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Health Care: Who Should Pay For What?

WHEC Practice Bulletin and Clinical Management Guidelines for healthcare providers. Educational grant provided by Women's Health and Education Center (WHEC).

In recent years there has been a shift from publicly financed and organized health systems to more mixed arrangements, with an increasing role played by private profit-making and other organizations. This shift has produced a great variety of cost-sharing mechanisms. As a result, in some countries the government may be reducing its role in financing and increasing its role in regulating the health-related activities of its various partners. The most difficult and controversial issue in health finance in both developed and developing countries is how to pay for publicly provided health services. Two approaches have predominated: public financing of health services through revenue from taxation, and private financing through revenue from users charges, which are service fees paid by patients at the time of use. A third approach, prepayment to publicly or privately managed insurance funds, has played only a minor role in most low-income countries. The existence of a very numerous underclass of extremely poor people is something which the national policies in every country must come to terms with, whether they are designed to improve health or reduce poverty, or both. In particular, three operating principles should be kept in mind. Firstly, we should promote the economical use of resources, whether they come from the public or private purse. This does not necessarily mean spending less. It means making an investment in health. Secondly, finding the right combination of local and central administrative responsibility can make a major contribution to improving health status. Assigning more responsibility to the local level will often make services more flexible and adaptable to changing needs. Thirdly, the health sector should play a very active role in reducing the huge disparities in access to health services that exist today. Even in high-income countries with relatively good health status, many of the rural people and the poor have little or no access to basic health necessities for health.

The purpose of this document is to understand most difficult and controversial issues in health finance in both developed and developing countries. No single model of health care financing will apply everywhere. Principles must be adapted to the specific local context. Over the last 20 years, health care financing reforms in both developed and developing countries have often failed to improve the population's health status because they were based too rigidly on assumptions of economic theory or on experiences in quite different situations. This chapter also looks at the place of maternal, newborn and child health within a wider context of health system development. Today, maternal, newborn and child health are no longer discussed in purely technical terms, but as part of a broader agenda of universal access. We must spare no effort to find financing solutions which work for rich and poor countries alike because a population's good health is one of a country's most precious assets. Better health through better use of resources.

Health Financing Mechanisms

Health financing mechanisms are organizational options for a health financing system of how to offer financial risk protection to people against the costs of healthcare. These include tax-based financing, social health insurance, private health insurance and medical savings accounts. An issue of paramount importance to policy-makers in a majority of the world's countries is how to ensure that all people have access to health care when they need it - i.e. how to achieve universal coverage of health care. The technical brief for policy-makers below summarizes the main organizational options for reaching universal coverage. Campaigns are needed to inform public, patients and healthcare providers at health facilities about health financing mechanisms that can improve access to health care.

Public Financing:

Arguments in favor of public financing of health services frequently revolve around the concepts of public goods, social externalities, and merit goods. These concepts are simple but very powerful in mobilizing human emotion and reasoning in support of public funding for health services. Some health services are considered to be public goods because their benefits accrue to all members of society. An example would be disease eradication campaigns by means of immunization or vector control. Such preventive public health interventions are appropriately funded by the government because they protect everyone from illness. Social externalities are the effects on the health of the general public of decisions made by individuals about their own medical care. These effects may be positive or negative, and are external to the individual making the decision. For example, the treatment or immunization of one person protects the health of others. Conversely, a person's decision not to seek treatment for an infectious disease can result in many healthy people becoming infected. Since, the price of care can deter people from seeking it; it makes sense to provide it free of charge. Thus, if social externalities associated with use or non-use of specific health care services are significant, they provide sufficient reason for public funding of these services. Despite these strong reasons for publicly financed health services, experience in many developing countries has not been encouraging. In many instances, access to basic health services is universal in principle, but in practice the services are not available, or are of insufficient quality.

Private Financing:

In an attempt to overcome the inefficiencies and budgetary constraints associated with public provision of health care, many countries have introduced market-based reforms in the government health sector. In low-income countries, the most important of these has been to introduce user charges in public health facilities. The objectives of this policy were to enhance efficiency, generate revenue and improve service quality so as to increase the use of services. Unfortunately, the results of applying this policy have so far not been promising. In many countries, the use of medical services dropped by 40-50% after modest fees was introduced. In most cases, gains in service quality have not been sustained, and income from fees generally accounts for only 3-4% of health budgets. None the less, user charges may be necessary for sustainable national health services in developing countries. But they have to be part of a well-structured system which promotes efficiency and equity in the use of public referral health services without excluding people from basic and specialized health care. Political action and government support are key factors in the establishment of a viable and equitable health insurance system.

Universal Coverage:

The key to moving towards universal access and financial protection is the organization of financing. Current government expenditure and international flows cannot guarantee universal access and financial protection, because they are insufficient and because they are too unpredictable. Every year, more than 150 million individuals in 44 million households face financial catastrophe as a direct result of having to pay for health care. This policy brief outlines the circumstances in which this occurs, and what policymakers need to consider in seeking to protect populations. In May 2005, the (then) 192 members of WHO endorsed a resolution entitled "Sustainable health financing, universal coverage and social health insurance" (WHA58.33). It urged countries to develop their financing systems to ensure that their populations have access to needed services without the risk of financial catastrophe, and urged the secretariat to support countries to do this. When people have to pay fees or co-payments for health care, the amount can be so high in relation to income that it results in "financial catastrophe" for the individual or the household. Such high expenditure can mean that people have to cut down on necessities such as food and clothing, or are unable to pay for their children's education. Every year, approximately 44 million households, or more than 150 million individuals, throughout the world face catastrophic expenditure, and about 25 million households or more than 100 million individuals are pushed into poverty by the need to pay for services.

Moreover, the impact of these out-of-pocket payments for health care goes beyond catastrophic spending alone. Many people may decide not to use services, simply because they cannot afford either the direct costs, such as for consultations, medicines and laboratory tests, or the indirect costs, such as for transport and special food. Poor households are likely to sink even further into poverty because of the adverse effects of illness on their earnings and general welfare. A concern of policy-makers is to protect people from financial catastrophe and impoverishment as a result of use of health services. WHO has proposed that health expenditure be viewed as catastrophic whenever it is greater than or equal to 40% of a household's non-subsistence income, i.e. income available after basic needs have been met. However, countries may wish to use a different cut-off point in setting their national health policies.

Country Responses: Like all aspects of health system strengthening, changes in health financing must be tailored to the history, institutions and traditions of each country. However, six important principles can be used to guide country responses:

  1. Raising additional funds where health needs are high and revenues insufficient;
  2. Educing reliance on out of pocket payments where they are high, by moving towards pre-payment systems;
  3. Taking additional steps to improve social protection by ensuring the poor and other vulnerable groups have access to needed services, personal and non personal;
  4. Improving efficiency of resource use by focusing on the appropriate mix of activities to fund and inputs to purchase, provider payment methods and other incentives for efficient service use, and financial, contractual and other relationships with the non-government sector;
  5. Promoting transparency and accountability in health financing systems;
  6. Improving the generation and use of information on the health financing system and using it to modify policy where necessary.

Repositioning Maternal, Newborn and Child Health:

The requirement for countries to formulate Poverty Reduction Strategy Papers (PRSPs) as a precursor to debt relief and the shared commitment to the Millennium Development Goals (MDGs) have cemented the links between pro-poor policy and maternal, newborn and child health (MNCH) priorities. What does it take to encourage national leaders to act to ensure the health rights of mothers and children - rights to which they are committed? There is extensive knowledge of the technical and contextual interventions required to improve maternal, newborn and child health. In contrast, little is known about what can be done to make national political leaders give it their sustained support. The international community knows how to put things on the global policy agenda - the MDGs are proof of that - but there is a lot more to learn about how to bridge the gap between global attention and national action, and on how to maintain attention spans long enough to make a difference. Political will first requires information on magnitude, distribution and root causes of the problems and that mothers and children face, and on the consequences, in terms of human capital and economic development, of failing to confront them effectively. Maternal, newborn and child health can boast a large network of advocates at the international level that has done much to produce and disseminate such information. Considerable progress has also been made in developing a battery of interventions, to demonstrate their cost-effectiveness, and to share that knowledge. Finally, much has been done to emphasize the need for a wide range of interventions to be implemented simultaneously at household level, in communities, and through health centers and hospitals.

The common project that can bring together the interests and preoccupations of the MNCH programs, as well as those of sector managers and health care providers, is that of universal access to care for mothers and children, embedded within an overall strategy of universal access for the whole population. Presenting MNCH in terms of progress towards universal access to care is not only a question of language. It frames the health of mothers, newborn babies and children within a broader, straightforward political project that is increasingly seen as a legitimate concern and is the subject of a wide social debate: responding to society's demand for the protection of the health of all its citizens. In poorest countries, where large numbers of people are excluded from access to health care, financial protection is often absent. The limited supply of "free" services is usually tax-based and under-funded. Current estimates show that out-of-pocket expenditure in these countries is between two or three times the total expenditure by government and donors, a substantial proportion of these out-of-pocket expenses being captured by commercial providers or through the payment of informal fees. The latter have become a major obstacle which has prevented the poor from accessing scarce public services, with the unpredictability of the cost compounding their reluctance to seek care.

Making the most of transitory financial protection mechanisms - as countries expand their health care networks, they often also supplement the limited coverage of public or quasi-public health insurance (social health insurance based on taxation, or mixed systems) through a multitude of voluntary insurance schemes: community, cooperative, employer-based and other private schemes. These usually proved limited financial protection from catastrophic expenditure, support equality in the distribution of spending, and facilitate the provision of affordable quality care to the enrolled population. In countries where the health care network is well developed, and exclusion from access to care is limited to a relatively marginal group, the need to generalize financial protection persists, also for the non-excluded. Historical patterns of financial management - incremental adjustments of the recurrent program budgets, supplemented by donor-funded projects - have often been slow to adapt to initiatives aimed at scaling up universal access to health care. Funding flows have not only to increase; they have to be channeled in a different way.

Making Health Care Accountable:

Why performance-based funding of health services in developing countries is getting more attention?

Developing countries and their international partners are increasingly adopting methods of financing health care activities in developing countries that link the availability of funding to concrete, measurable results on the ground. Such "performance-based" financing was advocated a decade ago in the World Bank's 1993 World Development Report--Investing in Health and other policy documents in the early 1990s, although relatively little practical experience with this type of financing was available. Since then, much experimentation has taken place, and we are seeing with growing clarity the important potential--as well as the challenges--of performance-based financing for achieving national and global health goals. Governments and partner agencies are interested in performance based financing for health for a number of reasons. First, there is a growing focus worldwide on achieving measurable results with development assistance, and performance-based financing spotlights such results. In terms of health care, these results are being closely tracked as governments and their partners strive to achieve the Millennium Development Goals (MDGs). The goals include reductions in child and maternal deaths; reductions in rates of infection from HIV, malaria, and tuberculosis; and improvements in the nutritional status of children. Governments and their partners are thus naturally attracted to the idea of providing funds for programs that achieve or make progress toward the MDGs in health or that at least show increases in some of the key services needed to reach the goals. For example, where immunization and prompt treatment of pneumonia are crucial for halting child deaths, funding for health care might be tied to advances in the coverage of these services. Second, even though external funding for health care in developing countries is currently in excess of $8 billion a year (Michaud, 2003), substantially greater development assistance will be needed to reach the health MDGs. Politicians and legislators in donor countries are under growing pressure from their constituencies to show that development assistance budgets, in health as in other areas, are having measurable results. Partner agencies are thus seeking to increase the effectiveness of these resources by allocating them to countries and programs that demonstrate progress as measured by performance indicators.

Third, linking the availability of financing to measurable results--whether in terms of changes in health status or in the coverage and quality of health services--is consistent with the objective of making service providers more accountable. Increasing accountability of service providers to clients in low-income communities and to government policymakers is the theme of the 2004 World Development Report--Making Services Work for Poor People. Linking financial payments to getting the job done--immunizing infants, treating tuberculosis patients, or testing more young men and women for HIV and counseling them on their status--can be a tremendous incentive for those providing the services, not least because it exposes their performance to their clients and others footing the bill. The 2004 World Development Report advocated the expanded use of public monies to pay private non-governmental and for-profit doctors and clinics to deliver basic health services to the poor. Performance-based contracts between the government and these private providers are the principal instrument for putting this recommendation into practice.

Looking ahead: Performance-based financing for health is likely not only to continue but to expand. This trend is being spurred on by several factors. They include government and donor concern for health outcomes; interest in improved measurement of results; the push for greater accountability of health care providers to their clients and to governments and for stronger accountability of governments to donor agencies; and a recognition that NGOs and the private sector can, in some cases, deliver essential health services to poor people more efficiently than the public sector. It is vital for the development community to continue to monitor closely these promising experiments in performance-based financing and to disseminate and apply the lessons of success and failure as rapidly as possible to maximize the benefits of development assistance in pursuit of the health Millennium Development Goals.

Editor's Note:

Basic health care is referred to as a merit good because without it human life is at risk. Therefore, everyone should have excess to it. Ensuring that vulnerable groups continue to be covered through contributions from more affluent, healthier groups, while introducing competition among insurers in an ambitious and difficult undertaking. Does competition between insurers lead to better health care? Can solidarity be combined with competition? Institutional arrangements are changing. We should learn as much as we can about them, but we should also propose mechanism and programs to help ensure that these arrangements move us towards the goal for health for all. As the reform of health care systems progresses, countries are searching for a balance between the financial benefits of a competitive health care market, and the need for fairness in sharing the burden of treatment costs. In organizing health care delivery, economics and market competition cannot be the only basis for successful performance. The system's fairness must also be considered. The aim of stimulating competition among health insurers is to make the systems more efficient. But competition among insurers works against the sharing of financial risks and burdens, since it puts pressure on insurances to seek the lowest possible risk. This is a common problem for many developed countries. Mechanisms and financing methods exist that can make access to health care more equitable, and health authorities must insist that they be used. Differences between countries mean that no single model of health care financing will apply everywhere; principles must be adapted to the specific local context.

As the reform of health care systems progresses, countries are searching for a balance between the financial benefits of a competitive health care market, and the need for fairness in sharing the burden of treatment costs. For the past two decades, health policy reforms have been driven to large extent by the rising cost of care. The aging of populations, associated with higher levels of chronic disease and disability, the availability of costly new treatments and technologies, and higher public expectations have contributed to the rise in health-related spending. In some ways, perfect relationships among partners in health care systems are difficult to find. In organizing health care delivery, economics and market competition cannot be the only basis for successful performance. The system's fairness must also be considered. We hope our forum provided useful information and ideas on how to tackle the many challenges we are still facing. Each situation is different, and competing needs are often difficult to understand and even more difficult to meet. However, in all of them one imperative is clear: to achieve better health through better use of resources.


  1. World Health Organization (WHO)
    Healthcare Financing Mechanisms
    Designing Health Financing Systems to Reduce Catastrophic Health Expenditure (pdf)
  2. World Bank
    Policy Toolkit for Strengthening Health Sector Reform (pdf)
  3. International Monetary Fund (IMF)
    Making Services Work for Poor People (pdf)
  4. U.S. Congressional Budget Office Cost Estimate
    Protecting the Medicaid Safety Net Act of 2008 (pdf)

Published: 7 December 2009

Women's Health & Education Center
Dedicated to Women's and Children's Well-being and Health Care Worldwide