Health care: who should pay for what?

4 World Health • SOth Year, No. 5, September-October 1997 Health care: who should pay for what? Germano Mwabu A vaccination suNey in Honduras. Immunization campaigns bene fit all members of society Photo WHO/ PAHO/ C. Gaggero The most difficult and controver-sial issue in health finance in developing countries is how to pay for publicly provided health services. Two approaches have predominated: public financing of health services through revenue from general taxation, and private financ- ing through revenue from user charges, which are service fees paid by patients at the time of use. A third approach, prepayment to publicly or privately managed insurance funds, has played only a minor role in most low-income countries. Public financing Arguments in favour of public fi- nancing of health services frequently revolve around the concepts of pub- lic goods, social externalities, and merit goods . These concepts are simple but very powerful in mobiliz- ing human emotion and reasoning in support of public funding for health services. Some health services are consid- erect to be public goods because their benefits accrue to all members of society. An example would be dis- ease eradication campaigns by means of immunization or vector control. Such preventive public health inter- ventions are appropriately funded by the government because they protect everyone from illness. Social externalities are the ef- fects on the health of the general public of decisions made by individ- uals about their own medical care. These effects may be positive or negative, and are external to the individual making the decision. For example, the treatment or immuniza- tion of one person protects the health of others. Conversely, a person 's decision not to seek treatment for an infectious disease can result in many healthy people becoming infected. Since the price of care can deter people from seeking it, it makes sense to provide it free of charge. Thus, if social externalities associ- ated with use or non-use of specific health care services are significant, they provide sufficient reason for No single model of health care financing will apply everywhere. Principles must be adapted to the specific local context. public funding of these services. Basic health care is referred to as a merit good because without it human life is at risk. Therefore, everyone should have access to it. This social objective can be pro- moted by making such care freely available through public financing. Despite these strong reasons for publicly financed health services, experience in many developing coun- tries has not been encouraging. In many instances, access to basic health services is universal in principle, but in practice the services are not avail- able, or are of insufficient quality. Efficient provision of good quality care in government health facilities is rare in many developing countries, given the severe budgetary constraints their governments face. Such practical realities have tended to outweigh the theoretical rationale for public fund- ing of health services, resulting in an increased reliance on private funding of publicly provided services. Private financing In an attempt to overcome the ineffi- ciencies and budgetary constraints associated with public provision of health care, many countries have introduced market-based reforms in the government health sector. In low- income countries, the most important of these has been to introduce user charges in public health faci lities. The objectives of this policy were to World Health • SOth Year, No. 5, September-October 1997 enhance efficiency, generate revenue and improve service quality so as to increase the use of services. Unfortunately, the results of applying this policy have so far not been promising. In many countries, the use of medical services dropped by 40-50% after modest fees were introduced. In most cases, gains in service quality have not been sus- tained, and income from fees gener- ally accounts for only 3-4% of health budgets. None the less, user charges may be necessary for sustainable national hea lth services in developing coun- tries. But they have to be part of a well-structured system which pro- motes efficiency and equity in the use of public referral health services without excluding people from basic and specialized health care. A mix of financing methods In many developing countries, health services are provided through a pyramid-like system of hea lth facili- ties, with health centres and dispen- saries at the base, regional and district hospitals in the middle, and national hospitals at the top. Appropriate policies on user charges are needed to make sure the flow of patients through the referral system is efficient and equitable. Health services at the base of the referral system and specialized medical care at national and regional hospitals should be provided practi- cally free of charge by the govern- ment, while charges are made for services at the middle-level facilities. Such a fee structure should be de- signed to make tertiary care accessi- ble to all who need it. This is important because specialized med- ical care is expensive and is typically best financed by private medical insurance, a financial arrangement not feasible in most low-income areas. In this context, public funding should provide this insurance func- tion. Provision of primary health care free of charge at the base of the system would facilitate efficiency and equity, as persons unable to afford care at middle-level or private facilities would seek treatment at lower levels. Treatment for common ailments should be of the same qual- ity everywhere in the system, even though some patients may choose to pay more for convenient access to it. General tax revenue is the main source of health financing in the above scenario, supplemented by revenue from user charges. The nature of an individual 's medical condition, rather than his or her income, would be the basis for deter- mining exemptions from payment at higher levels of the system. Essentially, the proposal amounts to a tax-funded government health insurance scheme, with patient fees used to reduce the likelihood of over- use or waste of services. This kind of financing is much simpler to operate than a system in which user fees are charged throughout the referral system, with exemptions granted on the basis of inability to pay. Need for flexibility The system of health care financing proposed above is based on two crucial assumptions: that markets for health services either do not exist or function with undesirable social consequences, and that the state is strong enough to generate tax rev- enue and to use it to provide a decen- s tralized national health service. Where the state is unable to function so effectively, health care financing would rely more heavily on charges in the short run. But the long-term goal would be to strengthen state institutions to ensure effective health service provision, both directly through the public health sector, and indirectly by creat- ing an environment for the develop- ment of the private health care sector, including organizations such as not- for-profit groups that provide health- related information to consumers. Over the past 20 years, health care financing reforms in developing countries have often failed to im- prove the population's health status because they were based too rigidly on assumptions of economic theory or on experiences in quite different situations. Differences between countries mean that no single model of health care financing will apply everywhere; principles must be adapted to the specific local context. Developing countries must spare no effort to find financing solutions which work for them, because a population 's good health is one of a country 's most precious assets. • Dr Germano Mwabu is a Senior Research Fellow at the United Nations University and World Institute for Development Economics Research (WIDER), Kata;anokanlaituri 68, 00 160 Helsinki, Finland. A clinic in India. Basic health services of good quality should be accessible to all. Photo W HO/). & P. Hubley