Who Pays for Health St people, particularly the poor, will reduce the amount of services demanded(even to the extent of not demanding a service at all) but will not necessarily be more rational in distin guishing when to demand services or which services they need to demand. Therefore, us ing user charges indiscriminately will indiscriminately reduce demand, hurting the poor in particular. Free-of-charge services do not translate automatically into unjustified over-utilization of services. Services that are free of direct charge are in reality not necessarily free or afford able, particularly for the poor, because of other costs associated with seeking health care, such as the cost of medication(when not available free of charge), under-the-table pay- ments, transportation, or time lost from work (18, 19) Given its potentially negative impact on necessary services, especially for the poor, co- payment should not be chosen as a source of financing except for low-cost relatively pre- dictable needs. Rather, it can be used as an instrument to control over-utilization of specific interventions(when such over-utilization is evident) or to implicitly exclude services from a benefit package when explicit exclusion is not possible Because of the desirability of sepa rating contributions from utilization, out-of-pocket payment should not be used unless no other alternative is available. All prepaid arrangements are preferable, except for low-cost interventions for which the administrative costs involved in prepayment arrangements mig not be worthwhile SPREADING RISK AND SUBSIDIZING THE POOR POOLING OF RESOURCES Pooling is the main way to spread risks among participants. Even when there is a high degree of separation between contributions and utilization, prepayment alone does not guarantee fair financing if it is on an individual basis only- that is, via medical savings accounts. Individuals would then have limited access to services after their savings were exhausted. It is claimed for medical savings accounts, which have been implemented in Singapore and in the United States, that they reduce moral hazard and give consumers the incentive to buy services more rationally, but while there is evidence of reduced expendi ture and of substantial savings among those who receive tax benefits and can afford to save (20), there is no evidence of more rational purchasing And individual financing fosters fee- for-service payment and makes it harder to regulate the quality of provision( 21). Peopl with a high risk of having to use services, such as the sick and the elderly, would be denied access because they could not save enough from their income. On the other hand, the healthy and the young, whose risk is usually low, might prepay for a long time without needing the services for which they had saved. In this case, mechanisms allowing for cross- subsidies from the young and healthy to the sick and old would benefit the former without damaging the latter. Thus, systems as well as people benefit from mechanisms that not only increase the degree of prepayment for health services, but also spread the financial risk among their members Ithough prepayment and pooling are a significant improvement over purely out-of- pocket financing, they do not take questions of income into account. As a result of large pools, society takes advantage of economies of scale, the law of large numbers, and subsidies from low-risk to high-risk individuals. Pooling by itself allows for equalization of contributions among members of the pool regardless of their financial risk associated with service utilization. But it also allows the low-risk poor to subsidize the high-risk rich Soci eties interested in equity are not indifferent to who is subsidized by whom. Therefore, health
Who Pays for Health Systems? 99 people, particularly the poor, will reduce the amount of services demanded (even to the extent of not demanding a service at all) but will not necessarily be more rational in distinguishing when to demand services or which services they need to demand. Therefore, using user charges indiscriminately will indiscriminately reduce demand, hurting the poor in particular. Free-of-charge services do not translate automatically into unjustified over-utilization of services. Services that are free of direct charge are in reality not necessarily free or affordable, particularly for the poor, because of other costs associated with seeking health care, such as the cost of medication (when not available free of charge), under-the-table payments, transportation, or time lost from work (18, 19). Given its potentially negative impact on necessary services, especially for the poor, copayment should not be chosen as a source of financing except for low-cost relatively predictable needs. Rather, it can be used as an instrument to control over-utilization of specific interventions (when such over-utilization is evident) or to implicitly exclude services from a benefit package when explicit exclusion is not possible. Because of the desirability of separating contributions from utilization, out-of-pocket payment should not be used unless no other alternative is available. All prepaid arrangements are preferable, except for low-cost interventions for which the administrative costs involved in prepayment arrangements might not be worthwhile. SPREADING RISK AND SUBSIDIZING THE POOR: POOLING OF RESOURCES Pooling is the main way to spread risks among participants. Even when there is a high degree of separation between contributions and utilization, prepayment alone does not guarantee fair financing if it is on an individual basis only – that is, via medical savings accounts. Individuals would then have limited access to services after their savings were exhausted. It is claimed for medical savings accounts, which have been implemented in Singapore and in the United States, that they reduce moral hazard and give consumers the incentive to buy services more rationally, but while there is evidence of reduced expenditure and of substantial savings among those who receive tax benefits and can afford to save (20), there is no evidence of more rational purchasing. And individual financing fosters feefor-service payment and makes it harder to regulate the quality of provision (21). People with a high risk of having to use services, such as the sick and the elderly, would be denied access because they could not save enough from their income. On the other hand, the healthy and the young, whose risk is usually low, might prepay for a long time without needing the services for which they had saved. In this case, mechanisms allowing for crosssubsidies from the young and healthy to the sick and old would benefit the former without damaging the latter. Thus, systems as well as people benefit from mechanisms that not only increase the degree of prepayment for health services, but also spread the financial risk among their members. Although prepayment and pooling are a significant improvement over purely out-ofpocket financing, they do not take questions of income into account. As a result of large pools, society takes advantage of economies of scale, the law of large numbers, and crosssubsidies from low-risk to high-risk individuals. Pooling by itself allows for equalization of contributions among members of the pool regardless of their financial risk associated with service utilization. But it also allows the low-risk poor to subsidize the high-risk rich. Societies interested in equity are not indifferent to who is subsidized by whom. Therefore, health
The World Health Report financing, in addition to ensuring cross-subsidies from low to high risk(which will happen in any pool, unless contributions are risk-related), should also ensure that such subsidies (see Figure 5.1) Health systems throughout the world attempt to spread risk and subsidize the poor through various combinations of organizational and technical arrangements(22). Both risk and income-related cross-subsidies could occur among the members of the same pool, for example in single pool systems such as the Costa Rican social security organization and the ational health service in the UK, or via government subsidies to a single or multiple pool In practice, in the majority of health systems, risk and income cross-subsidization oc curs via a combination of two approaches: pooling and government subsidy. Cros subsidization can also occur among members of different pools (in a multiple pool system via explicit risk and income equalization mechanisms, such as those being used in the social security systems of Argentina(23), Colombia(24)and the Netherlands(25). In these countries, the existence of multiple pools allows members of pools to have different risk and income profiles Without some compensatory mechanisms, such arrangements would offer incentives for pooling organizations to select low risks, and to exclude the poor and the sick Even under single pool organizations, decentralization, unless accompanied by equali zation mechanisms for resource allocation, may result in significant risk and income differ- ences among decentralized regions. Brazil has introduced compensatory mechanisms in the allocation of revenues from the central government to the states to reduce such differ- ences(26) Table 5.2 shows four country examples of different arrangements for spreading risk and subsidizing the poor. Some organizational arrangements are less efficient than others in ensuring that these two objectives are achieved, particularly if the arrangements facilitate fragmentation, creating numerous small pools. Collecting, pooling, purchasing and provi- Figure 5.1 Pooling to redistribute risk, and cross-subsidy for greater equity (arrows indicate flow of funds) Contribution Net transfer Utilization bsid
100 The World Health Report 2000 financing, in addition to ensuring cross-subsidies from low to high risk (which will happen in any pool, unless contributions are risk-related), should also ensure that such subsidies are not regressive (see Figure 5.1). Health systems throughout the world attempt to spread risk and subsidize the poor through various combinations of organizational and technical arrangements (22). Both riskand income-related cross-subsidies could occur among the members of the same pool, for example in single pool systems such as the Costa Rican social security organization and the national health service in the UK, or via government subsidies to a single or multiple pool arrangement. In practice, in the majority of health systems, risk and income cross-subsidization occurs via a combination of two approaches: pooling and government subsidy. Crosssubsidization can also occur among members of different pools (in a multiple pool system) via explicit risk and income equalization mechanisms, such as those being used in the social security systems of Argentina (23), Colombia (24) and the Netherlands (25). In these countries, the existence of multiple pools allows members of pools to have different risk and income profiles. Without some compensatory mechanisms, such arrangements would offer incentives for pooling organizations to select low risks, and to exclude the poor and the sick. Even under single pool organizations, decentralization, unless accompanied by equalization mechanisms for resource allocation, may result in significant risk and income differences among decentralized regions. Brazil has introduced compensatory mechanisms in the allocation of revenues from the central government to the states to reduce such differences (26). Table 5.2 shows four country examples of different arrangements for spreading risk and subsidizing the poor. Some organizational arrangements are less efficient than others in ensuring that these two objectives are achieved, particularly if the arrangements facilitate fragmentation, creating numerous small pools. Collecting, pooling, purchasing and proviFigure 5.1 Pooling to redistribute risk, and cross-subsidy for greater equity (arrows indicate flow of funds) Pooling (across equal incomes) Risk Low High Subsidy (across equal risks) Income Low High Contribution Net transfer Utilization
Who Pays for Health St sion imply flows of funds from sources to providers through a variety of organizations, which may perform only one, or several of these tasks. Figure 5. 2 illustrates the structure of health system financing in four countries which differ greatly in the degree to which there is formal pooling of funds and purchasing rather than consumers paying directly to pro- Large pools are better than small ones because they can increase resource availability for health services. The larger the pool, the bigger the share of contributions that can be allo- cated exclusively to health services. A large pool can take advantage of economies of scale in administration and reduce the level of the contributions required to protect against certain needs, while still ensuring that there are sufficient funds to pay for services. Given that needs vary unpredictably, the estimation for an individual could be unaffordably large By reducing this uncertainty, the pool is able to reduce the amount set aside as a financial reserve to deal with variations in the health expenditure estimates for its members. It can then use the funds released for more and better services Fragmentation of the pool-in other words, the existence of too many small org . of all tions involved in revenue collection, pooling and purchasing -damages performance of all three tasks, particularly pooling. In fragmented systems, it is not the number of existing pools and purchasers that matters, but that many of them are too small. In Argentina, prior to the 1996 reforms, there were more than 300 pooling organizations(Obras Sociales Nacionales) for formal sector workers and their families, some with no more than 50 000 members. The administrative capacity and financial reserves required to ensure financial viability for the small ones, together with the low wages of their beneficiaries, guaranteed that their benefit packages were very limited. A similar problem occurs with community Table 5.2 Approaches to spreading risk and subsidizing the poor: country cases Country System Spreading risk Subsidizing the poor Multiple pools: multiple Intra-pool via non-risk-related Intra-pool and inter-pool: salary inter-pool via a related contribution plus explicit organizations, municipal health central risk equalization fund. subsidy paid to the systems and Ministry of Health Mandated minimum benefit poor to join social security; supply package for all members of all side subsidy via the Ministry of Health and municipal systems Netherlands Multiple pools: predominantly Intra-pool via non-risk-related private competing social insurance contribution and inter-pool via excluding the rich. organizations. central risk equalization fund. Republic of Korea Two main pools: national health Intra-pool via non-risk-related insurance and the Ministry of contribution. supply side subsidy via the Health Ministry of Health and national cit single benefit package for health insurance from Ministry of National health insurance health expenditures of any Public subsidy for insurance for the member poor and farmers Zambia Single predominant formal pool: Intra-pool, implicit single benefit Intra-pool via general taxation Ministry of Health/Central Board of package for all in the Ministry of Supply side subsidy via Health Health System and at state level. Ministry of Health Financed via general taxes
Who Pays for Health Systems? 101 sion imply flows of funds from sources to providers through a variety of organizations, which may perform only one, or several of these tasks. Figure 5.2 illustrates the structure of health system financing in four countries which differ greatly in the degree to which there is formal pooling of funds and purchasing, rather than consumers paying directly to providers without any sharing of risks. Large pools are better than small ones because they can increase resource availability for health services. The larger the pool, the bigger the share of contributions that can be allocated exclusively to health services. A large pool can take advantage of economies of scale in administration and reduce the level of the contributions required to protect against uncertain needs, while still ensuring that there are sufficient funds to pay for services. Given that needs vary unpredictably, the estimation for an individual could be unaffordably large. By reducing this uncertainty, the pool is able to reduce the amount set aside as a financial reserve to deal with variations in the health expenditure estimates for its members. It can then use the funds released for more and better services. Fragmentation of the pool – in other words, the existence of too many small organizations involved in revenue collection, pooling and purchasing – damages performance of all three tasks, particularly pooling. In fragmented systems, it is not the number of existing pools and purchasers that matters, but that many of them are too small. In Argentina, prior to the 1996 reforms, there were more than 300 pooling organizations (Obras Sociales Nacionales) for formal sector workers and their families, some with no more than 50 000 members. The administrative capacity and financial reserves required to ensure financial viability for the small ones, together with the low wages of their beneficiaries, guaranteed that their benefit packages were very limited. A similar problem occurs with community Table 5.2 Approaches to spreading risk and subsidizing the poor: country cases Country Colombia Netherlands Republic of Korea Zambia System Multiple pools: multiple competing social security organizations, municipal health systems and Ministry of Health. Multiple pools: predominantly private competing social insurance organizations. Two main pools: national health insurance and the Ministry of Health. National health insurance, however, only covers 30% of total health expenditures of any member. Single predominant formal pool: Ministry of Health/Central Board of Health. Spreading risk Intra-pool via non-risk-related contribution and inter-pool via a central risk equalization fund. Mandated minimum benefit package for all members of all pools. Intra-pool via non-risk-related contribution and inter-pool via central risk equalization fund. Intra-pool via non-risk-related contribution. Explicit single benefit package for all members. Intra-pool, implicit single benefit package for all in the Ministry of Health System and at state level. Financed via general taxes. Subsidizing the poor Intra-pool and inter-pool: salaryrelated contribution plus explicit subsidy paid to the insurer for the poor to join social security; supply side subsidy via the Ministry of Health and municipal systems. Via risk equalization fund, excluding the rich. Salary-related contribution plus supply side subsidy via the Ministry of Health and national health insurance from Ministry of Finance allocations. Public subsidy for insurance for the poor and farmers. Intra-pool via general taxation. Supply side subsidy via the Ministry of Health