Raising revenues in support of universal health coverage

Usually the first question for countries striving for universal health coverage (UHC) is “How should we raise revenue?”

Jowett and Kutzin (2015) make a clear statement that the priority for revenue raising should be for governments to move towards relying predominantly on tax-based public sources of funding to finance UHC.

So, what are public sources of financing?

Public sources of financing are compulsory and pre-paid, i.e. direct and indirect taxes including mandatory social health insurance payments, non-tax revenues (e.g. from state-owned companies) and funds from donors that flow through government budgets. Private revenue sources are considered voluntary and include both voluntary pre-payment (private health insurance or community-based health insurance schemes) and out-of-pocket payments.

What level of public spending on health is required to improve access to health services and provide financial protection?

There is no magic number. Various estimates have been made such as US$86 per capita, 5-6% of GDP and 15% of total government spending. However, there is considerable variation in performance where countries have improved access and provided financial protection even with lower levels of public spending. The level of access and financial protection also depends on how revenue sources are pooled and how and what services are purchased. In general, however, there is consensus that to achieve financial protection, out-of-pocket payments need to be under 20% of total health spending, i.e. government spending (including social health insurance) should constitute approximately 80% of total health spending to limit catastrophic household spending on health.

Why do you think a government can’t rely on voluntary pre-payment schemes to achieve UHC?

It is difficult to get high population coverage through voluntary schemes (not everyone wants to pay or can pay) and there is a very large tendency towards adverse selection (the sick are more likely to want to join, thus making the scheme financially unviable). Jowett and Kuzin (2015) cite evidence that shows that, globally, voluntary health insurance accounts for a small percentage of health expenditures, little more than 5% in forty-one countries, and over 20% in only six countries. On the other hand, compulsory pre-payment schemes are difficult to use for revenue raising in countries with a large informal sector (and outside the formal tax system).

Can adverse selection in voluntary pre-payment schemes be avoided to progress towards UHC?

Two conditions are required for overcoming adverse selection in pre-payment schemes:

1. Mandatory membership (making it compulsory for all regardless of health status) and
2. Subsidisation (supplementary funding by the government to cover the poor and the informal sector).

In most low-and-middle-income countries where the informally-employed sector is large, enforcing mandatory pre-payment (such as through payroll taxes) is very difficult, and raising health revenues for UHC will require additional government budget.

What are the implications of a government’s revenue raising policies on health system goals?

The way a government chooses to raise revenue for health has an impact on health financing goals of equity in financing and financial protection. For example, each revenue source has an impact on equity in terms of the extent to which it is progressive (more burden on the wealthy), regressive (more burden on the poor) or proportionate (equal burden on all). Income tax is generally progressive, but only if those earning more are taxed at a higher rate. Indirect taxes tend to be regressive unless a country specifically makes policies around correcting for this by making basic food exempt from taxes, or charging a higher tax on “luxury” goods. Out-of-pocket payments as a revenue source are highly regressive. The amount of revenue raised by the government from public sources also has an impact on financial protection (as discussed previously).

How can governments promote the efficient use of funds that have been raised?

The most efficient use of funds can be achieved through effective pooling, which then allows the use of strategic purchasing and therefore greater value for money (efficiency) in service delivery. Some countries choose to pool funds from different revenue sources (more efficient) while other countries have a harder time with this, leading to different funding pools for different revenue sources (causing fragmentation, generally considered more inefficient). Revenue raising methods based on pooling can also create a more stable and predictable flow of funds for the health sector. This is achieved through the purchasing function (by contracting providers, public and private) and can more easily ensure there is no disruption to services.

Which of the following options would you recommend for countries with large informally-employed sectors to raise additional funds for UHC?

Please post your comment below and briefly explain your reason for using or rejecting these approaches:

• Mandatory social health insurance
• Voluntary health insurance
• Increased government spending on health
• Earmarked indirect taxes

References

Jowett, M, Kutzin, J, 2015, Raising revenues for health in support of UHC: strategic issues for policy makers, (No. WHO/HIS/HGF/PolicyBrief/15.1), World Health Organization.