Healthcare Financing

Healthcare Financing

Introduction

• Definition: Health finance refers to the mechanisms for raising, pooling, and allocating money to pay for health services and public health goods so people can use needed services without financial hardship.
• Objectives of health financing:
1. Raise sufficient funds to provide essential services.
2. Pool risks across people to protect individuals from catastrophic spending.
3. Purchase goods and services efficiently — strategic purchasing to buy services that improve health outcomes.
4. Ensure equity — both in financing (who pays) and in access (who gets services).
• Functions of health financing: Revenue collection, pooling (risk sharing), purchasing (provider payment), stewardship/regulation.

Sources of Health Financing / Revenue Collection

• Tax-based public financing (general taxation): Revenues collected by central and state governments used to fund public facilities, salaries, public health programs and subsidies. Advantages: large risk pool, progressive if tax system progressive. Challenges: competing fiscal priorities, low fiscal space in some states.
• Social health insurance / social security contributions: Payroll taxes or mandatory contributions for formal workers (e.g., Employees’ State Insurance Scheme — ESI). Provides benefits to contributors and dependents. Coverage traditionally limited to formal sector.
• Government transfers / earmarked levies: Central transfers to states, specific cess (e.g., tobacco cess) or dedicated health funds (if any).
• Private health insurance (commercial): Voluntary purchase by individuals or employers; indemnity products, family floater policies. Often leads to adverse selection and limited coverage for poor unless subsidized.
• Community-based health insurance (CBHI) / micro-insurance: Local schemes run by community groups, cooperatives — limited risk pooling and benefits.
• Out-of-Pocket Payments (OOP): Direct payments by households at point of service (consultation, drugs, diagnostics). Historically a major source of financing in India.
• External aid / donor funding: Grants and program support from bilateral/multilateral donors and philanthropies for vertical programs, capacity building, and research.
• User charges / fee recovery: Fees in public facilities for certain services (varies widely by state/facility).
• Philanthropic / voluntary contributions: Funds raised by NGOs, religious bodies, charitable hospitals.

Health Insurance Schemes (India — categories & examples)

• Social insurance / statutory schemes:
• Employees’ State Insurance Scheme (ESIS): For formal sector industrial and certain service employees; financed by employer and employee contributions.
• Central Government Health Scheme (CGHS): Civil servants; direct provision and reimbursements.
• Government-sponsored publicly financed insurance / tax-funded schemes:
• Large scale central/state schemes that purchase services from public/private providers and target low-income groups. (Examples commonly cited in literature: Rashtriya Swasthya Bima Yojana (RSBY) historically; more recently, major central schemes aim to provide secondary/tertiary coverage for poor families.)
• State health insurance schemes — many states operate their own programmes with varying benefit packages and provider networks.
• Private commercial insurance: Individual/family/employer-sponsored policies sold by insurers regulated by IRDAI — covers hospitalization, some outpatient riders.
• Community-based and micro-insurance: Small scale, voluntary pooling in communities; limited benefit ceilings.
• Employer-provided insurance: Larger firms provide group health insurance to employees; important for formal sector.

Health Plans and Outlays in India

• National planning & budgeting: Central and state governments prepare health plans and budgets annually and through multi-year plans. Key elements: vertical national programmes (immunization, HIV/TB, family planning), NHM (National Health Mission) style funding, infrastructure, HR, essential medicines.
• Public health expenditure (outlays): Historically described as low relative to GDP compared with many middle-income countries. Governments set periodic targets (e.g., targets to increase public health spending to specific GDP percentages in national policies).
• Budgetary components: Recurrent (salaries, medicines), capital (infrastructure), programmatic (disease control programmes), insurance/purchasing (premiums/subsidies).
• Constraints: fiscal space, competing priorities (education, defence), and inefficiencies in allocations across states and programmes.

Role of State and Central Government

• Constitutional distribution: Health is primarily a state subject (states have responsibility for delivery of primary and secondary care). The central government has responsibilities for national policy, tertiary care, national programs, regulation, and financing support (centrally sponsored schemes and conditional/unconditional transfers).
• Central government roles: Policy formulation, financing central programmes, vertical disease control, national standards, financing flagship schemes, national regulatory authorities, funding of medical education and tertiary institutions.
• State government roles: Primary and secondary care delivery, staffing of rural health infrastructure, implementing national programmes, co-financing of some centrally sponsored schemes, procurement and distribution of supplies at state level.
• Intergovernmental fiscal relations: Finance Commission recommendations, Centrally Sponsored Schemes (CSS), vertical programme grants, and state own-tax revenues determine capacity and priorities.
• Local governments / PRIs: Emerging role in planning and delivering primary care in some states (decentralization), but capacity varies.

Factors Influencing a State’s Ability to Finance Health Care

• Fiscal capacity: Size of state’s own tax base, revenue mobilization ability (GST share, state taxes).
• Transfers from Centre: Magnitude and predictability of central transfers, formulae from Finance Commission.
• Demographics and epidemiology: Older populations, high NCD burden or high fertility increase costs.
• Economic structure: Richer states can raise more revenues and spend more on health.
• Political priorities & governance: Political commitment to health, anti-poverty and pro-health policy choices.
• Health system inefficiencies: High waste or leakages reduce effective coverage even when nominal funds exist.
• Debt burden and fiscal rules: Limits on borrowing constrain capital spending.
• Administrative capacity: Procurement, budgeting, financial management, and absorptive capacity of health departments.
• Presence of private sector: Extent to which private providers deliver services influences public provisioning and purchasing needs.
• External financing: Availability of donor support or philanthropic funds.

Voluntary Health Agencies (VHAs) in India

• Definition & roles: NGOs, charitable hospitals, community organizations and faith-based agencies that supplement government services through service delivery, outreach, awareness, mobilization, capacity building, research and advocacy.
• Functions: Providing targeted services (mobile clinics, TB/HIV programmes), innovation and pilot models, advocacy for vulnerable groups, community mobilization, training health workers, running specialty hospitals and programs in underserved areas.
• Examples (types): Large national NGOs, local community health organisations, charitable trusts running hospitals, professional associations and voluntary networks.
• Strengths: Flexibility, community trust, ability to mobilize funds and volunteers, innovation.
• Challenges: Fragmentation, variable quality, sustainability of funding, need for coordination with public systems.

Health-related Spending in India (patterns & implications)

• Composition of spending: Health spending in India comprises public spending (centre + states), private prepaid (insurance), and private out-of-pocket (household payments).
• Dominance of OOP historically: A large share of health spending comes from household OOP payments (consultation fees, medicines, diagnostics). Consequences: catastrophic health expenditure, impoverishment, delayed care seeking.
• Insurance expansion & shifting patterns: Publicly financed insurance programs and private insurance have increased the share of prepaid financing, but OOP remains substantial, especially for medicines and outpatient care.
• Inequality in spending and access: Regional and socioeconomic disparities in per capita spending and service availability.
• Efficiency & allocative issues: High spending on hospital curative care vs underinvestment in primary care and preventive services reduces value for money.

Public–Private Partnership (PPP) in Health

• Definition: Long-term contractual arrangements between public sector and private providers to deliver health services, build infrastructure, or manage facilities while sharing risks and responsibilities.
• Common PPP models:
• Service contracts / outsourcing (diagnostics, ambulance services, support services).
• Management contracts (private agency runs a public facility).
• Build-Operate-Transfer (BOT) or infrastructure PPPs (new hospital construction).
• Contracting in of clinical services (specialist services in public hospitals).
• Insurance purchasing from private hospitals under government schemes.
• Advantages: Increases capacity, private investment in infrastructure, potential for efficiency gains and innovation.
• Risks & challenges: Quality assurance, profit motive may lead to supplier-induced demand, contract design and enforcement, equity/access concerns, regulatory oversight, cost escalation.
• Success factors: Clear contracts, performance indicators, monitoring, transparent selection, tariff regulation, grievance redressal, alignment of incentives.

Health Care Personnel — Financing & Human Resources for Health (HRH)

• Costs associated with HRH: Recruitment, salaries, incentives (rural/remote postings), training and continuing medical education, retention costs, pension liabilities. HRH often accounts for the largest recurrent item in health budgets.
• Shortages & maldistribution: Urban concentration of specialists and doctors vs shortages in rural/remote areas; nursing and allied health workforce gaps. Financing must address incentives to redistribute staff.
• Financing strategies to strengthen HRH:
• Competitive salaries and rural hardship allowances.
• Bonded scholarships for medical and nursing students with rural service obligations.
• Task shifting and training of mid-level providers (e.g., community health officers).
• Performance-based incentives (linked to outputs, immunization coverage, maternal outcomes).
• Investment in pre-service and in-service training funded by government and donors.
• Private sector workforce financing: Many specialists work in private sector; dual practice (public + private) raises governance and time allocation issues.

Key Problems & Challenges in Financing Health Care (India)

• Low public spending relative to need: Limits availability of free/subsidized services and infrastructure.
• High OOP payments: Leads to catastrophic spending and inequity.
• Fragmented risk pooling: Many small schemes with limited cross-subsidization; lack of universal pooling.
• Inefficient purchasing & provider payments: Fee-for-service and input-based budgets incentivize volume not outcomes.
• Weak regulation of private sector and insurance: Leads to variable quality, overcharging, and provider-induced demand.
• State disparities: Variability in fiscal capacity and implementation across states.
• Insufficient spending on primary care & public goods: Prevention, health promotion, and primary care often underfunded.

Reforms & Policy Options (directions to improve financing)

• Increase and stabilize public financing: Gradual increase in public health expenditure with predictable multi-year commitments.
• Expand risk pooling and move toward Universal Health Coverage (UHC): Merge small schemes, broaden benefit packages, and reduce reliance on OOP.
• Strategic purchasing: Move from input-based budgets to performance-oriented purchasing, use standard treatment guidelines and case-based payments (DRGs or package rates) where appropriate.
• Provider payment reform: Mix of capitation (for primary care), case-based payments (for inpatient), and performance incentives to align provider behavior with outcomes.
• Strengthen primary care and public health funding: Reorient funds to prevention and first-contact services to reduce hospital burden.
• Regulation and quality assurance: Strengthen accreditation, price regulation for government-purchased services, and transparency in public procurement.
• Targeted subsidies & means testing: Carefully designed subsidies to protect the poor without fragmentation.
• Integrate financing for medicines and diagnostics: Reduce OOP by supplying essential drugs and diagnostics through public systems and pooled procurement.
• Invest in HRH: Dedicated funding for recruitment, capacity building, and retention strategies, especially for underserved areas.
• Leverage technology for efficiency: Digital payments, e-claims processing, e-health records to reduce leakages and track expenditures.
• PPP with strong governance: Use PPPs where appropriate, but with robust contracts, monitoring and equity safeguards.

Indicators & Measures to Monitor Financing Performance

• Total health expenditure (THE) as % of GDP — tracks national commitment.
• Government health expenditure (GHE) as % of GDP and as % of THE.
• Out-of-Pocket expenditure (OOP) as % of THE.
• Catastrophic health expenditure and impoverishment rates (households pushed below poverty line due to health payments).
• Per capita public health expenditure and per capita total health expenditure.
• Coverage indicators: Percent population covered by any prepayment/insurance, percent coverage of essential services.
• Financial protection and equity measures: Share of poor protected, concentration indices.

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