Health Care Financing

Learning outcomes
• Describe the functions of health care financing
• Discuss the different sources of revenue in health care
financing
• Compare and contrast health care systems from various
countries
• Assess how alternative models of health care financing
perform in Ethiopia
• Analyze the role of government in financing health
care in Ethiopia
• Evaluate the alternative revenue collection
mechanisms in Ethiopia
• Evaluate the role of donors in financing the Ethiopian
health care system
 1. Introduction
• Sub-Saharan African countries set the SDG agenda
for sustainability of the national health targets.

• Despite their efforts, however, health systems are

facing challenges of rapid population growth,
increasing burden of chronic diseases, natural& man
made catastrophes

• These are placing an additional burden on the already

stretched health systems, and inequity
 1. Introduction . . .

• The establishment of universal health care coverage

would require strong health financing systems.

• This prompts the question: how can a meaningful and

functioning health financing system be established?
 “The Four U’s”: Health Shocks
 …are unwanted/undesirable.

 unlike many other goods/services,

people generally do not want to
consume medical care unless they have
no choice.

 …are largely uncertain/unpredictable at the

individual level.

 …are uncommon, usually concentrated in a

relatively small share of the population.

 …occur in unison with financial shocks.

 direct OOP health-related expenditures.

 indirect costs due to inability to work,
etc.
UHC recognizes this health shock-financial shock duality and these
characteristics make it desirable for health to be financed using prepaid/pooled
sources and mechanisms, not OOP.
 Cross-Subsidization is Intrinsic to Pooling

Cross-subsidy from Cross-subsidy Cross -subsidy from

from productive to non-
low-risk to high-risk
rich to poor productive part of
(risk subsidy)
(equity subsidy) the life cycle

Non
Hig Pro
-
h Ric duct
Low Poo pro
risk h ive
risk r duct
ive

Health risk Income Age

 Conceptualizing UHC
What is Missing:

Three
Dimensions: Quality of health
Total health
expenditure care;

Population
coverage Foregone care
(“breadth”); due to distance
and/or high OOP;

Service coverage Prepaid/pooled

health expenditure
(“scope”); Indirect costs of
illness/waiting
time
Financial
coverage
(“depth”).
 UHC is a SDG
SDG 3: “ensure healthy lives and promote well-being
for all ages”

Target 3.8:
Achieve
universal health
coverage

Indicator 3.8.1: Indicator 3.8.2:

Coverage of essential Financial protection
health services for all
 Narrow Concept:
Financing Defined as Mobilizing Financial
Resources
 Broad Concept of Health Financing
Revenue collection

Risk pooling

Resource allocation

Provider payment
 Health Financing Modalities
General • Each modality is associated
Government
Revenue with different instruments
for revenue generation,
Out-of- Social Health pooling, and purchasing of
Pocket Insurance health services.
(OOP) (SHI)

• Rarely do we see a “pure”

form exist in a country and
all countries are hybrids.
Community-
External
Based Health
Sources • Some form of
Insurance
prepayment/pooling in all
modalities except for health
Voluntary
Private systems financed
Insurance predominantly by OOP.
 General Government Revenues
Resources from general government revenues include “direct” taxes (e.g., on income, payroll,
property, wealth, and corporate profits), “indirect” taxes (e.g., on consumption such as sales
tax, VAT, excise tax, export and import duties), and other non-tax revenue sources (e.g., from
natural resources such as oil).
Strengths Weaknesses Examples

 Broad revenue base
comprising tax and non-tax
sources;
 Pool risks for entire
population. Easy to extend
coverage to all, including
those in informal sector.
 Financial burden of financing
health (and other sectors) can
be spread across entire
population.
 Can be a progressive source of
financing in some countries.
 Potentially unstable source due to
annual budget process, sensitivity to
political priorities, weaknesses in
public financial management, and
exposure to macroeconomic
volatility.
 Poverty, large informal share of
economy, and capacity constraints
limit revenue-generating capacity in
many developing countries.
 May be regressive in some countries;
“excessive” taxation may have
adverse macroeconomic
implications.
 Tuvalu, Cuba, Solomon
Islands, Micronesia,
Seychelles, Brunei, Timor-
Leste: >90% total health
expenditures is general
government revenue financed.
 Other prominent examples:
UK, Australia, Canada,
Norway, Denmark, Sweden,
Italy, Malaysia, New Zealand,
Spain, Portugal.
 Social Health Insurance
Resources from mandatory earmarked payroll/income contributions by employers and
employees that are typically pooled by independent/quasi-independent insurance
agencies/“social health insurance funds” but can also be implemented as compulsory private
insurance; in modern social health insurance programs, governments pay contributions on
behalf of poor.

Strengths Weaknesses Examples

 Additional revenue source: “benefit
tax” and contributions from
employers.
 Removes health financing from
annual general government
appropriation process.
 Facilitates organizational change
(e.g., purchaser-provider splits and
new provider payment mechanisms).
 Can enhance transparency and
accountability, linking financing
with clearly defined benefits.
 Difficult to mandate and collect
contributions in countries with
large levels of informality and
self-employed workers.
 Often requires extensive
subsidization/co-financing from
general government revenues in
developing countries
 Mandatory payroll contributions
can increase labor costs, reduce
competitiveness, and contribute
to informality.
 Moral hazard.
 Czech Republic, Croatia,
Netherlands, Japan, France:
>70% total health
expenditures is social health
insurance.
 Other prominent examples:
Estonia, Slovenia, Belgium,
Germany.
 Compulsory private
insurance: USA,
Netherlands, Switzerland.

Resources from external sources – bilateral aid, multilateral organization,
external philanthropic organizations, etc. -- which are channeled either via
government budget and/or via NGOs.
Strengths
 Can be critical in conflict/post-
conflict settings.
 Allows low-income countries
to provide access to services
that they would normally not
be able to afford (e.g., for
HIV/AIDS, onchocerciasis).
 Financing often comes with
much-needed technical
assistance.
 Introduction of procurement,
financial management, and
monitoring systems that are
often superior to those in host
External Sources
Weaknesses
 Key challenges with regard to
harmonization, additionality,
predictability, and alignment
with national priorities.
 Can skew and distort service
delivery in capacity-constrained  Other prominent examples:
settings.
 Financial and programmatic
sustainability is challenging
when countries “graduate” from
external financing.
Examples
 Malawi, Micronesia,
Burundi, South Sudan:
>65% total health
expenditures is externally
financed.
Lao PDR, Solomon Islands,
Vanuatu, Timor-Leste:
>25%; Low income
countries with external
share: <10% Togo,
Bangladesh, Chad.
 Voluntary Private Insurance
Financing via private voluntary contributions to for- and/or non-profit private insurance
organizations.

Strengths Weaknesses Examples

 Adverse selection.  Bahamas, South Africa.

 Increases financial
protection and access to
 Generally not effective in
health services for those
reducing cost pressures.
choosing and able to pay.
 May be inequitable without
 When an “active
public intervention either to
purchasing” function is
subsidize premiums or regulate
present it may also
insurance content and price.
encourage better quality and
cost-efficiency of health
 Applicability in developing
care providers.
countries requires well-
developed financial markets and
strong regulatory capacity.

 Often associated with high

administrative costs.
 Community-Based Health Insurance
Not-for-profit pre-payment plans for health care, with community control and voluntary
membership, care generally provided through NGO or private facilities.

Strengths Weaknesses Examples

 Promotes prepayment.  Access and financial  Rwanda.

 Plays a role in
mobilizing additional
resources, providing
access and financial
protection in low-
income settings.
protection impact are
limited due to the small
size of most schemes.
 Financial sustainability
of most schemes is
questionable.

 Provide some form of  Impact on service

coverage, better than delivery usually
not having any. limited.
 Out-of-Pocket
Financing by OOP payments made by users at point of service of contact with public and/or
private providers.

Strengths Weaknesses Examples

 Patients can choose  Inequitable: connects access to  Azerbaijan, Nigeria,

providers. health care with ability to pay; Afghanistan, Yemen,
generally regressive. Sudan: >60% total health
 Discourages unnecessary expenditures is OOP.
over-utilization.  Inefficient: deters utilization;
constrains redistributive capacity  Other prominent
 When combined with of health systems. examples: Georgia,
medical savings accounts, Singapore, Albania.
can promote individual  No pooling of risk: exposes
pooling over time. individuals to health as well as
catastrophic financial shocks.

 “Negative user fees” are often

what is needed to stimulate
utilization, especially for
preventive care.
 Balance of revenue and cost
• As a rule, the rate of increase in total health care expenditure
should not exceed the rate of GDP growth of a country.

• While Ethiopia and several other developing nations may still

have scope to increase the share of health expenditure in total
as a proportion of GDP,

• a fundamental requirement which lies at the core of good

health care financing systems is the efficient use of resources.
Balance of revenue and cost . . .
Health Care Financing in Ethiopia
 Learning outcomes

• Discuss the rationale and functions of health care

financing
• Examine the basic concepts and components of health
sector reform
• Analyze the role of government in financing health
care in Ethiopia
• Describe the health care financing reform in Ethiopia
• Identify the different HCF components
 1. Introduction
• Health care financing reform in Ethiopia began with a
strategy document in 1998, with implementation
following in 2004.
• Reform was necessary because up until then, all revenue
collected by health facilities was transferred to the finance
bureaus and Ministry of Finance.
• This meant that any fees collected from the health
facilities could potentially have no direct benefit to the
health delivery institutions themselves.
 1. Introduction . . .
• Health facilities also suffered from shortage of
essential drugs and supplies, and out-of-pocket
spending on health was very high for most
Ethiopians.

• All of these deficiencies demanded the introduction

of new health care financing reforms.
 1. Introduction . . .
• In June 1998 the council of ministries of the FDRE
approved the Ministry of Health’s proposed health
care and financing reform strategy, which established
a new policy of health care financing.

• The strategy sought to spread the cost of health care

to multiple financing mechanisms, thereby making
funding more sustainable.
 1. Introduction . . .
• The reforms were intended to bring about increased
levels of decentralized ownership and
• to assist local government in taking leadership in
health care quality improvement for their
communities.
The major goals of reform were to:
• Identify and obtain resources
• Increase efficiency in the use of available resources
• Promote sustainability and
• Improve quality and coverage of health services.
 Guiding principles and
implementation strategy
 Services were to be offered on the basis of
cost sharing between patients and providers
of the services, developing and revising fee
schedules.
 User fees were to be retained and used by
the facilities
These can also be used to outsource non
clinical services to the private sector in order
to increase supply and reduce cost.
 Guiding principles . . .
 Any fee waivers were to be granted to reduce
financial barriers for the poor and;
 exemptions shall be given to encourage
consumption of particular kinds of preventive
or public health services.
 The cost of fee waivers were to be covered by
an appropriate third party, and eligibility
criteria were to be revised.
Accountability and governance structures
would also be revised.
 Main components of health sector
financing reform in Ethiopia
• In most developing countries like Ethiopia;
• Infrastructures are seriously deteriorated
• Physical access to health service providers was
beyond the reach of the majority of the rural
population and the poorest in society.
• Health service delivery was inefficient and
inequitable
• Quality of health care was generally poor.
• Overall national budget was limited, resulting in
the inadequate financing of health care services
 Health Care Financing Reform Components

1. Revenue retention and utilization

2. Systematizing fee waiver system
3. Standardizing exemption services
4. Outsourcing of nonclinical services in public
hospitals
5. User fee setting and revision
6. Initiation of health insurance
7. Establishment of a private wing in public hospitals
8. Health facility autonomy through establishment of
governing bodies
 1. Revenue Retention and Utilization

 Ethiopia has a tradition of paying for health services, that dates

back to the introduction of the modern health service delivery
system.

 In Ethiopia, all public institutions that are collecting revenue

are supposed to channel their revenue to the central treasury

 Similarly, in the health sector, health facilities were channelling

all revenue that they had been generating internally to the
treasury.

 and receive their operational funding in the form of a

government budget.
 1. Revenue Retention and Utilization…

 This caused a lack of sense of ownership by health

facilities,

 Health facilities faced a serious shortage of resources

to cover their operational costs,

 In most cases, their non-salary operational budget was

being depleted by the end of the first quarter

 Resulted in critical shortage of resources and poor

quality of health care.
 1. Revenue Retention and Utilization…

 In response to this problem, the health care

financing strategy, followed by the respective
regional and federal laws,
 allowed health facilities to retain and use their
revenue for health service quality
improvements.

• Hospitals and health centers are allowed to

retain and use their revenue for service quality
improvements.
 2. Systematizing Fee Waiver System

 Ethiopia institutionalized mechanisms for

providing services to the poor free of charge

 through a fee-waiver system, as well as

 through free provision/exemption/ of

selected public health services

 However, a strong need existed to systematize

and standardize these services.
 2. Systematizing Fee Waiver System…

 For instance, local authorities had been issuing fee

waiver certificates to the poor as verified through
local social justice systems at the time of sickness.

 This resulted in cumbersome procedures that caused

delays in the poor’s ability to access care.

 This was not the case for individuals in higher income

categories, and the system therefore created health
care inequities.
 3. Standardizing Exemption Services

 In the Ethiopian health system, some public health

services have been provided to all citizens free of
charge regardless of level of income.

 This has occurred because of the nature of these

activities and because of the need to promote use of
certain health care services.

 although exemption services were more standardized

across regions, some services needed standardization
by government.
 3. Standardizing Exemption Services…

 Services that were provided free of charge in

some public health facilities were not free in
others.

 In addition, there was no clear distinction

between the financing and service provision.

 Health facilities were providing free services

without budgetary/funding support for these
activities.
 3. Standardizing Exemption Services…

Activity:
In pairs list all health services exempted by
the Ethiopian government and how the
reimbursing mechanism is covered?
 4. Outsourcing of Nonclinical Services in
Public Hospitals
 Hospital management was spending
considerable time and resources on
 routine administration and management of
human and material resources for provision
of supportive services for these health
facilities.

 When managed by hospitals, these services

tend to be inefficient and expensive.
 4. Outsourcing of Nonclinical Services in Public
Hospitals
 This includes services such as:
 catering,
 laundry,
 cleaning,
 gardening,
 security, and
 maintenance.

• The purpose of outsourcing is to improve efficiency,

reduce costs, and enable health facilities to focus on
their core clinical services.
 5. User Fee Setting and Revision
 In the Ethiopian public health system, health
facilities have been collecting revenue in the
form of user fees for more than half a century.

 However, these fees have never been

systematically revised and no longer reflect the
cost of providing services,

 They did not consider the user’s ability to pay

for the services.
 5. User Fee Setting and Revision…
 The health care financing strategy clearly
stipulated that user fees needed to be revised to
reflect the costs of delivering health care
services,
 And also underscored that individuals should
be charged according to their ability to pay.
 Cost sharing between the government and
users was one of the principles of the health
care financing strategy.
 6. Initiation of Health Insurance

 As previously mentioned, out-of-pocket spending

accounts for a significant proportion of health sector
spending.

 Direct payment at the time of sickness is considered

“unsuited,” because it could inhibit access, especially
for the poor, and because of “the risk of
impoverishment
 6. Initiation of Health Insurance…

 Direct payments are inequitable as they are regressive,

allowing the rich to pay the same amount as the poor .

 The WHO revealed that if households are spending

more than 40% of their disposable income, they could
become impoverished.

 Given the poverty level of nearly one-half of the

population in Ethiopia,

 It initiated health insurance schemes

 6. Initiation of Health Insurance…

 Social health insurance for the formal

sector civil servants

 Community-based health insurance for

citizens in the informal and agriculture
sectors.

 Private health insurance for private

sectors
 6. Initiation of Health Insurance…

 Assignment:
 Prepare a detailed description of the
current HI schemes in Ethiopia
 Implementation
 Challenges
 7. Establishment of A Private Wing in
Public Hospitals
 In most regions and at the federal level, public
hospitals are allowed to open and operationalize a
private wing with the primary objective of

 improving health workers’ retention,

 providing alternatives and choices to private health

service users, and

 generating additional income for health facilities.

 8. Health Facility Autonomy through Establishment
of Governing Bodies
• Before the introduction of health financing reform, health
facilities experienced awkward and inappropriate
communications from major administrative health officials at
different levels.
 These decision makers were also physically detached from the
health facilities and were not responsive to day-to-day client
health service needs.

 The need for health facility autonomy through establishment of

a health facility governing body was found to be critical,

 Governing bodies/board/ include representatives from the local

administration, the health facility, and the local community.
 5. Health financing reform achievements in
Ethiopia
• In 2004/5, the three big regions of Amhara,
Oromia and SNNP adopted the legal and
operational frameworks for HSFR
• The legal frameworks and operational
manuals further implemented by the
remaining regions
• Gov’t authorities at all levels found that the
operational frameworks and guidelines were
very useful for proper implementation of the
various reform components.
Performance in the main components of
HSFR in Ethiopia

Reading assignment
 Insurance
 Reducing risk by combining a group of risks so that
the accidental losses to which the group is subjected
become predictable within narrow limits.

 Pooling of accidental losses by transfer to an insurer,

who agrees to indemnify/cover/ insureds for such
losses and render services connected with the risk.
• Types of insurance can include:
– Automobile
– Health
– Life
– Disability
– Homeowners/Renters
 Health Insurance
 Health insurance is a means of pooling risk across different
population groups as a means of avoiding the financial burden
of unanticipated and catastrophic.

 A means by which money is raised to pay for health services

by financial contributions to a fund

 The fund then purchase health services from providers for the
benefit of those for whom contributions are made or who are
otherwise covered by the system/design
 Benefit of Insurance

 Certainty is gained at the cost of a reduction in wealth.

 The certainty is “experienced” because the risk is transferred

to the insurance company.

 The insured benefits from insurance whether or not there was a

loss.

 Therefore, the primary benefit of insurance is certainty, not the

payment of a claim.
 Demand for Insurance by Individuals

 Why do individuals take actions to reduce risk?

 Simple answer: they are risk averse

 Risk aversion ==> prefer certain outcome to an uncertain

outcome with the same expected value
 Risk Aversion

 A risk averse person prefers a certain amount of wealth to a

risky situation with the same expected wealth

 Example:

 Would you accept a 50-50 chance of winning $1,000 or

losing $1,000?

 The gamble does not change a person’s expected wealth,

but it makes the person’s wealth uncertain

 A risk-averse person therefore would choose not to accept

the gamble
 Factors Affecting the Demand for Insurance

 Premium Loadings
 As loading increases, quantity of insurance purchased
generally falls

 Income and Wealth

 More wealth is usually associated with more assets to lose
and therefore more insurance coverage
 Limited resources may prevent people from purchasing
insurance
 Limited liability may cause poor people to buy less liability
insurance coverage
 Factors Affecting the Demand for Insurance…

 Information
 Individual’s perception of loading
 Underestimate the true risk ==> buy less insurance
 Overestimate the true risk ==> buy more insurance

 Other Sources of Indemnity

 If others (e.g., society or family) will pay uninsured loss, buy
less coverage

 Non-monetary Losses (examples: pain and suffering)

 Demand for insurance against non-monetary losses differs
from demand for insurance against monetary losses
 Estimating Demand for Medical Care

 Quantity demanded = f( … )
 out-of-pocket price
 real income
 time costs
 prices of substitutes and complements
 tastes and preferences
 profile
 state of health
 quality of care
 Determinants of Health Insurance Demand

1 Price of insurance
 The consumer will forego/ give up/ health insurance if the
premium is greater than expected.

2 Degree of Risk Aversion

 Greater risk aversion increases the demand for health
insurance

3 Income
 Larger income losses due to illness will increase the
demand for health insurance
 Determinants of Health Insurance Demand

4 Probability of ILLNESS
 Consumers demand more insurance for events most likely
to occur
 Consumers demand less insurance for events least likely to
occur
 Consumers more likely to insure against random events
 Types of Health Insurances
Health insurance Advantages Challenges
model
1.National / state-funded • Comprehensive coverage • Funding subject to political
of population pressures and available tax
(Beveridge) •Progressive revenue revenues
collection • Potential inefficiency in
Funding source: General • Large scope for raising healthcare delivery because
tax revenues resources of lack of competition and
• Simple mode of provider choice
governance
• Potential for administrative
efficiency
2.Public sector -Social • Mobilizes resources from • Coverage limited to
Health insurance employers for health workers employed in formal
• Funding typically sector
(Bismark) earmarked for health • Less progressive if tax is
• Can be progressive capped
Funding source: Payroll • Strong support from • Burden of payroll
taxes covered population contributions may increase
unemployment
• More complex to manage
 Types of Health Insurances…
Health insurance Advantages
model
3.Community-based • Available to low-income
(micro-insurance or groups& informal sector
mutuelles) workers
• Useful complement to
Funding source: other financing
Premiums paid by mechanisms, such as user
households fees or SHI
• Facilitate government or
donor funding to subsidize
premiums to target
populations
4.Voluntary (private) • Financial protection for
higher income population
Funding source: • Can supplement state or
Premiums paid social insurance coverage
by households or • Can build local capacity
employers / in professional insurance
employees management
Challenges
• Limited financial protection for
members
• Small risk pools risks
sustainability (bankruptcy
common)
• Exclusion of poorest without
subsidies
• Limited effect on delivery of care
• Require national-level political
and financial support to achieve
breadth & depth
• Typically limited to higher
income populations
• Plans compete for healthy /
wealthy members
(cream-skimming)
• Increases differentials in
access based on income
• Has high administrative costs
How does insurance affect the demand for Health
care?
1. Coinsurance - A form of medical cost sharing
in a health insurance plan that requires an
insured person to pay a stated percentage of
medical expenses after the deductible
amount, if any, was paid.
Patient pays only a fixed % of the cost of each visit
(often C = .20)
e.g. If the visit costs $ 100: patient pays $ 20,
insurance pays $ 80
2. Maximum/ limit- Insurer covers all costs until
some upper limit is reached
3. Indemnity Insurance( Co-pays)
– Insurer pays a fixed amount for each purchased
service (e.g. Physician office visit) and patient pays
any additional costs.
• Insurer pays $150 for each overnight hospital
stay, and patient pays the rest

Price
$150

D1
D0

Visits
 4. Deductible
 A fixed money amount during the benefit period -
usually a year - that an insured person pays
before the insurer starts to make payments for
covered medical services.
 Plans may have both per individual and family
deductibles.
 Some plans may have separate deductibles for
specific services.
e.g:- a plan may have a hospitalization deductible
per admission.
 Patient pays a fixed amount out of pocket, then
insurance company pays all additional costs
 Payment Methods
Payment:
 The allocation of resources (usually money) to health sector
organizations and individuals in return for some activity (e.g.
delivering services managing organization)

Methods:
 Third party payment-fee for services
 Capitation
 Out of pocket payment (self insurance)
 1. Third party payment (fee-for-service)

 Payments to a provider for each act or services rendered

 A payment mechanism where by a provider or health care

organization receives a payment each time a reimbursable
services is provided (e.g. office visit, surgical procedures,
diagnostic test, etc)

 The fee-for services system encouraged physicians to provide

more care than necessary in order to increase their income, as
they were paid for each service or procedure they provided
 Rationale for third party payment

 Public demand and political commitment to equity

 Dominance of provider interest groups

 Market failure

 Imperfect information

 Externalities
 Imperfect Information and Uncertainty

 Do not know how long you will live,

 Do not know how healthy you will be in the future.

 Do not know when you might be unhealthy.

 Do not know how much health care you might need.

 Do not know how much change in health will affect future

income
 2. Capitation

 A fixed payment to a provider for each listed or enrolled

person served/period of time

 A payment mechanism where by an organization receives a

fixed, specified amount of money per time period (e.g. month,
years) for each individual for which it is responsible for
meeting health needs (e.g. primary care, regardless of the
volume of services rendered)
 2. Capitation…

 In other words, payments will vary according to the number

of patients enrolled, but not with the number of services
rendered per patient

 Prevents overuse of services

 Could limit necessary services

 3. Out of pocket payments

 Fee paid by the consumers of health services directly to the

providers at the time of delivery.

 Health care - commodity

 Government role small or nonexistent

 Those in need least able to pay

 Poor health reduces ability to earn

 Summary
• Insurance schemes can have an important role
to play in helping people by:

– filling financing gaps in the health sectors of

low-income countries;
– providing coverage to poor people;
– increasing risk-sharing and the level of
protection offered;
– improving quality access to health care
 Contributions of Insurance
Therefore, insurance schemes have to be
considered in relation to the contribution they
make towards

– Universal access,

– Horizontal and vertical equity

– Efficiency within a country