What Is Health Financing Meaning, Sources, Functions and Importance
Wellbeing financing, whether understood as a mechanism, function, or "control knob," is a fundamental component of every health system. It is also essential for the success of all other functions and components.
The way a health system is financed, governed, and managed determines how financial resources are raised, how they are pooled, and how they are used to purchase goods and services.
The financing model of a health system is a key factor in financial protection and in achieving universal health coverage. It also influences the incentives for those who provide healthcare services and insurance.
Table of Contents
- How Health Systems Are Financed: Revenue Collection, Pooling, and Purchasing
- What Does Good Health Financing Look Like?
- International Cooperation to Improve Health Financing
How Health Systems Are Financed: Revenue Collection, Pooling, and Purchasing
The way a health system is financed affects:
- The motivation of healthcare providers to deliver quality care
- The financial burden families may face when using health services
- The resources available to hire health professionals
- The maintenance of health facilities
- The purchase of medicines and equipment
Health financing is determined by how different financing sub-functions are carried out, rather than by whether the system follows models such as Bismarck or Beveridge. Political decisions related to health coverage also play an important role.
Collection of Financial Resources
In a mainly public system, funds are raised through:
- Taxes
- Social health insurance contributions
- Other mandatory contributions
In some countries, paying social insurance contributions gives people the right to receive healthcare. In such systems, there may be:
- A contributory subsystem for those who pay contributions, usually with better quality and wider coverage
- A subsidized subsystem for those who do not contribute, often with lower quality and limited coverage
In a mainly private system, funds are raised through:
- Private insurance premiums
- Community health insurance contributions
- Direct out-of-pocket payments by households
Out-of-pocket payments made at the time of service are not considered revenue collection because they are direct purchases and are not pooled.
In many countries, multiple financing sources may exist at the same time, including:
- Taxes
- Social insurance contributions
- Private insurance premiums
- Deductibles
- Co-payments
- Out-of-pocket payments
- External donor funding
Different subsystems may also serve different population groups within the same country.
Pooling of Financial Resources
Pooling means collecting financial resources into one or more funds and distributing them across the population.
Some systems place all collected funds into a single national fund. Others use multiple funds with similar or different methods of collection.
Many systems use risk adjustment and equalization methods to distribute funds fairly according to the needs and characteristics of the population.
Some systems collect large amounts of money but still exclude certain groups, such as unemployed people or non-citizens.
Purchasing Health Goods and Services
Pooled funds are used to purchase:
- Medicines
- Medical equipment
- Healthcare services
The financing system determines:
- Which services will be purchased
- Which providers will deliver them
- Under what terms and conditions
If a system does not raise enough money to provide a comprehensive package of benefits for the whole population, the gap is often filled by high out-of-pocket payments, whether formal or informal.
What Does Good Health Financing Look Like?
Good health financing ensures that sufficient and stable resources are available and distributed fairly across the population.
Simply spending a large amount on health is not enough. For example, some countries spend heavily on healthcare but still have poor equity in access and weak health outcomes.
The World Health Organization (WHO) provides a framework showing how health financing can contribute to universal health coverage and serve as a basis for analysis.
International Cooperation to Improve Health Financing
International cooperation can support countries in strengthening health financing systems and improving progress toward universal health coverage.
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