World Medical & Health Policy, Vol. 5, No.

4, 2013

The Challenges of Health System Financing

Rele Ologunde

With recent world health reports focussing on health systems, there have been renewed calls for
universal health-care coverage globally. Ensuring universal coverage requires a well-financed health
system. However, the evidence guiding health system financing policy is equivocal. Health financing
mechanisms need to be appropriate for the country with an emphasis on equity, income and risk
subsidization, and a trend towards reducing out-of-pocket payments. Innovative financing
mechanisms have great potential to meet the funding demand without generating unsustainable
pressure on public resources. As such, innovative financing has the potential to fill the funding gap
critical to the transition to more equitable models of health-care financing in many low- and middle-
income countries.
KEY WORDS: health system, finance, equity

Introduction

The World Health Report 2000 reported that health expenditure as a

percentage of global gross domestic product (GDP) rose from 3 percent in 1948 to
7.9 percent in 1997 (World Health Organization [WHO], 2000). Despite this
increase many countries are seeing their financial budgets decrease due to global
economic turmoil. The need to maintain financing for health has never before
been more important, with several international public health objectives, such as
the millennium development goals (MDGs), currently on course to miss their
target date. Finding sustainable sources of funding for these health initiatives is
crucial in securing the long-term future of national and global health objectives.
Expenditure on health varies significantly between countries with contrasting
performance in terms of the equity in financing, quality, and access to healthcare.
How is it that some countries with smaller health expenditure per capita of GDP
achieve better health outcomes than countries with greater health expenditure?
Why is it that some mechanisms of financing are more likely to result in financial
deprivation than others? This paper begins by defining the objective of health
system financing and explores the different methods by which this can be
achieved. The paper then explores the evidence in favor of and against the

403
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Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ.
404 World Medical & Health Policy, 5:4

different approaches, using relevant examples to illustrate this where appropriate.

Finally, the need for a new sustainable approach to health system financing in the
21st century, innovative financing, and its role in addressing shortfalls in the
current framework of financing is discussed.

Mechanisms of Health System Financing

The objective of health system financing is to make funds available, as well as

to set provider incentives that enable individuals to access personal and public
health-care services in a timely fashion when required (WHO, 2000). This
encompasses the implementation of standards to ensure that individuals seeking
care will not encounter barriers to accessing it, such as inability to pay or financial
impoverishment as a consequence of payment.

Public Financing

Public financing mechanisms for health, including general tax revenues, are
seen to be the most equitable form of financing as they are often based on fair
financial contribution from those who benefit from the health care it funds. It also
has the benefit of covering the entire population and thereby overcoming
potential disadvantages of other forms of health financing, such as exclusion on
the basis of health status or the inability to afford care. Despite this, there are
challenges to public health financing mechanisms, including competition with
other public sectors for the allocation of raised revenue. Another possible
limitation of general tax revenues is the reliability of income to fund health care.
If the bulk of revenue received is derived from tax on sales, for example, this may
be an unpredictable source of income particularly in times of economic uncertain-
ty whereby expenditure on consumer goods may be reduced due to reduced
disposable income. Although general tax revenue does represent a form of
prepayment and pooling of funds, which have considerable benefits over other
forms of health financing, it may not take into consideration varying income
levels. Pooling of funds, though it allows equalization of funds from all members
contributing to a pool, may also allow the poor to subsidize the rich. Solutions to
achieve greater equity within this financing mechanism would include income-
dependent financial contributions or government subsidization of the poor, as
employed by the Brazilian government (Musgrove, 1996). Despite its challenges,
general tax revenues are utilized in numerous countries to partially or fully
finance their health systems.

Social Health Insurance

Social health insurance (SHI) provides an interesting historical perspective in

that it was in many countries an important transition point in health system
financing from direct out-of-pocket payment (OPP) to general taxation (Saltman
& Dubois, 2004). The main drawback of SHI schemes is restrictions in eligibility
Ologunde: The Challenges of Health System Financing 405

as the schemes are often linked to wage-related contributions and so do not cover
the entire population. This is particularly the case in low-income countries (LICs)
where there is a large informal working sector, which represents that part of the
economy that is not subject to government regulation and taxation, and
consequently this leads to SHI failing to cover such workers. One of the major
benefits of SHI is that contributions are allocated exclusively for health-care
provision and as such the revenues generated do not suffer from public sector
competition, which is common with general tax revenues. In addition, these
schemes allow contributions to be collected relatively easily through salary
deductions, making it easier for organizations to identify subscribers and also
restrict benefits if contributions to the insurance plan are not made. In Germany
and the Netherlands more than 60 percent of health spending is covered this
way, whereas in other European countries such as Austria, Belgium, and
Luxembourg the figure is much less, with less than half of total health spending
coming via salary contributions to SHI (Busse, Saltman, & Dubois, 2004).

Private Health Initiatives

Another mechanism of health system financing is that provided by private

health initiatives (PHIs). PHI financing can however be associated with many
significant undesired effects, such as the refusal to insure those with greater than
average risk of poor health, thereby excluding those who arguably require access
to care the most. This mechanism of financing may also restrict access to care on
a financial basis by setting premiums that are beyond the affordability of many
within the population. In the United States this has led to numerous cases of
financial impoverishment (Himmelstein, Thorne, Warren, & Woolhandler, 2009).
On the other hand, private providers are able mobilize resources to a greater
degree than that of governments and this may be particularly crucial to health
systems during times of economic instability. As private insurance subscriptions
are not tax based, there is less scope for fund contribution evasion compared to a
general tax revenue funded health system as in the UK, for example. PHI schemes
also permit market competition with various providers to which users may
subscribe. This competition has several benefits for the user. These include
providing an incentive for PHIs to innovate in the delivery of health care, and
reduce subscription fees, as witnessed following the 1996 mergers in the reform
of the quasi-public PHIs in Argentina (WHO, 2000) and in the Estonian Health
Insurance Fund, which publishes performance indicators based on population
satisfaction of health insurance providers (Estonian Health Insurance Fund, 2009).

Out-of-Pocket Payments

Out-of-pocket payments consist of a direct financial transaction between an

individual and a health-care provider. These fees are not reimbursed by insurance
or state-funded schemes but entirely borne by the patient. This means of funding
health care is the predominant form of health system financing in LICs (Schieber,
406 World Medical & Health Policy, 5:4

Baeza, Kress, & Maier, 2006), but accounts for only 20 percent of total health
expenditure in high-income countries (Preker & Langenbrunner, 2005). Often the
poorest members of a society are the most vulnerable to the detrimental effects of
a health system funded by OPP, as it restricts access to only those who can afford
it (Nyonator & Kutzin, 1999). An example of this is Albania in 2002 where the
proportion of household income spent on health was twice as much in the
poorest fifth of the population compared to the wealthiest fifth of the population
(World Bank, 2003). In addition, OPP has the possibility of incentivising over-
servicing at the provider end, compounding the economic burden on the user.
Financial risk protection, one of the primary aims of an equitable health system
(Schieber et al., 2006), requires separation between revenue collection and
utilization, and is not possible with a health system based on OPP. Consequently
this represents a major disadvantage of OPP funded health systems (WHO, 2000).
Contrastingly, general tax revenue financing, which allows for the maximum
separation between collection of funds and revenue utilization, enables the
possibility of financial risk pooling. Separation between revenue collection and
expenditure requires administrations that have strong organizational capacity. In
LICs few institutions have such capacity and hence implementing a health system
financed in this way would be challenging, particularly in countries where there
is a predominant informal working sector (WHO, 2000). The share of prepayment
in total spending is the most important determinant of how fairly a health system
is financed (WHO, 2000) and as such OPP spending represents the most
regressive form of financing as it deters people from accessing health care when
they need to.

Eternal Aid

External aid, largely in the form of development assistance for health (DAH),
represents a critical contribution to health system financing in LICs, accounting
for 20 percent of health expenditure (Schieber et al., 2006). Despite increases in
overall DAH, allocation towards health sector support has remained a relatively
small proportion of total DAH (Ravishankar et al., 2009). This has raised concerns
about the effects of DAH on domestic expenditure in domains targeted by global
health initiatives and the effect of DAH on the health system in general (Travis
et al., 2004). Reported reductions in national health spending in, for example,
Ethiopia, Mozambique, Uganda, and Zambia have caused some to suggest that
the increase in external funding may have substituted domestic efforts (Ooms,
Van Damme, Baker, Zeitz, & Schrecker, 2008). Although cumulative DAH
funding is greatest in South American, Sub-Saharan African, and some Southeast
Asian countries, there is substantial variation across and within regions suggest-
ing that DAH contributions are influenced by numerous factors, including burden
of disease, political stability, and relations between donor and recipients
(Ravishankar et al., 2009). The reasons underlying reliance upon external aid are
often due to political instability, corruption, or as a result of postconflict damage
to the health system.
Ologunde: The Challenges of Health System Financing 407

However, notable health sector gains have been made in some countries. For
example, in Rwanda the Global Fund has supported progress towards universal
health coverage by developing existing community health insurance schemes
(Twahirwa, 2008). Despite some examples of success, global health initiatives are
often not targeted towards country-specific health needs, creating a misalignment
between global health policy and country requirements (Taskforce on Innovative
International Financing for Health Systems [TIIFHS], 2009b). Considerable fund-
ing is devoted to vertical, disease-specific, health initiatives and concerns have
been raised about the suitability of this model of DAH. Particularly in view of the
human workforce crisis in many LICs, vertical health initiatives may have the
unintended consequence of diverting human resources towards the care of certain
diseases at the expense of others (Joint Learning Initiative, 2004).

Innovative Financing

The various models of health system financing have their merits and
limitations and in practice a country rarely utilizes one mode exclusively but
rather draws upon the merits of various mechanisms. In the current climate of
economic recession in the context of increasing globalization and a double burden
of disease in many low- and middle-income countries (LMICs) the need for
alternative health financing strategies has never been greater. This is particularly
important in LICs where the current modus operandi consists of an over-reliance
on OPP and external aid. In this context alternative funding methods, such as
innovative financing, need to be explored in order to accelerate efforts towards a
more equitable approach to health system financing.
Innovative financing proposes alternate means of healthcare funding to those
currently employed to provide additional revenue for the health system. The
High Level Taskforce for Innovative Health System Financing (HLTIHSF)
suggested that an additional $36–45 billion is needed in order to achieve the
health MDGs (TIIFHS, 2009a). The 2009 report by the HLTIHSF proposed various
innovative financing options (TIIFHS, 2009a). These mechanisms consist of both
strategies to raise additional capital and strategies to maximize efficiency. In this
section we will focus only on mechanisms to raise additional revenue.
Raising taxes by expanding solidarity levies and taxes provides a means of
generating predictable and sustainable income for health financing. For example,
UNITAID, the international facility for the procurement of drugs against HIV/
AIDS, TB, and malaria, is largely financed by income raised through a mandatory
solidarity levy on airline tickets. This compares with general tax revenues and
can be used to subsidize or part substitute contributions from such revenues. In
France alone this levy generates s180 million a year in revenue (TIIFHS, 2009a).
These airline taxes generate substantial income, can be implemented with low
transaction costs, and are sustainable; however, they may meet technical and
political barriers to implementation (TIIFHS, 2009a). Despite this, these taxes
provide a favorable means of resource pooling with significant benefits over the
more regressive forms of financing such as OPP and PHIs. Another case of a
408 World Medical & Health Policy, 5:4

financing mechanism that can enable a predictable flow of income is the

International Financing Facility for Immunization (IFFIm). The IFFIm raises funds
through financial markets by leveraging pledges of future government donations.
Since its introduction in 2006, IFFIm has raised almost $2 million (TIIFHS, 2009a).
Funds raised by IFFIm have been used to expand global immunization access and
coverage.
Catalyzing non-tax revenues by encouraging voluntary or private contribu-
tion is an alternative method of revenue collection but holds less potential to raise
significant funds compared to taxes and may require significant upfront set-up
fees. Italy has proposed a De-Tax consisting of a share of VAT and a voluntary
contribution from businesses associated with the scheme (TIIFHS, 2009a). The
value of the De-Tax lies in its ability to raise additional capital, and cost-benefit
analyses are currently underway to explore its feasibility. This mode of revenue
collection may be difficult to implement in LICs due to weak economies and
already limited financial contributions from taxes as a result of predominant
informal sectors. The Millennium Foundation for Innovative Finance for Health
has proposed two initiatives with low administration costs and potential income
generation capability of $1 billion annually (TIIFHS, 2009a). The initiatives consist
of voluntary solidarity contributions linked to travel products, such as hotel
rooms and car rentals, and contributions linked to mobile phone use. Financing
derived from these contributions could be used in countries where OPPs
predominate, thus allowing governments to finance a set of predefined health
services available to those most unable to pay. These initiatives require up-front
investment in implementation and may be an unpredictable source of income.
Nevertheless, they do have the potential to raise additional funds and implemen-
tation is feasible in many LMICs where tourism, travel products, and mobile
phone use contribute significantly to the economy (Stenberg et al., 2010).
Innovative financing mechanisms represent tangible means of raising much-
needed additional capital to accelerate progress towards the MDGs and to aid
countries in health sector development by supplementing current revenue for
health system financing.

Conclusion

Policy discussions pertaining to health system financing often concentrate on

the impact of public and private finance on health system performance. The
evidence guiding policy is, however, equivocal. Health financing mechanisms
need to be appropriate for the specific country with an emphasis on equity,
income and risk subsidization, and a trend towards reducing OPP. To this end,
innovative financing mechanisms show great potential to raise the additional
revenue needed to fill the funding gap critical to the transition to more equitable
models of health-care financing in many LMICs. Making gains in efficiency will
also aid development of the health system, and thus innovations in procurement
to align service provision to country-specific needs are also crucial.
Ologunde: The Challenges of Health System Financing 409

Glossary

Development assistance for health: financial donations or loans for health

from public and private institutions whose primary purpose is to provide aid to
low-income and middle-income countries.
Equity: fairness in the distribution of the burden and benefit of health care
within a population.
General tax revenues: government income due to income and other tax
revenues levied on consumer products.
Gross Domestic Product: the monetary value of all the goods and services
(public and private) produced within a county in a specific time period.
Informal working sector: individuals who do not have employment security,
work security, and social security and form part of the economy that is not taxed,
monitored by any form of government, or included in any gross national product
(GNP) calculations.
Millennium development goals: eight international development objectives
that all 191 UN Member States have agreed to try to achieve by the year 2015 to
combat poverty, hunger, disease, illiteracy, environmental degradation, and
discrimination against women.
Out-of-pocket payment: unofficial or informal payments, and expenditures
imposed on service users in order to access health care that are not reimbursable
by insurers or other third parties.
Risk pooling/subsidization: evenly spreading the financial burden of risk
due to ill health among low- and high-risk groups.
Private health initiatives: health insurance schemes whereby buyers volun-
tarily purchase insurance from private, independent, competing sellers who
charge premiums that reflect the buyer’s risks rather than their ability to pay.
Public financing: financing mechanism whereby the at-point-of-use fees to
the users are subsidized, in part or whole, by the local government through
measures such as general tax revenues.
Public sector: refers to the part of the economy that covers publicly managed
or funded goods and services.
Social health insurance: health insurance whereby the employed pay
contributions to a provider that covers a package of health services available to
the insuree and their dependents should they need it. Contributions to the
insurance provider are often made by the insurees’ employer and sometimes
subsidized by the government in order to ensure or improve its financial
sustainability.

Rele Ologunde, BSc (Hons), is a medical student at Imperial College London. He

recently completed an intercalated BSc(Hons) degree in global health and has a
keen interest in global surgery, disaster and emergency medicine, and medical
education.
410 World Medical & Health Policy, 5:4

Notes

The author is thankful to Miss Victoria Rowe for her critical review of the manuscript.

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