Health Systems Policy, Finance and
Organization
Health Care Financing
and the Health System
Date: November 25, 2022 Samuel Amponsah, PhD
Copyright © 2017, 2012 Pearson Education, Inc. All Rights Reserved
Introduction (1 of 2)
1. Introduction
2. Health Policy Objectives
3. Financing of Current Health Systems
4. Evaluating Health Financing and Health Systems
Performance: Concepts, Criteria, and Measurements
Introduction
• Well-functioning health systems are of critical importance to the
achievement of both national policy objectives and international
policy commitments (such as the Millennium Development Goals
[MDGs] of the United Nations).
• Financing systems should be the servants of policy
– the choice of financing mechanisms should be informed by the type of health
system that will meet overall policy objectives.
• This article analyzes the main types of health systems and financing
systems across the world,
– exploring the policy objectives,
– the compatibility of financing mechanisms,
– and the overall objectives and the extent to which systems operate as they were
intended.
• Emphasizes the importance of culture and history to the development
of health systems and identifies factors that cause or constrain
change.
Health Policy Objectives (1 of 2)
• It is common for governments to have stated (if sometimes
somewhat vague) health policy objectives, and in some cases these
are written into the constitution of a country.
• These normally cover protection against infectious diseases and
other public health hazards, and access to important treatment and
care when this is needed.
• Reasons people may have difficulty in paying for care
– Needs are very uncertain,
▪ so, it may be important to insure the risks
▪ Insurance is not always available to those who would need it
– Some service are very expensive
▪ There is the need to have funds available at the time of need
– Some services may be considered important and cost-effective
▪ But may be too expensive for some parts of the population to afford
Health Policy Objectives (2 of 2)
• If a government has an objective of securing access for
its citizens to some or all effective treatments, the chosen
system of financing will have three main objectives:
– mobilizing funds for when they are needed,
– sharing risks, and subsidizing access,
▪ where needed, for those with low income.
Financing of Current Health Systems (1 of 2)
• Almost all governments accept that health systems cannot be left
entirely to market forces to produce outcomes that are socially
acceptable. There are two main reasons for this:
• First, in various technical ways there is market failure.
– For example, for some services (such as vaccination) the benefits of
treatment are not exclusive to the individual who receives the
intervention. Such externalities in consumption mean individuals will
undervalue services from a societal viewpoint.
• Second, conditions for perfect markets, and their associated
efficiency, are rarely found in health care.
– For instance, there is often an imbalance of information between
supplier and consumer that can lead to induced demand.
– High costs in entering the market
Financing of Current Health Systems (2 of 11)
• The response of governments to this market failure includes
– regulation of the financing and provision of care,
– subsidies to individuals or providers of services,
– or in some cases direct provision by government agencies.
• Indeed, the state together with social security organizations
are the largest funders of health services in many countries.
• According to the World Health Organization (WHO, 2007)
– general government funding accounted globally in 2004 for 56%
of total health-care expenditure,
– increasing to an average of over 70% of funding in Europe.
– Further, over a third of all countries have 70% or more of their
health-care funding coming from government sources
Financing of Current Health Systems (3 of 11)
• Archetypal Systems
– Systems that remove barriers to access for the poor are often as
being ‘solidarity based,’ in contrast to those that allow access to
depend on being able to afford insurance or to pay for services
directly.
• Solidarity-based finance systems
– Taxation
▪ Uses funds raised from general government taxation of the
population
▪ Direct taxes on income or wealth or indirect taxes
▪ Government employs all health care staff
▪ Risks are shared
▪ Services are then free at point of contact for patients
Financing of Current Health Systems (4 of 11)
• Solidarity-based finance systems
– Social Health Insurance (SHI)
▪ The underlying principles of SHI are
▪ Access to care is provided on the basis of need
▪ And payment for insurance based on income or ability to pay
– Basic Characteristics
▪ Insured persons pay a regular contribution based on income or
wealth, not on the cost of the services they are likely to use.
▪ Access to treatment and care is determined by clinical need and not
ability to pay.
▪ Contributions to the social health insurance fund are kept separate
from other government-mandated taxes and charges.
▪ The social health insurance fund finances care on behalf of the
insured persons, and care is delivered by public and private health-
care providers.
• SHI funds are formally separate from general taxation funds, and
may be organized and managed by autonomous organizations.
Financing of Current Health Systems (5 of 11)
• Solidarity-based finance systems
– Social Health Insurance (SHI)
▪ Income from contributions must cover the fees paid for the service
which members are entitled.
▪ SHI are subsidized in two ways
–From direct payments by government directly to provides of
care
–Through government payments of subscriptions for people
unable to pay for themselves
– Contributions and entitlements to services
▪ Basic model has much in common with tax finance
▪ But they have separate structures for collecting and managing funds
▪ Patients have status of a customer
▪ There is the need to be explicit about the range of services to which
the contributor is entitled
– Risk are shared
▪ SHI provide significant subsidies from the rich to the poorer
people
Financing of Current Health Systems (5 of 11)
– Social Health Insurance (SHI)
▪ Removes financial barriers
▪ Can lead to a tendency for people to want more than available
–This may create shortages and the need the need for rationing
–Rationing access to care may use waiting list
–Systems of triage and referral
– Community Prepayment Schemes
▪ There have been attempts to mobilize and manage resources locally,
where there may be more trust from the population.
▪ This can be done through insurance at the community level or through
firms or cooperatives.
▪ Community-based schemes provide members with the opportunity to
give a flat payment in advance in return for free or reduced-cost health
care if they get sick.
▪ It protect communities against catastrophic costs of care and cash
constraints due to seasonal income
▪ It require high local motivation of communities
Financing of Current Health Systems (5 of 11)
– Non-solidarity Financing Systems
▪ Private risk based health insurance
▪ Medical savings accounts
▪ Out-of-pocket prepayment
▪ Informal fees
– Private risk-based health insurance
▪ In a health system that relies on private risk-based insurance (private
commercial health insurance), consumers choose insurance products
covering a range of benefits and conditions, according to their willingness
and ability to pay
▪ Private insurance schemes set contributions on the basis of risk
▪ Contribution reflect the age and health needs of the individual
▪ Unemployed and those in dangerous jobs may find it difficult to afford
private insurance
▪ In certain cases, there are subsidies for older people who can not afford
private insurance
▪ Risk-based insurance tends to fail when there is asymmetry in knowledge
of insurers and insures
Financing of Current Health Systems (5 of 11)
– Typical Strategies to avoid the problem of the fact that
all those who want insurance are those at high risk
▪ Qualifying conditions for membership: For example,
pensioners can only participate if they have been members
for 50% of their working life.
▪ Waiting periods: Voluntary members must have a waiting
period before they can claim.
▪ Limited voluntary access: Each person has the chance only
once in his or her life.
– Moral Hazard
▪ If health services are free or modestly priced at the point of
contact, there is no incentive to limit demand because it is
the insurance firm that pays.
▪ Co-payment
▪ Excluding services can reduce ,moral hazard
Financing of Current Health Systems (5 of 11)
– Medical savings accounts
▪ Ensure that funds are saved and protected so as to be
available when needed
▪ Individuals or families must set aside funds into a special
account until the funds reach a certain level
▪ They can spend this money only on approved forms of
medical costs, and when money is spent they must save
again until the reserves are replenished.
▪ There are variants on the system –
–the funds can cover extended families so as to provide
an element of intergenerational solidarity,
–and in some cases the remaining funds can be inherited
in the event of a death.
– The main point is to ensure that people who have sufficient
income to save for their medical expenses do so.
Financing of Current Health Systems (5 of 11)
– Medical savings accounts
– The two main limitations of systems of compulsory saving are
▪ the lack of explicit risk sharing and
▪ the inevitable need for other mechanisms to cover the very
high costs of serious illness
Financing of Current Health Systems (5 of 11)
– Out-of-pocket
▪ These are fees paid by the patient on use of health services
▪ They include both user fees for public-sector services and
payments to private providers at the point of contact.
▪ Proponents of public-sector user fees argue that they can
both improve financial sustainability and referral patterns and
dissuade consumers from unnecessary use of services
▪ Such arguments have been challenged by others who
maintain that, in practice,
–the cost recovery potential of user fees is limited,
particularly without retention of fees at the point of
collection.
–Equity suffers
• Out-of-pocket payments are generally recognized as an extremely
inequitable source of financing
Financing of Current Health Systems (5 of 11)
– Out-of-pocket
▪ These are fees paid by the patient on use of health services
▪ They include both user fees for public-sector services and
payments to private providers at the point of contact.
▪ Proponents of public-sector user fees argue that they can
both improve financial sustainability and referral patterns and
dissuade consumers from unnecessary use of services
▪ Such arguments have been challenged by others who
maintain that, in practice,
–the cost recovery potential of user fees is limited,
particularly without retention of fees at the point of
collection.
–Equity suffers
• Out-of-pocket payments are generally recognized as an extremely
inequitable source of financing
Financing of Current Health Systems (5 of 11)
– Informal Fees
▪ Informal or unofficial fees are payments – monetary or
nonmonetary – made by an individual to a state healthcare
worker during official hours of work that do not form part of
the worker’s official salary.
▪ These payments may be expected or unexpected and may
be given for services that are routinely carried out or for an
augmented or additional service.
– Explanations
▪ ‘legitimate’ payments for doctors when state finances have
collapsed, such as in some countries in the former Soviet
bloc;
▪ the prevalence of a culture of rent-seeking and entitlement,
such as in Bangladesh;
▪ the importance of gift-giving as a sign of respect in a
transaction, such as with the practice of giving ‘red packets’
in China.
Financing of Current Health Systems (5 of 11)
– Funding by NGO and Development Aid Partners
▪ Many high-income countries have pledged to achieve the
target of giving 0.7% of their gross national product (GNP) in
aid, and this was reiterated with the Monterrey Consensus of
2002.
▪ The MDGs have created a fresh impetus in generating
funding for the world’s poorest and most vulnerable groups.
▪ Increasing funding for health systems in low-income
countries is a priority for many donors.
▪ It is estimated that in 2004, 55 countries were reliant on
external aid for over 10% of their total health-care funding.
• Donor policy conditionalities have been a key driving force for the
reform programs implemented across Africa, and donors will
continue to be important players in any future changes in reform
design.
Financing of Current Health Systems (5 of 11)
– Funding by nongovernmental organizations and
foundations
▪ There has been a long tradition in many countries of health-
care provision and some financing by charitable
organizations.
▪ A significant part of health systems in rural areas is provided
and managed by missions
▪ Subsidized from donations from outside the countries as well
as by governments
▪ Charitable foundations providing resources for certain
services in developing countries
Evaluating Health Financing and Health
System performance: Concepts, Criteria, and
Measurement
• Healthcare financing systems and health system performance are
linked
• it is important not just to reflect on how the financing of health care
can impact on overall performance, but how overall system
performance affects health-care financing and helps to ground
evaluation to further achieve policy goals.
• The WHO stated that ‘‘the purpose of health financing is to make
funding available, as well as to set the right financial incentives for
providers, to ensure that all individuals have access to effective
public health and personal health care.’’
Evaluating Health Financing and Health
System performance: Concepts, Criteria, and
Measurement
• It is important to review how resources are deployed, who is entitled
to what, and how services are financed and organized.
• The key challenges in evaluating health-care financing and health
system performance relate to:
– The selection of policy goals against which performance must
be measured.
▪ There will often be trade-offs between different policy objectives,
one of which is that between financial sustainability and equity.
– The selection (and interpretation) of indicators used to monitor
and evaluate performance.
▪ In order to be able to gauge progress, it is important to select
indicators that can act as proxies for the goals/objectives of the
health system. More than one indicator may be required for any
particular objective to allow for triangulation.
Evaluating Health Financing and Health
System performance: Concepts, Criteria, and
Measurement
– The calculation of indicators.
▪ The old adage of ‘rubbish in, rubbish out’ applies here. The
values and movement of indicators are only as good as the
data available.
– Hence, in considering the most appropriate indicators when
measuring performance, policy makers need to understand local
constraints in data collection systems, what is collated regularly
and to good standard, and what will require additional data
collection efforts, whether one off or continual.
Criteria for Evaluation
• It is useful to base any judgments on a range of measures.
• Equity
• Relates to fairness of distribution.
• There are two general approaches to equity that can be applied both
to the provision and to the financing of health care:
– Horizontal equity, implying the need for the equal treatment of
equals;
▪ May fail to narrow the gaps that exist between different
groups in society
– Vertical equity, implying the unequal but equitable treatment of
unequals.
▪ Creates more upheaval to the distribution of resources
• Equity in health-care financing relates to payment according to ability
and treatment according to need.
Criteria for Evaluation
• It is useful to base any judgments on a range of measures.
• Efficiency
• There are two central approaches to efficiency in health economics.
• Allocative efficiency is concerned with maximizing the impact of
health-promoting interventions across a broad range of activities
– The idea of allocative efficiency focuses on asking whether we
are doing the ‘right’ things. It relates to prioritizing some
activities over others in relation to how they will meet set
objectives, such as aggregate health status improvement.
• Technical efficiency, in contrast, looks at the optimal combination of
resources in any one activity to produce maximum output at
minimum cost
– It is closer to the wider use of the concept of efficiency – asking
whether we are doing things in the right way and if we are
avoiding waste.
Criteria for Evaluation
• It is useful to base any judgments on a range of measures.
• Financial Sustainability and Cost-containment
• Another objective for evaluating system performance is financial
sustainability.
• It has two definitions
– the financing of the health sector in relation to its dependency on
external resources
– the sufficiency, predictability, and regularity of sources of
finances in the health sector
Criteria for Evaluation
• It is useful to base any judgments on a range of measures.
• Acceptability and Satisfaction
• Acceptability of a health system and satisfaction of its users can be
seen as judgments on its performance in terms of equity and
efficiency.
– Consumers may politeness of staff and quality of facilities
– It is important to give consumers a say in evaluating
performance given their experience as end users
• Evaluating Frameworks
– Resource generation
– Optimal resource use
– Financial accessibility of health services for all
Criteria for Evaluation
• It is useful to base any judgments on a range of measures.
• Performance in relation to these targets
– Revenue collection
– Revenue pooling
– Purchasing
• Five key components of health system performance
– Overall level of population health (25%);
– The distribution of health across the population (25%);
– The overall responsiveness of the health system (12.5%);
– The distribution of responsiveness of the health systems across the
population (12.5%);
– The fairness of financing of the health system (25%).
• The efficiency of the system, or its ‘overall system performance,’ is
indicated by a single index that measures the actual achievement of
these five goals compared to a maximum score it could have
achieved given available resources.
Performance of Archetypal Financing Systems
• Public systems
– Focus on social valuation
▪ Ration services
▪ Dependent on the tax base
– SHI systems
– Often popular to consumers
▪ Experience problems with cost control
▪ Questions marks about how the poor and those in the informal
sectors are covered and their services financed
– Private health insurance systems
▪ battle to control cost
▪ Will put profit above efficiency and equity
• Systems in those countries that rely on private insurance as a chief
financing mechanism tend to be more expensive than those in
countries with mainly tax-based or SHI-based systems.
Performance of Archetypal Financing Systems
• Out-of-pocket and free market systems
• Those states that tend to have health-care financing composed
largely of out-of-pocket payments by households tend to have worse-
than-average equity of financing using the WHO (2000) fairness-of-
financing index.
– Individual payments for health affect access to services
– measures of equity relating to financing will not adequately reflect the
overall degree of inequity in the health system
• Mixed Financing Systems
– No system conforms precisely to the archetypes. Even in the
freest market with least organization of financing or regulation of
service delivery there is some public spending on health care.
Conclusion
• We reviewed financing mechanisms and their likely impact
on health system performance.
• The article has emphasized the importance of making
financing the servant of policy and of evaluating financing
with reference to local goals and contexts.
• It has also explored the problems with superficially
labelling health systems according to financial flows
without exploring the incentives in the system and the
values that are prevalent in the society
