Functions of Health Financing

MGT 611 Health Financing and Insurance
Functions of Healthcare
Financing
National Open College (NOC)
Pokhara University
PRESENTED BY:
SHARMILA SHRESTHA
Assignment Questions
Q1: What is the major function of health care financing in Nepal?

Q2: Explain the performance of public spending on health can improve.
Functions of Health Financing
Health Financing Functions in Nepal
Public Spending in Health

Health Financing
Health financing is “the function of a

health system concerned with the
mobilization, accumulation and allocation
of money to cover the health needs of the
people, individually and collectively, in
the health system.”
Function of healthcare financing Each country makes different
choices about how to raise
revenues, how to pool them and
how to purchase services.
Raising revenue
Pooling of funds
Purchasing services
Reference:
Health Systems Financing: the Path to Universal Coverage, The World Health Report 2010, World Health Organization (WHO)
Healthcare Financing
A core function of health systems that can enable progress towards universal health
coverage by improving effective service coverage and financial protection.
Revenue raising (sources of funds, including government budgets,

WHO’s compulsory or voluntary prepaid insurance schemes, direct out-of-
approach to pocket payments by users, and external aid)
health
financing Pooling of funds (the accumulation of prepaid funds on behalf
focuses on of some or all of the population)
core
functions: Purchasing of services (the payment or allocation of resources
to health service providers)
Reference:
World Health Organization (WHO). Health Finance factsheet. 2023
Raising revenue
Raising revenue is what most people associate with health financing.

It is the way money is raised to pay health system costs.
Money is typically received from households,

organizations or companies, and sometimes from
contributors outside the country (called “external
sources”). Resources can be collected through
general or specific taxation; compulsory or
voluntary health insurance contributions; direct
out-of-pocket payments, such as user fees; and
donations.
Reference:
World Health Organization. Health systems financing: the path to universal coverage. (No Title). 2010 Nov 22.
Principles and recommendations guiding the revenue raising policy:
Countries must move towards a predominant reliance on public funding (compulsory and pre-paid)
for its health system. i.e. taxes.
A compulsory source means that the government requires some or all people to make the payment,
whether they use the health service or not.
Out-of-pocket payments are almost always regressive i.e. lower-income households face greater
financial burden.
Despite growing interest in new taxes, the scope to raise significant resources from these sources is
often limited; furthermore, general allocations may be reduced, effectively offsetting new revenues
where these are earmarked.
More importantly the political commitment adequately fund the health sector, not whether funds are
earmarked.
Reference:
World Health Organization. Health systems financing: the path to universal coverage. (No Title). 2010 Nov 22.
Pooling of funds
The accumulation and management of prepaid financial resources.
It creates opportunities for redistribution of resources to support equitable access to

needed services and greater financial protection even if additional revenues for universal
health coverage cannot be raised.
Pooling arrangements set the potential for what can be redistributed, the extent to which
this is realized in practice depends on the purchasing function, which drives expenditures
and incentives that in turn have important implications for the intermediate objectives of
efficiency and equity in resource distribution.
Risk pooling
The main purpose of pooling is to spread the financial risk associated with the need to
use health services.
Risk pooling is the collection and management of financial resources so that large
unpredictable individual financial risks become predictable and are distributed among all
members of the pool
The accumulation and management of financial resources to ensure that the financial
risk of having to pay for health care is borne by all members of the pool and not by the
individuals who fall ill.
Reference:
World Health Organization. Health systems financing: the path to universal coverage. 2010 Nov 22.
Pooling of funds
The WHO defines the purpose of risk-pooling as being “to spread financial risk across
the population so that no individual carries the full burden of paying for health care”.
Larger rather A more diverse Compulsory

than small risk mix within rather than
funds pools voluntary pools
To make progress towards Universal health coverage (UHC)
Reference:
Pooling revenues and reducing fragmentation. World Health Organization (WHO).
Funds pooling mechanism
• Government revenues
• National insurance systems
• Social health insurance systems
• Community based insurance systems
• Private health-insurance
Reference:
No risk pooling Level
Each person of risk
pays forpooling
their own health care needs and all
liability lies with the individual
Fragmented risk A series of independent risk pools for different population

pooling groups
Level
of
pooling
Financial transfers are made across fragmented risk pools to
Integrated risk
mitigate the health inequalities and risks of poor financial
pooling
protection which arise from fragmented risk pooling
Unitary risk All health risks for a population are pooled together in a
pooling single national fund
Reference:
Smith PC, Witter S. Risk pooling in health care financing: the implications for health system performance. 2004
Purchasing services
Purchasing is a core health financing function that refers to the allocation of funds to
public and private health care providers for the services they provide. WHO 2019
It is the link between the revenue raised from financing the health system, the pooling of
these funds, and the flow of funds to providers using different payment mechanisms in
exchange for the delivery of services.
Purchasing involves making decisions about what services to purchase (health benefits),
what (and how) to pay for them, which providers to contract with, and what quality and
outcomes can be expected.
Reference:
Health Financing Concepts. Health financing: the basics. USAIDS
Purchasing services
An Institutionally
For Government to provide
separate purchasing
budgets directly to its own
agency (e.g. a health For an individuals
health service providers
insurance fund or
(integration of purchasing to pay a provider
government authority)
and provision) using directly for
to purchase services on
general government services.
behalf of a population
revenues and, sometimes,
(a purchaser-provider
insurance contributions.
split).
Reference:
What services should be purchased?
• Identifying and designing of benefits packages based on the need for, effectiveness of, and
cost of specific health services.
Who should services be purchased for?
• Try to reduce out-of-pocket payments by subsidizing or providing free health services for
different segments of the population.
Purchasing
mechanism Who should services be purchased from?
are based
on • Healthcare could be purchased from public and private service providers, including
pharmacies or drug shops. In some countries, governments may purchase services
exclusively from public providers, while others may contract with private providers.
How should providers be paid for services?
• Purchasing may be “passive” or “strategic”. Passive purchasing is based on a pre-

determined budget or pays for costs as they arise. Strategic purchasing deliberately
structures payment mechanisms to maximize health outcomes, lower costs, and incentivize
quality.
Reference:
Health Financing Concepts. Health financing: the basics. USAIDS
Health Financing: Nepal
Health Financing in Nepal
Government-funded health programmes for Basic Health Services(BHS)
Nepal has adopted a
mixed healthcare
financing system in line Insurance-based tertiary services
with the healthcare
delivery system.
Private health services through out-of-pocket (OOP) expenditure
Sources of health financing at the federal level include domestic revenues, foreign aid or internal
borrowing. Health financing sources at the provincial and local levels are arranged through fiscal
transformation, revenue sharing, internal sources, and internal borrowing or federal loans.
External development partners (EDPs) either support government healthcare programmes directly
through earmarked funding or assist in the implementation of health programmes through
nongovernmental organizations
Reference:
Khanal, G.N., Bharadwaj, B., Upadhyay, N. et al. Evaluation of the National Health Insurance Program of Nepal: are political promises translated into actions?. Health Res Policy Sys 21, 7 (2023).
https://doi.org/10.1186/s12961-022-00952-w
1. Revenue-collection in Nepal
Mixed tax-based/health insurance revenue
collecting mechanisms in the current health
system in Nepal.
Revenue collecting comprises four kinds of

sources:
(a) compulsory and mandatory prepayments;
(b) voluntary prepayments
(c) household Out-of-the-pocket (OOP)
spending
(d) foreign resources
Source: Adhikari 2019.
Reference:
Government of Nepal, Ministry of Health and Population. 2019. SITUATION ANALYSIS OF HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu,
Nepal.
1. Revenue-collection mechanism in Nepal
a. Compulsory or mandatory revenues:
General revenues of the central and local governments, which include direct taxes levied on
individuals and firms, indirect taxes levied on consumption or trade, and revenues from
government-owned assets or enterprises.
Earmarked revenues of central or local government, such as taxes on tobacco and alcohol, are
potential resources. Re-evaluation and update of information on the use of these funds, looking at
their potential to raise revenues for the health sector.
Health Insurance (HI) contributions, also called payroll taxes, are a kind of direct or earmarked
tax commonly used as a source of funds for mandatory/social health insurance. Nepal created a
mandatory national HI, but its implementation has been challenging because Nepal still has a
large informal labour market, which makes it difficult to establish compulsory mechanisms to
collect premiums.
Reference: Abbreviation:
Government of Nepal, Ministry of Health and Population. 2019. SITUATION ANALYSIS OF HI: New national Health Insurance established the Health Insurance Act in October 2017.
HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal.
b. Tax-funded revenues
Health services delivered by the MOPH, provinces, and municipalities (including general
health services and others such as the Safe Motherhood Program, the Free Health Care Program,
the Basic Health Care Package (BHCP) service, and the Impoverished Citizens’ Service Program)
are mostly tax funded but also receive contributions from external donors (both pooled in the
public budget). These funds are complemented by user fees paid as OOP by families when the
services are delivered.
The proportion of the funding from each of these sources in the financing of each of these
programs is currently unknown, because there are no data on where the OOP funds go. But
there are probably overlaps in the financing—for example, between the Free Health Care
Program and the BHCP services program. Therefore, it is important to analyse the funding
composition and the size of overlaps in each program to measure the levels of efficiency in the
funds’ allocation.
References:
Nepal.
c. Health insurance funding mechanisms
Contributions (premiums) collected from members with the ability to pay
Tax funds, provided by the MOHP and MOF as annual block grants to the national HI fund to
subsidize premiums for disadvantaged groups and to cover its administrative expenses.
Reference: Abbreviations:
HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal. MOHP: Ministry of Health and Population
MOF: Ministry of Finance
2. Funds-pooling in Nepal
Benefits of the pools are associated with;
Fund-pooling aim to maximize the redistributive
capacity of the prepaid funds
 their size, given that greater funds have
the capacity to provide cross-subsidies to
the poor.
 their diversity, given that the funds must
have a mix of people as contributors and
beneficiaries with different
socioeconomic characteristics.
 compulsory participation, which avoids
adverse selection of the sicker and the
poorer as beneficiaries of the fund.
 the unitary character of the fund, which
avoids fragmenting the fund for
earmarked or other uses based on
Source: Adhikari 2019. privilege, preventing the use of cross
Figure summarizes the fiscal federalism and financial flows according to information from the subsidies for equity purposes.
intergovernmental fiscal council.
Reference:
Government of Nepal, Ministry of Health and Population. 2019. SITUATION ANALYSIS OF HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal.
2. Funds-pooling mechanism in Nepal
Pooling mechanisms in Nepal should be understood according to the two major health financing
schemes: the tax-based schemes and the health insurance schemes;
The specific pooling mechanisms

Major sources of financing for related to different programs designed
the Central Government include or restructured to increase access by
tax and nontax revenues, poor people to basic health services.
foreign on budget grants, and Tax-based These programs have been crucial to
external and internal loans, and pooling Pooling funds reducing inequality in access to health
for the poor
these resources are mostly care services in Nepal: The Safe
pooled to finance central Motherhood Program, the Free Health
Government programs and a. Tax-based Care Program, the Impoverished
priorities. schemes Citizens’ Service Program, and the
Bed-for-the-Poor Initiative.
Reference:
Nepal.
2. Funds-pooling mechanisms in Nepal
b. Health insurance schemes
Funds pooling under health insurance schemes tends to perform according to classical
mechanisms of social security.
The funds for the new HI compose a single pool at the national level managed by the HIB,
while the governance of the proposed health insurance under the SSF will be based on a single
national pool managed by the SSF.
Voluntary health insurance funds are pooled separately, according to the different health
insurance providers, and managed individually.
EPF funds are pooled at the MOF and transferred to a government agency (Rastriya Beema
Company Limited) that is responsible for managing the resources.
HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal. EPF: Employment Provident Fund
MOF: Ministry of Finance
3. Health services-purchasing in Nepal
Purchasing mechanisms are ways to transfer pooled funds to health services providers.
The analysis of the purchasing function examines the following aspects:

 the existence of benefit entitlement policies, describing the package of services be
purchased from the pooled funds and the means by which these entitlements will be
rationed
 the existence of mechanisms to pay providers and the incentives created as a result
 the organizational structure and governance of the purchaser, to ensure its ability to
provide the health package to the beneficiary in the conditions assured by the benefit
entitlement policy
 the existence of monitoring and evaluation systems to measure the beneficiary health
outcomes achieved with the purchased services
Reference:
Nepal.
3. Health services-purchasing mechanisms in Nepal
Packages of
health services
Payment
mechanisms
Service purchasing Organizational

mechanism structure and
governance for
purchasing
Reference:
Nepal.
a. Packages of health services:

Nepal has a benefit package but needs to redefine it to ensure UHC requirements under
federalism.
b. Organizational structure and governance for purchasing:

For public facilities, the services are “implicitly” purchased—that is, no explicit
contracting takes place with these facilities.
Health insurances (voluntary health insurances, enterprises, and EPF) do not have
purchasing contracts with providers since the payment for services delivered is a cash
reimbursement to the beneficiary.
Government of Nepal, Ministry of Health and Population. 2019. SITUATION ANALYSIS OF HEALTH HI: New national Health Insurance established the Health Insurance Act in October 2017.
FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal. EPF: Employment Provident Fund
UHC: Universal Health Coverage
c. Payment mechanisms:
In Nepal’s public health system, no functions are split between purchasers and
providers.
The MOHP is responsible for the provision of services at the national and specialized
hospitals, and provincial and local governments are both owners and purchasers of
health services at the subnational levels. Provider payments are based on inputs paid
according to line-item budgets.
On the health insurance side, the main government initiative—HI—uses fee-for-service
to pay for outpatient services and case-based payments for inpatient health services.
For ancillary services such as diagnoses, the use of fee-for-service payment is common,
except for diagnoses included in the inpatient services, which are part of the case-based
schemes.
Public Health Spending
Public Health Spending
It is the sum of government transfers and all social contributions.
Private sources consist of the premiums for voluntary and compulsory
insurance schemes, as well as any other funds coming from households or
corporations
The level of public health spending is determined by the type of health

system in place, the demographic composition of the population and
.
government policy.
Budget priorities can also shift from year to year due to political decision
making and economic effects.
References:
OECD (2021), Health at a Glance 2021: OECD Indicators, OECD Publishing, Paris, https://doi.org/10.1787/ae3016b9-en.
Improvement in performance on public health
spending
The small size of the population enrolment in Voluntary prepayment mechanisms,
financed by premiums collected from enrolees are not significant for raising revenues for
the whole system as willing to pay for this kind of insurance are less than 1 percent of the
population. Therefore, the mandatory enrolment mechanisms should be implemented.
Health insurance funds in Nepal are very fragmented; to increase efficiency, the pooling
mechanisms need to include all mandatory schemes. Some voluntary schemes, such as the
EPF, which is related to government schemes through the MOF, could also be part of the
pooled funds, but this will require calculating which part of the premium should be
transferred to the new HI.
Local and provincial governments need to plan mechanisms for collecting revenues and
pooling funds, beyond the central transfers and need to increase their ability to
efficiently elaborate and implement health budgets according to their needs.
Government of Nepal, Ministry of Health and Population. 2019. SITUATION ANALYSIS OF HI: New national Health Insurance established the Health Insurance Act in October 2017
HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal. MOF: Ministry of Finance
spending
Better coordination among the three levels of government finances will be necessary to
avoid duplication and to build common capacities and oversight mechanisms to
monitor budgets and spending on health.
New mechanisms and options to organize and purchase health services need to be
planned, considering the issues of efficiency, economy of scale, and affordability among
the three levels of government.
Both financing mechanisms need to be adjusted and merged in the context of the
transition to the federal system to avoid overlapping funding strategies such as free basic
health care and health insurance subsidies.
Reference:
Government of Nepal, Ministry of Health and Population. 2019. SITUATION ANALYSIS OF HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ,
Kathmandu, Nepal.
spending
On the health insurance side, the Government needs to coordinate the existing health
insurances with the national HI and unify the mandatory enrolment mechanisms to
avoid duplication.
The national HI basic health package must be the same adjusted package for those
subsidized by public funding. The national HI enrolment should be universal and most of
its finance will come from tax-based funds targeted to the poor.
Local and provincial governments must be able, on a bottom-up basis, to decide on the
categories and on the quantity and quality of services that they intend to offer and to
elaborate budgets reflecting these needs, which would be adjusted according to the
availability of funding.
spending
To avoid discontinuity and to provide predictable financing for local needs, all levels of
government need to coordinate the funding process, mixing federal transfers, external
resources, HI premiums, and OOP resources.
The proportions of this mix will vary according to regions, priority diseases,
socioeconomic/income groups, and levels of government, and it needs to be carefully
designed in conjunction with the revenue-collecting, resource-pooling, and purchasing
processes mechanisms.
Managing these complex structures requires a HMIS that needs to be interoperable and
transparent, allowing the systematic production of financial and performance reporting
on fiscal funds and expenditures statements.
HEALTH FINANCING IN NEPAL. MOHP, World Bank, WHO, GIZ, Kathmandu, Nepal. OOP: Out-of-Pocket
HMIS: Health Management Information System
Health financing is much more than a matter of raising
money for health. It is also a matter of who is asked to pay,
when they pay, and how the money raised is spent.
Reference:
Health Systems Financing: the Path to Universal Coverage, The World Health Report 2010, World Health Organization (WHO)

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MGT 611 Health Financing and Insurance

Q1: What is the major function of health care financing in Nepal?

Functions of Health Financing

Health Financing Functions in Nepal

Public Spending in Health

Health financing is “the function of a

Revenue raising (sources of funds, including government budgets,

Raising revenue is what most people associate with health financing.

Money is typically received from households,

The accumulation and management of prepaid financial resources.

It creates opportunities for redistribution of resources to support equitable access to

Larger rather A more diverse Compulsory

To make progress towards Universal health coverage (UHC)

• National insurance systems

• Social health insurance systems

• Community based insurance systems

Fragmented risk A series of independent risk pools for different population

Who should services be purchased for?

How should providers be paid for services?

• Purchasing may be “passive” or “strategic”. Passive purchasing is based on a pre-

Revenue collecting comprises four kinds of

Contributions (premiums) collected from members with the ability to pay

The specific pooling mechanisms

b. Health insurance schemes

The analysis of the purchasing function examines the following aspects:

Service purchasing Organizational

a. Packages of health services:

b. Organizational structure and governance for purchasing:

The level of public health spending is determined by the type of health

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