Health Economics

Sources of Financing
• Government (local & central)
• User fees/Fee for service
• Private Insurance
• Community based Insurance
• ODA
• Health Savings Accounts (HSA)
• Social Health Insurance Scheme
• Informal payments **********
 Insurance Schemes
• Risk pooling mechanism
 Risk Aversion
• Most people are averse to (they hate and
would rather avoid) risk
• Risk aversion means that they prefer the
certain choices over the uncertain ones
– Even if it means less immediate benefit than
more promised/future but uncertain benefit
– E.g. preference for $100 cash than an
uncertain promise of getting $200 in 1 year
 Risk Pooling
• Due to risk aversion, people avoid their risk
of paying large sums of money individually
when they fall sick by joining other willing
people to form a group
• They put their risk of falling sick together
with that of others => “Risk Pooling”,
What do We Mean by Risk Pooling?

Cross-subsidy from Cross-subsidy from Cross subsidy from productive

low-risk to high-risk rich to poor to non-productive part of the
life cycle
(risk subsidy) (equity subsidy)

High Non-
risk Producti
Rich producti
Low risk Poor ve
ve

Health risk Income Age

 Risk Pooling
• They all pay relatively small regular
amounts of money into a fund in the hope
that the combined resources contributed by
all the members will be more than any
member can afford individually
• They are guaranteed that if they fall sick
and need money, it will be paid by the fund
 Risk Pooling
• For General Tax Revenue, the payment of
contributions for health is indirect because
they just pay taxes and government
allocates some of the revenue to health
• For Insurance, the contributions go directly
into a Fund which then procures services
for its contributors from a provider
 Advantage of Risk Pooling
• Sickness is unpredictable
– Timing
– Selection of victims (age, sex, health status etc)
– Gravity

• The cost of care can be catastrophic

(enough to destabilise income and savings)
– Even for the rich
 General Tax Revenue
• Advantages:
– No new bureaucratic insurance administration required
– No expensive risk assessment and premium collection
mechanism required
– Allocates resources according to need
– Generally, contribution is according to ability to pay =>
“Progressive” i.e. the more you earn, the more you pay
(fixed % of income or variable) – apart from some taxes
e.g. VAT and earmarked health taxes
– Allows universal coverage
 General Tax Revenue
• Disadvantages
– General taxes are not earmarked for health
and may be used for other needs identified by
the government
– The health sector then has to compete for the
funds with other sectors
– Is therefore an unreliable way of guaranteeing
funding for health
Regressive Nature of Tax Revenue
• In developed countries, taxes are taken from
payrolls but miss out many rich property owners
who obtain rent directly from customers

• In developing countries, taxes are obtained from

payrolls, import/export business, graduated tax,
VAT, earmarked health taxes and other small
activities. Some, like VAT, are very regressive
because they are a flat rate for everybody
irrespective of income
Health Insurance
 Health Insurance
• Is a tri-partite arrangement in which one party,
the (contributor or their employers) pays funds to
a fund-holder (the insurer) to pay to a health care
provider when the contributor falls sick
• The fund-holder may be a private business
organisation, a member-owned organisation, a
government-created organisation, or a provider
• Based on the concept of ‘risk-pooling’
 Health Insurance
• May be a short-term or lifelong contract
• Lifelong insurance depends on the benefits
outweighing the risks
• The amount contributed regularly is called a
‘Premium’ (or Tax, for general tax revenue)
• The science of determining the risk and premium
= “Actuarial Science”
• When a member falls sick, the fund pays all or
part of the funds required for treatment =>
“Insurance”
 Health Insurance
• The fund-holder is also called the
“Managing Institution” or the “Third Party”
• Its duty is to collect, accumulate and
administer the contributions / premiums
• The service provider presents his/her bill to
the Third Party and not to the patient

9/4/19 16
 The Three Parties
The Managing Institution
government, or private (for profit or non
profit) managing payments in a fund
for consumers

Pays for
Pays premium
costs

The Insured The Service Provider

government, or private (for
makes regular
Provides services profit or non profit) provides
payments to a health care and receives
fund and receives payment from third party
benefits institution
9/4/19 17
 The Three Parties
The Managing Institution
government, or private (for profit or
non profit) managing payments in a
fund for consumers
Regulates
Pays for behaviour
Pays premium
Presents costs
Regulates Bills
behaviour

The Insured The Service Provider

government, or private (for
makes regular
Provides services profit or non profit) provides
payments to a fund health care and receives
and receives payment from third party
benefits institution
9/4/19 18
 Health Insurance
• Traditionally,
– The Third Party was different from the Provider.
Nowadays, some Third Parties are also the
Providers, and are called Health Maintenance
Organisations (HMOs)
– The Third Party selected the Provider. Now,
some of them allow the patient to choose a
provider of their own preference and are called
the Preferred-Provider Organisations (PPOs)
 Why Health Insurance?
• There are four arguments that are made in
favour of health insurance.
– attracting additional money for health
– getting better value for money (or increasing
efficiency) and
– improving the quality and targeting of health
care (increasing effectiveness)
– For ideological reasons /changing international
policy environment
 Why Health Insurance?
The ‘Additional Money for Health’ Argument
• Additional resources may be available
through insurance because:
– consumers are more enthusiastic about paying for
health insurance than paying general taxation
because the benefits are specific and visible
– consumers are more able (and prefer) to pay
regular, affordable premiums while healthy than
paying fees for treatment when they are ill
 Why Health Insurance?
The ‘Increased Efficiency and Effectiveness’ argument
• The third party can specify in contracts the
kinds of health care that are to be provided
and can therefore concentrate on efficiency
• Contracts lead to better accountability since
all parties are independent
 Why Health Insurance?
• Choice among providers leads to
competition which can lead to lower costs
and better quality care
• Consumers and their representatives will
demand better quality care because they
can see a clear link between their payments
and services
 Why Health Insurance?
The “Changing Policy” argument
• Alma Ata Declaration of 1978, and Bamako
initiative of 1988 had a goal of promotion of
Community Participation

• World Bank Agenda for Reform of 1987 had a

goal of promotion for private contribution, for
purpose of gaining efficiency & effectiveness
 Appealing Features of Insurance
• Since health risks are highly skewed (10% of
population usually consume 60% of the total
health expenditure and 30% has no expenditure)

– Individuals pay predictable amounts when healthy to

cover unpredictable costs when sick/injured

– Health insurance agencies pool many risks together

and generate resources to pay large unpredictable
health bills

– Equity objectives served when more healthy/wealthier

people cross-subsidize less healthy/poorer people
through risk pooling
 Insurance Coverage Is Rising
Everywhere

Each diamond represents % of population covered in one country

Source: WHO/DAP Global pharmaceutical expenditures 1999; Slide Source: J. Quick, 2000
 Setting a Premium
• The sum of premiums from contributors
should cater for
– the costs of the risks of the members
– The administrative costs of the scheme
– Any profit (if the scheme is for-profit)
• Therefore, a premium must be set carefully
to avoid loss
 Setting a Premium
• Community premium
• Individual premium
 Setting a Community Premium
• Community (average) premium = {expected total
benefits + administrative costs + profit + reserve
fund} / number of members
• Everybody pays the same amount
• Reserve fund is needed because the benefits are
estimated, using history of treatment (records or
self-declarations)
– Declines as members increase because the risk is
spread out over many people
 Setting a Community Premium
• Some people do not like the community premium
because they know themselves to be healthy
• They do not like to subsidise the very sick ones in
the pool
• Others prefer the community premium because
they know they are very sick and need support
• However, the insurer may not know any of this
information => “Information Asymmetry”
 Setting a Community Premium
• Therefore, the healthy tend to reject community
schemes while the sick tend to join such schemes
=> “Adverse risk selection”
• Adverse selection may be avoided by making the
scheme compulsory (individuals cannot opt out)
• Options:
– Premium may be based on salary and not a flat rate
– Coverage to citizens only (who can be forced to pay)
– Services developed only on the basis of need, to reduce
costs
 Setting an Individual Premium
• Relies on obtaining information on the
medical status of a potential contributor so
that it can be used to determine his/her
individualised premium
 Setting an Individual Premium
• Uses two approaches
– The insurer obtains person characteristics (age, sex,
occupation, lifestyle, medical exam, past medical history
etc) and uses average observations of similar people to
determine individual risk => “Risk rating”

– Insurer makes policies that force contributors to indirectly

select a risk group e.g. “you get a 50% discount on
premium but pay 60% of the bill” or “you pay full premium
and get full cover”. The young and healthy (low risk) will
opt for one that demands less premium => “Self-
selection”
 Setting an Individual Premium
• Most commercial insurers prepare
insurance packages based on individual
risk rating
• Their packages are targeted to different
risk groups e.g.
– “Gold”
– “Diamond”
– “Silver”
 Moral Hazard
• Uncontrolled demand and supply of care
• Occurs in risk pooling mechanisms e.g. insurance
and tax-based funding
• Because the payer is a third-party i.e. the insurance
organisation, the main parties (the patient and
provider) have no incentive to minimise demand
and supply
• Insurance helps to control both demand and supply
of care at individual and national levels
Controlling Moral Hazard - Demand
• Financial and non-financial mechanisms are used
Financial:
• A penalty (fee) is charged to discourage users
from unnecessary (frivolous) demand
• Effect: the poor may not afford the fees
• Control mechanisms:
– Deductible
– Co-insurance
– Pay-out limit
– No-claims bonus
 Deductible
• The member pays a fixed amount of the
cost
• If the cost exceeds that mount, the insurer
pay the excess
• The amount is set at the signing of the
agreement
• May vary with perceived or confirmed risk
 Co-insurance/co-payment
• The member pays a percentage of any
cost charged
• The percentage is usually agreed upon at
the signing of the service contract
 Pay-out Limit
• The insurer pays no more than a given
amount
• Any excess is paid by the member
• Amount is set at the signing of the agreement
 No-claims Bonus
• For customers who make no claim or
below a given number of claims in a year,
a discount is made on the premium of the
subsequent year

• A combination of these measures may be

used in a scheme
 Controlling Moral Hazard - Supply
• Regulation: The state may impose limitations on the
– Number of doctors, hospital beds etc
– Technologies used in care
• Assumption: Controlling supply also controls demand
Effect:
• Lines and lists of patients waiting for operations and
care
• Very sick people may not wait for their turn and
either use private providers or die
 Controlling Moral Hazard - Supply
• Insurers: use several mechanisms to ensure that
treatment given is appropriate, effective and cost-
effective
• They are collectively called “Managed Care”
• Some are financial and others are non-financial
– Capitation funding
– Physician bonuses/penalties
– Physician audits
– Drug formularies
– Gatekeeping etc
 Capitation Funding
• The Third Party signs a contract with a
Provider to pay only a fixed amount of
money per patient seen
• This forces the provider to be efficient and
restrictive with treatment because he/she
gains nothing by being wasteful on a
customer
• At the same time, he/she must provide
quality care to retain the customers
 Physician Bonuses/Penalties
• The Third Party may provide bonuses for a
provider who saves money on patients or
penalties on one who exceeds the
estimated expenditure
 Physician Audits
• A Third Party may use an independent
specialist medical worker to evaluate the
treatment protocols of the contracted
Provider as a control mechanism
• A Provider may then either be rewarded or
penalised depending on the findings
 Medical Formularies
• Insurance companies often require their
Providers to use a specified Formulary for
prescriptions
• They do not pay for any medicines
prescribed outside the agreed Formulary
• If they are prescribed at the request of the
patient, then he/she is required to pay for
them privately
 Gatekeeping
• In a bid to control excessive costs, Third Parties
usually institute a system of a junior doctor who
sees all patients requiring a doctor, before they
see a consultant
• This saves the cost of paying a consultant for
every consultation
• The junior doctor is called a ‘gatekeeper’
• His role includes giving information to the patients
about the complexities of secondary care by a
consultant
Problems with Health Insurance
Problems Imperfect Solutions
 Setting the Premium in Risk Pooling
Methods
General Earmarked Social Health Voluntary Private
Tax Health Tax Insurance Community Insurance
Revenue Insurance

Rating Income/ Income Income Community Risk

basis Expend.

Earmarked X √ √ √ √
for health

Premium X X √ √ √
determines
benefit
 Types of Health Insurance
• Community Health Financing schemes
– Pre-payment schemes
– Community health insurance schemes
• Private Insurance
• Social Health Insurance
 Community Health Financing

• The schemes are localised and usually concern

small communities coming together to pool risks
• Membership is usually voluntary but may be forced
under the local customary practices, but not
enforced by the state
• Usually start the scheme in association with a local
trusted provider, who may also be the fund-holder
• Many examples exist in Uganda, DRC, Tanzania,
Burkina Faso, Thailand etc

9/4/19 51
 Pre-payment Schemes
• Are variations of user-fees and not true
insurance schemes
• Members pay an amount into a fund and
obtain services
• When the amount paid is used up, they add
on more or are protected until they can raise
funds (e.g. after the harvest) and pay
 Pre-payment Schemes
• The essence is that the individuals pay the
full (or near full) cost of the service
obtained, unlike in insurance where the
(subsidised) cost is paid by the pool
• Examples:
– Pre-payment schemes e.g. Mutolere, Kisiizi
– Health card schemes e.g. Burundi
 Private Insurance
• Emerges from voluntary actions in a market where
buyers are willing to pay premium to insurance
companies that:
-- pool the risks and insure them for health expenses
– Contract and pay providers who provide treatment for
members

• Motivated by the prospect of earning a profit

• Private insurance companies compete for clients on the

basis of “price” and quality
 Private Insurance
• Enrolment is voluntary
• 2 broad types:
– Insurance companies (for-profit)
– Community financing/insurance schemes

• Private insurance companies

– Generally has adverse risk selection, leading to high
premiums because of the high risks covered
– Suitable for middle to high income countries as a major
mechanism
 Private Insurance Companies
• May have 3 broad principles on which they
are constituted:
– Make profits for individual shareholders
– Reinvest their profits into the same company
– Regard the contributors as the shareholders
and any profits are given to them through
lower premiums (Provident Funds)
 Private Insurance Companies
• Require strong regulation for 3 main issues
• Consumer Protection
– Clarity on the benefit package to customers

• Financial Regulation
– Reporting and public transparency, to avoid insolvency
and use of the funds for non-declared purposes

• Entry and Exit of companies into the market

– Small companies without a reserve to meet sudden large
claims should be locked out
 Private Insurance Companies
• There should be a system of accreditation
for companies intending to join that
business
• The authorities must be willing and able to
enforce the regulations on such companies
in the business
• The state may contract private insurance to
cater for the population
 Community Financing
• A variety of risk-pooling and pre-payment
schemes
• Got a boost after the Bamako Initiative
(“Revolving Drug Funds”) which sought
community contributions to guarantee
availability of medicines (Unicef/WHO, 1988)
• Implemented in many parts of the developing
world
 Community Financing
• General characteristics
– Usually voluntary
– A fixed premium for a given small range of
services
– Cover services for which patients must pay for
(usually exclude preventive services)
– Such services are generally easy to evaluate
e.g. availability of medicines, waiting times etc
– Revenue does not cover full cost but just
supplemental
– Revenue retained by the local facilities
 Community Financing
• Suffer from severe adverse risk selection as most
low-risk people opt not to join
• As a result, measures have been taken to enroll
them, with various results:
– Attractive benefits for the low risk
– Attractive benefits for everybody (not viable for the
organisation)
– Subsidy for the scheme by an external source so that no
member pays a premium which covers the full cost (not
sustainable for the external source)
 Community Financing
• Should be developed with community
involvement at all stages
– Setting objectives
– Setting premiums
– Fixing the benefits
– Deciding penalties
– Use of the funds
– Regulating etc
 Community-Based Health Insurance Schemes
• The beneficiaries are typically
• In the informal sector or
– Unemployed or
– often the poor or socially excluded
– With no or minimal access to general tax-
financed health services (geographic barriers,
unavailability)
– Can not pay for market-based private
healthcare
9/4/19 63
Community-Based Health Insurance Schemes

• Members contribute funds on an annual

basis which are kept by the fund-holder
• Contribution is usually for an entire
household rather than for individuals
• A package of services for the contributors
is negotiated with the provider
• The members appoint an overseer to
control moral hazard
 Community-Based Health Insurance Schemes

• A few have survived but most usually fail because

– Administrative costs become too high unless borne by
an external body e.g. donor, gov’t etc
– Moral hazard occurs with frivolous use being the main
problem
– Since no risk assessment is done, they suffer severe
adverse risk selection
• In Uganda, they are grouped under the Uganda
Community-Based Health Care Financing
Association (UCBHCFA)
 Making Community Financing Methods
Successful
• Government or a donor may subsidize the poor
• Organize and operate primary care clinic at village level
to gain efficiency and quality and contract and pay only
for secondary level services
• Manage by community members who are accountable
back to members, not by a government employee
• Governmental role--initiate, train, support, monitor and
regulate CF schemes
Potential Improvement in Efficiency and
Quality Under Community Financing
• Efficiency Gains: Organized primary care with salaried
practitioner at the village level; Bulk purchasing drugs;
Contracting for secondary services

• Lower Costs: Bulk purchasing and distribution of drugs;

Remove incentive to induce demand

• Improve efficiency and accountability: Manage by

Community Members for their own benefits with external
monitoring and regulation

• Improve responsiveness and quality: Monitored and

managed by Community Members
 Health Savings Accounts
• Also called “Medical Savings Accounts”
• Individuals and employers make tax-exempt
payments into personal accounts managed
by employers, banks or a state agency
• When they become ill, they use those funds
and when exhausted, a back-up insurance
with a large deductible may be used to
support the patient
 Health Savings Accounts
• Popular because
– Patients feel they do not pay for unknown
fellow contributors
– Especially in countries where people do not
trust the government, people feel they are not
giving their money to the bureaucracy
• Have been used in Singapore, China, US
 Health Savings Accounts
• What is not used in a year is carried forward
to the following year until death
• At a certain level, one may even withdraw
some of the money and leave an agreed
minimum
• At death, one may pass on the funds to
another family member
 Social Health Insurance
• Is a compulsory insurance for selected
categories of the population – usually those
in formal employment
• Easy to target with legislation because they
have a known income source: salary
• May be managed by the MoH or an
independent Insurance Fund
• Requires very accurate costing of services,
to avoid making systemic losses
 Social Health Insurance
• Law compels employers to deduct a % of each employees
monthly wage for health to be paid into a “social insurance fund”

• Law compels employee to pay a % of his/her monthly wage,

(deducted by the employer) to “social insurance fund”

• Social insurance funds can be managed publicly or privately;

they can be monopolies or competitive

• The employer/employee deductions are earmarked for health,

and cannot be used for any other purpose

• Applicable largely to formal sector employers and employees;

evasion is severe among self-employed and informal sector
workers
 Social Health Insurance
• Costs must include all inputs and capital
expenditure like depreciation
• Has a narrower tax base than general tax
because it depends on just one tax (salary-
based)
• Is susceptible to changes in employment
rates and salary scales
• Discourages investment because it
increases employment costs
 Social Health Insurance
• Requires an independent Fund (hence a
costly bureaucracy) to manage contracts
• Requires some subsidy from the
government, thus encroaching on the
funds of the remaining unemployed poor
(case of Burundi)
• May lead to reduction of government
contribution from MOFPED to MoH
 Why Do Nations Consider Social
Insurance?
• Diseases and illnesses are uncertain; serious
illnesses can bankrupt families

• Health and health care are basic necessities for

life, EQUITABLE access to health care is a
national goal for most countries

• Insurance (pooling risks) enhance people’s well-

being and prevents impoverishment
 Advantage of Insurance Fund
• Unlike general tax revenue channeled
through the MoH, the Fund may force the
providers to behave in a customer-
responsive manner
• MoH is usually involved in the
management of the hospitals and has a
conflict of interest in the administration of
the insurance
Challenges to Social Health Insurance
• Who to tax
• How much to charge them
• How to make them pay

– Rural employed people are difficult to know

– Hard to know the income of informal workers
– Defaulting on payments when they lack money to pay
wages
– Assessment of risk is generally difficult (confidentiality,
ethical issues etc)
 Social Health Insurance

• Is sponsored by the government through

subsidised premiums
• N.B.: Gov’t may subsidise the contributors
by taxing salary only after the insurance
premium is deducted
• By linking premia to income, social
insurance promotes a degree of
redistribution among its members
• Health benefits are sometimes offered
together with other social benefits such as
pensions and unemployment subsidies
9/4/19 78
Advocates of SHI in LIC
• Various interest groups:
– Governments:
• as a way of increasing and earmarking resources for
health (this is only possible if other funding sources
are maintained and the costs of administration are not
too high)
– Health Professionals:
• largely indifferent but may be keen if they expect
better remuneration (but if the additional funds are
absorbed by higher pay then there will limited impact
on the health objectives)
Advocates of SHI in LIC
• Donors:
– keen, partly because it is a familiar funding
mechanism for health and
– because they anticipate benefits in terms of
efficiency
• The population:
– who will be insured (e.g., those in stable
employment) are indifferent, largely because
insurance is a new concept to many
 Opponents of SHI
• Private insurers:
– may oppose a well regulated social insurance scheme
because of foreseen competition
– easier to start social insurance early, before private
health insurers become a large, organised and
influential group

• Employees:
– If they do not trust the government system’s ability to
deliver quality care or to effect payment to the
providers, they see it as just an extra tax, likely not to
benefit them, like any previous taxes
 Opponents of SHI
• Workers Unions:
– Fear that it might deny the workers further
salary increments by the employers

• Employers:
– Fear that it adds to the employment costs
Opposition to SHI in LIC
• In poor countries, economic growth is very slow
and incomes are low
• The introduction of insurance will have little
impact in mobilising additional resources
• The number of those in formal employment is
also very small and most have very low salaries
• most people work in the non-formal and
agricultural sectors and therefore have irregular
income, difficult to make regular contributions and
to collect contributions
 Advantage of Payroll Insurance
• Staff know it is earmarked for their health
care, unlike general tax revenue which
may fund other government activities
Opting out of Compulsory Insurance
• At times a contributor may wish to opt out of
a compulsory insurance and be served by a
privately selected provider
• He/she may:
– Opt out of getting the service but is still obliged
to pay the premium or
– may be allowed to pay less premium or (rarely)
– May be allowed to opt out entirely from paying
the premium and getting the benefits
 Who May Use What Strategy?
Income High Middle Low Poor

Employment
Status
Employed or Retired in - Social Insurance - Social Insurance Social Social
Formal Sector - Private Ins - Private Ins (for some) Insurance Insurance
- User Fees/Self- -User Fees/Self Pay (for
Pay small expenses)

Employed in Informal -Voluntary SI - Voluntary SI

Sector - Private Ins - Private Ins (for some)
-User Fees/ Self- - User Fees/Self Pay (for some
Pay small expenses)

Self-Employed -Vol. SI, User Fees/ - Vol. SI, User Fees for small
Self-Pay expenses)

Retired

Unemployed

Farmers -User Fees/ Self-

Pay
- Community Fin.

GENERAL REVENUE and USER FEES CAN BE USED TO FUND ANY GROUP
Can People Rely On Free Market For
Insurance?
• Market and competition deal with efficient
allocation of resources, not EQUITY

• There are serious market failures in the insurance

market and in the health services markets.
Regulations have not been able to effectively
remedy the market failures

• Social insurance is a major approach to promote

equity and address insurance market failures
Failures In The Private Insurance Market

Asymmetry of Information

Adverse Selection by Risk Selection by

insurance buyers insurance company

Absence of Optimal Elderly and less

Insurance Products healthy people left
uninsured
 Special Features of SHI
• Mandatory for designated population to avoid adverse and
risk selections

• A social contract between government and the enrollees

• Eligibility for benefits requires that the enrollee has paid the
premium (contribution) for a minimum period. Thus SHI is
not a right of every citizen, and not a welfare program

• Financially autonomous and has to maintain its own

solvency
 Advantages of SHI
• Pools risks widely

• Can improve equity by targeting

• Mobilizes financial resources for health care from

workers in the formal sector

• Low administrative costs

• Can control health expenditure inflation if the program

is designed properly
 Social Health Insurance is not a
magic bullet (or a panacea) to solve all
health care financing problems for
developing nations. It offers a partial
solution. It takes decades for social
health insurance to cover everyone.

N.B: Resistance to include new groups

 Disadvantages of SHI
• Requires sophisticated knowledge and
organization to do it properly

• Alters economic relationship between the

providers and the contributors

• Alters locus of financial power and this power can

be misused

• Cannot provide universal coverage unless the

government subsidizes the farmers and workers
in the informal sector
 Impacts of SHI
• Organize and mobilize extra funds for health
• Pool risks between the healthy and the sick,
cross subsidy by the high-income to the low-
income
• Can provide cost effective health care
• Can control health cost inflation
• Can improve efficiency and quality of health
care
• Potential negative economic impacts:
– Excess burden, labor market, price inflation
 Major Planning Issues
• Covered population/eligibility
• Enrollment/premium collection
• Benefit package
• Costing/financing
• Macro organization
➢Public, Semi-public, Private non-profit, for-
profit
➢Monopoly or competition
• Payment system
 Major Planning Issues (2)
• Administrative systems
– Eligibility card and enrollment
– Premium collection and accounting
– Claim card
– Monitoring quality and cost
– Management information
 Administration
• Costs of premium collection and targeting

• Transparency of its operations and

performance

• Accountability to regulators and enrollees

• Compliance with law when operated by

private insurers
 Models of Social Health
Insurance in Developing
Nations
 Five key structural differences
• Single unified fund or multiple funds?

• Separate risk pooling for different population groups?

• Benefit package: one tier of several tiers?

• Agency to manage SHI: Government (MOH, MOLSS,

new agency) or non-profit private organizations?

• Assure and improve health services delivery

– Will SHI deliver health services directly?
– Will SHI act as an active prudent purchaser or simply reimburse?
• Competition: among insurance plans? Among providers?
• Payment
 Impacts of single unified fund
versus multiple funds

• Risk pooling
• Cross subsidy and equity among groups
• Public satisfaction
• Proper allocation of resources
• Ease of eventually achieving universality
• Efficiency
• Ability to control health expenditure
inflation
Impacts of separate risk pooling for different
population groups

• Equity

• Risk pooling

• Sustainability
 Impacts of benefit package:
one tier or several?

• Equity

• Affordability of same benefit package for all

• Trade-off between covering more of the

subsidized population versus more
comprehensive benefits for fewer people
Who will manage and operate the SHI? Government or competing non-
profit private organizations:

• Government – political interference; patronage;

corruption

• MOH or MOLSS or a new independent agency?

• Single agency – public or private monopoly leads

to inefficiency

• Competing non-profit organizations –regulation

and duplication
Cost and financing

cxQ=E=P+T

c = cost per unit of service

Q = quantity of service
E = total health expenditure
P = total premium contributions
T = subsidy from tax revenues
 Assure and improve health
service delivery

• SHI as a direct provider

– Often better management
– Better funded, better quality of service
– Creates a two-tiered system: public health facilities vs.
SHI health facilities

• SHI acts as an active prudent purchaser

– Accreditation of providers
– Set prices and practice standards (protocols)
– Control balance billing
 Assure and improve health
service delivery
• Introduce competition to improve efficiency and quality of
health care
– Competition between health insurance plans which serve as
intermediaries for the fund as a prudent purchaser
– Competition among providers
• Money follows the patient
• Pay for performance

• Introduce new payment method to improve efficiency and

quality of health care
– Reform payment method – move away from fee-for-service
payment
– Capitation or DRG payment

• Reduce supply side subsidy

Reducing the public hospitals’ subsidy
1.
Percentage of public hospitals' revenue

0.75
Payment by
SHI

0.5

Government
0.25
budget

0.
0 1 2 3 4 5 6 7 8 9 10
Year
 Long road to universality
100%

75%

Thailan
d

50% Colombi
a

Philippine
Kenya Ghana
25% s

0%
1990 1992 1994 1996 1998 2000 2002 2003 2005 2007 2009 2011 2013
Models of Social Health Insurance in
Developing nations

• Ghana
• Philippines
• Colombia
• Mexico
• Thailand
 A comparison of SHI structure
Country Cases
Structural
feature Kenya Ghana Philippines Colombia Thailand
Single or
Single Single Single Single Multiple
multiple funds
Separate risk
By
pooling of Unclear Single group 3 groups 3 groups
community
groups
Benefit Not decided Intended to
One tier Three tiers Multiple tiers
package yet be one tier
SHI agency Government Government Government Government Government
Rely on
SHI as prudent competing Managed
Undecided community & Doubtful Yes
purchaser private plans
competition

Reduced Yes Yes

supply side ? Yes (modest) Yes
(planned) (modest)
subsidy
 Enabling Factors For
Universal Social Health Insurance
Potential Advantages of Universal Social
Health Insurance
• Mobilizes more funds for health

• Provide universal insurance coverage with a benefit package.

• Improve access to health care, risk pooling and risk protection.

• Target public fund to the poor more effectively

• Shift subsidy from supply side to demand side to improve

efficiency and quality of health care.

• Improve access to health care by contracting private sector

providers.
 Successful SHI Requires 8 Enabling
Factors
• Economic condition and growth rate

• Sufficient government revenue to subsidize the poor and near poor.

• Social structure

• Sufficient popular demand for social insurance

• Adequate supply of health services

• Good governance

• Administrative capacity

• Data and Management information

Enabling Factor 1: Economic Conditions
• A formal sector that employs a large portion of
the working population

• A formal sector consists of larger companies

employing more than 30 workers

• A significant middle income and upper middle

income class working in the informal sector who
can pay premium

• Rapid economic growth

 Enabling Factor 1(a)
• Example of economic enabling condition for SHI
➢ South Korea, 1977-1989:
• average annual growth rate of GDP per capita = +13.3%
• universal coverage achieved

• Some margin to increase labor costs

– moderate wage rate to reduce the negative effects of SHI
contributions on competitiveness, employment and tax evasion

• Limited size of the informal sector

– large informal sector create difficulty to achieve universal
coverage.
 Enabling Factor 2: Government
Revenue
• Sufficient government revenue that
government can allocate a significant
amount to subsidise the premium for the
poor and near poor,
OR
• Ability to raise new revenue and designate
it for social health insurance ( example:
Ghana increased its value added tax rate
by 2% and designate it for SHI)
Enabling Factor 3: Social Structure

• Well designed SHI covers worker’s family

members. How large is the family?

➢Number of wives
➢Family size: Relation between parent and
adult children.
 Enabling Factors 4: Demand Side
• Do people have the interest and incentive
to enroll and pay SHI premium?

➢People’s understanding about risk and

preference for insurance.
➢Do people have to pay high user fees for
public health services now?
➢Do people have access to reasonably good
quality and low cost public health services
now?
 Enabling Factor 5: Supply Side

• SHI pertains to mobilizing financial

resources: can the resources be
transformed into effective health services?
Depends on supply:

➢Are there adequate supplies of qualified

hospitals, clinics, doctors and nurses?
➢Is there an adequate pharmaceutical supply
and a good distribution system?
 Enabling Factor 6: Governance
• Develop an organization that would represent the
interest of the insured.

• Insulate organization from politics.

• Check and balance to prevent corruption (e.g.

Kenya Hospital Insurance Fund, Shanghai’s Social
Insurance Fund)

• Establish efficient and effective administration

(administrative expense less than 5% of the total
revenue, OECD nations set goals to reduce admin
expenses by 0.1% of total revenue yearly from
1990-1999)
 Enabling Factor 7:
Administrative Capacity
• Enrolling eligible population and collect premium.

• Target the subsidy to the poor—how to do it, definition of

poor, identify the poor

• Technical Competence—actuarial, accounting…

• Select and certify high quality hospitals and clinics.

• Purchasing, contracting and setting performance standards

for efficiency and quality health services.

• Design appropriate payment system to promote efficiency

and quality.
 Enabling Factor 8: Data and
Management Information

• Data on utilization rates and unit cost to compute

the actuarial premium

• Quality measurement of health services

• Management information:
➢Financial
➢Hospital and clinics’ performance
➢Premium evasion rate
➢Public satisfaction
The ability to extend the SHI coverage
• Design of a realistic and progressive scenario of
extension of SHI
– progressive: in order to ensure expanding coverage and financial
sustainability and because SHI is essentially complex and
requires time to implement and expand.

• Capacity to include informal workers in the system

– attractive scheme (benefits package, available health services)
– marketing of the SHI
– innovative techniques to collect contributions: flat premium, go
through existing local networks to reach informal workers, people
required to pay high user fees if they do not contribute to SHI…
 CONCLUSIONS
• SHI can be a very effective way to raise additional resources for
health and, expand coverage to everyone, provide stable
financing, make benefit and cost more transparent.

• Expansion of SHI to everyone is a long process, depending on

the political and socioeconomic characteristics of each country.
For many DC with large informal sector and stagnant economies,
it may be unrealistic in the foreseeable future to achieve
universality.

• A nation must assess its enabling conditions and be realistic how

to overcome the barriers to achieve an sustainable program with
universal coverage and take advantages of SHI and reduce its
drawbacks.
Design and Implementation of SHI (I):
Eligible population, benefit package,
cost and financing.
 SIMPLE FACT
Designing a Social Health Insurance system
is a constrained optimizing problem:

• Contributory Regime: Cost and contribution rates must

be acceptable to the employers and workers.

• Subsidized Regime: Cost must be affordable to the

government
Pop[P x Q] =E= Government budget
allocation
 Eligible population

• Population covered under contributory

regime

• Fully subsidized population

• Partially subsidized population

 Uganda
Economically
Income→ High Middle Low/ Poor Active
Employment Population
Employed in formal
sector
Government 25,000 232,000 --- 257,000
Private
Employer with >10 110,000 358,000 100,000 568,000
Employer <10 30,000 200,000 398,000 628,000
Employed in informal
sector & self- 80,000 200,000 537,000 817,000
employed
Farmers/ Hunters 250,000 750,000 4,760,000 5,760,000

Total 415,000 1,740,000 5,795,000 8,030,000

 Thailand
Income groups
Employment groups
High Middle Low Poor Total
Employees
- government sector 11%
7.0% 24.3% 1.5% 0.2%
- private sector 22%
- informal sector 0.3% 1.1% 1.3% 0.6% 3.3%
Self employed
- professionals - 3.8% 2.1% 0.1% 6.0%
- vendors - - 2.1% 3.4% 5.5%
- farmers 3.9% 8.3% 13.5% 4.3% 30.0%
Other
- pensioners 0.8% 0.6% 1.5% 3.2% 6.1%
- income from foreign service 2.6% 0.4% 0.5% 0.4% 3.9%
- investment and rental income 2.1% 0.4% 0.3% - 2.8%
- miscellaneous 0.5% 1.3% 2.1% 0.4% 4.3%
Unemployed - 0.1% 2.1% 2.9% 5.1%
TOTAL 16.0% 33.7% 33.7% 16.6% 100%
 Enrollment and premium collection
• Formal sector employees
– Civil service & government enterprises
– Private sector employers

• Non-poor working outside the formal sector

– Self-employed
– Informal sector workers
– Members of organizations (unions, cooperatives,
guilds)

• Who is able to enroll these groups and collect the

premiums?
 Subsidized Population
• The poor and near poor?

• Retired , disabled, children?

• Unemployed?
 Population under the subsidized regime

• Target by what criteria?

– Income
– Age, sex (elderly, children, pregnant women)
– Geographic region
– Race or religion

• Fully subsidized population, partially subsidized

• Who can administer it?

 Determinants of SHI Costs
• Services included in benefit package

• Coinsurance, deductible, copayment and maximum

caps

• Expected demand for covered services (by age, sex,

income, and region)

• Payment methods and level

• Expected supply of services

• Administrative costs and contingency Rx

Pop [P x Q] = E = (C + T + D)

Pop = Population
P = Unit price of service / person
Q = Quantity of service / person
E = Total health expenditure under SHI
C = Premium contribution
T = Tax revenue for subsidy
D = Donor funds
 How Benefit Package Affects Costs
• Benefit package mostly affects the quantity of services
and demand for higher quality of services

• Patients have an underlying need/demand for health

services

• Covered services alter patients’ demand due to price

elasticity of demand and cross price elasticity of demand

• Covered services also alter the type of services that

physicians supply, they may induce demand for profitable
services while undersupplying the unprofitable services;
they may also substitute uncovered for covered services if
they are allowed to charge extra amounts
 Cost Estimation
• Expected quantity of covered services to
be utilized per person at different levels of
facilities. The utilization rate will vary by
benefit package design

• Unit cost per each covered service that will

vary by how provision of services is
organized and payment method used
 Determinants of Future Cost
• Demand for services – demand forecast

• Increase in population

• Aging

• Change in epidemiology

• Technology adoption

• Change in supply of physicians and beds

• Improvement in quality of services

• Improvement in efficiency
 Cost Estimation Methods
• Cost estimation method differ between
– Direct provision of services by Social Insurance Fund
through its own facilities
– Public provision
– Private provision
– Mixed provision

• A totally new program or extension of old

• Quality improvement expected

Cost Estimation for Indirect Provision

• Price for services (negotiated or unilaterally set),

but requires some “evidence” to set prices such
as actual cost

• Quantity – requires data by age/sex and region

• Practical considerations – use data and

information from existing SI and private
insurance plans or surveys
 Estimate The Contribution Rate
• Estimate the wage base to be taxed using
income tax and other information

• Forecast evasion rate

• Divide total estimated cost by the taxable

earning base
 Reality Test
• Is the contribution rate acceptable to the public
and different organized interest groups such as
business federation and labor unions?

• Can the low-income workers “afford” the

contribution rate?

• How much subsidy required for the poor and

near poor?

• What are the economic impacts?

 How to Finance the Package(s)?

• Social insurance contributions

• General revenue subsidy

• Earmarked taxes to subsidy social

insurance

• Investment earnings

27
 Consultations
• Employers

• Workers & labor unions

• Farmers organizations

• Professional associations & guilds

• NGOs and community organizations

 Political Negotiations
• Amount of tax subsidy

• New earmarked taxes

• Targeting the subsidies—target group and

amount

• Salary scales or price of services

• Scope of the benefit package and coinsurance

Enrolling and Premium Collection
 Definition of Employee
• How does the SHI define employee?

• Does the definition include temporary and

contract workers?

• Does the definition include the independent

self-employed workers who are under
contract to the employer?
 Taxable Base

• What is the earnings base for the social

insurance premium contribution?
➢Salary
➢Salary plus bonus
➢Salary + bonus + housing allowance + ……
 Enrolling Formal Sector Workers
• Who are the formal sectors workers?
➢Civil servants
➢State enterprises
➢Employees of registered private business
companies:
• Multinational corporations
• Large companies employ more than 100 workers
• Medium size companies employ 25-100 workers
• Small companies employ less than 25 workers
Large and Medium Size Companies

• Maintain accurate records on employees

• Keep accurate wage records
• File business and income tax
 Enrolling non-poor self-employed and
informal sector workers

• Who are they?

– Self-employed professionals
– Farmers, hunters, fisherman
– Shop keepers, restaurant workers, taxi drivers

• Size of population: 30% - 40% of total

population
Barriers to enrolling and collecting premium
from informal sector workers
• No formal employment contract or agreement
• No formal record of income / wage
• Most are lower and lower middle income people
• Non-cash income; seasonal income
• Self-employed have no employer to match
premium contributions

• High evasion rate

• Under reporting of wages
• Adverse selection
 Overcome the barriers
• Offer incentives:
– provide subsidy
– Charge high user fees

• Enroll through organizations:

– Community organizations
– Cooperatives: micro-financing organizations,
agricultural, lumber, and milk cooperatives
– Trade guilds
Compare approaches used by
Ghana, Philippines, Colombia and
Thailand in enrolling the non-poor
self-employed and informal sector
workers
 Goals of This Session
• Provides an overall context that gives rise to Social
Insurance
• Introduce the essential characteristics of Social
Insurance
• Examine the planning issues for SI
• Present the models of social health insurance in
developing nations
• Discuss the challenges facing the developing nations
in implementing social health insurance
Newer Modes of Influencing Demand

• Conditional Cash Transfers

– Cash given to patients on condition that they use
services
– Dispensed at health units

• Service Targeting
– Selected areas targeted
– Specific services (e.g. maternal health, immunisation
etc) discounted to ensure maximum access
 SHI in Uganda
• Part of NRM Presidential Manifesto for
2006
• Expected to start 1st July 2007
• To start with contributions from all people
in formal employment (see scenarios)
• Hoped to, eventually, become universal
(no time frame)
• Employees and employers each to pay 4%
of gross salary per month
 Objectives of the Fund
• Raising additional funds for health (~$20m
initially and $35m when fully operational)
• Build health management capacity, efficiency
and cost effectiveness in the health sector
• Development of Ugandan capacities and
skills to implement collection, payment, care
management and regulation of a modern
health financing system
 Objectives of the Fund
• Diversify and strengthen health care
financing in support of national health
policy priorities
• Welfare gain in health care, financial risk
protection and consumer satisfaction for
the covered population
• Facilitating the provision of accessible,
affordable and quality health care to
members
 Objectives of the Fund
• Equitable allocation of health sector
resources
• Promoting private sector growth in quantity
and quality of health care provision
 Projected Contributors
• Expected to serve
– Civil Servants: 67,712
– Teachers: 116,194
– Private sector (NSSF): 80,000
– Private sector (URA): 120,000
– Contingency: 100,000
Total: 403,906
 Projected Revenue
• Average monthly salary: 122,889
• Monthly Revenue Base: 49.6 bn
• Expected monthly revenue: 1.96 bn
 Operationalisation
• Mandatory
• Managed by a corporate body not under
government control but attached to MoH
• Body headed by a Board of Directors
appointed by the Minister for Health
• Tax-exempt in its operations
• Contributions to be tax exempt
 The Fund
• BOD headed by a C/man
• Directorate headed by a MD
• 11 BOD members
– 4 from gov’t (MOH, MOFPED, GLSD, MOPS)
– 1 from employees
– 1 from employers
– 5 eminent persons from the fields of
• Medicine, Finance, Corporate Law, Health
Insurance, Health Service Promotion, Institutional
Management
 Contribution Basis
• Civil servants: salary
• Self-employed: annual, voluntary
• Employers: annual

• Contributions: monthly, quarterly or annual

• Evidence of payment: Cards
 Providers
• Accredited providers only
• May be public (private wings), PHP, PNFP
• Packages will be negotiated before signing
contracts
 Benefits Package
• Coverage:
– Member, spouse, 4 dependants

• Services:
– OPD services
– Lab investigations
– Dental services
– Inpatient services
– Maternity
– Major and minor operations
– Rehabilitation
• Some services are excluded (see list)