Sources of Financing in Health Insurances

Sources of financing

1. Tax-financing

2. Social security contributions

3. Social health insurance premiums

4. Private-premiums

Tax-financing

• In tax-funded schemes financing is collected by a central authority that either pays directly health care providers, or allocates these resources to third payers.

• Tax-financing include general taxation, local government taxes and earmarked taxation.

General Tax

• Tax is deducted from employees’ pay and other sources such as customs duties and sales tax.

• The funds collected are then used by government for various activities including health care, but without guaranteeing any specific benefits.

• Taxation can be ‘progressive’ – i.e. favour the poor – where the amount paid rises as a proportion to income (for income taxes).

• Use of services is usually not dependant on proof of payment of tax.

Earmarked Tax

• An earmarked tax (‘health tax’) is clearly identified within the taxes paid by the individual and the revenue collected is earmarked for health rather than forming part of general tax revenues.

• Use of services is generally not dependent on proof of payment of tax.

Social Security Contributions

• Social security contributions are premiums collected to finance social security schemes, typically received as payroll tax (income-related)contributed to by employers, employees or both.

• Social security schemes are mandatory for defined categories of workers and their employers and protect insured persons and their dependants against, among others, loss arising from sickness/illness.

• The government is the ultimate guarantor of benefits, and usually directly participates in the financing of the scheme.

Social Health Insurance Premiums

• It may be called National Health Insurance. It is usually compulsory for certain groups in the population and the premiums are determined by income (an hence ability to pay) rather than related to health risk.

Private-premiums

• Private health insurance refers to insurance schemes that are financed through private health premiums, which are often (but not always) voluntary.

• Although the government often regulates these type of insurance, the pool of financing is not usually channeled through the general government.

Private for Profit

• The key distinction here is that premiums are set at a level which provides a profit to third party and provider institutions.

• Premiums are based on an assessment of the risk status of the consumer (or of the group of employees) and the level of benefits provided, rather than as a proportion of the consumer’s income.

Private-non-Profit: Non-Government, Community-based Fund

• Premiums are usually flat rate (not income-related) and therefore not progressive. Making a profit is not the purpose of these funds, but rather improving access to services.

• Often there is a problem with moral hazard because of a large number of high-risk members, since premiums are not based on assessment of individual risk status.

• Exemptions may be adopted as a means of assisting the poor, but this will also have adverse effect on the ability of the insurance fund to meet the cost of benefits.

Prepayment and Collection

• The way policy-makers organize public financing or influence private financing will affect four key determinants of health system financing performance:

1. The level of prepayment2. The degree of spreading of risk3. The extent to which the poor are

subsidized4. The strategic purchasing

The level of prepayment

• The level of prepayment is mainly determined by the predominant revenue collection mechanism in the system.

• General taxation allows for maximum separation between contributions and utilization, while out-of-pocket payment represents no separation.

The level of prepayment

• Separation of contributions from utilization requires the agencies responsible for collection to have very strong institutional and organizational capacity which are lacking in many developing countries.

• Thus although the highest possible level of prepayment is desirable, it is usually very difficult to attain in low income settings where institutions are weak.

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