Health Financing and Insurance

-Dr.Sharad H. Gajuryal

Every year an estimated 25 million households — more than 100 million people — are plunged into poverty when they or their relatives become ill and they must struggle to pay for health-care services out of their own pockets.-World Health Organisation, 2014

Health Financing :

Health financing is concerned with how financial resources are generated, allocated and used in health systems. Health services financed broadly through Public expenditure or Private expenditure or external aid.

Public expenditure includes all expenditure on health services by central and local government funds as well as government and social insurance contributions where services are paid for by taxes, or compulsory health insurance contributions either by employers or insured persons or both this counts as public expenditure. Voluntary payments by individuals or employers are Private expenditure.

External sources refer to the external aid which comes through bilateral aid programme or international non governmental organizations .

High income and low income countries alike finance health care using a mixture of five possible sources:

1.Taxes

2.Direct out of pocket (pay as you go; User Charge )

3.Risk Based Insurance

4.Social Health Insurance

5.Community Health Insurance

5.External Donation/Funding

1. General Tax Revenues : Major portion of source used in health care in every Nations and the most traditional way of financing health care . One of the foremost advantages is that it effectively pools health risks across a large contributing population. In such systems, individuals contribute to the provision of health services through taxes on income, purchases, property, capital gains, and a variety of other items and activities.

2. Out of Pocket: or Pay as you go is made by patient to private providers at a time a service is rendered. Proponents of user fees believe that the fee can increase revenue to improve the quality of public health services and expand coverage .

Insurance :

Insurance is defined as an equitable transfer of risk of loss from one entity to another in exchange for a premium. In this process, insured person bear a small loss to counter the bigger loss in future. An insurance premium is the amount of money charged by an insurance company for coverage. Generally, premiums cover whatever is detailed in the insurance policy, and the services provided or paid for depend entirely on the specific policy and type of protection.

Insurance schemes in India: Mandatory, voluntary, employer based, and NGO based. Mandatory insurance ESIS and CGHS principally financed by the contributions of the beneficiaries and their employers and from taxes. ESIS receives contributions from state governments whereas the latter is mainly financed from central government revenues.

3. Risk Based Insurance : It is a contract offered by a an insurer to exchange a set of benefit for a payment of specified premium. Private insurance are marketed by either non-profit or for profit insurance companies and offer packages on individual and group base. Under individual insurance ,insurance is based on individual risk characteristics. Buyer’s Adverse selection is major concern in private insurance. (unhealthy person are more likely to be attracted and involved than healthy one ). On group base , whole family is insured and risk is pooled across age, gender and health status.

4. Social Health Insurance : Systems with publicly mandated coverage for designated groups, financed through payroll contributions, semi-autonomous administration, care provided through own, public, or private facilities. They have two characteristics that distinguish it from private insurance. First, social insurance is mandatory, Everyone in the eligible group must enroll and pay a specified premium contribution in exchange for a set of benefit. And secondly, they are described in social compacts established through legislation.

5. Community Financing :(micro insurance) They are organised and managed by a community and Tends to cover all insured members of the community for all available services but have emphasis on primary health. They are based on three principles :

a. Community cooperation

b. Self-reliance &

c. Pre-payment

The members of community voluntarily pay a contribution to a community organised entity in advance for a package of basic benefit . In exchange of advanced payment, the community entity organizes and provides preventive care, primary health care and drugs when members need them.

9 Principle of Insurance :

1.Law of large number : Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses

2.Definite Loss : The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion.

3.Accidental Loss: The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost.

4.Large Loss: The size of the loss must be meaningful from the perspective of the insured

5.Affordable Premium : If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer

6.Subrogation : Third Party Concept; Insurance company have right to claim the loss from the party causing loss of the insured person.

7.Contribution : Insured person can claim for the loss only from one insurance. He/she cannot take more than one insurance policy and apply claim on both organization.

8:Utmost Good Faith

9.Limited risk of large loss : Insurance company set limit in case of catastrophic loss like loss from disasters and natural occurrence.

Few Terms in Health Financing and Insurance :

Catastrophic Loss : Loss due to disasters such as earthquakes, floods and hurricanes, and against man-made disasters such as terrorist attacks that results in more than 40% loss of total income.

Red- lining in Insurance : It is a practice of denying insurance coverage in specific conditions. Private insurance company generally follow this condition. There is no redlining in social health insurance.

Risk-Pooling : Accumulation of asset on behalf of population to distribute the loss out of risk or spreading of financial risks evenly among a large number of contributors to the program.

Moral Hazard : Insurance should change people's behaviour because insurance reduces the costs of misfortune. When people make less effort to avoid misfortune as a result of insurance, this change in behaviour is called moral hazard. For example, if an accident costs a person $1000 but insurance pays $900, the insured person has less incentive to take steps to avoid the accident or misfortune .

Adverse Selection : The insurance industry can also face problems of screening the buyer. People who buy insurance often have a better idea of the risks they face than do the sellers of insurance. People who know that they face large risks are more likely to buy insurance than people who face small risks. Insurance companies try to minimize the problem that only the people with big risks will buy their product, which is the problem of adverse selection.