You are here

Health Care Financing

PDF icon Duggal(2007)HealthCareIndia.pdf93.74 KB

This page is under development. Watch this space.


Health care financing is about three questions:

  • How is the money raised?
  • How are funds pooled? and
  • How are services paid for?
  • Raising money

    There are four main ways of raising money for health care:

  • Taxation,
  • Health insurance contributions
  • User pays (out of pocket, no reimbursement)
  • Donor funding
  • Taxation as a source of health care funding raises questions about the tax base in different countries. How easy is it to collect personal income tax or corporate income tax? How big is the informal economy? What is the role of indirect taxation (consumption tax, payroll tax, tariffs, etc)? The tax revenues available to different levels of government and different regions also affect how much may be available for health care.

    Health insurance is a very broad idea. There are many different kinds of health care funding arrangements which are referred to as 'health insurance'. Health insurance schemes vary widely:

  • Who owns the health insurance organisation: government, not-for-profit, commercial?
  • Coverage: voluntary or mandatory (universal)?
  • Collection of premiums: employment based or family based?
  • Pooling (see below)
  • Payment for services (see below)
  • These differences make a big difference to the incentives operating on the managers of the insurance organisation. Publicly sponsored health insurance schemes might be under great pressure to control expenditure. Commercial insurers whose profits are linked to turnover might be keen to expand their turnover but in some systems they are under competitive pressure to keep their premiums low and so might seek to control expenditure.


    The second question to be asked about health care financing is about how funds are pooled between the processes of collection and the processes of paying for services.

    Another way of speaking about pooling is to speak in terms of cross subsidies; people who pay more than the value of the services they use are effectively subsidising people who use services which cost more than the value of their contributions. The magnitude and direction of cross-subsidisation depends on how the contributions are collected and how they are pooled before payments to the providers are made

    Most health insurance schemes (although not all) effect transfers from healthy to sick. Healthy people contribute more than they use and so contribute to the costs of sick people. Insurance schemes where premiums are uniform regardless of individual risk ('community rating') effect a subsidy from low risk to high risk contributors. Insurance schemes which are funded by tax and where tax collection is 'progressive' effect a transfer from rich to poor.

    Paying for services

    The third question to ask about health care financing is: how are services are paid for. We can look at this question, firstly, in terms of the organisational relationships and secondly in terms of the different kinds of contractural or purchasing relationships.

    In terms of organisational relationships we can identify four broad categories of payment systems.

    The first model involves government provision, where the government owns the buildings and employs the staff directly.

    In the second model, the patient provider contract, the principal financial relationship is between the patient and the provider. The patient pays the provider and then seeks re-imbursement from their insurer in accordance with an independent contract with their insurer.

    In the third model, the purchaser provider contract, there is a direct contract between the purchaser (government or health insurance organisation) and the provider. The provider will have a separate relationship with the patient concerning the provision of services but as far as payment is concerned the relationship is directly between the funder and the provider.

    Finally, in the fourth model, the patient pays the provider out-of-pocket and because the cost is not covered by any contract between patient and insurer it is not re-imbursable. Clearly many health care financing arrangements offer a combination of these different models.

    In the first model, where the government is both the funder and the provider of services it is not so meaningful to talk about the relationship between the funder and the provider because they are the same. However, in the other models there is an organisational separation between the funder and the provider of services.

    The nature of this payment relationship provides a further basis for categorising systems of paying for health care. The basic categorisation is between 'input' or budget funding and various forms of 'purchasing'. Budget funding is based on the various inputs which providers need to mobilise in order to produce health care services.

    Purchasing health care

    In many systems where the role of funder is organisationally separate from the role of provider we can speak about a purchasing relationship and we may further categorise different systems of health funding in terms of this relationship. Ways of purchasing health care can be categorised according to the kind of package which is being purchased.

    We can 'purchase' items of service, such as a standard consultation, immunisation, an ECG or a blood test.

    We can 'purchase' episodes of service such as inpatient episodes or care for a pregnancy including delivery. The development of new forms of casemix classification such as DRGs has made the purchase of in-patient episodes much more common.

    We can 'purchase' an assurance of health care for a fixed period, for individuals, or families or the staff of an enterprise. The various capitation models, such as the GMS contract for general practice in the UK, fit this category. In the UK system GPs agree in advance to provide primary medical care to the people on his or her list and in return the NHS agrees to pay the GP a fixed figure per head per year.

    We can ‘purchase’ a program of services and activities, such as a health promotion program or a chronic disease program, where the agreed price covers a package of activities (and supporting infrastructure), generally with associated specifications about content, impact and outcomes. Whether this kind of program or project grant can be called a 'purchase' is a moot point.

    Finally, and still of theoretical interest only, we can imagine 'purchasing' health care outcomes. However, we presently do not have valid and reliable tools for defining, quantifying and pricing health care outcomes at the clinical level. In many cases the outcomes of care are only revealed well into the future and even then there is uncertainty about whether the outcomes which are evident can be attributed to the health care intervention or whether they would have happened anyway. The lack of proper measures and the uncertainties of attribution are significant drawbacks in terms of 'purchasing' outcomes.

    The metaphor of ‘purchasing’ (rather than the looser and more general idea of simply paying for health services) has been introduced into health policy jargon through the efforts of the market enthusiasts, who needed to represent health care as a commodity with a clear definition, a unit price and a capacity to be counted as a condition for applying market principles and market disciplines.

    At this stage there remain some significant limitations to the application of free market principles to health care, including the difficulty of measuring outcomes, information asymmetry and the public goods nature of much health care.

    Nevertheless, the metaphor of purchasing has provided a useful analytical framework for thinking through the different incentives which are associated with different forms of payment. The application of this kind of analysis can be seen, for example, in the idea of blended payment systems where an incentive environment is created in order to achieve particular outcomes.


  • WHO Technical Briefs for Policy Makers
  • WHO National Health Accounts
  • SEARO (2007) Health systems development: health care financing
  • GTZ ILO WHO Consortium on Social Protection in Developing Countries
  • Policy Reform Options Database "... for effective health sector reform"
  • European Observatory on Health Systems and Policies
  • Health Policy Monitor
  • Diane McIntyre (2007) Learning from experience: health care financing in low and middle income countries (beware 7mb)
  • Chiu-Cheng Chang (1978)Health care financing systems around the world (moderated conversation)
  • Reiner Brettenthaler (2000) Comparison of the health care systems in the EU Member States
  • Gerard Anderson and Peter Sotir Hussey (2001) Comparing health system performance in OECD countries. (Health Affairs 20(2) 219-232)
  • India

  • Ravi Duggal (2007) Health care in India: Changing the financing strategy
  • "The way in which healthcare is financed is critical for equity in access to healthcare. At present the proportion of public resources committed to healthcare in India is one of the lowest in the world, with less than one-fifth of health expenditure being publicly financed. India has large-scale poverty and yet the main source of financing healthcare is out-of-pocket expenditure. This is a cause of the huge inequities we see in access to healthcare. The article argues for strengthening public investment and expenditure in the health sector and suggests possible options for doing this. It also calls for a reform of the existing healthcare system by restructuring it to create a universal access mechanism which also factors in the private health sector. The article concludes that it is important to over-emphasize the fact that health is a public or social good and so cannot be left to the vagaries of the market."

    Learning objectives

    Participants will:

    • become more familiar with the language within which discussions of health care funding are conducted;
    • become more familiar with the different patterns of health care funding around the world and the strenths and weaknesses of those systems;
    • become more familar with the generalisations regarding health care financing which are commonly drawn from international experience and the limits to such generalisations in terms of the different health system contexts;
    • be able to analyse and explain health care problems in terms of health care funding arrangements and able to suggest policy strategies for particular situations which may overcome such problems.
    • Return to: Health Systems