Health Financing Issues in MICs
MICs benefit from higher levels of domestic funding, higher initial levels of risk pooling and prepayment, and stronger health systems than LICs. Many MICs are now focused on ensuring access and financial protection through universal health coverage. Chile, Colombia, the Republic of Korea, Mexico, Poland, and Thailand are implementing universal coverage reforms or have already done so. However, they and many other MICs still face challenges similar to those facing LICs.
Alternative Risk Pooling Arrangements
Country experience shows that the critical factors for increasing coverage—that is, the number of individuals covered and the extensiveness of the benefit package—are increased risk pooling and prepayment and better access to equity subsidies. As discussed earlier, most MICs face fragmented risk pools (ILO and STEP 2002b). Table 12.4 presents MIC approaches to reforming risk pooling arrangements for achieving universal coverage.
[Table .]
Most MICs face an additional strategic decision: whether to pursue aggregation of all pools in a single organization (a single pool) or whether to allow for the existence of multiple risk pooling organizations, which would explicitly or implicitly compete for members and would be subject to the same rules regarding benefit packages, revenue collection mechanisms, and portability of benefits (that is, a virtual single pool). Colombia and Turkey have opted for the virtual single pool reform, whereas Costa Rica has chosen a single risk pool. In the OECD context, Germany and the Netherlands have virtual single pool arrangements, whereas New Zealand and the United Kingdom have single pool arrangements.
Reforms of Social Security
Because SSOs traditionally cover salaried formal sector workers from whom payroll contributions can be collected, requiring informal sector workers or self-employed workers to join is difficult. The reforms for confronting this issue range from voluntary enrollment to various types of subsidization, as detailed in table 12.4.
Country experiences are also illuminating. For instance, Chile and Mexico have opened SSOs to the informal sector and the self-employed through voluntary affiliation, yet they still face risks of adverse selection because of the voluntary nature of enrollment and the exclusion of the poorest (Bitran and others 2000; Instituto Mexicano de Seguro Social 2003). Chile, Colombia, Costa Rica, and the Philippines have addressed exclusion either by subsidizing the SSO directly or by subsidizing premiums for the poor and informal and self-employed workers who join. The Republic of Korea and Taiwan, China, have implemented mandatory universal participation, including gradual expansion to the whole population, whereas Panama has expanded coverage to dependents of contributing members.
Some of the most important advantages underlying SSO innovations include the existence of organizational capacity and of pools of funds (or sometimes a single large fund) that allow newly enrolled individuals and groups to take advantage of the risk and income cross-subsidization mechanisms and purchasing arrangements that are already in place. This approach results in an immediate enlargement of the risk pool in contrast to creating other pooling organizations as intermediate steps for the future merging of schemes. However, SSOs usually cover only a relatively small portion of the total population, and their focus on formal sector workers and use of payroll contributions as their main revenue collection mechanisms might be an insurmountable obstacle for reaching the informal sector and the poor, particularly those in rural areas.
In countries where a SSO is well established and covers a large population, it might face problems in including informal sector workers in the absence or even the presence of public subsidies if the incentive structure is not well designed. For instance, in the case of Mexico, the SSO operates a scheme that is partially subsidized by the central government, yet the scheme still has experienced severe adverse selection and has few participants, which has also discouraged actively promoting enrollment (World Bank 2004c).
Reforms of MOHs and NHSs
MIC reform approaches for MOHs and NHSs include introducing internal markets, including separating the purchasing function from the provision of health services; using public-private purchasing; reforming provider payment systems; and decentralizing. In theory, efficiency gains in the system could be used to provide access to new enrollees, to increase the number and quality of services to all participants in the system, or to do both. Success in these areas has been limited (Baeza and Packard 2005). Effective modernization of public sector management and civil services statutes has to date been missing from most provider payment and health sector reform efforts.
Private Health Insurance Reforms in MICs
Since the 1980s, MICs have seen two main reforms related to private insurance: (a) the facilitation and promotion of voluntary health insurance, including formal recognition of competing private health insurance, and (b) the integration of regulated private insurance as one component of mandatory social security schemes for formal workers. Many MICs, such as Indonesia, Mexico, and the Philippines, now recognize and regulate voluntary private health insurance. In Chile and Colombia, private insurers participate in the provision of mandatory risk pooling for social security.
The literature provides some evidence of the potential benefits and problems resulting from the introduction of private health insurance and competition in the insurance market (Londono and Frenk Mora 1997; Sheshinski and Lopez-Calva 1998). However, an ample literature also deals with the equity and efficiency problems of private health insurance competition, including risk selection (insurers seeking to enroll low-risk individuals) and underservice (insurers setting barriers to the use of services, for instance, by not contracting with providers of expensive interventions or in low-income areas) (Arrow 1963; Hsiao 1994; Hsiao 1995; Laffont 1990; Milgrom and Roberts 1992).
As to whether harnessing private health insurance contributes to or damages MICs' chances for achieving universal coverage, the question is whether MICs can take advantage of the benefits of introducing health insurance competition and avoid the related efficiency and equity problems. MICs must confront the feasibility of introducing specific financial, regulatory, and organizational reforms at a level of transaction costs that would not offset the benefits of competition and privatization (Baeza and Cabezas 1998; Coase 1937; Newhouse 1998; Williamson 1985).
Single Pool versus Virtual Single Pool
Most MICs must also decide whether to aggregate all pools into a single organization or to aim for a virtual single pool (Baeza and Packard 2005). The implementation of more effective and efficient cross-subsidies between groups with different income and health risks is facilitated by merging smaller pools into large pools—in some cases, national pools. Indeed, the main preliminary lessons emerging from Costa Rica, the Republic of Korea, and Taiwan (China), all of which have achieved universal coverage, suggest that the combination of a clearly defined benefit package and reforms for enlarging risk pools plays a paramount role in achieving greater inclusion through solidarity in financing and increasing access.
Yet for most MICs, the reality is that multiple pooling arrangements exist, leading to a fragmented, inefficient, and inequitable health financing situation overall. Given that developing proper regulations and incentive systems for counterbalancing such problems is complicated, both institutionally and cost-wise, fostering a virtual single pool is likely the most feasible option for these countries.
Sources of Health System Financing in MICs
As discussed earlier in this chapter, health systems use different sources of financing and revenue collection, including general taxation, payroll contributions, risk-rated premiums, and user fees. However, concern is increasing about the use of payroll contributions as a mechanism for collecting revenue. In a recent study on financial protection in Latin America, Baeza and Packard (2005) argue that to extend effective risk pooling to the informal and nonsalaried sectors and to achieve universal participation in risk pooling arrangements, policy makers need to delink health insurance financing and eligibility from labor market status or employment sector, by gradually reducing and eventually eliminating payroll contribution financing. In addition to extending protection against health shocks, this delinking might also have a positive effect on labor market mobility and formalization. This delinking can be achieved through shifting health financing toward general taxation, which is likely preferred on equity and efficiency grounds, or through risk-rating premiums as a transition if fiscal constraints do not permit full fiscal financing.
Donor Disengagement from MICs
As demonstrated both by the composition and recipients of DAH and by new health financing and policy agendas, global health financing policy is currently focused on LICs, leaving most MICs under the radar. The MDG agenda is predominantly a LIC agenda, or at least most MICs perceive it as such. Thus, the question is what to do with the MIC policy dialogue. Is the status quo tantamount to disengagement? If so, the international community is in danger of losing important financing lessons that would most likely be of great use for LICs. In addition, a more concerted effort is needed to analyze what the MDGs mean for MICs—particularly in light of their increased noncommunicable disease and injury burdens, areas that the MDGs do not address—and to invest more in the evidence base for MIC-relevant reforms. It is important to maintain broad goals, but also important to develop new MIC-specific indicators, especially for financial protection, which is at the core of poverty alleviation in MICs as well as LICs but is not explicitly reflected in the MDGs.
The PRSP process also sends a clear signal to the international community to focus on the LICs. Unfortunately, few PRSPs consider the role of the health system in ensuring financial protection and reforms of risk pooling arrangements, which are at the core of most LIC and MIC health sector financing strategies. A new approach is needed to support MICs' efforts to improve public subsidy management and health system performance to ensure financial protection. Such approaches are also critical in assisting LICs with their poverty reduction and health financing reform efforts in the future.
