Health Care Economics Lecture Notes PDF

**COURSE TITLE: Health care Economics** **COURSE CODE: HCM 902** **LECTURE seven** **Health Care Financing** **CONTENTS** 1.0 Introduction 1. Main Content 2. 3. 4.0 Conclusion 5.0 Summary **1.0 INTRODUCTION** The precise definition of what services and activities comprise of the healt...

**COURSE TITLE: Health care Economics** **COURSE CODE: HCM 902** **LECTURE seven** **Health Care Financing** **CONTENTS** 1.0 Introduction 1. Main Content 2. 3. 4.0 Conclusion 5.0 Summary **1.0 INTRODUCTION** The precise definition of what services and activities comprise of the health sector is necessary to guide data collection and to make comparisons of health systems across countries or at different times. The following pairs of items show the difficulty of drawing a line between aspects of the health sector/non-health sector. Which should be included within the definition of the health sector? heath services, environmental services (e.g. water, sanitation, environmental pollution control, occupation safety etc.), hospitals, social welfare institutions, education and training, pure medical research, medical social work, social work, formally trained medical practitioners, traditional medical practitioners. In practice, the boundaries of the health sector vary considerably between countries and different definitions have been developed for different purposes. In developing countries, the definition tends to be broader than in developed countries due to greater deficiencies in certain areas (e.g. environmental health) and extensive use of the traditional health sector. 1. Health care financing is a broad term used to define alternative arrangements for paying, allocating, organizing and managing health resources. It includes: i. defining a level/ quality of care preferably a minimum basic health services packages to be provided, in an accessible and equitable manner; ii. identifying different modalities of financing to establish a financially sustainable system; and iii. institute different mechanisms for mobilizing funds and rationalizing the use of available resources including cost and risk --sharing mechanisms/ insurances plans. 1. **Financing Strategies** The financing mechanisms are grouped into broad and complementary strategies. It includes improving government health sectors efficiency, generating additional and new sources of revenue, encouraging private and non-governmental organizations participations, development of social and private health insurance, promotion of community participation, encouraging bilateral and multilateral agencies participation, alternate financing options for the urban areas and organizational mechanisms for implementation of the health care and financing strategies. National health care financing systems has pluralistic nature in funding. Therefore, it has different sources of health care funding which are i. **Public sources** - Direct government budgeting - National health services and public services health systems - Social health insurances sponsored or mandated by the government - Community financing ii. **Private sources** - Direct payment by households - Private voluntary health insurance - Employers based health insurances - Payments by community and other local organizations iii. - Foreign aid or development loans 1. **Government Financing** 1. **Public and QUASI-public sources of Finance** a. **General tax revenues:** General tax 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 larger 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. b. **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 certificates or long-term low-interest loans. The cost enjoying the use of those 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 of interest on loans) and lack of confidence in the government's abilities to honor eventual redemption of the bonds may make it difficult to use deficit financing as a source of support for health systems. care infrastructure, foreign aid is often limited to support import components. c. **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. d. **Social Insurance**: Social insurance can finance health care, as well as other needs such as invalidity and old age support. It is conventionally financed by imposing mandatory insurance payments on employed workers as a percentage of their wages, and by imposing a similar higher payroll tax on their employers. In order to include those workers outside the modern employment sector insurance, payments may also be calculated on measured 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 from 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 favor of high-risk (high-need) workers. The main problems of social insurance are related to issues of equity and efficiency. 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 mal-distribution of resources between rural and urban areas in developing countries. e. **Lotteries and Betting**: These may be used as sources of earmarked income for health and social services in developing countries. Often administrated 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. 2. Private financing for health care can be direct or indirect f. g. 2. **Health Insurance** i. **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 letter 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. Private insurance is not subject to the political allocation process and may channel extra funds into the health sector. However, it suffers from problems of two coverage because of its cost and the exclusion of bad risks, or enhancing inequity and promoting the growth of high-technology health care, inappropriate to developing countries. ii. **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-centered 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 work force. 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. iii. **Charity and voluntary contributions**: It 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 channeled through foundations or religious bodies. The problem with this source of finance is often indirect for example, donors may have different priorities from the recipient nation and may not recognize their most urgent health needs. iv. **Community Financing and Self-Help:** Primary health care initiatives in developing countries stress the importance of national self-reliance and community participation in health care delivery. By mobilizing underutilized national and local resources (e.g. organizational skills, manpower and cash) and by developing affordable and culturally appropriate delivery systems, it is hoped that basic health care will become universally accessible. v. **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 household requirements in excess of this level. vi. **Health Insurance:** Provides the means by which risks or uncertain events are shared between many people. Premiums are paid to an insurance institution which compensates any insured victim of the event for any financial loss resulting from the event. Insurance therefore, helps to lessen and spread risks, and it relies on the fact that what is unpredictable for an individual is highly predictable for a large number of individuals. It follows that for insurance to be feasible, there must be enough individuals insured to spread the risks widely, and the uncertain events must be relatively independent of each other. That is, the principle is one of insurance based on probabilities, not one of prepayment for known future events; though in practice, a prepayment element for health care exists since certain types of utilization are highly predictable. For a health insurance scheme to be cost covering, the level of its premiums needs to be related to the statistical frequency with which the population covered requires care, and to the average cost of claims, plus an allowance for administrative costs and a profit margin (for commercial institutions). Insurance has redistributive consequences, their nature and magnitude depending on the financing of the schemes and the way in which premiums are assessed. Because the occurrence of the event being insured against is uncertain, some participants will draw out more than they pay in, thus resulting in redistribution from the healthy to the sick. Other distributive effects will depend on whether the insurance is organized privately or through collective mechanisms, and on the method of distributing the costs over the population. Health insurance can be financed and organized in a variety of different ways. It can be purchased by an individual or group through the private market, from either profit or non-profit firms, and under these circumstances is conventionally termed private or voluntary health insurance. Health care itself would usually be delivered by independent providers, but sometimes by facilities owned by the insurer. In the case of private or voluntary health insurance, the level of an individual's premium would be based on the actuarially determined likelihood of illness of that individual. In contrast, group insurance is often based on a firm or co-operative and the premiums related to the risk of the group of employees in it, not of individuals. All subscribers will pay similar premiums and such insurance may well be made compulsory by the firm to prevent low risk or high income employees opting out. In some countries (for instance the United States and Australia) there are examples of the imposition of community rating on private insurers; that is, within a given geographical area, premiums are not permitted to vary according to health risk or occupation. Premiums are often paid at least in part by employers, health insurance being considered a fringe benefit, though labour legislation making it compulsory for employers to provide their workers with some form of medical care is increasingly being introduced in developing countries. **SELF ASSESSMENT EXERCISE** Discuss various sources of health care financing.