Plan benefit coverage and description States review and approve insurance policies to ensure that they are not vague or misleading and meet state requirements (such as mandatory benefit provisions).
Small−group reforms Most states require insurers selling to small employers to accept and renew employees who want health insurance coverage, establish short waking periods for preexisting conditions, and require portability of coverage when an individual changes jobs or insurers.
Consumer protections and complaints States monitor insurers' actions to ensure that they are not engaging in unfair business practices or otherwise taking advantage of consumers. They also assist consumers by investigating complaints, answering questions, and conducting educational programs.
Financial requirements
Licensing States license insurance companies and the agents who sell insurance to ensure that companies are financially sound and reputable and that agents are qualified.
Financial solvency States set standards for and monitor the financial operations of insurers to determine whether they have adequate reserves to pay policyholders' claims.
States restrict how insurers invest their funds.
Rate reviews States review and approve rates or require actuarial certification to ensure that rates are reasonable for consumers and sufficient to maintain the solvency of insurance companies.
Some states regulate insurer rating practices in the small−group market to determine the factors insurers can use in setting premiums.
Tax requirements
Premium taxes Nearly all states assess premium taxes on insurers.
Guaranty funds States require insurers to finance guaranty funds that provide financial protection to enrollees who have outstanding medical
Private Financing Sources 39
claims in case of insurer insolvency.
High−risk pools Some states require insurers to finance losses in high−risk pools that provide health coverage for individuals who had otherwise been denied coverage because of a medical condition.
Source GAO 1996, pp. 5−6.
several aspects of insurance market failure. The basic goal of managed competition is to organize insurance markets so that individuals can make informed choices about their purchase of insurance while reducing moral hazard by making them financially responsible for the consequences of their actions. Moreover, many of the inappropriate risk selection practices of private insurers can be mitigated by organizing insurance through purchasing cooperatives subject to rules such as standard benefit packages, coordinated open enrollment periods, guaranteed issue, guaranteed renewability, limits on the number of rating bands, information disclosure on plan performance, and marketing through the purchasing cooperative (not the insurance plan). By eliminating (or precluding) tax subsidies for the purchase of insurance, subscribers are more cost−conscious, and moral hazard is reduced. Purchasing cooperatives are essentially a supermarket in which informed and cost−conscious consumers compare prices and services before buying health insurance. This approach also creates strong incentives for insurers to be efficient purchasers of services from medical care providers (Enthoven in this volume).
For managed competition to work effectively and equitably, the revenues that finance the system (from whatever source) should be pooled in a fund that distributes them to the insurers who chose to participate (through the purchasing cooperative) on a risk−adjusted capitation basis. Risk−adjusted capitation payments are essential to ensure that insurers will enroll individuals with greater health risks. Developing operational risk adjustment tools is far from simple (Enthoven in this volume). The California Public Employees Health Plan, the U.S.
Government's Federal Employees Health Benefits Plan, health plans in the U.S. states of Connecticut, Florida, Iowa, Kentucky, Minnesota, and Washington, U.S. President Clinton's failed health care reform initiative, the now−suspended Dutch health reform, and the recently established Russian health insurance system all rely on managed competition organized by a public entity with participation by public or private insurers and providers (Sheiman in this volume).
Medical savings accounts. Medical savings accounts also provide incentives for individuals to be effective purchasers of health services (see Nichols, Prescott, and Phua in this volume). Simply put, medical savings accounts are individual savings accounts from which individuals pay for health care, coupled with a backup financing mechanism (along the lines of a catastrophic insurance policy). The source of the savings account and the backup financing can be public or private. Like direct out−of−pocket payments (including user charges) and managed competition, medical savings accounts provide consumers with strong incentives to be cost conscious.
Such accounts also preserve freedom of choice of medical care provider and offset the moral hazard implicit in insurance arrangements. In addition, medical savings accounts may help achieve basic development objectives by encouraging domestic savings.
There are at least two basic models of medical savings accounts: the system used in Singapore, which supplements other publicly funded health programs, and the models used in the United States, which cover a much broader range of services. Both models are backed by a public or private insurance mechanism that covers catastrophic costs above some threshold deductible if the savings account is exhausted. To encourage cost consciousness, this deductible must be significant—perhaps 5−10 percent of family income.
One of the biggest advantages of a medical savings account is that individuals have a strong incentive to be prudent consumers of medical services, since they can use any unspent funds in a variety of ways (Nichols, Prescott, and Phua in this volume). In other words, the benefits from being a prudent consumer accrue to the
Private Financing Sources 40
individual—not
Box 4
Recent U.S. reforms in state insurance regulation Guaranteed issue (everybody must be offered a policy).
Guaranteed renewability except for fraud, nonpayment of premiums, and the like.
Continuity of coverage provisions, including insurer limitations on preexisting condition exclusions and waking periods.
Restrictions limiting the rating factors that can be used to determine premium rates (for example, limits on the number of rating bands based on age or limits on premium differentials across groups).
Full disclosure of information.
Standardized plan benefits.
Source: Institute for Health Policy Solutions 1995.
the government, employer, or private insurance company (or its subscribers, collectively). Unspent savings can be used for nonmedical consumption, passed on as a cash transfer at the time of death to the deceased's heirs, or rolled over from year to year and used for future medical expenses (so that in a sense individuals are pooling noncatastrophic risks over their life cycle). Although there have been few rigorous evaluations of the experiences of U.S. corporations that have switched to medical savings accounts, recently passed U.S. health insurance reforms provide tax subsidies to individuals establishing such accounts, making it likely that their use will increase.
Informal risk−pooling arrangements. Informal, generally rural, and usually voluntary risk−pooling schemes are one variant of the health insurance model common in developing countries, particularly in Asia and Africa (see Creese and Bennett in this volume). These schemes generally encourage prepayment of individual premiums into an identifiable fund, provide some notion of entitlement to benefits, and work with a defined set of service providers. The schemes are usually organized by and often linked to government providers, although in some cases they are run by community health committees. Zaire's Community Health Insurance Scheme, Thailand's Health Card, and the United Nations Children's Fund's (UNICEF) Bamako Initiative (in more than thirty
countries) are examples of such arrangements (see La Forgia and Griffin 1993; Khoman in this volume; Tibouti).
Creese and Bennett (in this volume) describe the underlying conceptual bases for these schemes and experiences in developing countries.
Out−of−pocket Payments for Health Services
As noted above, consumer out−of−pocket payments for health services are private expenditures. But such
expenditures can take a variety of forms, including direct purchase of private services, direct purchase of publicly provided services (for example, public user charges), and cost sharing for publicly or privately financed services.
When such payments are in the form of user charges for publicly provided services, they are a public revenue source. When they are direct payments for privately provided services, they are a private revenue source. (The conceptual issues and empirical evidence regarding direct out−of−pocket payments were discussed above.)
Out−of−pocket Payments for Health Services 41
Much of the discussion about health insurance focuses on how such insurance can cover most basic personal health services needs. But insurance policies are just as relevant in other contexts—such as covering dread diseases, providing supplemental benefits to individuals covered under a public system, and covering long−term care and social services that are not covered by standard health insurance policies or public systems. These are important issues in middle− and high−income countries. Although a detailed discussion of these issues is beyond the scope of this paper, such insurance needs to be evaluated using the same criteria (economic efficiency, equity, and administrative simplicity) defined earlier.
Furthermore, it is important to analyze the effects these supplemental policies have on the insurance policies or systems that they supplement. For example, if a supplemental policy covers the cost−sharing requirements of the primary policy, then individuals will use more of the basic services covered by the primary policy. Thus several countries' insurance regulations forbid private insurers from filling in for cost sharing in public programs. Other issues of concern include high administrative costs and deceptive marketing practices, which are especially problematic when policies are marketed to the elderly, who tend to overinsure (Chollet and Lewis in this volume).
Much of the above discussion has focused on the conceptual and operational bases for health insurance and on policy prescriptions for industrial countries. Developing countries, however, face additional challenges. It is difficult to provide private insurance in the absence of well−developed financial markets. Operating private insurance is complex, requiring effective management information and accounting systems as well as mechanisms to deter fraud and abuse. Reinsurance mechanisms and consumer protections are needed. Private health insurance needs to be regulated by government, yet such regulations are complex and may be beyond the capacity of governments in many developing countries. There are also potentially high administrative costs associated with insurance, potentially diverting money from health services into health administration. All these factors must be given careful consideration.
Charitable Contributions
Because charitable contributions can be directed to public or private institutions, they can be a public or private revenue source. In industrial countries such contributions are sometimes encouraged by the tax system (that is, such contributions are tax deductible), but they are generally a small portion of total health spending. Such contributions are generally beyond the control of policymakers, and cannot be relied on as a stable and long−term source of financing.
Moreover, there are virtually no data on the importance of this source of financing for developing countries.
Charitable contributions can be domestic or foreign. Foreign charitable contributions are the same as foreign grant assistance (discussed above) that has few or no policy conditionalities attached. There are no efficiency or equity costs in obtaining these funds. Domestic charitable contributions do have an opportunity cost—the alternative domestic uses of the funds raised by the charity. If such contributions are encouraged by the tax system, there will be efficiency and perhaps equity costs to the economy.
Private Financing Implications for Developing Countries
Although private finance cannot address equity and public health issues, it is generally essential given governments' limited ability to marshal sufficient resources to finance (directly or through transfers) most personal health services. Yet given the market failures affecting both the demand and supply sides of the market for health services, efficiency in health services consumption and provision is unlikely to be achieved through consumer sovereignty and a laissez−faire approach to the health services market. This is especially true in developing countries, where the bulk of health spending, especially in the poorest countries, is private. Putting aside issues of equity, if heavy reliance on private spending is necessary for financial reasons or desirable on efficiency grounds, governments should implement regulations that offset health market failures.
Charitable Contributions 42
Several government interventions in the private market for health services can improve the efficiency and equity of private financing:
Public regulation of private health insurance is essential to ensure effective risk pooling, affordability, solvency, informed choice, and continuity of coverage.
In the absence of a private insurance market, governments in developing countries may want to consider establishing a publicly organized (or quasi−public) but privately financed insurance system.
Governments need to provide the regulatory framework to ensure quality, efficient pricing, and relevant information concerning both health insurance and health service provision and consumption.
Reliance on private financing is a necessity in many low−income countries. As a result governments' abilities to deal with equity and redistribution objectives are somewhat limited. Still, for people who are able to pay,
government regulation of insurance and public provision of privately financed health insurance can result in more equitable and efficient insurance markets and in gains from risk pooling. Moreover, effective oversight of the entire delivery system (public and private) can result in higher quality, greater efficiency, and better value for money for both publicly and privately financed services (insurance and out−of−pocket). The difficult questions are: Given the limited institutional capabilities of many developing countries, is effective regulation of the insurance industry and private providers possible? Can effective insurance markets be developed given the state of these countries' financial markets? And can administrative costs be kept within reasonable limits? These important questions need much more attention from the countries themselves as well as from development agencies and donor organizations.
Regional Perspectives on Health Financing Reform
This section summarizes the main challenges confronting each region's health care financing and delivery systems and proposes essential reforms. These observations are based on the epidemiological and economic information presented earlier as well as on the characteristics of the countries and health systems in each region. Many of the health financing challenges facing developing regions can also be analyzed from an income perspective (box 5).
Europe and Central Asia
The formerly socialist economies of Europe and Central Asia face major challenges as they move away from centrally planned health care systems toward systems based on social insurance models (see World Bank 1996b;
Goldstein and others 1996; and Klugman and Schieber 1996). The region contains about 9 percent of the world's population and accounts for 3 percent of its income. Among developing regions Europe and Central Asia has the highest public share of health spending—more than 70 percent. Moreover, health systems account for 7.2 percent of GDP, or $154 per capita, the highest regional per capita expenditure after Latin America and the Caribbean.
Yet although Europe and Central Asia is within the middle−income range, with a per capita GDP of about $1,800, the transition to market−based economies and the breakup of the Soviet Union have brought economic crisis to many countries in the region. As a result health outcomes have declined, and in some countries diseases such as diphtheria and tuberculosis (both under control before the transition) are on the rise. Adult health is also a serious problem. Overnutrition, substance abuse (alcohol, tobacco), and violence are major public health concerns.
Although under central planning Europe and Central Asia managed to achieve universal access in all
countries—the only region to do so—these systems relied on large numbers of low−quality inputs. Moreover, central planning provided few incentives for efficiency. And clinical standards are dated, resulting in inefficient and ineffective treatments for many conditions.
Regional Perspectives on Health Financing Reform 43
The challenge for the region is to maintain universal access, increase efficiency, reduce adult mortality, and improve quality. Overưresourced delivery systems need to be reconfigured. Clinical practices must be updated.
Health promotion and disease prevention programs should be implemented. Sustainable and efficient financing arrangements
Box 5
Trends in health care financing at different income levels
Lowưincome countries (per capita health expenditure of less than $80, with health sectors accounting for 3ư4 percent of GDP). Government budgets finance most public health care expenditures, but are limited by narrow tax bases and weak collection capacity. Although public spending is sometimes supplemented by user fees, these account for a small percentage of public revenues. External assistance continues to be a significant source of revenue, especially in SubưSaharan Africa, South Asia, and the Pacific. Apart from the government budget, options for formal insurance schemes (public or private) are limited by the small size of the formal employment sector, limited savings, underdeveloped financial sectors, and weak institutions. Instead, households rely on informal arrangements (extended families, traditional community support systems, NGOs, charitable organizations, rural cooperatives) to provide protection in the event of catastrophic illnesses. Key issues: Developing informal riskưpooling mechanisms (such as NGO or community schemes) to expand coverage to the poor and making better use of external assistance.
Middleưincome countries (per capita health expenditure of $80ư400, with health sectors accounting for 5ư6 percent of GDP). Middleưincome countries rely on more financing sources than lowưincome countries, including social security schemes for civil servants and other groups of formally employed workers. Although some countries prefer to expand coverage using social security systems, others are moving toward national health service models that rely on general revenues. There is usually rapid growth in private spending as modern private health services expand; private insurance becomes more common, although it (as well as private providers) remain largely unregulated. Expansion in formal employment, capital markets, and financial sectors, improved institutional contexts for formal insurance, and urbanization and other social changes help households and enterprises make the transition from informal to formal riskưpooling mechanisms. But countries in this group still fall short of universal coverage. Ruralưurban disparities and the persistence of poverty contribute to these problems, and the multiplicity of financing sources, often with overlapping or inconsistent policies, adds to inefficiencies and inequities. Key issues: Developing consistent social insurance schemes, expanding coverage to rural and informal sectors, and regulating the private sector.
Highưincome countries (per capita health expenditure of more than $400, with health sectors accounting for 6ư15 percent of GDP). Except for the United States, all industrial countries have achieved universal coverage, largely through public financing (whether publicly managed or publicly mandated). Also with the exception of the United States, private insurance is used mainly to supplement the core services covered by public financing. The Republic of Korea and a number of newly industrialized countries also have attained, or are close to attaining, universal coverage. Key issues: Containing costs, dealing with aging populations, and ensuring quality of service and patient satisfaction.
must be put in place, and the adverse economic consequences of high payroll taxes to support social programs (including health insurance funds) must be mitigated. Service provision should be separated from finance, and incentiveưbased provider payment systems should be introduced. The ongoing transition from public finance and
Regional Perspectives on Health Financing Reform 44
provision to public and private finance and provision must be carefully monitored. With real per capita GDP projected to grow at 3.7 percent a year over the next ten years, the need for new governance structures and human development, rather than financial constraints, may be the biggest challenge to effective reforms.
Latin America and the Caribbean
Health systems in Latin America and the Caribbean are moving toward universal access, with mixed public and private provision and financing (see Burki 1995; World Bank 1996c; and Medici and others in this volume). The region, which contains 8 percent of the world's population and accounts for 6 percent of its income, has a per capita income of some $3,100—the highest among the six developing regions. Health systems account for an average of 6 percent of GDP, or $200 per capita, the highest per capita expenditure of any developing region.
At 49 percent, Latin America and the Caribbean ranks fifth among developing regions in terms of the public sector's share of health spending. Health care is financed by ministries of health, with social insurance funds playing a prominent role, although outưofưpocket payments and private insurance are also major sources of financing. Most countries in the region need to work harder to ensure coordination between ministries of health and social insurance funds on the financing and provision of services, and achieve a balance in the financing and delivery of preventive and curative services. Nutrition, reproductive health, and communicable diseases are still major problems in some of the poorer countries. Still, injuries and noncommunicable diseases account for most of the burden of illness—and receive most of the attention of policymakers—in nearly every country. In the larger countries there are significant urbanưrural differentials in access and health outcomes.
Universal access, quality, and efficiency are major concerns in most countries. Many countries are reforming their financing systems to increase access, generally by expanding social insurance systems and by encouraging private financing. In some countries these efforts are leading to twoưtiered systems of care. Fiscal sustainability is also a concern, especially since health and other social insurance funds (such as pensions) are often commingled without specific earmarks. A number of countries have introduced broadly based reforms to address these issues. With real per capita GDP projected to grow at 2.2 percent a year over the next decade, the fourth highest of the six developing regions, many slowưgrowth countries in the region will likely face significant financial constraints in improving access and quality.
Middle East and North Africa
The Middle East and North Africa region is extremely diverse in terms of economic development, political orientation, and social conditions (see World Bank 1996d). The region contains 5 percent of the world's
population and accounts for 2 percent of its income. At $2,700, the region's average per capita income is second only to that in Latin America and the Caribbean. The public sector accounts for half of health expenditures, the fourthưhighest share among the six developing regions. Health expenditures account for 5.2 percent of GDP, or about $120 per capita, the third highest among developing regions.
Nonưoil and oilưproducing countries as well as socialist, nonsocialist, and statist health systems have very different approaches. There is considerable political instability in the region as a result of interregional rivalries.
High adult illiteracy (particularly among women) and poor women's health indicators are important concerns, especially in the lowerưincome countries. Most countries in the region face dual disease
burdens—noncommunicable and communicable. Given the region's high levels of fertility and population growth, reproductive health continues to be a major issue in many countries. The publicưprivate mix in financing and provision is important in the lowerư and middleưincome countries, while the wealthier oilưexporting countries tend to have national health service systems. Social insurance is not widespread and private health insurance plays a small, albeit increasing, role in some countries. The quality of care in the public sector is often a problem.
Latin America and the Caribbean 45
Like the region, countries' health care reform agendas are diverse, though there are commonalties. The poorer countries still face the unfinished public health agenda of communicable diseases, with a focus on women's health and education. All countries are experiencing substantial increases in their burden of noncommunicable disease.
Efficiency and quality are problems in most countries. Unfettered and uncoordinated growth in private health care systems is increasing costs and resulting in two−tiered systems of care. Appropriately dealing with the
public−private mix in financing and delivery should be a priority. More equitable risk pooling and financing of public systems is also important in most of the region's lower− and middle−income countries. With the end of the oil boom in the mid−1980s and the globalization of the world economy, many Middle Eastern and North African countries are facing serious economic constraints. With real annual growth in per capita GDP projected at just 0.4 percent over the next decade, the lowest of the six developing regions, increasing efficiency in financing and delivery will be essential to prevent deterioration in access and quality.
East Asia and the Pacific
The economies in East Asia and the Pacific are extremely diverse, accounting for some of the world's largest (China, Indonesia, Philippines) and smallest economies. The region contains 30 percent of the world's population and accounts for 4 percent of its income; per capita income, at about $1,200, is the fourth highest among
developing regions. The public sector accounts for just over half of health expenditures, the third−highest share among developing regions. Health expenditures account for 4.1 percent of GDP, of almost $40 per capita, making it (along with Sub−Saharan Africa) the second−lowest health expenditure region.
The region has experienced rapid and sustained economic growth for many years, with most countries approaching or having achieved middle−income status and market friendliness. There is confusion about the government's role in the health sector, however, and largely unregulated private financing and delivery have grown rapidly, often duplicating public efforts. Many public health services are poorly funded and inefficiently delivered. Decentralization is needed, but administrative and managerial capacity at regional and local levels are weak. Traditional medicine is a significant part of the health system. Clinical skills are often limited. Most countries face dual disease burdens (communicable and noncommunicable) but have been slow to react. Access, universal coverage, efficiency, quality, and the public−private mix are major concerns in most countries.
Needed reforms in the region span virtually every major health services issue, including the unfinished public health agenda, access, quality, costs, financing, and the public−private mix. Rebuilding the shattered health systems in Southeast Asia, completing the unfinished health agenda in the poorer countries and rural areas, and implementing insurance reforms and effective risk pooling are important issues for the region. Given the
emerging private market and the emphasis placed on individual and family responsibility for health care in many countries, particular attention needs to be paid to the public−private mix in delivery and financing and to user charges and cost recovery. Given the region's pragmatic governments and the high rates of annual growth in real per capita GDP projected over the next decade—aver−aging 6.8 percent, the highest among developing
regions—there are major opportunities for basic health reforms. It will be particularly important to ensure that these systems absorb the lessons learned in other countries (such as in the Republic of Korea, with its serious cost−containment problem) as their incomes rise and their systems are reformed. Ensuring universal access with an appropriate public−private mix in financing and delivery in an expanding economy creates major risks for cost escalation as well as for two−tiered systems of care. Pooling risks through private and social insurance, medical savings accounts, and other approaches to national health services will be essential as access improves.
South Asia
South Asia also contains some of the world's largest countries (Bangladesh, India, Pakistan), as well as some of the poorest. But South Asia differs from East Asia and the Pacific in several important ways, including its much lower income level and lower projected economic growth. South Asia contains 22 percent of the world's
population and accounts for 2 percent of its income. At $440, per capita income is the lowest among developing
East Asia and the Pacific 46