Chapter 12: Sources of Finance for the Health Sector

1. Criteria for Assessing Financing Mechanisms

The problems of the health sector that are discussed in Chapter 11 have fuelled the debate about how health care is financed. There have been calls for 'alternative financing' in order to address these problems. However, before considering different financing options it is important to identify criteria for their evaluation. The criteria should be based on the overall objectives of health planners and policy-makers and should also reflect concern with the feasibility of implementing new financing mechanisms.

1.1 Efficiency

Given the limited resources available for health in developing countries, it is essential to raise and use resources as efficiently as possible. Four aspects of the overall efficiency with which financing mechanisms raise and use finance should be considered.

Raising resources: it is clearly important that any mechanism raises adequate resources - channelling sufficient new funds into the health system to support existing or expanded services, and having the potential to raise additional revenue to meet the growing needs of health programmes. The stability or reliability of financing sources are also important considerations. Uncertainty or cyclical fluctuations in the economy and/or political allocation process can undermine the level of revenue raised. Finally, the net yield of any source is a reflection of efficiency. The net resources available for the purposes of health care delivery consist of total revenue minus the administrative and other costs of collection. In addition administrative corruption or evasion on the part of those liable to taxation or fees may reduce the actual yield below its hypothetical yield.

Using resources: freedom and flexibility in the management of funds are important, as excessively stringent reporting requirements can increase administrative costs, and restrictions on the allocation of funds between expenditure categories can cause inefficiencies in the delivery of services. Public sector sources and external sources are typically less flexible than private sector sources in this respect.

1.2 Equity

Most governments explicitly identify equity as a policy objective - and, in particular, as one of the objectives of their health care system. While the precise definition of equity that is adopted is often not clear it generally reflects a concern to distribute health care fairly, in recognition of differences in health need. The question “who gains?” must, therefore, be asked in assessing the equity impact of health systems.

In considering the impact on equity of health care financing options it is equally important to ask “who pays?”. One standard against which to assess the answer might be that only those who benefit from/use health care (i.e. the sick or potentially sick) should pay for it - horizontal equity. However, this standard is likely to penalize those who are least able to pay and most likely to be sick (low-income groups). Their inability to pay not only reflects the largely chance initial allocations of income, but also is likely to underlie their sickness/vulnerability. An alternative standard that is more fair, therefore, is that the distribution of the burden of paying for health care should reflect differences in ability to pay - vertical equity. Some would argue that health care payments (with taxation) should contribute to a more equal distribution of income.

The impact of the payment burden may influence the distribution of health service benefits, and so the interaction of the payment method with the demand and supply of health care must also be considered (see below).

The first step in evaluating equity, however, must be to define the equity goal of health care and so clarify the nature of the gains sought (e.g. more equal access to health care or more equal utilization). In practice, evaluation should also focus on the socioeconomic status of those who pay for and use health care, as this status underlies both health need and ability to pay.

1.3 Demand/utilization and consumer behaviour

Different financing mechanisms have very different effects on the level and type of service use. Some methods of payment influence consumer behaviour by the incentives given to providers to withhold or provide services; while some may directly stimulate or restrain the utilization of services. Many existing financing policies have paid little attention to the incentives they create or reinforce, or to their ensuing impact upon service providers, households, and government agencies. Some financing mechanisms may encourage undesirable practices such as the inappropriate utilization of services.

Identifying the effect of financing mechanisms on consumer behaviour requires an understanding of its determinants. The demand for health services can be defined in terms of the coincidence in one individual of both the willingness and ability to pay. These can be related to a set of sociodemographic factors such as age, education, gender and health status; and a set of economic factors such as the monetary (e.g. fees, drug costs and travel costs) and non-monetary (time) costs of seeking care, income levels in relation to the magnitude of the costs of the care, and the degree of access to cash or other accepted forms of payment.

The evidence concerning the demand for health care in developing countries is mixed but suggests that, especially for low income groups, demand may be elastic with respect to price, falling as price increases and resulting in significant shifts in the use of alternative providers. Even where only the lime price of health care (resulting from travel and waiting times) has been considered, the evidence supports this finding; and other factors, such as poor access to facilities, is also recognized to undermine utilization. Clearly planners must assess these other influences, as well as monetary prices, in order to evaluate the effects on utilization of financing mechanisms such as user fees.

1.4 Supply/provision and provider behaviour

Methods of financing affect the supply or provision of services. Some financing sources are biased with respect to the types of expenditure that they favour: favouring curative rather than preventive, or capital rather than recurrent, expenditures. The sources may also influence the nature of the production technology and the type of health personnel employed. Public health authorities are more likely to experiment with the use of paramedical personnel, especially in outlying rural areas, and private providers are more likely to favour the use of professionals. Finally, certain payment and reimbursement mechanisms have undesirable effects on specific aspects of the behaviour of service providers. For example, they may encourage surgical intervention in labour where it is not medically required.

Like demand incentives, these supply-side spin-offs of financing policies are often ignored. Yet their impact on the cost of provision and their encouragement of inappropriate service provision contribute to the inefficiency of resource use.

1.5 Displacement effects

Rather than generating additional resources for the health sector, new or expanded financing mechanisms may merely displace funding from other sources. Displacement is not necessarily an undesirable consequence if the new or expanded source of finance is more efficient or more equitable than the one it partially displaces.

Examples of displacement effects include foreign assistance which may displace government support for health care; counter-funding, often a precondition for foreign assistance, which may divert funds away from existing priority projects; health insurance schemes, which may in some instances displace rather than add to the total of resources being allocated to health care (e.g. displacing direct payments); charitable contributions which may be withdrawn when other sources are developed; and government allocations which may be reduced when other sources of finance (such as user fees) are developed.

1.6 Wider effects of the health sector

Health sectors may account for a sizeable share of national resources and are often major employers. Consequently, the activities of the health sector may have spill-over effects on the economy as a whole. These include external effects on costs (e.g. inflation through the repercussions of high increases in staff pay); foreign exchange problems through heavy foreign borrowing for development projects or for payments for imports such as pharmaceuticals or equipment; opportunity costs such as the attraction of scarce manpower into the health sector at the expense of other professions; and disincentives to investment and employment (e.g. as a result of financing health services through high taxes on certain economic activities, enterprises or sectors). These external effects may also be positive as in the case of improved productivity resulting from reduced death and disability in the work force.

2. Public and Quasi-public Sources of Finance

2.1 General tax revenues

General lax revenue is used in almost every country of the world to finance certain components of health care and, in developing countries, it is often the most important source of financing. However, low tax ratios (the proportion of national income collected as tax) in these countries mean that it is often insufficient by itself to support health care. Although tax ratios tend to increase in line with development, this depends in large part on a country's political will to increase the tax burden. In developing countries general tax revenue is composed largely of duties on imports and exports, and sales taxes. Taxes on business transactions, profits and incomes are all of lesser importance.

General tax revenue is currently not the most reliable source of finance for the health sector in developing countries. This results from factors such as the low political priority frequently given to the health sector in national budget decisions; the instability of government finance in countries heavily dependent upon taxes on imports and exports; the frequent use of public expenditure as a tool of macro-economic policy; and frequent disparities between budgeted funds and their actual availability or disbursement. The net yield is usually high, unless bureaucratic overheads are high.

The equity impact of tax systems is dependent on both the proportional burden of taxation and on the use which is made of the revenue raised. Tax systems can be progressive, falling more heavily on the rich than the poor and, therefore, equitable; but they may also be regressive, falling more heavily on the poor than the rich, and inequitable. Developing countries are assumed to have regressive financing systems because they tend to rely on indirect taxation, but in practice their tax systems may be progressive because the poorest sections of society fall outside the formal economy and indirect taxes may be levied primarily on luxury items consumed predominantly by the wealthier population groups. Available evidence on the burden of taxation is inadequate to permit firm conclusions about its incidence to be drawn. However, it is clear that tax revenue is often used inequitably in health systems: health systems are dominated by high-technology urban-based care and so the rural populations (and the urban poor) have inadequate access to any form of care.

There is a limit to what can be collected in tax revenue and how much can be allocated to the health sector without conflict with wider primary health care objectives. Taxes that make the poor poorer could seriously damage their health status and undermine their productivity; there are also many other fields of socioeconomic development that compete with the health sector for funds and yet give substantial support to primary health care (e.g. agriculture).

2.2 Deficit financing

General tax revenue may be supplemented by deficit financing, that is the decision to borrow and spend funds in the present and repay them over some period of time. Deficit finance may be raised nationally or internationally, through mechanisms such as the issuing of bonds or certificates or long-term low-interest loans. The cost of enjoying the use of these funds in the present rather than the future is the interest that needs to be paid on the loan. In developing countries high inflation rates (affecting the real rate of interest on loans) and lack of confidence in the government's abilities to honour eventual redemption of the bond may make it difficult to use deficit financing as a source of support for health systems.

When it is used, deficit financing is typically for specific construction projects (e.g. hospitals and water and sewerage systems). Unless such projects sell their services or contribute directly to increased output that can be taxed to service the debt, the deficit must be repaid from general tax revenue. Thus the agency doing the deficit financing must be endowed with the authority to impose additional taxes or fees, or be given a claim on general tax revenue in order to service the debt.

Deficit finance may also be raised from abroad in the form of bilateral or multilateral aid loans, typically given for a project life of between three and five years, and thereby constituting only a short-term source of support. Although useful for many developing countries in helping to develop and expand health care infrastructure, foreign aid is often limited to supporting import components. Past reliance on deficit financing in the economy as a whole is now burdening many countries with excessive debt repayment problems.

2.3 Earmarked taxes

Most tax revenues are paid into a national pool and then shared out between different areas of government expenditure. Some governments, however, may 'earmark' a particular tax for a particular purpose. For example, taxes on the sale of particular products may be earmarked for health services at either national or local level. The problem with such taxes is that they are often difficult to administer, may be politically unpopular, and are also often unpopular with tax administrators because they limit their freedom of action. They can be regressive if, as is often the case, taxes are levied on items such as beer, cigarettes, recreational events, or foodstuffs; but they can be progressive if they are imposed on luxury products purchased primarily by the more affluent sections of society.

A clear advantage of this source of finance is that a tax is visibly assigned to priority funding of certain activities or programmes. Although not a major source of health sector finance in most countries, they may constitute an important source of finance for specific projects or programmes.

2.4 Social insurance

Social insurance can finance health care, as well as other needs such as invalidity and old age support, for either the whole population or a part of it. It is conventionally financed by imposing mandatory insurance payments on employed workers as a percentage of their wages, and by imposing a similar or somewhat higher payroll lax on their employers. Governments may in some instances also contribute to the schemes. Beneficiaries (workers and their dependents) may have to pay a user fee (termed copayment) in addition to their wage deduction. In order to include those workers outside the modern employment sector insurance payments may also be calculated on measures of income or wealth other than wages, such as the value of crops produced. Allowance will then have to be made for the fact that cash income is only available seasonally, when crops are sold. In their capacity as employers, governments may either run their own social insurance scheme or contract such schemes to private insurance companies.

The total financial contribution to social insurance schemes is (in theory) determined actuarially on the basis of the incidence of illness, the conditions of eligibility for benefit, and the value of those benefits. Individual contributions are not determined, however, on the basis of expected risks or claims, but in some proportion to income. As risks are pooled, there is an unequal benefit distribution in favour of high-risk (high-need) workers.

The main problems of social insurance are related to issues of equity. It is easiest to cover those in regular employment, who may be as little as 5 to 15% of the population in developing countries; and there are often marked inequalities in the quantity and quality of services available to those covered by insurance relative to those who are not. Overall, it is argued that social insurance reinforces the maldistribution of resources between rural and urban areas in developing countries. It provides extra funds for largely urban, employed workers and leaves the large rural populations and the informally employed urban population even further handicapped than before its introduction. Critics of social insurance also argue that it undermines both public and private health care by competing with these sectors for limited supplies of real medical resources (e.g. personnel). Finally, it tends to promote or reinforce high-cost, hospital-based, doctor-centred, curative health care.

More positively, social insurance can be the means of channelling extra funds into organized health services. By relieving the pressure on ministries of health to devote resources to urban health services, it may even, indirectly, make more resources available to those in rural areas. Governments have in many instances an increasingly favourable attitude to the development of social insurance.

2.5 Lotteries and betting

These may be used as sources of earmarked income for health and social services in developing countries. Often administered by quasi-public bodies under national or local government regulation, these typically non-profit schemes rarely constitute an important component of overall health sector finance. Largely supported by the incomes of the poor and thereby constituting a form of regressive taxation, they typically have low net yields because of the payment of prizes and high administrative costs. The typical net yield from lotteries is between 10-30% of gross receipts.

3. Private Sources of Finance

3.1 Private health insurance

Private health insurance differs from social insurance in two main ways. First, private health insurance typically does not include pensions for invalidity or old age. Second, the price (or 'premium') charged for private health insurance is not based on the pooled risks of a large population, but on personal risk characteristics and the likelihood of illness in the individual or group covered. As a result, premiums are likely to vary for different individuals or groups.

Schemes may be profit or non-profit making, and may be organized for individuals or groups, the latter often benefiting from lower premiums (resulting from lower per capita administration costs as well as a degree of risk-sharing). In many countries the larger employers act as an organizing body for health insurance, and may pay part of the premium as a fringe benefit. However, in order to control the level of utilization of services, individuals are often required to pay for part of the cost of medical care on a direct fee-for-service basis. In countries where demand is sufficiently high, commercial insurance companies may be active.

In the past few years there has been increasing interest in some developing countries (especially in Latin America) in health maintenance organizations (HMO), an innovative pattern of health insurance and health care organization developed in the USA. Individuals or groups contract with a particular HMO to cover all their health care needs (either in the HMO's own facilities or in facilities under contract to the HMO) in return for an annual payment. The integration of the insurance and provider functions provides an incentive for cost containment, in contrast to a third-party payment system where providers and consumers agree on the quantity of care to be supplied and a third party (the insurance agency) merely reimburses the cost. In addition, competing HMOs enable consumers to choose the one that best suits them and encourages efficient health care provision.

Private insurance is not subject to the political allocation process and may channel extra funds into the health sector. However, it suffers from the problems of low coverage because of its cost and the exclusion of bad risks, of enhancing inequity and promoting the growth of high-technology health care, inappropriate to developing countries.

3.2 Employer-financed schemes

In some instances employers may directly finance health care for their employees. They may, for instance, pay for private sector health services, employ medical personnel directly, or provide necessary facilities and equipment. Oil companies, mining and mineral industries, and large-scale export-centred agricultural enterprises usually provide for the health needs of their workforce. Benefits are seldom extended to families as employers are primarily concerned with maintaining the productivity of the workforce. In developed countries the primary focus is on accident prevention and occupational health, and in developing countries also, employers may have a legal obligation to provide first aid or occupational health services (e.g. sugar and coffee plantations in Latin America, tea and rubber estates in Asia and cocoa farms and mines in Africa).

Problems with employer-financed schemes relate to the quality of care provided, the possible fragmentation of services, difficulties enforcing employer liabilities, and the fact that viability depends upon the performance of the employing agency. Nowhere is employer finance a predominant source of support for health, although employer schemes are often a precursor to national social insurance schemes.

3.3 Charity and voluntary contributions

Charitable or voluntary contributions can take the form of financial support or in-kind donations (e.g. personal services, physical facilities, equipment and supplies), and may originate from business enterprises, wealthy families, religious organizations or private individuals. Often these resources are channelled through foundations or religious bodies.

The problems with this source of finance are often indirect. For example, donors may have different priorities from the recipient nation and may not recognize their most urgent health needs. Donors may prefer to finance visible evidence of their support such as physical facilities and equipment, and thereby commit the recipient country or organization to the recurrent costs of those facilities in the future. Charitable contributions may also take the place of, or reduce, other sources of finance. For example, contributions may be eligible for tax relief, reducing general tax revenues for use elsewhere (although the effects in this instance are likely to be minor).

Charitable contributions have played an important role in health service provision in the past, and in some African countries are still a major source of health care finance, channelled through religious agencies. The general trend, however, is for governments to support or take over mission health services. Thus the role of charitable and voluntary contributions is decreasing, although it may still be important in times of emergency or disaster and can be a useful supplement to other forms of health finance.

3.4 Community financing and self-help

Current primary health care initiatives in developing countries stress the importance of national self-reliance and community participation in health care delivery. By mobilizing under-utilized national and local resources (e.g. organisational skills, manpower and cash) and by developing affordable and culturally appropriate delivery systems, it is hoped that basic health care will become universally accessible. Consequently some governments and many non-governmental agencies are turning to communities for organization, participation and financial support, and communal self-help is increasingly thought of as an important source of financial support for health services in developing countries. The challenge is to develop new types of local institution that can coordinate and systematically utilize the community resources. Self-help can take many forms such as labour, local insurance, support for volunteer health workers, and drug cooperatives.

Opponents of community financing mechanisms argue that it puts the burden of financing on those least able to afford it (often the poorer rural communities). It is also seen as a diversion for governments lacking the political will to generate new sources of revenue, or to re-allocate existing ones. Although in some instances it can make a substantial contribution, community finance is unlikely to generate sufficient resources by itself to meet country health needs, and should be seen as complementary to, rather than as a substitute for, other sources of finance.

3.5 Direct household expenditure

Household income is ultimately the source of most health care finance, but direct expenditure constitutes a specific category of financing that should be considered separately. Included in this category are any payments a consumer may make directly to health care providers such as fees for services, or prices paid for goods and supplies.

Direct household expenditure is not independent of other sources of finance. Government services may charge user fees (often nominal) for certain services. Even with insurance coverage, there is often a requirement for some degree of copayment, which tends to increase the amount that would otherwise have been spent on health. Health insurance benefits, moreover, may have an upper ceiling, with households required to pay directly for their health care requirements in excess of this level.

Until recently, comparatively little was known about the extent or the characteristics of direct household expenditure on health care, but a range of recent studies have shown that this form of financing is far more common and considerably more important than was hitherto thought.

The extent to which these payments represent a real ability and willingness to pay for health care is, however, unclear. Willingness to pay does not necessarily reflect ability to pay. Current levels of household expenditure partly result from the existing pattern of government health care provision, and the limited access to free/cheap government health care (particularly in rural areas). People may use and buy non-government (e.g. mission, private, traditional) health care partly because they have no cheap or good quality government alternative. Low-income groups tend to delay use of health services until illness is severe, presumably in part to avoid payment, but such delay generally only increases the necessary expenditure. High health care bills may sufficiently undermine their economic position to push them further into poverty. Health care payments also sometimes displace expenditure for other basic necessities of life (e.g. food), because there is only limited ability to pay for the range of household needs.

Utilization of, and payment for, health services is, moreover, likely to depend heavily on the perception of their relevance to a specific health need and the extent to which they provide a service that people value. Use of traditional healers, for example, may reflect a belief in the relevance of their treatments for certain diseases rather than a general willingness to pay for any type of health care. Perceptions of poor quality in government services certainly undermine their use and, therefore, willingness to pay for them. Private services may be more oriented to the preferences and circumstances of households, for instance providing for payment in kind or payment related to ability to pay.

Raising the level of direct household expenditure for health care, for example by user fees, will clearly have a negative impact on equity (by influencing both the distribution of the payment burden and the benefits gained). It may be mitigated by the introduction of an exemption mechanism for the poor, although such a mechanism may itself reduce the demand for health care made by low-income groups because they may not wish to be identified as 'poor'. Moreover, such willingness to pay as exists is attached primarily to curative services, and so can only extend the provision of preventive care if it is possible to re-allocate resources within the health sector. Finally, the potential yield from user fees is unclear. It is dependent on the level and type of fees, the bureaucratic structure required to implement them, the existence of exemption mechanisms, the impact of fee systems on the demand for care and the rates of collection. The administrative difficulties of implementing a fee system (e.g. how is ability to pay assessed? who assesses it? who collects the fees? how is abuse of the system restricted?) may cause less revenue to be collected than theoretically is possible.

4. Approaches to Improved Financing of Health Activities

Resource shortages in developing country health systems clearly must be addressed, but the introduction of new financing systems is not an appropriate initial response to the problem. Shortages result both from inefficiencies in resource use and from absolute deficiencies, and until the first are adequately addressed any additional resources will also be used inefficiently.

It is also important to recognize that health financing problems are not simply health sector problems, but often reflect economy-wide difficulties. They certainly require national strategies to address them, even where additional resources are to be recruited by actions within the health sector. For example, there must be national agreement that extra finance will be retained for use within the sector (rather than being matched by budget cuts or transferred to other sectors) and that resources can be re-allocated within the sector to meet priority health needs, in order to justify alternative financing strategies.

Within the health sector the first priority must be to improve efficiency, making better use of available resources and enhancing the standing of the sector nationwide. Management can be strengthened through staff training and the development of appropriate tools (including incentives), efforts can be made to understand the community's needs in order that health care better meets them, and resources can be allocated more appropriately (e.g. to preventive rather than curative care). At the same time, the options for increasing funds can be considered - using appropriate evaluation criteria.

If efficiency improvements together with the possibility of additional resources still do not bridge the gap between resource requirements and resource availability, then health sector goals must be reconsidered. Not everything that may have a positive impact on health can be afforded and health plans must be based on a realistic view of resource availability.