Author: Nicholas Barr, Professor of Public Economics London School of Economics
Action to improve health and facilitate access to health care is important for individual well-being and national economic performance. But paying for health care is problematical. Equally vital elements of well being such as food are paid through out-of-pocket payments. But that approach does not work well for health care: unlike food, it is needed unpredictably and can be very expensive. On the face of it, the solution is private insurance. But this approach, too, does not work well because major information problems make individually risk-rated private insurance inefficient, expensive and unable to cover all medical risks. The US system, substantially reliant on private medical insurance, faces problems that are entirely predicted by economic theory.
All other advanced industrial countries finance health care out of a mixture of (limited) out-of-pocket payments, together with funding through social insurance, from taxation, or from a mixture of the two. Neither approach is perfect: systems with taxpayer funding of publicly-produced health care can be slow to innovate and to respond to consumer preferences; systems based on social insurance combined with private production face continual upward pressures on medical spending. Yet either is capable of delivering a reasonable combination of quality, access and cost containment.
What, however, of poorer countries with limited (or minimal) fiscal and institutional capacity? Public budgets in such countries cannot afford more than minimal health care systems; and individually risk-rated insurance is likely to face even more problems than in the West because of the limited regulatory ability of government. As a result, when illness strikes, the poor – and especially the rural poor and people working in the informal economy – have to rely on private resources to pay for health care. For poorer people in low-income countries, out-of-pocket expenditure on health care can reach 80 percent of total medical spending; and a recent study of hospital visits in India showed that between one-third and half of patients needing in-patient care became impoverished because of inadequate risk management techniques.
Enter Dror, Preker and their co-authors! This volume discusses community-based approaches to insuring people against medical risk – not based on individual risk rating like private insurance, but along the lines of decentralised social insurance based on the average risk. Recent studies of community savings, loans and financing schemes show how even the poor can insure themselves against unexpected events. Community-level health insurance programs improve access to essential drugs, primary care and basic hospital care for rural populations and informal sector workers, offering at least some protection against the impoverishing effects of illness.
Tapping into experience from other sectors, the authors argue that subsidies can be used more effectively to expand insurance coverage, and that reinsurance can improve the financial viability of community-financed health schemes in settings where larger or more formal health financing mechanisms fail to reach large parts of the population. Reinsurance makes it possible to spread and transfer medical risks previously regarded as common shocks (and hence uninsurable), such as environmental hazards (risks of pollution), earthquakes, meteorological and electronic storms, and retroactive coverage of asbestos damage.
The authors suggest that reinsurance techniques could also be used to improve the viability of small risk pools typical of community health financing schemes. This is an innovative application to the health sector and to poor populations of lessons learned from other sectors.
This book shows how the underlying idea of social insurance can be made operational in countries without the capacity to finance or organise large-scale systems, thus making it possible to improve access to health care for poor people in poor countries. There is no need to labour the importance of the topic.
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