Health Care Financing

An Overview

by

William C. Hsiao
January 20, 2003
 Goals of Financing Module
• Provide more in-depth knowledge
• Understand when and where you can
“borrow” experience and ideas from other
nations
• Work through for your own country
 Health Policy and Financing Policy are
inseparable because Financing Policy
determines:

• How much is available

• Who controls the funds and how they are
used
• Who allocates the resources and their uses
• What financial incentives are given to
patients and providers
 Financing Policy determines:

• Who has access to basic health care

• How many people fall into poverty
• Whether health care cost inflation can be
controlled
 The Golden Rule:

“Those who have the

Gold make the Rules.”

Alfredo Bengzon, M.D.

Secretary of Health
Philippines
 Financing Method Alters:

• Incentives on both consumers and

insurers (e.g. adverse selection, risk
selection)
• Incentives on patients and providers
(e.g. moral hazard, induced demand)
• Organizational structure and relations
between key players
 Narrow Concept:
Financing Defined as Mobilizing Financial Resources
Financing, Allocation and Payment:
The Three Key Questions
Financing
Allocation

Payment
Organization & Incentives
 Evolution of Health Care Financing and Provision
Systems at Various Stages of Economic Development
Stage II
Stage I Stage III
(segmented Fin and
(three-tiered system) (universal coverage**)
Prov)
Poor Low
(less than $1,800)* ($1,800-$4,800)* ($5,000-$12,000)* (greater than $12,000)*
General
Public health, prevention NHS (UK, N.Z.)
Revenue
Public health services Public Health Service Medisave + Cat.
Financed
(clinics, hospitals) (Singapore)
+ Donor
(50-60%) (40-50%) (20-40%)

Social For civil servants Social Direct Prov. NHI (Canada,

Insurance only
(10-20%) (
insurance )
Indirect Prov. Australia)
Bismarckian Social
Insurance
(30-60%)
(Germany,
Japan)

Private Private Insurance Managed Care +

Negligible (5-10%)
Insurance (15-40%) Medicare (USA)

Private hospitals & clinics

Self-pay Pharmacists Self-pay Self-pay
Indigenous providers
(35-45%) (20-40%) (15-25%) (15-25%)
Mali, Nigeria, China, Egypt, Turkey, Chile, Mexico,
Tanzania, Kenya, Peru, Ecuador, Argentina, Brazil, * GDP per capita, 1997 PPP $
Yemen, Philippines, Lebanon, Venezuela, ** Except USA & Hong Kong
Bangladesh, India Indonesia Thailand, Malaysia
How much was spent on health
in 1994, in US$
Low Middle High
Characteristics OECD
Income Income Income
Per Capita GDP 396 2,707 18,611 22,498
Per Capita health 16 168 1,468 1,827
expenditure
Health expenditure 4.3 5.3 6.9 8.3
as % of GDP
% Share of Total
Health Expenditure
- Public Sector 47 57 67 76
- Private Sector 53 43 33 24
 Financing Options

• Self pay (include user fees, and savings)

• General tax revenue financing
• Insurance:
– Social insurance: Compulsory; Public or
private management
– Private: Voluntary
• Community Financing
• Individual Savings Account
 What are General Tax
Revenues?
• Direct taxes
– personal income taxes
– corporate profit taxes
– property taxes
– wealth taxes
• Indirect taxes
– sales taxes
– value added taxes
– excise taxes (Tobacco and alcohol)
– import duties
– export taxes
 Appealing Features of Health
Insurance
• Health risks are highly skewed; 10% of
population usually consume 60% of the total
health expenditure
• Individuals pay predictable amounts when
healthy to cover unpredictable costs when
sick/injured
• Health insurance agencies pool many risks
together and generate resources to pay
unpredictable large health bills
• Equity objectives served when more
healthy/wealthier people cross-subsidize less
healthy/poorer people through risk pooling
Problems with Health Insurance
Problems Solutions
· Adverse Selection Risk Adjustment (age,
sex, urban/rural)

· Moral Hazard Deductibles & Co-

payments

· Cream Skimming Open Enrollment Policy

(Risk Selection)

· High Admin. Costs Social Insurance

 What Is Social Insurance?
• Law compels employers to deduct a % of each
employees monthly wage for health to be paid to a
“social insurance fund”
• Law compels employee to pay a % of his/her monthly
wage, (deducted by the employer) to “social insurance
fund”
• Social insurance funds can be managed publicly or
privately; they can be monopolies or competitive
• The employer/employee deductions are earmarked for
health, and cannot be used for any other purpose
• Applicable largely to formal sector employers and
employees
 What is Private Insurance?
• Emerges from voluntary actions in a market
where buyers are willing to pay premium to
insurance companies that;
-- pools the risks and insure them for health
expenses
– Contract and pay providers who provide treatment
for members
• Motivated by the prospect of earning a profit
• Private insurance companies compete for
clients on the basis of “price” and quality
 What is community financing
• Community-based funds where members
prepaid a set amount each year for specified
services. Government subsidizes the poor.
• Organize and operate primary care clinic at
village level to gain efficiency and quality
• Contract and pay secondary services
• Managed by community members, not the
government, accountable back to members
• Governmental role--initiate, train, support
monitor and regulate CF schemes
Potential Improvement in Efficiency
and Quality Under Community
Financing
• Efficiency Gains: Organized primary care with salaried
practitioner at the village level; Contracting for secondary
services
• Lower Cost: Bulk Purchasing and Distribution of Drugs
• Better quality, efficiency and accountability: Management
by Community Members for their own benefits with
external monitoring and regulation
 A Summary of Ranking of Different Financing Methods
(I)

Equity Risk Reduce Risk Efficiency*

Pooling Selection
BEST
General Rev General General Rev User Fee (Sometimes
Rev Hard to collect)

Social Ins Social Ins Social Ins Social Ins

Comm Fin. Comm Fin Comm.Fin Comm. Fin.

Private Ins User Fees Private Ins Private Ins (High

Administrative Cost)

WORST User Fee User Fee --------------- General Rev/ Direct

*Efficiency factors include technical efficiency and administrative costs.
Provision (Inefficient)
Where do you want to go?
Feasible Financing Options for Various
Employment Groups
income High Middle Low Poor

Employment Status
Employed or - Social Insurance - Social Insurance Social Social
Retired in Formal - Private Ins - Private Ins (for some) Insurance Insurance
Sector - User Fees/Self- -User Fees/Self Pay (for
Pay small spending)

Employed in - Private Ins - Private Ins (for some)

Informal Sector -User Fees/ Self- - User Fees/Self Pay (for
Pay some small spending)

Self-Employed -User Fees/ Self- - User Fees (for small

Pay spending)

Retired

Unemployed

Farmers -User Fees/ Self-

Pay
- Community Fin.

GENERAL REVENUE CAN BE USED TO FUND ANY GROUP

 What goals does a society want to
achieve?

• Equity in health status and equal access to

health care
• Equitable Risk protection
• Efficiency
• Quality
• Sustainability (including public’s satisfaction
for the amount they have to pay and the
benefit received)

What trade-offs are a society willing to make?

What should the Government finance?

• Public Health and Prevention

• Subsidize the Poor and Low-Income
People for Health Services
• Subsidize Risk Pooling Schemes for
Insuring Against Catastrophic Health
Expenditures
• Training
• Research and Development
 Modern practices in health care financing
• For equity reasons, government has to finance a
significant part of total health expenditures
• Government has to regulate adverse selection and
risk selection in insurance industry
• Money needs to follow the patient to generate
competition in the delivery of health services
• Effective competition requires organized
intermediary for consumers
• Rational pricing policy to coordinate public/private