Health Financing (and

Insurance)
AN INTRODUCTION TO HEALTH FINANCING
Some things to think about as we go…..

• What are the different ways in which countries choose to finance their health systems?

• How do these choices affect health systems goals of each country, i.e. better health for all
(Equitable Access), financial protection & responsiveness?

• How does the means of financing and paying for healthcare in a country affect the cost of care?

• How can payment methods impact health care utilization, efficiency, quality and costs?

• Does health spending impact health outcomes? What kind of variations do we see?

• How can increasing health needs be financed and paid for with limited resources? (cost
containment)
Health financing
• Generation of resources and their allocation for providing health services-
the flow of money through the system
Purchaser
/ Payor

Financing triangle

Patient/Citizen
Provider
3
 Financing triangle
Purchaser
Payor

Allocation Funding

Provider Citizen/
Patient
Delivery

Source: Elias Mossialos, Anna Dixon. Funding Healthcare: Options for Europe. WHO 2002
Ways in which money can flow through the
system: terminology!
Purchaser
1. You go to a GP for a consultation and pay a / Payor
fee at the end of the visit
2. You are admitted at a hospital and pay the
hospital bill at the end of the stay
3. You are admitted at a hospital and your
insurance provider covers the cost of your
hospitalization
4. You go to a government hospital for
treatment and don’t pay anything/ pay a
nominal cost

Patient/
Provider Population
5
Identify the money flow in the same examples:
1. You go to a GP for a consultation and pay a
fee at the end of the visit
2. You are admitted at a hospital and pay the
hospital bill at the end of the stay
3. You are admitted at a hospital and your
insurance provider covers the cost of your Purchaser / 4. Taxes (pre-paid) Public
hospitalization Payer financing
4. You go to a government hospital for
treatment and don’t pay anything/ pay a 3. Premium (pre-paid care,
nominal cost 3. Provider payments – fee not OOPE)
for service, case based
payments

4. Provider payments –
salaries, budgets

Patient/
Provider Population
1. Out of pocket expenditure
6
2. Out of pocket expenditure
Financing and payment methods within the Financing
triangle
OOPE/ User Charges
Citizen/Population/Patient Provider

Taxes
Statutory Health Ins.
Private Health Ins. Payment Mechanisms
CBHI Budgets, Fee-for-service, Capitation, Case-
based payments, Pay for performance

Payer/
Purchaser
Financing – how does it fit
within all health system
functions?
What is a health system

• All organizations, people and actions whose primary intent is to promote,

restore or maintain health.
• Complex
• Multiple actors- public sector | private sector | NGOs/not-for- profits
• Patients
• Consumers
• Treatment providers – individuals and institutions
• Preventive service providers
• Financial intermediaries, e.g. public or private insurance companies
• Input producers
• Planners, administrators, and regulators
• Other actors producing system outcomes
 The Health System lens: WHO building blocks
framework
Final goals
▪ Improving health
▪ Financial protection
▪ Responsiveness

Source: World Health Organization (2007). Everybody’s Business: Strengthening Health Systems to Improve Health Outcomes and WHR
Kheya Furtado | GIM 10
2000
 How can we impact system goals? How can we measure
performance?
A control knob
• Significantly determines health system
performance
• Something that can be changed
through reform / government
intervention

Source: Marc Roberts et al. 2002. Getting Health Reform Right

Goals of a health system
• Health status
• Level- Better health – goodness of the system
• Distribution- Equity- level across groups- fairness of the system

• Financial protection
• Preventing impoverishment
• Threat of impoverishment can also affect health status
• Fairness of financing

• Responsiveness / Citizen satisfaction

• Meeting people’s needs, notions of dignity, response to change
• Complexities: primary vs tertiary care
• Unnecessary treatment?
Financing methods- overview
• Taxation
• Direct taxes- on incomes/wealth – low in India
• Indirect taxes- on what people buy- high in India, disproportionately on the
poor
• General government expenditure may be divided among different sectors
• Taxes may be ear-marked, hypothecated
• Mandatory / statutory / Social Health insurance
• Collected by government, national body
• Employer, employee contributions
• Usually as a levy on earnings
• Voluntary insurance
• Voluntary pre-payments
• Pre-paid premiums to insurance companies
• User charges/ Out of pocket payments
• Paid when care is needed - At the point of care
• Contributes to catastrophic expenditure
• External aid
• Donor funding usually to low income countries
• Medical/Health savings accounts (minor source)
• Contributions made over time
• What is taken out of the account to pay for health is limited to what is put in
• Usually supplemented by VHI/ high deductible VHI plan (US)
• Requires a strong saving propensity (Singapore)

ALL COUNTRIES DRAW ON MORE THAN ONE SOURCE but the MAJOR SOURCE matters
 Mode of financing varies with national income

16
Source: Owen Smith, World Bank.
As countries get richer, governments spend more on health
Government health expenditure as a % of GDP is low in India for the country’s level of overall GDP

• Global average = 3%

• India - 1.3%
• South Asia average: 1.4%
• Lower middle-income: 1.6%

Kheya Furtado | GIM 17

Source: Owen Smith, World Bank. Government Health Expenditure database and World Development Indicators
 Higher government spending is associated with higher
service coverage, but other factors also matter

Source: Global Health Expenditure report 2023

Low government health budgets correlates strongly with
high OOPE
• Out of pocket expenditure-
direct payments made by
users to healthcare providers
at the point of care

• India among the highest OOPE

proportion of total health
expenditure

• OOPE most regressive form of

health spending, affects
utilization of care

19
Source: Owen Smith, World Bank. Addressing Fiscal space for Health
 How much does the world spend on Health?
Country share of global health expenditure in 2015, by income group

Total = USD
7.3 trillion

10% of global
GDP

How does
health
spending in
nations
correlate with
population
density?

High income –
17%
Middle
income – 76%
Source: World Health Organization (2018). New perspectives on Global Health Spending for Universal Health Coverage.
 What’s the source of revenue?
Public financing forms the majority of total health spending in
most developed countries

Source: OECD Health Statistics 2018.

 India snapshot
• Total Health Expenditure = 3.27% of GDP; INR 4863 per capita; 6,55,822
crore
• Government Health Expenditure = 41.4% of THE, 1.35% GDP, INR 2014
per capita
• OOPE = 47% of THE; 1.54% GDP, INR 2289 per capita
• Private health insurance = 7% of THE

Source: National Health Accounts 2023. Data for FY 2019-20

Exercise: India comparisons
• Total health expenditure as a percentage of GDP
• Per capita health expenditure
• Total health expenditure as a percentage of total government
expenditure (indicates health as a priority)
• Source: Global health expenditure database (WHO)
Does more health spending result in better health?
 GDP/Income and Life expectancy
• How Does Income Relate to Life Expectancy--HD.mp4
• Key messages:
• Richer countries have healthier people
• However, there are wide variations among middle income countries w.r.t varying life
expectancies at similar levels of income.

Source: https://www.gapminder.org/answers/how-does-income-relate-to-life-expectancy/
Therefore, methods of financing and payment
(rather than just the amount), can influence health
gains
Goals of a health system
• Health status
• Level- Better health – goodness of the system
• Distribution- Equity- level across groups- fairness of the system

• Financial protection
• Preventing impoverishment
• Threat of impoverishment can also affect health status
• Fairness of financing

• Responsiveness / Citizen satisfaction

• Meeting people’s needs, notions of dignity, response to change
• Complexities: primary vs tertiary care
• Unnecessary treatment?
 Components of a financing system

Source: WHO Europe/Joseph Kutzin- Health Financing Policy Paper

Kheya 2008/1
Furtado | GIM 31
Components of health financing 1/2
• Revenue Collection- some methods are associated with better
outcomes than others
• Taxes, premiums, OOP/user charges, MSAs

• Pooling- greater pooling brings about a more stable financial pool,

provides better purchasing power to payer/purchaser
• Risk pooling- high risk and low risk pools must be mixed
• Prevention of fragmentation of risk pools/ population pools
• Solidarity – well-off offset the cost of care for those who cannot afford
Components of health financing 2/2
• Purchasing- Decisions of what services to buy, from whom, at what
cost, how to pay for services
• Strategic versus passive purchasing
• Strategic- using information and data to make decisions on purchasing

• Stewardship- relates to overall oversight of all components of the

health system
• Governance- Managing the environment in which components of the health
system operate
• Information
• Regulation
Financing objectives
• Financial protection – protection against financial risk
• Fairness in financing - Promoting a more equitable distribution of burden
of financing the system

Intermediate objectives
• promoting equitable access and provision of services relative to the need
for such services and not ability to pay;
• Improving transparency and accountability of the system to the
population;
• Promoting quality in service delivery; and
• Improving efficiency in service delivery and the administration of the
health financing system
 Financial hardship and barriers in accessing
health

Source: World Bank and WHO. Tracking Universal Health Coverage: 2023 Global Monitoring Report
Financial protection- how is it measured
• Catastrophic health expenditure: % of households whose out-of-pocket (OOP)
payments for health care as a percent of household income or consumption
expenditure exceeds a certain threshold (10% /25%/40%)

• Impoverishment due to OOPE/ Poverty head count: % households whose income

fall below poverty line due to OOPE.
 Trend in catastrophic expenditure

India figures:

Catastrophic HE = 17.5%
(some states much higher)

Impoverishment = 8%

Source: World Bank and WHO. Tracking Universal Health Coverage: 2023 Global Monitoring Report
 High level of correlation between OOPE spending and catastrophic health expenditure

Source: WHO Europe/Joseph Kutzin- Health Financing Policy Paper 2008/1

Fair financing/ Equitable financing

• Households ought to be required to pay for health care in line with their
ability-to-pay (WHO 2000)
• Delinking payments from utilization- Flat rate tax would also accomplish this
• Health spending reduces the ability to households to pay for other needs –ex: food | redistribution
effect is of importance
• Health spending is involuntary
• Community as a whole should jointly bear the financial burden of such shocks in order that the
distributions of health status and disposable income are not worsened- solidarity

• Comprehensive analysis required- consider

• Who pays (directly through OOP , voluntary and mandatory prepayments for insurance, indirectly in
the form of taxes)
• Relative contribution to total health system funding
How to fairly finance:
• Vertical equity (different but fair treatment of un-equals, based on
ability to pay)
• households of unequal ability to pay -make appropriately dissimilar payments
• Consideration has to be given to the precise form that the differential
treatment should take
• Progressive- Regressive – Proportionate

• Horizontal equity (similar treatment of equals)

• Households of the same ability to pay make the same contribution
• Households with equal disadvantage should be treated no differently from
each other
Assessing equity of financing

Perfect equality

Source: Adam Wagstaff, Caryn

Brekedamp, World Bank. Module 4.
Adept.
 Equity in utilization of care / access to care

Source: WHO Europe/Joseph Kutzin- Health Financing Policy Paper 2008/1

The Market
• Producers (sellers) and Consumers (buyers) interact to trade goods and
services.
• Forces of demand and supply work to achieve optimal price at which goods
are sold and bought.
• All markets work to achieve economic efficiency in resource allocation–
maximum satisfaction at lowest cost for consumers, minimum unit cost of
production for producers
• Ideal market conditions lead to efficient resource allocation
• examples: consumers have requisite information about products
• Demand / Supply certainty
• A person is the best judge of his/her welfare
• Firms do not have monopoly powers

• Market failures lead to a loss of resources and welfare

Market failures in Healthcare
• Uncertainty of HC
• Information Asymmetry
• Doctor-patient
• Supplier induced demand
• Patient- Insurance
• Moral Hazard
• Adverse Selection
• Externalities (the presence of externalities make health a merit good)
Efficiency
Using your limited resources in the best possible way to achieve your
goals

Inefficiencies in Health Markets can result in the following:

• May deny health gain to patients who have received treatment because they do not receive the best
possible care available within the health system’s resource limits;

• By consuming excess resources, inefficient treatment may deny treatment to other patients who could
have benefited from treatment if the resources had been better used;

• Inefficient use of resources in the health sector may sacrifice loss of consumption opportunities elsewhere
in the economy, such as education or nutrition;

• Wasting resources on inefficient care may reduce society’s willingness to contribute to the funding of
health services, thereby harming social solidarity, health system performance and social welfare.

46
 Efficiency

Technical Allocative
Efficiency Efficiency

47
• Allocative efficiency – or doing the right things (providing highest
value health services for available resources)
• Technical efficiency – or doing the things right (how resources are
used during service provision)
• An efficiently organized health sector will maximize the use of
available resources, such that the least amount of resources is used to
produce the most outputs.

Tools for using evidence to improve efficiency:

Cost-effectiveness Analysis: outcomes (ex: in life years, DALYs, QALYs) per unit cost of
input

Health technology assessments (HTAs): for payers to obtain maximum output/gains

from their financial contribution
 Example
What should a national government spend on AIDS vs TB vs Malaria?
Question of allocative efficiency

Burden of Disease (DALYs)

Funds ($)
TB $
TB (DALYs)
HIV $

HIV Malaria $
(DALYs)
TB $

HIV $
Malaria (DALYs)
Malaria $
49
Source: Aakansha Pande, World Bank Group
Cost per QALY for benefits packages
 Indications of low technical efficiency

Source: Chen W, Tang S, Sun J Ross-Degnan D, Wagner A. Availability and use of essential medicines in China:
manufacturing, supply, and prescribing in Shandong and Gansu provinces. BMC Health Serv Res
2010;10:211
as as
Trade-offs in health financing policy: Can you
accomplish both objectives?
• EQUITY

• EFFICIENCY

Examples

• User fee- moral hazard (eff) vs burden of pay on poor households(equity)

• Ranking therapies by priority and exclusions from benefits packages

• Setting up geographically accessible PHCs versus as per population norm

Health Financing Policy questions
• Is the funding system progressive (vertically equitable)?

• Is the funding system horizontally equitable?

• Does funding result in redistribution of resources?

• Does it result in overall financial protection?

• How does the funding system affect access to health care?

• How does the funding system affect allocative efficiency and technical
efficiency?

• How does the funding system affect cost containment?