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Financing

Where does funding for the Health System come from? How are the funds pooled? How are they allocated and spent?

 Content

The approaches that countries use to finance their health systems provide the financial resources those systems need and also determine some of the important institutional arrangements that create economic incentives in the operation of health systems.
All health financing approaches should try to fulfill three basic principles of public finance:

1) Raise enough revenues to provide individuals with the intended packages of health services that assure health and financial protection against catastrophic medical expenses caused by illness and injury in an equitable, efficient and financially sustainable manner;

2) Manage these revenues to pool health risks equitably and efficiently; and

3) Ensure the payment for or purchase of health services is carried out in ways that are allocatively and technically efficient.

  

Bullet  Basic Principles of Public Finance 

Bullet   Health Financing Mechanisms 

Bullet   Criteria for assessing Financing Methods 

Bullet   General Revenue/ National Health Service Systems

Bullet   Social Health Insurance 

Bullet   Private/ Voluntary Health Insurance

Bullet   Community Based Health Insurance 

Bullet   Out of Pocket Payments & User Fees 

Bullet   External Financing Sources 

Bullet   Additional Reading 

How a health system is financed can have a large impact on how people access services, how much they end up paying for those services out of their own pockets, and on which services are provided and how well they are provided.

There are a number of different and widely observed health financing mechanisms such as:
– General Revenue                                       
– Social Health Insurance                           
– Private Health Insurance
– Community Financing
– Out-of-Pocket Spending
– External Aid 

In practice we find that real health systems use some or all of the mechanisms at the same time and that there is a lot of mixing of specific characteristics and approaches across these simple types. For example, it is not unusual for social health insurance to be administered by private health insurance providers who receive significant general revenue financing for some population groups from the government.   

Health system financing mechanisms can be assessed using different criteria, such as:
- Risk Pooling: due to the uncertainty of illness, there are significant social and individual benefits from spreading the risks of ill health among lower- and higher-risk groups. To what extent do different mechanisms pool risks effectively?

- Equity: fairness in the distribution of the burden and benefit of health care – for example, in financial terms who pays what into the system and who receives what (in financial value) from the system; vertical equity typically refers to the extent to which the burden and benefits are fairly distributed between the rich and the poor; horizontal equity typically refers to which the burden and benefits are similarly distributed among those at the same income level.

- Economic Effects: how and how much do the ways in which resources are raised for health care have impacts on deterring or encouraging investment, employment opportunities, and labor supply, which affect economic activity.


Comparison of alternative types of financing methods in terms of risk pooling, equity, and efficiency:  

Financing method

Risk pooling

Equity

Efficiency

General revenue

Widest risk pooling

Most equitable

Inefficient

Social insurance

Within the covered population

Can be redistributive within the covered population

Moderate/good efficiency

Private insurance

 

 

Inefficient (high administration costs)

      Group

Within a group

Can be redistributive within a group

 

      Individual

Within an age/sex group

Less equitable

 

Community Financing

Within a community

Can be redistribution within a community

Moderate efficiency

Out of pocket payments and User fees

No risk pooling

Least equitable

Most efficient (though can be hard to collect)

The figure below illustrates transitions in general health systems as countries move from low- to middle- to high-income status (see also Disease Control Priorities in Developing Countries, second edition, 2006)  

LMH Countries

 

The following table presents examples of countries in each of the three stages of health development and summarizes the financing and service provision in each stage:

FinancingStageEconDevt

Source: Hsiao & Heller, 2007

General Revenue/ National Health Service Systems
General tax revenue is an important source of financing health care in low, middle and high income countries although government's capacity to raise general revenues is strongly correlated with income. This revenue can come from a variety of taxes - income and profit taxes,  value-added and sales taxes, taxes on imports and taxes on  profits from the sale of natural  resources (minerals, oil, timber – etc).  The mix of taxes used by different countries usually depends on their individual situations and low income countries tend to rely on taxes that are easier to collect – such as import and export duties. General tax revenue is used to support a wide range of government programs including the health system.   

Pros and Cons of using general revenues to fund health systems

Pros

Cons

       National Health Service systems cover the entire population and general taxation may the fairest way to generate the required funds.

        Resources for health increase over time as the economy grows.

        High degree of political accountability in democratic political systems through regular legislative budget processes.

       State-funded systems are relatively easy to manage

       Health System has to compete with other sectors for funds.

        Depending on the types of taxes and economic conditions, revenues can be unpredictable/ fluctuate.

        Can be inequitable depending on the type of taxes used and the level at which they are collected.

        In states with weak governance and accountability being able to control general revenues can lead to favoritism and corruption.

 

Certain kinds of services - public health, preventative services and care for the poor – are often tax- supported, regardless of other financing methods used, because taxes can be redistributive and raised from a broad base.

General tax revenue financing is often tied to National Health Service type of health care delivery (government-owned and operated health facilities). National Health Service systems are usually characterized by three features: their funding comes primarily from general revenues, they provide medical coverage to the whole population, and they usually deliver health care through a network of public providers. However, general tax revenues can also purchase care from private providers or a mix of public and private providers.

Social Health Insurance
Social health insurance (SHI) is a financing mechanism that is used in a variety of forms in high, middle and low income countries alike.

Insurance as a means of financing typically involves a defined contribution (premium) linked to a defined package of benefits for a specific period of time. The risks of needing health care expenditures are pooled across individuals who are enrolled in insurance plans or programs.

Three characteristics distinguish social insurance from private insurance:
 1) Social Insurance is compulsory – everyone in an eligible group must enroll and pay a specified premium. Often the premium is a percentage of one’s wage.
 2) Social Insurance premiums usually represent a social compact. Contributions and benefits are specified by law and difficult to change.
 3) Social Insurance contributions are earmarked and segregated from general revenues and expenditures. The advantage of this is that the insurance benefits demanded by voters come with a clear price tag – if they want the benefit they have to pay for it.

Social health insurance funds are generally required to maintain their solvency and this tends to produce greater transparency and accountability.  But, SHI only covers those who are eligible. Many schemes cover only workers in the formal sector since these groups are easier to identify and to provide contributions. Sometimes countries have multiple systems for different formal sector groups who have historically obtained their benefits at different times. Governments can also pay the premiums of social insurance beneficiaries, for example using general tax revenue to subsidize pensioners, the unemployed, the poor, workers in the informal sector and some small businessmen and farmers.

Social insurance programs can be, but need not necessarily be, administered by government or quasi-government agencies. In some countries both government and non-government agencies administer social health insurance for different groups in the population. 

Pros and Cons of using social insurance to fund health systems

Pros

Cons

       The social contract structure can increase citizen’s willingness to pay, as there is greater trust that benefits will be delivered

       Social insurance schemes have the greatest potential for providing effective risk protection, particularly in high income countries

       Scheme does not cover everyone; particularly in low-income countries SHI mostly only covers workers in the formal sector and only pools the health risks of its enrollees

       Requires both adequate fiscal capacity of the government and popular acceptance.

       Can result in higher real cost of labor due to higher social insurance premiums

       Though SHI contributions are often technically not “taxes” but “premia”, they may look and feel like taxes to the public and suffer from some of the problems which reduce the effectiveness of tax collection.

Addtitional Reading on SHI 

Private/ Voluntary Health Insurance
Under private health insurance schemes buyers voluntarily purchase insurance from private, independent, competing sellers  who charge premiums that reflect the buyer’s risks rather than their ability to pay. Private insurers can be both for profit and not for profit. These insurance purchases can be made by groups and individuals.
 

Pros and Cons of using private insurance to fund health systems

Pros

Cons

       Private insurance will mobilize resources additional to what governments can generate.

       Since non-payers do not get coverage, problems of tax-evasion (which may occur under tax-based schemes like social health insurance) can be minimized.

       When people can chose their own plan they may feel more empowered and willing to pay for health care

       Those with different attitudes and values, including those at different income levels, will prefer different health care plans.  A competitive market for private insurance should then respond by offering a range of insurance plans. This improves consumers’ welfare.

       Competitive private insurance is very prone to risk selection.  This occurs when insurers are able to favor enrolling the healthier groups in a population, leaving those more likely to be sick and incur higher health expenditures to have their needs met in other ways. This gives the impression that private insurance is lower cost or more efficient when it may be that it is simply insuring those with less need. Conversely, private insurers may also charge very high rates to those more likely to be sick .

       This method offers less risk pooling than social insurance or general revenue financing; groups with the highest risks and costs are typically excluded

       Competitive private insurance is also prone to having higher operating costs. Competition requires marketing and other expenses and smaller risk pools may mean fewer efficiencies in administration.

       Private insurance poses a complex set of regulatory and management issues to the government, which require high levels of analytical competence and political integrity that many countries do not have

Additional Reading:

Preker, Alexander S. Sheffler, Richard M.Bassett, Mark C., eds. Private voluntary health insurance in development: friend or foe? World Bank, 2007.


Community Financing, sometimes  called Community-Based Health Insurance
Community financing or community-based health insurance (CBHI) is often advocated as an alternative to other health financing strategies. It may be one to remedy some of the “cons” of other approaches, such as the difficulty of reaching the rural and informal sector and the tendency for social and private health insurance to focus more on higher cost, less frequent health care services (emphasizing financial protection) rather than more common and frequent needs related to primary health care (and population health outcomes).

In CBHI, communities operate and control the financing of their health care typically through locally- based prepayment schemes. Under these schemes financing and delivery of primary care can be separated or integrated, but higher level care is usually purchased by the scheme. Providers may be individuals hired by the community or nonprofit NGOs.  CBHI can also help finance the marginal costs of publicly delivered services such as user fees or additional supplies or tests that are needed.
Community-based health insurance schemes vary widely in size, organization, objectives, and management.  Several classification approaches exist, which capture the diversity of these arrangements (
Gottret & Schieber, 2006):

1) Atim (1998) categorizes mutual health organizations according to two dimensions: ownership and geographical and socio-professional criteria (rural/urban, profession/enterprise/trade union).
2) Bennett, Creese, and Monash (1998) distinguish schemes according to the nature of the risks involved (high-risk, low-frequency events versus low-cost, high-frequency risks)
3) Hsiao (2001) identifies five types of schemes: schemes involving direct government subsidy to the individuals; cooperative health care in which financing and provision are integrated at  village and sub-district levels; community-sponsored third-party insurance; provider-sponsored pre-payment; and producer or consumer cooperatives.
4) Jakab and Krishnan (2004) classify schemes in four categories: community cost-sharing; community pre-payment or mutual health organizations; provider-based health insurance; and government or social health insurance support for the community scheme.

Community-based health insurance is also referred to as community financing or community-based financing, all of which refer to schemes in which affiliation are based on community membership, with strong involvement of the community the management of the system.

Pros and Cons of Community Based Health Insurance

Pros

Cons

        Local control may produce more transparency and accountability

        Local financing and administrative arrangements may be attractive to citizens reluctant to use government run facilities further from their homes

       CBHI can be more easily combined with other community-based initiatives such as micro-finance and livelihoods programs or local organization of occupational groups.

       When pre-paid and compulsory, community financing can offer a good degree of risk protection

        Schemes are often voluntary – but to be really effective membership should be compulsory. Communities may not have mechanisms to achieve that.

        The populations involved in these schemes are often poor – it can be difficult to raise enough money to provide adequate coverage and these schemes often need to be supplemented by tax-based schemes.

       Risk pools in CBHI can be small and schemes are vulnerable to unexpected high cost events or epidemics.

        Community based health insurance depends quite a bit on capacity and organization at the local level

Additional Resources on CBHI 

Out of Pocket Payments & User Fees
Out of pocket payments are paid directly by patients for medical care and these expenditures are not reimbursable by insurers or other third parties.  Out of pocket payments include official user fees (charges for service), co-payments and deductibles for doctor visits and prescription medications, unofficial or informal payments, and expenditures imposed on service users for supplies and tests which may not be available in health facilities.  (In counting out of pocket payments for health care, the costs of transportation and related expenses are often not included). 

Out of pocket payments are often the largest type of health care financing in low income countries, often larger than government spending. They tend to decline as a share of the total as country income rises and new types of financing mechanisms, such as social and private insurance as well as increased government spending “substitute” for out of pocket spending.

The following graph shows the percent total out of pocket spending by country:

Health expenditure

 Out of pocket payments are widely agreed to be a poor way to finance health care. They fall disproportionately on the sick (no risk pooling) at their time of greatest need and have the worst impact on the poor. Household impoverishment resulting from out of pocket health spending is widely reported as a major cause of overall impoverishment. (See Wagstaff and van Doorslaer, 2003).

Table: Absolute increase in poverty headcounts due to out of pocket spending by levels of health service and types of health care

FinancingIncreasePoverty

Source: Bulletin of the World Health Organization | August 2007, 85 (8)

 

Graph: Incidence of household impoverishment by types of health care:

FinancingHHimpoverishmentOOP

Source: Bulletin of the World Health Organization | August 2007, 85 (8).

 

Graph: Out of pocket spending as share of total health spending relative to income: 

OOPspending

 

Out of pocket payments also may make health systems less efficient. While they do provide immediate incentives for health worker productivity, they also exacerbate informational inequalities between patients and providers. They embody incentives for over treatment and cost escalation.


Out of pocket payments are more common and account for a larger share of health spending in the poorer countries because they are simple, decentralized, easy to understand, and not challenged by better alternatives. Reducing the high share of out of pocket payments in health systems is pretty much a universal goal of health system development, although as countries achieve high coverage with organized financing they often find some value in maintaining some level of out of pocket payments as incentives for more efficient health care consumption.


 User fees, as opposed to informal out of pocket payments, refer to official charges for health services and is mostly used to refer to such charges by government providers. User fees may for example be found in situations where:


• Governments want to supplement inadequate budgetary resources with funding from patients
• Governments or facility managers want to introduce local revenue generation as an incentive for health workers
• Governments may be unable to assure adequate supplies of health care consumables which can more reliably be purchased locally with facility-level revenue.

 

Formal user fees usually do not account for a large share of government health spending and have important drawbacks. As with any payment for service, they can be a negative incentive for service use. That negative incentive can have serious consequences for life and well being when it impacts poorer patients or use of essential services. Measures to mitigate these negative consequences are possible, but often not easy to implement.


The negative aspects of user fees are attracting a lot of attention as opponents advocate abolition of fees in government facilities and free care at the point of access, especially for women and children. But there may be reason for concern about simply abolishing user fees without compensatory measures to assure adequate financing. 


The World Bank has long championed vastly better health for women and children in its development work, working closely with developing countries and other partners to achieve the improved maternal and child health called for in the 2015 Millennium Development Goals for Health. The Bank supports efforts to help mothers and children get the widest possible access to the health services they need for safe pregnancies and deliveries and agrees that these quality services should be 'free at the point of use where countries choose to provide it.'


This position has been widely adopted in the 2008 'Global Consensus on MDG5-Maternal Health, ' signed by 41 bilateral and multilateral development agencies, including the World Bank. It is further consistent with the World Bank's 2007 Health, Nutrition and Population Strategy which, after extensive consultation with country governments and their development partners, reiterates the Bank's readiness to assist countries in eliminating user fees provided that this effort be country-led, address the long-term fiscal sustainability; benefit poor people, and provide high-quality services.


Additional Reading on User Fees  

  

External Financing Sources
Many poor countries rely on foreign aid to varying degrees as a financing source for their health sectors.  Although some low income countries are highly dependent on external funding for the health health care systems, nationally generated resources are generally more important in most countries and are likely to be more so in the future.


Foreign aid can provide much needed assistance to countries as they strive to reach their health goals. However, donor requirements for accessing funds (project/ grant application procedures), for use of those funds and monitoring and evaluation requirements can be a burden on poor countries. There is concern that donor preferences and conditions can distort national policies.

Development assistance for health (DAH) consists of official development assistance as well as aid from unofficial sources such as NGOs, private foundations, and others. DAH has been growing over the last two decades and risen sharply since 2002 due to increases in public funding and increases in philanthropic donations. DAH has grown from 5.6 billion in 1990 to 21.8 billion in 2007. You can read more about the growth in DAH in Financing of global health: tracking development assistance for health from 1990 to 2007 (Ravishankar, et.al.  2009; The Lancet 373: 2113–24) .

 

Graph: DAH by funding source

Funding source

Source: Ravishankar et al, 2009.

 

Graph: DAH by channel from 1990-2007

Lending

Source: Ravishankar et al, 2009

Publicly-financed development assistance for health (DAH) in 1990, 1994, 1998, 2002, and 2007 separated by channel.  Non-governmental organisations (NGOs), public–private partnerships (PPPs) excluding the Global Alliance for Vaccines and Immunization (GAVI) and the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM), and other miscellaneous channels are shown together. Disbursements from the creditor reporting system when the channel of delivery code was not specified are shown here as unspecified. IDA=International Development Association. UNICEF=UN Children's Fund. UNFPA=UN Population Fund. UNAIDS=Joint UN Programme on HIV/AIDS.

Graph: DAH in 2007 by donor

Fig 1

Source: Ravishankar et al, 2009

Recent increases in official development assistance are largely due to increases in health aid which has grown through the increasing presence of global partnerships  such as the Global Fund,GAVI  Alliance, and private foundations like the Bill and Melinda Gates Foundation.  As the current international development architecture becomes increasingly complex, with a plethora of actors including the state, the private sector, and civil society, the importance of harmonization and coordination becomes increasingly clear.

In addition, the increased tendency to fund disease- or intervention-specific health programs also poses challenges to scaling up access to essential health services and making progress towards the achievement of the Millennium Development Goals.  Such interventions which are typically off-budget can often disrupt a country’s health system and undermine the opportunity to integrate the initiatives with the country’s overall health program.

Concerns over aid effectiveness have led to actions on the international level, in particular the Paris Declaration on Aid Effectiveness in March 2005 which emphasized the need for improvements in ownership, harmonization, alignment, results, and mutual accountability in aid effectiveness and established specific goals and measurable targets regarding aid delivery.  The Accra Agenda for Action in September 2008 made a commitment to accelerate and deepen the implementation of the Paris Declaration, reaffirming the importance of 1) strengthening country ownership on development 2) building more effective and inclusive partnerships for development, and 3) delivering and accounting for development results.  Also in September 2008 a High Level Task Force on Innovative International Financing for Health Systems was launched, creating a platform within which new innovative financing mechanisms could be identified to complement traditional aid and bridge the financing gaps which compromise attainment of the health-related Millennium Development Goals.

Additional Health Financing Web-sites:
–  WHO Health Systems Financing Website:
 

– WHO Health Financing and Social Protection Western Pacific Region Website

– ILO STEP Program on Social Protection  

– USAID Health Systems 20/20 on Financing   

– Access to Insurance Initiative (hosted by GTZ) 

– Consortium on Social Health Protection in Developing Countries (GTZ)

– Eldis site on Resource Allocation and Payment (Financing)

– Eldis site on Sources of Revenue for Health Care

– Eldis site on User-fees 

– Eldis site on Health Sector Financing
 
 Additional Reading:
• Gottret P, G Scheiber, H Waters , Good Practices in Health Financing: Lessons from Reforms in Low and Middle-Income Countries (2008)
• Preker A, X Liu, E Velenyi, Public Ends, Private Means: Strategic Purchasing of Health Services. World Bank, April 2007. 
• Analyzing Changes in Health Financing - Arrangements in High-Income Countries. Busse R, J Schreyögg and C Gericke. (Feb 2007)
• Gottret P, G Scheiber, Health Financing Revisited: A Practitioner’s Guide (2006)
• Preker A, J Langenbrunner, Spending Wisely: Buying Health Services for the Poor. World Bank, 2005.
• Smith PC and SN Witter , Risk Pooling in Health Care Financing: The Implications for Health System Performance. HNP Discussion Paper, World Bank, Sep 2004.
• Liu X and S O'Dougherty, Purchasing Priority Public Health Services (Sep 2004)
• Dror D and AS Preker. Eds, 
Social Re-Insurance: A New Approach to Sustainable Community Health
Financing. World Bank, 2002.
• Preker AS, G Carrin, D Dror, M Jakab, W Hsiao and D Arhin-Tenkorang, Effectiveness of Community Health Financing in Meeting the Cost of Illness. HNP Discussion Paper, World Bank, Feb 2002.
• Jakab M, A Preker, C Krishnan, P Schneider, F Diop, JP Jutting, A Gumber, K Ranson and S Supakankunti, Social Inclusion and Financial Protection Through Community Financing: Initials Results from Five Household Surveys. HNP Discussion Paper, World Bank, Sep 2001.
• Carrin G, R Zeramdini, P Musgrove, JP Poullier, N Valentine and K Xu, The Impact of the Degree of Risk-Sharing in Health Financing on Health System Attainment (Sep 2001).
• Schieber G, Innovations in Health Care Financing: Proceedings of a World Bank Conference, March 10-11, 1997 (Mar 1997)
• Musgrove P, Public and Private Roles in Health: Theory and Financing Patterns. HNP Discussion Paper, World Bank, July 1996.

Tools:
• 
WHO Toolkit on Monitoring Health Systems Strengthening 
 

 




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