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Prepayment and health insurance

Are prepayment and pooling essential to achieve universal health coverage?
PETER ANNEAR: This time, we’re going to talk about prepayment, what it means, and the pooling of funds, as we saw in our last session, is really an approach to prepayment. Prepayment meaning, of course, that we pay something in advance of the times when we need to access health care. Now, prepayment can be in these forms, as you see here. Prepayment is based on these principles– solidarity, risk sharing, and redistribution. We distinguish between Social Health Protection and Social Health Insurance, and I would like to reserve the term Social Health Insurance for, as we said, a national agency set up by the government funded by salary deductions, usually compulsory deductions, and acting as an insurance agency to buy services from providers.
Social Health Protection, I think, is something much broader. It may include Social Health Insurance. It may also include direct financing out of taxation funds. It may include direct subsidies for poor people who can’t join Social Health Insurance or private health insurance schemes. So, Social Health Protection covers the broad spectrum. Now, Social Health Insurance has a few associated principles, which are listed here. So risk selection we talked about earlier. That is insurers tend to enrol only people who are healthy rather than those who will cost in health care payments and payouts. There is a question of adverse selection– that is on the patient side. Only those who are sick, really, want to join these schemes and pay out a premium.
Well, a compulsory Social Health Insurance premium paid for out of salaries takes money, a small amount, from right across the working population and evens out the problem of adverse selection. Moral hazard is another issue. That is, once people are insured, they feel free to use as much service as they possibly can, rather than limiting what they demand just to what their real needs are. And finally, as we’ve said before, there will be a defined benefit package associated with Social Health Insurance, and through this benefit package, we can both provide service, and we can start to control the extent and the cost and the magnitude of that service and overcome some of the other problems we have faced.
Now, insurance in general is not a panacea. It’s not something that’s going to lead us directly to universal coverage. It is certainly very invaluable in particular conditions– that is especially where there is a very large formally-employed sector and where the ability to collect compulsory premiums is available. Then, Social Health Insurance can work well. Germany and the Republic of Korea are perhaps two examples to look at, which illustrate very well the Social Health Insurance principles. Now, the Korean example is a good way to distinguish between Social Health Insurance and National Health Insurance. And generally, Social Health Insurance means where the revenues are collected through compulsory or mandatory salary deductions, as we’ve said. National Health Insurance is a bit broader.
National Health Insurance includes not only premiums paid via salary deductions but also direct funding from the government through the taxation system. So under the National Health Insurance heading, we do have, again, some interesting examples to look at. Germany developed the Bismarck model of Social Health Insurance, salary deductions and mandatory payments for formal sector employees. In Britain, a similar national scheme was set up but entirely tax-funded. Thailand– now, again, by way of comparison– has developed a similar approach. In Thailand, of course, we have a Social Health Insurance scheme for the formally-employed sector, for the private-sector workers.
We have a second one for civil servants, and then there is a third national scheme called the Universal Coverage Scheme, which is, in fact, entirely tax-funded and provides health care for the remainder of the population. Is social health insurance a pathway to universal health coverage? Many people think it certainly is. The Thai model is a very good one to look at in terms of how we may move towards universal coverage. But again, in Thailand, we have the combination of tax funding and Social Health Insurance. So it’s important to keep this in mind. Many people now in a technical area will argue that it’s not possible to achieve universal coverage without a tax funding base in addition to Social Health Insurance.
So Social Health Insurance is on the demand side. It represents the patients, and the patients then, through the Social Health Insurance agency, purchase services from the health care providers. There is a flaw in the Social Health Insurance scheme, as you probably can imagine– very, very difficult to cover the informal sector because they are not working. In fact, not all pay taxation, either. They’re difficult to identify. They move around, difficult to organise. So the informal sector in low and middle-income countries becomes a challenge in itself. So Social Health Insurance alone, in the absence of taxation, will not lead to universal coverage. We need something much more comprehensive. Now, private and community schemes also play a role.
Generally, these are voluntary, not compulsory, so you only pay a premium if you choose to do so. And then these premiums are pooled, and the benefits are identified for the people who belong to the insurance scheme. So it doesn’t cover everybody– only those who are paying a premium. The private insurance industry works this way, and community-based health insurance works this way, too. In practise, however, we have found conclusively that community-based health insurance, CBHI, provides very little coverage, and these schemes are not stable. They are often financially at jeopardy where the health demands are large, so countries like Japan, Thailand, China, India– they once were committed to community-based health insurance and now no longer are and have looked for other methods.
Health Savings Accounts– Singapore is the prime example. These are individually-based. They are not an insurance system. They are compulsory in Singapore. Citizens must set up a savings account, a bank savings account that is dedicated purely to paying for health costs. It cannot be accessed for anything else. You save over a period of time, and when you become ill and need care, you draw down from that savings account. China tried this and then moved away from it because it does not easily provide universal coverage in the way that China was looking for. Covering the informal sector, as I said, is one very special issue, and there are no easy solutions to this.
Here is one document here you can see, something that was published through the Asia-Pacific Observatory. You will find a discussion about how to cover the informal sector using these different approaches– insurance approaches, CBHI, taxation-based, and those approaches we’ve been talking about. Now, here is an illustration of what happens through cross-subsidies in the insurance area, and this is an example from Mongolia, which is here to illustrate one point. The point is this– if you have a fairly large formally-employed sector, can you hope to collect enough premium income, enough revenue from the formally-employed sector so that you can provide coverage, then, across the whole population, even for those not contributing?
And Mongolia thought it could set out on this path using National Insurance Agency to do so, Social Insurance Agency. The level of coverage rose very quickly during the 1990s to 95% of the population, and it looked like this scheme would work beautifully. But then, as the scheme passed through the years, the number of those who were covered by this approach fell off really quite dramatically. Now, the problem here is the population balance. In Mongolia, 24% of the population were asked to provide the funding for 100% of the health care needs of the population. And that formula just could not work. So cross-subsidisation is important, but still, what’s also important is the way that these national insurance funds are constructed.
And here’s an example, I think you’ll see, where the contribution from premiums through compulsory payments through the salary system need to be and have subsequently been supplemented by taxation funding.

Prepayment and pooling are essential to achieving universal coverage and social health protection.

Private and community-based insurance schemes usually have low population coverage and small risk pools, and are often not sustainable without significant subsidies from government. Social health insurance can play an important role in population coverage where there is a large formally-employed population, but the informal sector dominates in many low-and-middle-income countries. Even in large social health insurance schemes, tax-based funding is necessary to subsidise the scheme, cover the informal sector and protect the poor.

The alternative to prepayment is, of course, out-of-pocket payment for services, which as we have seen carries a high risk of catastrophic health expenditure. In countries with high rates of out of pocket expenditure for health, people are often reliant on informal borrowing or financing through family and community networks to pay these out of pocket expenses; or they may get a formal loan; or they may sell assets to pay their costs.

Why are these seen as undesirable ways to pay for healthcare, since they allow people to use all the assets they have until a health care expense occurs, rather than tying assets up in insurance premiums?

How might out-of-pocket payments greatly increase inequity?

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Health Systems Strengthening

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