In the United States, 62% of personal bankruptcies are caused by medical expenses, according to a Harvard University study. In developing countries, poor families who typically live and work in the informal economy are highly vulnerable to health care shocks. According to Portfolios of the Poor, between 40 and 50% of all surveyed households faced significant health care expenditures over the course of the study. In one study in Hyderabad, India, almost 2/3 of households (64%) experienced a health shock costing Rs. 500 or more within the past year.
No wonder then that practitioners in developing countries working to advance financial access for the poor want to expand financial inclusion to include health insurance. They know that the less formal the employment and the less social protection is provided by governments, the more the poor need private or social sector financial services to capture economic opportunities and reduce vulnerabilities. Access to working capital to generate income, access to savings to smooth consumption, access to remittances from relatives in the cities, and access to crop insurance to shift from subsistence to cash crops are examples. When it comes to health expenditure, however, there are real limits to what private and social market solutions can achieve.
Appropriate health care coverage in my view isn't, and can't be, a pure financial service for three reasons:
• With the exception of some forms of catastrophic coverage, health care is not an insurable event in the classic (actuarial) sense of being low in frequency and high in severity. You want many elements of healthcare to go to everyone or nearly everyone (e.g., vaccinations for children or pre- and post natal care for young mothers). Note, there is still benefit in bundling people in terms of creating purchasing power and exerting better quality control over the underlying health care service.
• A lot of healthcare has public policy dimensions (e.g., the fight against communicable diseases in the developing world or against lifestyle diseases of epidemic dimensions in the developed world such as smoking and obesity). The public purse should, and typically would want to, subsidize and design healthcare coverage to achieve broader public health objectives.
• The incentives embedded in provider payment mechanism have a big influence over the effectiveness of the underlying health care delivery. For example, America's traditional, simple fee-for-service model is widely believed to lead to unnecessary duplications. Policymakers and regulators would want to use healthcare payment mechanisms for public health purposes to proactively shape delivery systems and improve aggregate health outcomes.
For these reasons, virtually all developed countries have historically had mandated, highly-regulated health care coverage (either in the context of fully nationalized systems such as the UK, France, and Italy or in the context of private administration under strict national rules such as Germany, Holland, or Switzerland). The United States has been the exception; with underwhelming public health statistics and the highest per capita spending on health care in the world (17.6% as a share of GDP compared to 8-11% for most Western European countries in 2010, according to OECD health statistics).
Most developing countries promise universal, free healthcare provided--in theory at least-- by the government, but have simply failed to deliver. As a result, some are experimenting with shifting some public resources from paying for ineffective health services to putting the cash directly into the hands of the people using the services through conditional cash transfers.
So what's the right mix of public and private? Because of fiscal pressures in the West and political pressures in several emerging markets, a dozen countries have reformed their health care finance systems in the past ten years. None has all of the following 10 elements in place, but typically a combination of these measures have been taken to broaden access and ensure better health care quality, while controlling costs.
On the demand side
1. Wide-cast, if not universal coverage mandates to ensure appropriate risk pooling
2. Full catastrophic coverage, but an increasing share of first-dollar, out-of-pocket expenses to increase consumer "skin in the game"
3. A sliding scale subsidy to support lower income families for their premiums, co-payments and/or deductibles
4. Benefits design to encourage healthy behaviors (e.g., smoking cessation, free annual check-ups, or cancer screens starting at certain ages)
On the health plan supply side
5. An obligation to enroll irrespective of pre-existing conditions
6. Limitations on allowable, risk-based pricing differentiation (e.g., for smokers, but not for women in child-bearing age)
7. Some overall regulation of pricing in private-sector executed setting, e.g., maximum allowable administrative/profit margins above medical payout such as the 15-85% split in the U.S. Affordable Health Care Act)
With respect to delivery payment reform
8. Pay-for-performance mechanisms, such as annual capitated payments per patient, or ex- ante average case payments for some 200+ pre-determined Disease-Related Groups (DRGs) based on evidence-based, best practice clinical treatment pathways
9. Push towards pay for integrated service delivery across primary/general and secondary/specialist care (e.g., primary care gatekeeper concepts, "Accountable Care Organizations" in the new U.S. law)
Accompanying information reforms
10. Data transparency about costs and medical performance across providers (e.g., publicly available mortality and morbidity statistics for commonly performed surgical procedures)
A few emerging markets are relying more on some forms of standalone private health insurance (e.g., India, where the government pays for the premium for the poor), but it typically only covers first-dollar, hospitalization cash costs up to pre-determined limits for a set of pre-specified surgical procedures or specific critical illnesses, which can be underwritten on the basis of actuarial tables without any medical management.
Leading-edge NGO models in developing countries are now trying to combine elements of a primary care Health Maintenance Organization to overcome poor provider infrastructure and to bundle purchasing power for wholesale drug purchases with catastrophic health insurance coverage and associated tertiary care network contracts for hospital/surgical care. These are tricky to design, but promising, with important experimentation happening in Bangladesh.
The note of caution struck in this blog doesn't mean to imply that the financial inclusion community need not push harder when it comes to helping poor families in the informal economy better cope with health care expenditure risks. The evidence shows that health shocks often keep people trapped in poverty, or push them back into poverty. But experiences from around the world suggest that we need to insist on private-public partnership and cost-sharing as the solution.