects: the nature and purpose of the scheme, the size of population they can cover, benefit structure, extend of risk pooling, and management (CMH/WHO 2001).

This paper argues that one type of community financing, hereafter referred as Rural Mutual Healthcare (RMHC), has the greatest potential to cover a large portion of the two billion poor farmers, if it's designed and implemented properly. RMHC aims to achieve two purposes: fund and provide cost-effective basic health care and drugs, and provide greater protection for the rural residents from impoverishment arising from health expenditures.

What is a RMHC? It recognizes the reality that the government lack sufficient revenues to fully fund basic health care for the poor farmers and the farmers are currently spending a significant amount out-of-pocket for health care. Under these circumstances, it's sensible to consider developing a prepayment scheme that's jointly funded by the government and the farmers. To do so, the government has to be willing to subsidize the demand side (i.e. the farmers) rather allocate most of its fund directly to the supply side. Under RMHC, the government funds the public goods, subsidizes low-income households to motivate the farmers to enroll, and pay the premiums in full for the very poor. Recently, both China and India have adopted such policy.

With these governmental initiatives, two critical questions emerge: How much are the peasants willing to prepay? How can a RMHC entice the peasant to prepay for their health care? For peasants to be willing to prepay, certain basic conditions have to be satisfied. We hypothesize at least two factors influence their willingness to prepay: economic benefits and social capital (Hsiao, 1995; Bennett, Creese, and Monasch, 1998; Jowett et al, 2003). First, the expected economic value of health benefits and insurance, E(B), has to be greater than C, the premium. For this principleofE(B)>C to hold, the health services offered must be those preferred by the patients. For example, the RMHC has to assure that primary care services and drugs are accessible at locations close to the farmers..

Prepayment involves risk pooling and it leads to cross subsidy between the healthy and less healthy. The healthy people expect less tangible benefits than the sick so they would not enroll or enroll only when premium is very low. Yet, the success and sustainability of a RMHC depends on its ability to attract a large number of the healthy and young people to enroll along with the less healthy people. The social capital such as mutual concern for each other's welfare in a community could have significant influence on people's willingness to prepay even when an individual household is uncertain whether the expected benefit would be greater than the amount to be prepaid. Farmers may enroll for community solidarity reasons.

A contingent table (Table A) shows the skewed distribution of health expenditure. It illustrates the difficulty of pooling risks of a community on a voluntary basis and the potential adverse selection that can occur.

Table A: Contingent Table on the Distribution of Households' Total Annual Health Expenditure in Zhangjai Town, Zhen'an County, China (population: 9784). 1999
Top % of households Accumulated amount spent( in RMB) Accumulated spending as a percentage of total health expenditure

Top % of householdsAccumulated amount spent( in RMB) Accumulated spending as a percentage of total health expenditure
80%465,124 100%
90% 465,124100%

Source: From claim data of Zhangjai Town's CMS, compiled by author

Table A shows that in a given year, 1% of the household spent 20.7% of the total health expenditures in a rural community of approximately 10,000 people, 10% spent about 61.0% of the total. Approximately 70% of the low spending households had spent 14.8% of the total expenditure while 30% of farmers had no expenditure. The challenge for a RMHC is how to attract a significant portion of those low users to enroll.

In order for RMHC to attract a large percentage of the households to enroll, it must satisfy three conditions. First, a RMHC has to make its scheme attractive by improving the efficiency in producing health services and lowering the cost of drugs. By reducing the cost of production, the RMHC can offer peasants larger benefits for the same amount spent. More peasants are likely to enroll.

Second, the location of primary care and essential drugs must satisfy farmers' preference that is to have the primary care and drugs available within a reasonable proximity. However, the governments have not shown the capability to manage thousands of clinics at the village and township level. Achieving the efficiency gains and shift the supply of primary to the village level where peasants demand the services would require a major reform of the delivery organization and its management.

Lastly, farmers have another concern about prepayment. Household interview surveys of several countries consistently found peasants are worried about whether the funds will be used exclusively for their benefit. Corruption is a major worry as well as excessive spending on staff compensation and services that have less value to the patients Liu et al, 2002). Consequently, the organization that manages the fund must have peasants' trust and confidence before peasants would enroll. In many low-income countries, the government has not earned the trust and confidence of the people at the village and township level (CMH/WHO, 2002). When this is the case, a nation has to rely on NGO's that has the confidence of the people to manage the fund. They could include the existing local agricultural cooperatives, churches and mosques, funeral funds, or a newly formed community organization. This aspect-people's confidence and trust in the organization managing the fund-has to be a precondition for a community financing scheme's success.

In designing pilot RMHC scheme in China, our primary concern was to offer benefit packages that the peasants were willing to prepay. The considerations include services covered are those the farmers' demand, and with drug safety assured and the quality level meeting farmers' expectations. We also had to improve efficiency to increase the ratio of E(B) over cost. To achieve these purposes, we turned the decision-making power and control to farmers who have the greatest self-interest to make RMHC work and produce benefits the farmers want. Each community decides on the package to satisfy farmers' demand, not by government fiat. This approach, we believe, would increase the sustainability of RMHC.

The farmers, through a Board, control and manage a Fund Office that finances and organizes village health posts that deliver prevention and basic health care--a mini HMO. Best qualified village doctors are selected on a competitive basis, employed and compensated by salary plus bonus. Other than treating simple and common diseases, others will be referred. Village posts will stock essential drugs, purchased through a central drug distribution system to assure safety of drugs at minimum cost. These measures remove the incentive for village doctors from over-prescribing or use counterfeit drugs. The Fund Office also contract for services from health centers and hospitals.

In the case of China, our analyses found that the changes in the organization of the primary care and drug distribution system can produce significant savings. The alterations of payment system to village doctors, health centers and hospitals also would improve efficiency. In total, the production efficiency could be improved by 30% (CMH/WHO, 2002).

We discovered the local community has greater managerial capacity to manage the services for the patients' benefit at the village level. The enrollees can monitor the efficiency and quality of services much more effectively because they can directly experience the availability of the staff, drugs and supplies, the technical competency of the practitioner and the quality of custom services provided, and can observe daily the cleanliness of the health facilities. Of course, peasants have very limited management know-how of larger organizations, and knowledge of medical affairs to manage township health centers and hospitals.

A RMHC has to cover a large number of lives so the low risk events such as heart attacks can be pooled. Otherwise, insurance can't be established. In China, RHMC pools risk at town level with minimum 10,000 people. The benefit packages had to incorporate coinsurance and limits tertiary services because the amount that farmers' willingness to prepay was limited.

RMHC differs from other community financing schemes. For examples, the Thai Health Card which only prepays a limited number of outpatient visits while RMHC provides coverage for large medical expenses. RMHC differs from Tanzanian's Community Health Fund which experienced very low enrollment rate and serious adverse selection problems. The Fund did not change the organization in delivering the services. The prepaid services continued to be delivered at the sub-district level while farmers demand services at the village level. Also Tanzania did not significantly improve the management of their sub-district level health centers. Often shortage of drugs and supplies continued. Lastly, the Fund was not effective controlled by the farmers to reflect their preferences. The farmers only have some representation on the Fund's Board.

RMHC takes a systemic approach in reforming the health care and risk protection for the farmers. It alters the financing, organization, payment and regulation of rural health care.
Experience tends to show this type of community financing scheme can work, but it requires the implementers to include the essential features to make it a success. The essential features of RHMC can be summarized as follows:

  • Combine and integrate the public and private financial resources and organize them into a prepayment scheme for risk pooling.
  • Tap the initiatives at the grassroot level, empower the peasants while draw on the government to assist the grassroot efforts, to subsidize the poor, correct market failures, and set rules of the game for RMHC.
  • Create simple HMO's (financing and delivery integrated) at village level to improve accessibility of preventive and basic health care, and improve production efficiency. Select and employ qualified village doctors on competitive basis.
  • Create purchaser organization (community NGO) to represent farmers' interests and welfare. This NGO manages the funds and their use, operates with great transparency, and accountable back to the farmers.
  • Separate the purchaser from providers for medical services rendered at town and county levels to improve their efficiency and quality.
  • Establish effective drug distribution system, develop essential drug lists, use market competition to buy drugs through a bulk purchase system.

Further Reading

  • Bennet, S., A. Creese, R. Monasch. 1998. Health Insurance Schemes for the People Outside the Formal Sector Employment. Current Concerns Series. World Health Organization. Geneva: WHO
  • Commission on Macroeconomics and Health .2001. Macroeconomics and Health: Investing in Health for Economic Development. Report of the Commission on Macroeconomics and Health. Geneva: WHO
  • 2002. Mobilization of Domestic Resources for Health. Report of Working Group 3 of the Commission on Macroeconomics and Health. Geneva: WHO
    Diop, F. et al .1998. Household Health Seeking Behavior in Zambia. Technical Report No. 20. Partnerships for Health Reform. Bethesda, Maryland: Abt Associates Inc.
  • Gottlieb, S. 2002. Medical Bills Account for 40% of Bankruptcies. British Medical Journal 320:1295
  • Hjortsberg, C.A., C.N. Mwikisa .2002. Cost of Access to Health Service in Zambia. Health Policy and Planning 17(1): 71-7
  • Hsaio, W.C. 1995. Community Health Care. Paper presented at the International Seminar on Financing and Organization of Health Care for the Poor Rural Population in China, Fragrant Hill Hotel; Beijing, October 8-10, 1995
  • Hsiao, W.C. 1995. The Chinese Health Care System: Lessons for Other Nations. Social Science and Medicine 41(8): 1047-55
  • International Labor Organization. 2001. Social Security: A New Consensus.Geneva: ILO
  • International Labor Organization. 2001. Social Security: Issues, challenges and Prospects. International Labor Conference, 89th Session, Geneva: ILO
    Jowett, M., P. Contoyannis, N.D. Vinh. 2003. The Impact of Public Voluntary Health Insurance on Private Health Expenditures in Vietnam. Social Science & Medicine 56(2):3 33-42
  • Liu, Y, K. Rao, S. Hu. 2002. People's Republic of China: Towards Establishing a Rural Health Protection System. Manila: Asian Development Bank
  • Mugisha, F., B. Kouyate, A. Gbangou, R. Sauerborn. 2002. Examining Out-of-Pocket Expenditure on Health Care in Nouna, Burkina Faso: Implications for Health Policy. Tropical Medicine and International Health 7(2): 187-96
  • Peters, D.H. et al. 2002. Better Health Systems for India's Poor: Findings, Analysis, and Options. Washington D.C.: World Bank
  • Wagstaff, A., E. van Doorslaer. 2003. Catastrophe & Impoverishment in Paying for Healthcare: With Applications to Vietnam 1993-1998. Health Economics (In Press)


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