Health financing methods

The main methods of financing for health care include the national health insurance system, general revenue, private insurance, community-based insurance and out-of-pocket payments. The choice of method will impact on who bears the financial burden, the amount of resources available and who manages the allocation of resources. Out of pocket: In the health care financing sector, this represents the share of the expenses that the patient or the family pay directly to the health care provider, without a third-party (insurer, or state). This usually means that the family has to bear the costs, without risk sharing or solidarity mechanisms involved, and without the possibility to spread the cost over time. There are generally five primary methods of funding health care systems:[3] 1. 2. 3. 4. 5. general taxation to the state, county or municipality social health insurance voluntary or private health insurance out-of-pocket payments donations

Definitions: Out-of-Pocket Expenditure on Health: The direct outlays of households, including

gratuities and in-kind payments made to health practitioners and to suppliers of pharmaceuticals, therapeutic appliances and other goods and services. This includes household direct payments to public and private providers of health care services, non-profit institutions, and non-reimbursable cost sharing, such as deductibles, copayments and fees for services. Private Health Expenditure: The sum of expenditures on health by prepaid plans and risk-pooling arrangements, firms' expenditure on health, non-profit institutions serving mainly households, and household out-of-pocket spending.

Definitions: Out-of-Pocket Expenditure on Health: The direct outlays of households, including

gratuities and in-kind payments made to health practitioners and to suppliers of pharmaceuticals, therapeutic appliances and other goods and services. This includes household direct payments to public and private providers of health care services, non-profit institutions, and non-reimbursable cost sharing, such as deductibles, copayments and fees for services. Private Health Expenditure: The sum of expenditures on health by prepaid plans and risk-pooling arrangements, firms' expenditure on health, non-profit institutions serving mainly households, and household out-of-pocket spending. Advantages:

Improve quality Arguments in favour of user fees include: (i) increasing economic efficiency whereby scarce resources are allocated to their most valuable uses both within the public sector and between the private and the public sectors; (ii) the levies charged enhance the accountability of the public sector, making it more responsive to differing preferences and changes in the demand for publicly provided goods and services; (iii) cost recovery and increased equity; and (iv) the idea of benefit taxation is applied based on the principle of fairness as every payer pays only for the goods and services that they use. Disadvantages: This is because the poor who cannot afford private health care services due to the high costs can also no longer afford to use the public facilities. This leads to untreated morbidity, reduced access to health care, long-term impoverishment, and irrational drug use (Whitehead et al., 2003). Evidence has further shown increased inequities associated with user fees (Nyanator and Kutzin, 1999).

Tax-based

In such systems, individuals contribute to the provision of health services through taxes on income, purchases, property, capital gains, and a variety of other items and activities. In contrast to systems that rely on affiliation to an insurer (whether public or private), this system mobilizes funds from everyone regardless of their health status, income, or occupation Advantages: The Theory and Practice of Taxation Tax revenues have many advantages for financing universal health coverage. One of the foremost advantages is that it effectively pools health risks across a large contributing population. In such systems, individuals contribute to the provision of health services through taxes on income, purchases, property, capital gains, and a variety of other items and activities. In contrast to systems that rely on affiliation to an insurer (whether public or private), this system mobilizes funds from everyone regardless of their health status, income, or occupation. Consequently, it avoids many problems common to systems in which individuals and firms can choose whether or not to acquire insurance, namely adverse selection (the tendency for insurance to attract only higher risk individuals, thereby raising the average cost of insurance beyond the reach of many people) and risk selection (the process by which insurers screen potential clients and try to enroll individuals who present health risks that are below average). Another consequence of raising funds through taxes is that contributions are usually spread over a larger share of the population than might otherwise be the case. For example, in many countries, employers (and their employees) evade payroll taxes through informal work arrangements and social insurance contributions are frequently capped. In such cases, the burden of financing social insurance systems is concentrated on formal sector workers, who, particularly in developing countries, may represent a fairly small share of the total population. By contrast, there are many other revenues that

affect almost everyone, such as value added taxes, sales taxes, and import duties. Thus, the scope for mobilizing resources may be larger for Tax-Based Systems. The relative comprehensiveness of raising government revenues has further implications for the progressivity of health sector financing. Tax-Based Systems can potentially capture revenues from rents, capital gains, and profits, and therefore may be more progressive than social insurance systems that rely predominantly on a share of formal workers' salaries. In practice, the differences between Tax-Based and Social Insurance Systems is not systematically large though both are clearly less regressive than systems with predominantly private financing (K. Xu et al. 2003) !Wagstaff and Van Doorslaer 1993! Wagstaff et al 1999. Noting that countries with more progressive tax systems (US, Switzerland, Netherlands and Germany) rely less heavily on general tax revenues to finance health expenditure, Evans suggests there may be a political tradeoff involved. He conjectures that "[a] political coalition in support of tax financing can be assembled and maintained, so long as the redistribution is not too extreme." (R. G. Evans 2002, p. 39). Disadvantages: of effective management in public services, and problems associated with weak accountability and instability
Health insurance, like other forms of insurance, is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. The collective is usually publicly owned or else is organized on a non-profit basis for the members of the pool, though in some countries health insurance pools may also be managed by for-profit companies A health insurance policy is a contract between an insurance company and an individual or his sponsor (e.g. an employer). The contract can be renewable annually, monthly or be lifelong. The type and amount of health care costs that will be covered by the health insurance company are specified in advance, in a member contract or "Evidence of Coverage" booklet. The individual insured person's obligations may take several forms Many states have created risk pools in which relatively healthy enrollees subsidise the care of the rest Advantages: Risk pooling Disadvantages : Adverse selection Moral hazards : Insured patients are naturally less concerned about health care costs than they would if they paid the full price of care Risk selection