Financing of Healthcare - Principles

The scope for the application of health financing policies needs to be looked at from the perspective of three basic public finance functions viz. collecting revenues, pooling resources, and supplying services. These functions need to be evaluated for the capacity of the economy to improve health outcomes. The outcomes have to be achieved in such a way as to realise the principles of equity, efficiency and financial sustainability. There are four broad sources of funding for meeting the healthcare servicing needs of a country.

These are:

(i) State funded systems implemented through the budgetary allocations of the government;

(ii) Social health insurance schemes;

(iii) Voluntary or private health insurance schemes; and

(iv) Community-based health insurance.

The specific details of these methods will be discussed later in the section on ‘healthcare delivery’. At this stage, it is important to note that the revenue raising capacity of a country increases as its income increases. This process depends and is promoted by factors like:

(i) Greater formalisation of the economy;

(ii) Greater ability of the individuals and businesses to pay taxes; and

(iii) Better tax administration.

It is said that revenue collection in developing countries is the art of the possible, not the optimal, as the institutional realities of developing countries often preclude the use of most equitable and efficient revenue raising mechanisms. The efficiency of a system has important financial implications for long term fiscal sustainability. It is necessary to expand the available ‘fiscal space’ in order to have large increases in public spending. Health financing policies need to be developed in the context of a government’s available fiscal capacity. In principle, a government can create fiscal space in the following ways:

(i) By widening the scope of tax collection and by strengthening the tax administrative machinery;

(ii) Cutting lower priority expenditures to make room for more desirable ones;

(iii) Borrowing resources, either from domestic or from external sources;

(iv) By resorting to deficit financing i.e. asking the central bank to print money and lend to the government; and

(v) Receiving grants from outside sources.

Enhancing the fiscal capacity, therefore, requires a judgement that the higher short-term expenditure, and any associated future expenditures, can be financed from current and future revenues. When financed by debt, the expenditure should be assessed for its impact on the underlying growth rate or its impact on a country’s capacity to generate the revenue for servicing the debt. As the countries operate within highly different economic, cultural, demographic, and epidemiological settings/contexts, the development of a suitable healthcare financing system would also be heavily influenced by the contextual and other historical factors. They are also influenced by factors dominating the political economy in the country. In this context, the three basic principles of public finance which any method or approach should strive to ensure are:  raise enough revenues to provide individuals with a basic package of essential services and financial protection against catastrophic medical expenses caused by illness and injury in an equitable, efficient, and sustainable manner; manage the revenues to pool health risks equitably and efficiently; ensure the production/purchasing of health services in ways that are allocatively and technically efficient.