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Social Protection

Building social protection floors and comprehensive social security systems

Pros and cons of key financing mechanisms for social health protection

Updated by Xenia Scheil-Adlung on 12.06.2015

Mechanisms Pros Cons
Tax-based health protection

e.g. national health systems (NHS)

Tax-financed national health systems that typically provide healthcare to anyone resident in a country for free at the point of delivery. NHS aim at establishing comprehensive access to free health services. Providers and services are paid through government revenues.

 

 
  • Pool risks for whole population
  • Potential for administrative efficiency and cost control
  • Redistributes between high and low risk and high- and low- income groups in the covered population

 

 
  • Risk of unstable funding and often underfunding due to competing public expenditure
  • Inefficient due to lack of incentives and effective public supervision
Social health insurance

Membership is usually compulsory within a given population, i.e. workers, creating a risk pool for the group covered. Contributions are typically wage related with the government subsidizing those who are unable to pay.

 

  • Generate stable revenues
  • Often strong support from population
  • Provides access to a broad package of services
  • Involvement of social partners
  • Redistributes between high and low risk and high- and low- income groups in the covered population

 

  • Poors are excluded unless subsidized
  • Payroll contributions can reduce competitiveness and lead to higher unemployment
  • Complex to manage governance and accountability can be problematic
  • Can lead to cost escalation unless effective contracting mechanisms are in place
Micro-insurance and community-based schemes

A mechanism for health-financing at the sub-national/community level, e.g. households in a village or district; socio-economic, professional or ethnic groups. They frequently provide only limited coverage to population groups that are typically difficult to reach. CBHI can thus be considered as a preparatory step on the way to universal. Membership in CBHI schemes is usually voluntary and schemes are typically run on a non-profit basis.

 

  • Can reach out to workers in the informal economy
  • Can reach the close-to-poor segments of the population
  • Strong social control limits abuse and fraud and contributes to confidence in the scheme

 

  • Poor may be excluded unless subsidized
  • May be financially vulnerable if not supported by national subsidies
  • Coverage usually only extended to a small percentage of the population
  • Strong incentive to adverse selection
  • May be associated with lack of professionalism in governance and administration
Private health insurance

Members pay a risk-related premium and earn entitlements to get the cost of certain health services reimbursed or get the services free at the point of delivery. This can be either in the form of principal or supplementary coverage. Experience has shown that, without adequate regulation, private insurance increases inequalities in access to and quality of health services as well as failing to ensure adequate consumer (patient) protection.

 

  • Preferable to out-of-pocket expenditure
  • Increases financial protection and access to health services for those able to pay
  • Encourages better quality and cost-efficiency of health care

 

  • High administrative costs
  • Ineffective in reducing cost pressures on public health financing systems
  • Inequitable without subsidized premiums or regulated insurance content and price
  • Requires administrative and financial infrastructure and capacity

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Additionally, criteria for choosing the mechanisms for particular sub-groups of the population should include:

  • the number, structure and performance of existing schemes;
  • political and cultural context;
  • size of the tax base;
  • size of the informal economy;
  • disease burden;
  • availability of infrastructure;
  • capacity to collect taxes/contributions/premiums;
  • managerial capacity;
  • possibilities to enforce legislation; and
  • regulation and related impacts on equity .

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Summary of key financing mechanisms for social health protection

 

Generally, taxes are considered an efficient and equitable source of revenue for the health sector. They may lead to national risk pooling for the whole population and redistribute between high and low risks, and high- and low- income groups. The civil service has the potential to be administratively efficient and control costs.

However, the contribution that taxes make to health-care financing is largely contingent upon national macroeconomic performance and competing demands from other sectors; the quality of governance; the size of the tax base; and the government's human and institutional capacity to collect taxes and supervise the system. In practice, government schemes often tend to be under-funded due to competing public expenditures, which might lead to a shortage of goods and services and to under-the-table payments and lack of efficient governance.

The success of social health insurance schemes depends on the generation of stable resources as revenues, strong support of the population, provision of  a broad package of services, involvement of the social partners and redistribution between risk and income groups. However, schemes are administratively complex and governance and accountability can be problematic. Also, from a macroeconomic point of view, payroll contributions can reduce competitiveness and lead to higher unemployment.

Furthermore, in countries with sizeable informal economies, social health insurance might have an impact on equity if coverage is not universal. It should be emphasized that health care for the workforce is not free and that enterprises and the economy have to bear a respective share of the financial burden. In the case of social health insurance schemes, funding should consist of shared financial resources from both employers and employees. For specific benefits such as maternity benefits, specific rules might apply; for instance, full coverage might be provided through public funds to avoid disadvantages for particular groups.

Specific schemes such as community-based health insurance schemes can be an efficient mechanism to collect non-salary-related contributions and reduce costs for the poorest at the point of delivery. But they often experience problems of coverage and therefore fail to achieve sufficient pooling; they also frequently find it difficult to organize membership across different ethnic groups and struggle with management capacity and inadequacy of resources.

Private for-profit health insurance schemes are also found in many countries, ranging from OECD countries to developing countries such as Peru and the Philippines. If they are not subsidized, they cover the wealthier part of the population and are based on risk-related premiums. Although they might provide a better quality of service in some contexts, their exclusive character and high administrative costs are often criticized.

Overall, there is no single best solution, given the different economic, social, political, cultural and legal environments for effectively mobilizing funds and efficiently applying them. Using different financing mechanisms simultaneously, exploiting synergies, and ensuring their complementarity will allow countries to move faster towards the ultimate goal of universal coverage.