Skip to 0 minutes and 11 secondsPETER ANNEAR: There are four health financing functions-- revenue collection, pooling, purchasing, and payment. We're going to look at each of these in turn. The first one is revenue collection. There are four main ways of collecting revenues that fund health care, which in the end, come entirely from the population. One is out-of-pocket payments by patients at the point of service. All different forms of taxation are there to provide government revenues. Compulsory salary deductions provide revenues for social health insurance programmes, and there is voluntary, or private, insurance, and these are funded by the insurance side, by out-of-pocket payments, or premiums. Development assistance can be regarded as another form of revenue for the government, alongside taxation and other schemes.

Skip to 1 minute and 2 secondsFor example, medical savings accounts are another way of doing this. So the question is, what is the most equitable and efficient way to raise revenues? Here, we have examples of countries across three continents and the ways in which they collect revenues. Each column adds to 100% of total expenditure. You can see the differences. In Asia, there's generally a very high level of out-of-pocket payment, shown in the red bars. In Latin America, out-of-pocket spending is much less, and the contribution of government taxation is much smaller-- in the dark blue. The difference is made up by much wider use of social insurance. Countries like Brazil and Mexico are good examples of this approach.

Skip to 1 minute and 51 secondsIn Africa, you can see that the government plays a bigger role, and there is a bigger contribution from the private sources of funding. This is likely to be faith-based organisations, charitable organisations, development assistance, and so on. Generating revenues from out-of-pocket payments has a big impact on people's access to health care, but also on poverty levels. In this graph, the level of household spending rises as income rises quite suddenly, as you can see in the black line. But the green line represents what happens after people pay for health care. In many cases, out-of-pocket payments push people below the poverty line. There are many different ways to collect revenues through taxation, compulsory health insurance, and other voluntary private insurance forms.

Skip to 2 minutes and 46 secondsInsurance is based on the idea of risk aversion. That is, people want to avoid the risk of catastrophic health payments by paying a small regular annual premium. The second function in health care financing is the pooling of risks and funds, and we talk here about risks on the one hand and funds on the other because they are slightly different. Pooling risks means that all those people who face the risk of ill health-- that is essentially everybody, we all do-- can benefit by pooling their resources and then funding health care for those who need it.

Skip to 3 minutes and 23 secondsPooling funds means that money collected through taxation or through insurance premiums is then pooled in a single place and used then to pay health care costs for beneficiaries. The act of pooling is also an act of redistribution-- that is, moving resources to those who need care most from those who can afford most. So a number of policy issues arise from pooling, and each of these requires considerable thought and research before decisions are made and before policies are set. Perhaps fragmentation of risk pools into many different government social insurance and private insurance schemes or risk pools is the most talked about.

Skip to 4 minutes and 10 secondsIt's argued that a single pool, or at least a few very large pools, is the best way to go about this from the point of view of efficiency. The third function of health care financing is purchasing of services. As you can see, out-of-pocket or fee-for-service, government budget, or insurance agencies are all means of purchasing health care from providers. Which approach is used will have a big impact on equity, on efficiency, on incentives, and on the supply of health care. You can find different examples of purchasing arrangements in countries like Vietnam or India, in the Philippines, where taxation and insurance mechanisms, along with out-of-pocket payments, combine in different ways. The act of purchasing requires a principal-agent relationship.

Skip to 5 minutes and 8 secondsThe principal needs and pays for service. The agent delivers the service. Now, strategic purchasing, which you'll hear about, is a process of using these methods to achieve the most equitable and efficient outcomes. Each of these stakeholders shown here will have different priorities as they interact with each other in the system. Understanding the preferences and incentives of each stakeholder and establishing policies, procedures, contracts that ensure quality, efficiency, cost-effectiveness of services. This is all a key responsibility of the health financing system. The fourth function is provider payment.

Skip to 5 minutes and 56 secondsHealth care providers can be paid in many different ways, and the method chosen will affect their behaviour, and what services are provided will affect the demand for services, all of which, of course, depending on prices. Fee-for-service is the most basic form of paying providers for the work they do and leads strongly in the direction of the oversupply of services. For providers, the more service that's provided in this system, the higher is their income, even if some of the services aren't really needed. In contrast, a highly-controlled method of payment on the right-hand side of this chart, like DRGs-- that is diagnosis-related groups-- or capitation, act to restrict payments and costs, and cause, in the end, a sense of under-provision.

Skip to 6 minutes and 52 secondsThat is, providers who get a fixed payment will most likely give as little service as they can because their money is already guaranteed. The services provided are usually arranged as a benefit package or a service-delivery package. Often, government services at primary and higher levels of care are defined by a minimum package of activities that every provider must deliver in order to receive payment or receive budget funding through the government. Within the insurance system, social health insurance and private health insurance-- exactly what the insurer will pay for is defined by a stipulated insurance package. Here, you can see the various questions that arise when government or insurance agencies set about defining a package of services.

Skip to 7 minutes and 45 secondsSo collection, pooling, purchasing, and payment are the four basic principles of health care financing or the financing functions. If you consider your health care financing needs in these categories and within this process, you will find a way to make well-based decisions about what services will be provided, how they will be provided for, how the providers will behave, and how equity will be achieved.

Principles of health care financing

Reflect on the different methods of raising revenue for health care. Can you identify a low- or middle-income country that has used mainly tax funding for its public health system? And a country which has mainly used social health insurance?

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