CHAPTER FIVE Who pays for Health ystems Choices for financing health services have an impact on how fairly the burden of payment is distributed. Can the rich and healthy subsidize the poor and sick? In order to ensure faimess and financial risk protection, there should be a high level ofprepayment; risk should be spread(through cross-subsidies from low to high health risk); the poor should be subsidized (through cross-subsidies from high to low income); the fragmentation of pools or funds should be avoided; and there should be strategic purchasing to improve health system outcomes and responsiveness
Who Pays for Health Systems? 93 CHAPTER FIVE ho ays for ealth ystems? Choices for financing health services have an impact on how fairly the burden of payment is distributed. Can the rich and healthy subsidize the poor and sick? In order to ensure fairness and financial risk protection, there should be a high level of prepayment; risk should be spread (through cross-subsidies from low to high health risk); the poor should be subsidized (through cross-subsidies from high to low income); the fragmentation of pools or funds should be avoided; and there should be strategic purchasing to improve health system outcomes and responsiveness. 93
WHO PAYS FOR HEALTH SYSTEMS? HOW FINANCING WORKS 19, h care expenditures have risen from 3% of world GDP in 1948 7.9%in 97.This dramaticincrease in spending worldwide has prompted societies every where to look for health financing arrangements which ensure that people are not denie access to care because they cannot afford it. Providing such access to all citizens has lor been a comerstone of modern health financing systems in many countries. The main func tion of the health system is to provide health services to the population, and this chapter concentrates on health financing as a key to effective interaction between providers and citizens. It discusses the purpose of health financing, and the links between health financ ing and service delivery, through purchasing. The factors affecting the performance of health financing are also examined The purpose of health financing is to make funding available, as well as to set the right financial incentives for providers, to ensure that all individuals have access to effectiv lic health and personal health care. This means reducing or eliminating the possibility that an individual will be unable to pay for such care, or will be impoverished as a result of trying to do so To ensure that individuals have access to health services three interrelated functions of health system financing are crucial: revenue collection, pooling of resources, and purchas- g of interventions. The main challenges are to put in place the necessary technical, or- ganizational and institutional arrangements so that such interactions will protect people financially the fairest way possible, and to set incentives for providers that will motivate them to increase health and improve the responsiveness of the system. The three functions are often integrated in a single organization, and this is currently the case in many health systems in the world. Although this chapter discusses the three functions separately, it does not imply that an attempt should be made to separate them in different organizations There is, however, an increasing trend to introduce a separation between financing and provision. Revenue collection is the process by which the health system receives money from hous holds and organizations or companies, as well as from donors. Contributions by donors are discussed in Box 5. 1. Health systems have various ways of collecting revenue, such as gen eral taxation, mandated social health insurance contributions (usually salary-related and almost never risk-related), voluntary private health insurance contributions (usually risk elated), out-of-pocket payment and donations. Most high income countries rely heavily
Who Pays for Health Systems? 95 5 WHO PAYS FOR HEALTH SYSTEMS? HOW FINANCING WORKS ealth care expenditures have risen from 3% of world GDP in 1948 to 7.9% in 1997. This dramatic increase in spending worldwide has prompted societies everywhere to look for health financing arrangements which ensure that people are not denied access to care because they cannot afford it. Providing such access to all citizens has long been a cornerstone of modern health financing systems in many countries. The main function of the health system is to provide health services to the population, and this chapter concentrates on health financing as a key to effective interaction between providers and citizens. It discusses the purpose of health financing, and the links between health financing and service delivery, through purchasing. The factors affecting the performance of health financing are also examined. The purpose of health financing is to make funding available, as well as to set the right financial incentives for providers, to ensure that all individuals have access to effective public health and personal health care. This means reducing or eliminating the possibility that an individual will be unable to pay for such care, or will be impoverished as a result of trying to do so. To ensure that individuals have access to health services, three interrelated functions of health system financing are crucial: revenue collection, pooling of resources, and purchasing of interventions. The main challenges are to put in place the necessary technical, organizational and institutional arrangements so that such interactions will protect people financially the fairest way possible, and to set incentives for providers that will motivate them to increase health and improve the responsiveness of the system. The three functions are often integrated in a single organization, and this is currently the case in many health systems in the world. Although this chapter discusses the three functions separately, it does not imply that an attempt should be made to separate them in different organizations. There is, however, an increasing trend to introduce a separation between financing and provision. Revenue collection is the process by which the health system receives money from households and organizations or companies, as well as from donors. Contributions by donors are discussed in Box 5.1. Health systems have various ways of collecting revenue, such as general taxation, mandated social health insurance contributions (usually salary-related and almost never risk-related), voluntary private health insurance contributions (usually riskrelated), out-of-pocket payment and donations. Most high income countries rely heavily
The World Health Report Box 5. 1 The importance of donor contributions in revenue collection and purchasing in developing countries Donor contributions, as a source countries, rly in Africa, de- Most aid comes in the form of and procedures, rather than con- of revenue for the health system, pend on donors for a large share of projects, which are separately devel- centrating on strategic steward- are of key importance for some total expenditure on health. The oped and negotiated between each ship and health programm developing countries. The absolute fraction can be as high as 40% donor and the national authorities. implementation. Donors and gov- amounts of such aid have been (Uganda in 1993)or even 849 Although by no means unsuccess- ernments are increasingly seeing large in recent years in Angola, (Gambia in 1994)and exceeds 20% ful, international cooperation the need to move away from a Bangladesh, Ecuador, India, Indo- in 1996 or 1997 in Eritrea, Kenya, The through projects can lead to frag- project approach towards wider esia, Mozambique, Papua New Lao People's Democratic Republic mentation and duplication of effort, programme support to long-term uinea, the United Republic of and Mali. Bolivia, Nicaragua, the particularly when many donors are strategic development that is in- Tanzania and several eastern Eu- United Republic of Tanzania and involved, each focusing on their own tegrated into the budgetary pro ropean countries, but in the Zimbabwe have obtained 10% to geographical or programme priori- ess of the country. In this respect larger countries aid is usually only 20% of their resources for health ties. Such an approach forces sector-wide approaches have a small share of total health from donors in one or more recent national authorities to devote sig- been effective in countries such as spending or even of govemment years. nificant amounts of time and effort Bangladesh, Ghana and Pakistan expenditure. In contrast, several to dealing with donors' priorities I Cassels A, Janovsky K. Better health in developing countries: are sector-wide approaches the way of the future? The Lancet,1998,352:1777-1779 on either general taxation or mandated social health insurance contributions. In contrast, low income countries depend far more on out-of-pocket financing: in 60% of countries at incomes below $1000 per capita, out-of-pocket spending is 40% or more of the total whereas only 30% of middle and high income countries depend so heavily on this kind of financing (see Table 5.1) In most social insurance and voluntary private insurance schemes, revenue collection and pooling are integrated in one organization and one purchasing process For organiza tions relying mainly on general taxation, such as ministries of health, collecting is done by the ministry of finance and allocation to the ministry of health occurs through the govern ment budgetary process. Pooling is the accumulation and management of revenues in such a way as to ensure that the risk of having to pay for health care is borne by all the members of the pool and no each contributor individually Pooling is traditionally known as the"insurance function within the health system, whether the insurance is explicit (people knowingly subscribe to a scheme)or implicit (as with tax revenues). Its main purpose is to share the financial risk associated with health interventions for which the need is uncertain. In this way it differs from collecting, which may allow individuals to continue bearing their own risks from their own pockets or savings. When people pay entirely out of pocket, no pooling occurs Table 5.1 Estimated out-of-pocket share in health spending by income level, 1997 Estimated share in total expenditure on health(%) (USS at exchange rate) Under 20 20-29 30-39 40-49 50-59 60 and over Total 10 19 1000-9999 18 73 15 8 All income classes 42 Source who national health accounts estimates income unknown for three countries
96 The World Health Report 2000 on either general taxation or mandated social health insurance contributions. In contrast, low income countries depend far more on out-of-pocket financing: in 60% of countries at incomes below $1000 per capita, out-of-pocket spending is 40% or more of the total whereas only 30% of middle and high income countries depend so heavily on this kind of financing (see Table 5.1). In most social insurance and voluntary private insurance schemes, revenue collection and pooling are integrated in one organization and one purchasing process. For organizations relying mainly on general taxation, such as ministries of health, collecting is done by the ministry of finance and allocation to the ministry of health occurs through the government budgetary process. Pooling is the accumulation and management of revenues in such a way as to ensure that the risk of having to pay for health care is borne by all the members of the pool and not by each contributor individually. Pooling is traditionally known as the “insurance function” within the health system, whether the insurance is explicit (people knowingly subscribe to a scheme) or implicit (as with tax revenues). Its main purpose is to share the financial risk associated with health interventions for which the need is uncertain. In this way it differs from collecting, which may allow individuals to continue bearing their own risks from their own pockets or savings. When people pay entirely out of pocket, no pooling occurs. Table 5.1 Estimated out-of-pocket share in health spending by income level, 1997 (number of countries in each income and expenditure class) Estimated annual Estimated share in total expenditure on health (%) per capita income (US$ at exchange rate) Under 20 20–29 30–39 40–49 50–59 60 and over Total Under 1000 7 10 9 7 11 19 63 1000–9999 16 18 23 15 8 8 88 10 000 and over 19 7 4 5 0 2 37 All income classes 42 35 36 27 19 29 188 Source: WHO national health accounts estimates: income unknown for three countries. Box 5.1 The importance of donor contributions in revenue collection and purchasing in developing countries Donor contributions, as a source of revenue for the health system, are of key importance for some developing countries. The absolute amounts of such aid have been large in recent years in Angola, Bangladesh, Ecuador, India, Indonesia, Mozambique, Papua New Guinea, the United Republic of Tanzania and several eastern European countries, but in the larger countries aid is usually only a small share of total health spending or even of government expenditure. In contrast, several countries, particularly in Africa, depend on donors for a large share of total expenditure on health. The fraction can be as high as 40% (Uganda in 1993) or even 84% (Gambia in 1994) and exceeds 20% in 1996 or 1997 in Eritrea, Kenya, The Lao People‘s Democratic Republic and Mali. Bolivia, Nicaragua, the United Republic of Tanzania and Zimbabwe have obtained 10% to 20% of their resources for health from donors in one or more recent years. Most aid comes in the form of projects, which are separately developed and negotiated between each donor and the national authorities. Although by no means unsuccessful, international cooperation through projects can lead to fragmentation and duplication of effort, particularly when many donors are involved, each focusing on their own geographical or programme priorities. Such an approach forces national authorities to devote significant amounts of time and effort to dealing with donors’ priorities and procedures, rather than concentrating on strategic stewardship and health programme implementation. Donors and governments are increasingly seeing the need to move away from a project approach towards wider programme support to long-term strategic development that is integrated into the budgetary process of the country. In this respect, sector-wide approaches have been effective in countries such as Bangladesh, Ghana and Pakistan.1 1 Cassels A, Janovsky K. Better health in developing countries: are sector-wide approaches the way of the future? The Lancet, 1998, 352:1777–1779
Who Pays for Health St For public health activities and even for aspects of personal health care- such as health check-ups- for which there is no uncertainty or the cost is low, funds can go directly from collecting to purchasing. This is an important consideration with regard to the regulation of mandatory pooling schemes, as consumer preferences for insurance packages often focus on interventions of high probability and low cost(relative to the household capacity to pay), although these are best paid for out of current income or through direct public subsi dies for the poor. poling reduces uncertainty for both citizens and providers. By increasing and stabiliz- ing demand and the flow of funds, pooling can increase the likelihood that patients will be able to afford services and that a higher volume of services will justify new provider invest Purchasing is the process by which pooled funds are paid to providers in order to deliver a specified or unspecified set of health interventions. Purchasing can be performed pas sively or strategically Passive purchasing implies following a predetermined budget or sir ply paying bills when presented. Strategic purchasing involves a continuous search for the best ways to maximize health system performance by deciding which interventions should be purchased, how, and from whom. This means actively choosing interventions in order to achieve the best performance, both for individuals and the population as a whole, by means of selective contracting and incentive schemes. Purchasing uses different instruments for paying providers, inchuding budgeting. Recently, many countries, including Chile (1, 2), Hungary (3), New Zealand(4, 5), and the United Kingdom(6-8), have tried to introduce an active purchasing role within their public health systems PREPAYMENT AND COLLECTION Traditionally, most policy discussions regarding health system financing centre around the impact of public versus private financing on health system performance. Chapter 3 clarifies the central role of public financing in public health For personal health care, how ever, it is not the public-private dichotomy that is most important in determining health system performance but the difference between prepayment and out-of-pocket spending Thus, private financing, particularly in developing countries, is largely synonymous with out-of-pocket spending or with contributions to small, voluntary and often highly frag- mented pools. In contrast, public or mandatory private financing(from general taxation or from contributions to social security) is always associated with prepayment and large pools The way policy-makers organize public financing or influence private financing will affect four key determinants of health system financing performance: the level of prepayment the degree of spreading of risk; the extent to which the poor are subsidized; and strategic A health system where individuals have to pay out of their own pockets for a substantial part of the cost of health services at the moment of seeking treatment clearly restricts access to only those who can afford it, and is likely to exclude the poorest members of societ (9-12). Some important health interventions would not be financed at all if people had pay for them, as is the case for the public good type of interventions discussed in Chapter 3 (13). Fairness of financial risk protection requires the highest possible degree of separation between contributions and utilization. This is particularly so for interventions that are high cost relative to the household's capacity In addition to affording protection against having to pay out of pocket and acing barriers to access, prepayment makes it possible to spread the financial risk among
Who Pays for Health Systems? 97 For public health activities and even for aspects of personal health care – such as health check-ups – for which there is no uncertainty or the cost is low, funds can go directly from collecting to purchasing. This is an important consideration with regard to the regulation of mandatory pooling schemes, as consumer preferences for insurance packages often focus on interventions of high probability and low cost (relative to the household capacity to pay), although these are best paid for out of current income or through direct public subsidies for the poor. Pooling reduces uncertainty for both citizens and providers. By increasing and stabilizing demand and the flow of funds, pooling can increase the likelihood that patients will be able to afford services and that a higher volume of services will justify new provider investments. Purchasing is the process by which pooled funds are paid to providers in order to deliver a specified or unspecified set of health interventions. Purchasing can be performed passively or strategically. Passive purchasing implies following a predetermined budget or simply paying bills when presented. Strategic purchasing involves a continuous search for the best ways to maximize health system performance by deciding which interventions should be purchased, how, and from whom. This means actively choosing interventions in order to achieve the best performance, both for individuals and the population as a whole, by means of selective contracting and incentive schemes. Purchasing uses different instruments for paying providers, including budgeting. Recently, many countries, including Chile (1, 2), Hungary (3), New Zealand (4, 5), and the United Kingdom (6–8), have tried to introduce an active purchasing role within their public health systems. PREPAYMENT AND COLLECTION Traditionally, most policy discussions regarding health system financing centre around the impact of public versus private financing on health system performance. Chapter 3 clarifies the central role of public financing in public health. For personal health care, however, it is not the public–private dichotomy that is most important in determining health system performance but the difference between prepayment and out-of-pocket spending. Thus, private financing, particularly in developing countries, is largely synonymous with out-of-pocket spending or with contributions to small, voluntary and often highly fragmented pools. In contrast, public or mandatory private financing (from general taxation or from contributions to social security) is always associated with prepayment and large pools. The way policy-makers organize public financing or influence private financing will affect four key determinants of health system financing performance: the level of prepayment; the degree of spreading of risk; the extent to which the poor are subsidized; and strategic purchasing. A health system where individuals have to pay out of their own pockets for a substantial part of the cost of health services at the moment of seeking treatment clearly restricts access to only those who can afford it, and is likely to exclude the poorest members of society (9–12). Some important health interventions would not be financed at all if people had to pay for them, as is the case for the public good type of interventions discussed in Chapter 3 (13). Fairness of financial risk protection requires the highest possible degree of separation between contributions and utilization. This is particularly so for interventions that are high cost relative to the household’s capacity to pay. In addition to affording protection against having to pay out of pocket and, as a result, facing barriers to access, prepayment makes it possible to spread the financial risk among
The World Health Report members of a pool, as discussed later in the chapter. Individual out-of-pocket financing does not allow the risk to be shared in that way. In other words, as already proposed by The world health report 1999 (14), there has to be prepayment for effective access to high-cost personal care. The level of prepayment is mainly determined by the predominant revenue collection mechanism in the system. General taxation allows for maximum separation between con tributions and utilization, while out-of-pocket payment represents no separation. Why then is the latter so generally used, particularly in developing countries?(15) The answer is that separation of contributions from utilization requires the agencies onsible for collection to have very strong institutional and organizational capacity. These attributes are lacking developing countries. Thus, although the highest possible level of prepayment is desirable, it is usually very difficult to attain in low income settings where institutions are weak. Relying on prepaid arrangements, particularly general taxa- tion, is institutionally very demanding. General taxation, as the main source of health fi nancing, demands an excellent tax or contribution collecting capacity. This is usually associated with a largely formal economy, whereas in developing countries the informal sector is often predominant. While general taxation on average accounts for more than 40% of GDP in OECD countries, it accounts for less than 20% in low income countries. All other prepayment mechanisms, including social security contributions and volun- tary insurance premiums, are easier to collect, as the benefit of participating is linked to actual contributions. In most cases, participation in social insurance schemes is restricted to formal sector workers who contribute through salary deductions at the workplace. This makes it easier for the social security organization to identify them, collect contributions and possibly exclude them from benefits if no contribution is made. Similarly, identification and collection is easier for voluntary health insurance and community pooling arrange ments. Nevertheless, such prepayment still requires large organizational and institutional capacity compared to out-of-pocket financing In developing countries, therefore, the objective is to create the conditions for revenue collecting mechanisms that will increasingly allow for separation of contributions from utilization In low income countries, where there are usually high levels of out-of-pocket expenditure on health and where organizational and institutional capacity are too weak to make it viable to rely mainly on general taxation to finance health, this means promoting job-based contribution systems where possible, and facilitating the creation of community ased prepayment schemes. Evidence shows (16, 17), however, that although the latter are an improvement over out-of-pocket financing, they are difficult to sustain and ments to improve the targeting of public subsidies in health. In middle income countries, with more formal economies, strategies to increase prepayment as well as pooling arrange bution systems, as well as increasing the share of public financing, particularly for the poor. Although prepayment is a cornerstone of fair health system financing, some direct con tribution at the moment of utilization may be required in low income countries or settings to increase revenues where prepayment capacity is inadequate. It can also be required in the form of co-payment for specific interventions with a view to reducing demand. Such an approach should only be used where there is clear evidence of unjustified over-utilization of the specific intervention as a result of prepayment schemes (moral hazard). The use of Co-payment has the effect of rationing the use of a specific intervention but does not have the effect of rationalizing its demand by consumers. When confronted with co-payments
98 The World Health Report 2000 members of a pool, as discussed later in the chapter. Individual out-of-pocket financing does not allow the risk to be shared in that way. In other words, as already proposed by The world health report 1999 (14), there has to be prepayment for effective access to high-cost personal care. The level of prepayment is mainly determined by the predominant revenue collection mechanism in the system. General taxation allows for maximum separation between contributions and utilization, while out-of-pocket payment represents no separation. Why then is the latter so generally used, particularly in developing countries? (15). The answer is that separation of contributions from utilization requires the agencies responsible for collection to have very strong institutional and organizational capacity. These attributes are lacking in many developing countries. Thus, although the highest possible level of prepayment is desirable, it is usually very difficult to attain in low income settings where institutions are weak. Relying on prepaid arrangements, particularly general taxation, is institutionally very demanding. General taxation, as the main source of health financing, demands an excellent tax or contribution collecting capacity. This is usually associated with a largely formal economy, whereas in developing countries the informal sector is often predominant. While general taxation on average accounts for more than 40% of GDP in OECD countries, it accounts for less than 20% in low income countries. All other prepayment mechanisms, including social security contributions and voluntary insurance premiums, are easier to collect, as the benefit of participating is linked to actual contributions. In most cases, participation in social insurance schemes is restricted to formal sector workers who contribute through salary deductions at the workplace. This makes it easier for the social security organization to identify them, collect contributions and possibly exclude them from benefits if no contribution is made. Similarly, identification and collection is easier for voluntary health insurance and community pooling arrangements. Nevertheless, such prepayment still requires large organizational and institutional capacity compared to out-of-pocket financing. In developing countries, therefore, the objective is to create the conditions for revenue collecting mechanisms that will increasingly allow for separation of contributions from utilization. In low income countries, where there are usually high levels of out-of-pocket expenditure on health and where organizational and institutional capacity are too weak to make it viable to rely mainly on general taxation to finance health, this means promoting job-based contribution systems where possible, and facilitating the creation of community or provider-based prepayment schemes. Evidence shows (16, 17), however, that although the latter are an improvement over out-of-pocket financing, they are difficult to sustain and should be considered only as a transition towards higher levels of pooling or as instruments to improve the targeting of public subsidies in health. In middle income countries, with more formal economies, strategies to increase prepayment as well as pooling arrangements include strengthening and expanding mandatory salary-based or risk-based contribution systems, as well as increasing the share of public financing, particularly for the poor. Although prepayment is a cornerstone of fair health system financing, some direct contribution at the moment of utilization may be required in low income countries or settings to increase revenues where prepayment capacity is inadequate. It can also be required in the form of co-payment for specific interventions with a view to reducing demand. Such an approach should only be used where there is clear evidence of unjustified over-utilization of the specific intervention as a result of prepayment schemes (moral hazard). The use of co-payment has the effect of rationing the use of a specific intervention but does not have the effect of rationalizing its demand by consumers. When confronted with co-payments