**3. Methods of financing health care**

The World Health Organization (WHO) defines health financing as the "function of a health system concerned with the mobilization, accumulation and allocation of money to cover the health needs of the people, individually and collectively, in the health system … .. The purpose of health financing is to make funding available, as well as to set the right financial incentives to providers, to ensure that all individuals have access to effective public health and personal health care" [4].

Health care can be financed through various methods, including resource pooling through health insurance, out-of-pocket payments, and public finance through direct or indirect taxes.

Health care financing can be classified into three different typologies: private health insurance (PHI), social health insurance (SHI), and national health insurance (National Health Service) [5]. Both government and third-party payers, as in organized private health insurance schemes or government agencies, play an especially key role in purchasing and pooling risk. The choice of the financing mechanism would depend on numerous factors, including the political economy of health, the political ideology of the country, equity principle, social solidarity, economics and financial strength of the country, and organization of the social and economic structure of the country, including labor unions, financial systems, health systems, and political systems of governance [5]. The choices made are associated with various advantages and disadvantages. It suffices to say that there is no perfect system, and there is no blueprint for each country. There can be a mix of both Beveridge and "Bismarckian" health care financing systems. There are no pure Beveridge or Bismarck systems. The choice of health financing system, to the best of my knowledge, will depend, to a considerable extent, on the health financing goals and several variables of the country in question. Selected methods of health financing and payment methods and governance of health care financing schemes are discussed in the following section.

As already stated, different countries have different methods of financing health care. The most common methods include but not limited to:

#### **3.1 Free medical care (usually financed by progressive direct taxes)**

With this system, every resident of a country is covered by the health care system and receives free medical care irrespective of income level or type of employment. The government pays for the entire cost of the health care, the cost of health professionals, and health infrastructure. In theory, this system is equitable, provided there are strong monitoring mechanisms put in place to ensure quality of care, and there is a large and consistent source of government revenue allocation to the health sector. Most developing countries practiced the free medical systems in the 1950s to late 1970s, but it was not sustainable because dwindling government revenue and quality of care were questionable [5, 6].

#### **3.2 Social health insurance (SHI)**

Social health insurance scheme is another method of health care financing through compulsory or voluntary health insurance. Ghana's National Health Insurance Scheme (NHIS), for instance, is a combination of mandatory NHIS Levy, mandatory social security contribution of formal sector workers, and voluntary premium payment

### *Health Insurance for Economically Disadvantaged People in LMICs: What are the Best Options? DOI: http://dx.doi.org/10.5772/intechopen.105679*

by the informal sector workers. In the case of compulsory social health insurance, all citizens contribute a prepayment determined by the terms and conditions of the scheme either based on income or through employment or flat sum, or through direct or indirect taxes. In turn, members of the social health insurance scheme benefit through the insurance coverage for their health care. With (private) voluntary social health insurance (as in the case of mutual health insurance schemes of Senegal and Ghana in the early stages of the introduction of health insurance), the underlying principle is solidarity, where members voluntarily contribute a premium to a pool for risk sharing and financing of their health care needs [7]. Social health insurance scheme can be an equitable way of financing health care with the employed when premiums are based on income and determined by the ability to pay. However, with the unemployed the government must pay premiums for the poor, vulnerable, and unemployed. This affords both the poor and the rich to contribute their respective quotas to the health insurance fund to ensure a buildup of large numbers and large pool of resources. In this case, there is a large pool of financial resources to ensure financial risk protection and sustainability of the scheme, all things being equal. The German social health insurance scheme (SHI) with substitutive private health insurance scheme (PHI) is worth emulating in LMICs, because it has stood the test of time and all odds for over 100 years with near universal coverage of the population and with sustainable quality health care. A snapshot of the German SHI is given in the following section. Germany was the first country in Europe (may be in the world) to establish SHI with substitutive PHI in Europe, in 1883, by Chancellor Otto Von Bismarck. The German SHI is dubbed the "Bismarckian" SHI system, attributed to Chancellor Bismarck. The main takeout of the scheme is that is backed by a strong legislation which makes it mandatory for both employees and employers. It is based on strong solidarity principle with members. Both employees and employers pay equal share of premium (50% employee and 50% employer contribution) to finance the SHI. Also, employees pay 14.7% of total gross income toward the SHI. The scheme is very democratic in terms of organization and governance and has disintegrated service providers throughout the country. The German SHI is one of the most sustainable SHI systems in the world which is worth replication in other countries. The key principles and success factors of the German SHI are summarized in **Table 1**.

The dual system of health insurance (SHI and PHI) enhances coverage of the population. In Ghana, Nigeria, and Senegal, like many LMICs, the health insurance systems are hybrid and enrollment are voluntary. But in Ghana, for instance, the enrollment in PHI is very insignificant due to the high premiums of private health insurance.

Most LMICs including Ghana, Nigeria, Rwanda, Uganda, and Thailand, and high-income countries such as Canada, Germany, the Netherlands, and Switzerland, among others have adopted the social health insurance model and are at various stages of achieving universal health coverage. Germany, for instance, is well known for the "Bismarckian" social health insurance health system, which has existed and provided quality health care for citizens and residents over 100 years, using the dual model: SHI with PHI. As already stated, the German SHI is worth replicating in LMICs and even other advanced countries.

#### **3.3 Universal health insurance coverage (UHC)**

**"**UHC means that all individuals and communities receive the health services they need without suffering financial hardship. It includes the full spectrum of essential,


#### **Table 1.**

*Key principles and success factors of the German SHI.*

quality health services, from health promotion to prevention, treatment, rehabilitation, and palliative care across the life course" [8].

Universal health insurance coverage ensures that every resident of a country has health insurance coverage, either financed through social security contribution or tax financing as in the case of United Kingdom, New Zealand, and Sweden, among others, with varying degrees of implementation structures. Everyone pays through different forms of taxation, irrespective of the risk burden of the individual. This system of financing ensures equity in financing because members pay for their health care through different forms of taxation based on their incomes and are provided universal health coverage. However, it should be noted that universal health coverage has different dimensions and usually covers the entire population but may not cover all health care services. Also, it may not be completely free at the point of use. Members may subscribe to supplementary health insurance schemes to cover expensive services that may not be covered under the universal health scheme or pay out-of-pocket, as in the case of France. Universal health coverage is also a sustainable way of financing health care as tax payment is compulsory. The caveat is when the tax is regressive which can perpetuate inequities. The question that remains is whether members of the universal health insurance scheme may receive quality health care, where and when needed, without a long waiting time to see specialist health professional.

## **3.4 Private health insurance**

Private health insurance (PHI) is an alternative mechanism of financing health care for populations. PHI schemes are independent private entities usually

#### *Health Insurance for Economically Disadvantaged People in LMICs: What are the Best Options? DOI: http://dx.doi.org/10.5772/intechopen.105679*

established to provide health care for populations usually for profits. Profit is the main motive of PHI schemes [9]. PHI is both a "bad" and a "good" in the sense that it provides both challenges and opportunities for the attainment of universal health coverage goals. Many LMICs have a combination of PHI and public or social health insurance schemes as part of their health financing systems, as in the case of Ghana, Nigeria, Uganda, Rwanda, Kenya, La Cote d'Ivoire, and Senegal, among others. The choice of private or public health insurance scheme as a health financing system policy has consequences. Countries like the United States, France, Germany, Canada, the United Kingdom, Ireland, and Switzerland have different forms and policies of PHI schemes, providing choices and health coverage for distinct categories of populations. Private health insurance usually thrives well in high-income countries, though, not without challenges.

PHI in the United States, for instance, is organized in different forms: a) employerbased health insurance plans through employee-employer contribution, b) direct purchase of insurance, where the individual buys health insurance direct from the private health insurance companies, or through a state or federal marketplace, and c) private health insurance for uniform service [10].

Germany operates a substitutive PHI the for the rich, alongside the mandated social health insurance as far back as the nineteenth century (1883) known as the Bismarckian Health System. Although, there is opportunity for members of the SHI to opt out to join the PHI, there are legal restrictions for opting out of the SHI for the private health insurance once enrolled, to protect the social health insurance scheme.

It is important to note that PHI is based on voluntary enrollment and can contribute to huge uninsured populations, especially if the cost of PHI is not regulated by the state to make it affordable, especially for the poor. Usually, PHI premiums are actuarially determined making the premiums expensive for less privilege health care consumers to afford. Private health insurance can contribute to large uninsured populations, especially in LMICs, and even in certain advanced countries like United States. In the Netherlands, for example, the state subsidizes those who are unable to pay for health insurance. In Ghana, the poor and the vulnerable are covered under the social net premium exemptions program. PHI in Ghana, though optional, is expensive and benefits mostly rich people. Arguments for and against PHI are illustrated in **Table 2**.

The dual system of health insurance (SHI and PHI) enhances the coverage of the population. In Ghana, Nigeria, and Senegal, like many LMICs, the health insurance systems are hybrid and enrollment are voluntary. But in Ghana, for instance, the enrollment in PHI is very insignificant due to the high premiums.

Most LMICs including Ghana, Nigeria, Rwanda, Uganda, Thailand, and highincome countries such as Canada, Germany, the Netherlands, and Switzerland, among others have adopted the social health insurance model and are at various stages of achieving universal health coverage. Germany, for instance, is well known for the "Bismarckian" social health insurance health system, which has existed and provided quality health care for citizens and residents over 100 years and still thriving.

#### **3.5 Community-based health insurance (CBHI)**

Despite the call for health care financing through health insurance by the WHO since 2010, and the recent commitment through the UN Sustainable Development Goals (Goal 3 and its targets) for universal health coverage, out-of-pocket spending still accounts for large proportions of total health spending in LMICs. For reasons


#### **Table 2.**

*Arguments for and against PHI.*

of inadequate financial mobilization capacity and fiscal space, many LMICs have adopted community-based health financing schemes (CBHIs) as alternative means of financing health care for financial risk protection. This informal sector mechanism of financing health care aims to reduce out-of-pocket payment for health care which can impoverish low-income households.

*"*Community-based health insurance is an umbrella term for the various types of community financing arrangements that have emerged because of high out-of-pocket spending, uncertainty surrounding anticipated financial flows from donors, and large and unregulated private sectors" (…) "CBHIS refers to prepayment plans that attempt to pool risks to reduce the financial risk an individual faces because of illness" [12–14].

The main distinguishing features of CBHI from other health insurance schemes are1) diverse groups of population coverage, 2) strong solidarity among members, 3) differentiated services in terms of benefits package, 4) variability in regulations and democratic governance, 5) different management styles, and 6) objectives. CBHI is not new in the global arena, but they are prevalent in sub-Saharan Africa. The classical examples are the "Mutuelles de Santé" (Mutual Health Organizations) in Senegal, Mali, Burkina, and Ghana in its formative stages of health insurance [6, 12, 14].

Ample evidence suggests that CBHI has been significant in providing financial protection and health care access to many rural and low-income populations*.* But, where premiums are somewhat high, affordability hampers access for the very poor in the community [8]. Notwithstanding, strong evidence suggest that that communitybased health insurance (CBHI) provides some financial protection through reduction in out-of-pocket expenditure on health and enhance cost recovery. But there is little or no evidence on the effect of quality of health care and efficiency of care. In totality, the impact of CBHI on access to health care is insignificant [14].

CBHI schemes serve only a small section of the population and cannot be guaranteed as a measure for achieving universal health coverage. They can however set the

*Health Insurance for Economically Disadvantaged People in LMICs: What are the Best Options? DOI: http://dx.doi.org/10.5772/intechopen.105679*

pace as a complementary scheme to other more efficient systems of health financing such as national health insurance schemes [15].

Despite the strong contribution of CBHI in providing financial protection for members and some level of resource mobilization, the general effect is somewhat small. CBHI schemes are insignificant in reaching the very poor. Hence, CBHI is necessary but may not be sufficient solution for risk pooling and revenue mobilization for health care in LMICs because of low population coverage and fragmented groupings.

*"Both theory and evidence suggest that the traditional CBHI model – relying only on voluntary, small-scale schemes with little or no subsidization of poor and vulnerable groups – can play only a limited role in helping countries move towards universal health coverage (UHC). CBHIs cannot be expected to provide a major source of funding or coverage, and hence can at best provide only a complementary role as part of a national health financing strategy toward UHC. This is partly because people with few health needs tend not to join on a voluntary basis, and there is usually little or no subsidization for poor and other vulnerable groups. Health service utilization rates of members, however, generally increase after enrollment" [15].*

Among other things, health insurance thrives on large numbers (risk pool) and sustainable revenue. However, with strong legislation and community solidarity, LMICs can merge CBHI schemes to form a single-payer national health insurance scheme, as in the case of Ghana and Rwanda*.* CBHI schemes can be a springboard for the establishment of national health insurance scheme in countries where they exist, but they may not ensure equity in access to health care and cross-subsidization of risks.

In the next section, the paper expounds on John Rawls' theory of justice and its linkages with equity in health care financing.
