Healthcare financing

School of Public Health

Department of Health Policy and Management

Abdi G.
(BSc.PH, MPH)
 Session objectives
– Fact about health care financing world wide
– Describe what is health care financing
– Explain Functions of health care financing
– Explain Different kinds of health care financing
– Demonstrate the strength and weakness of different kinds of
health care financing
 Global facts on Health financing
Low-income countries:
56% of global disease burden
($25.4 billion) 2% of global health spending
8% of health spending come from external sources.
Out-of-pocket health expenditure
– 93% in low-income countries
– 70% in middle income countries
– 56% in high income countries

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• Africa accounts for less than 1% of global health
spending. In 2022, health spending in Africa reached
$145 billion, which is about 5% of the region's GDP.

• The Abuja Declaration (2001).

To allocate at least 15% of their annual budgets to

health. But only Rwanda meet it .

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 Ethiopia
• Total Health expenditure (THE ) is 3.62 billion in 2021
• The per capita expenditure is 36.3 USD per capita but significantly less than
the globally recommended 86 USD needed
• Financing source: Donors, governments, and households continue to
finance roughly one-third of THE each.
• The 1% spending pre-payment via the CBHI scheme.
• The government’s health spending is 8.5% of total government spending,
which is well below the Abuja target of 15%.
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 Health Care Financing
• Healthcare financing refers to the generation,
allocation, and use of financial resources within the
healthcare system.
• It involves personal payment at the time of service to
financing through health insurance [prepayment] by
employer/ employee at the place of work and
governmental financing through social security or
general taxation.
 Factors influencing Healthcare Financing
1.Demographic changes
 Demographic change may lead to variation in health service coverage
 The older, younger, female and Under five year need higher health costs
2. Economic Recession
 Low or negative economic growth has an implication on health care
financing
3. Raising expectation
 Expectation of the consumer affect the financing as middle category
population need high technology
4. Concern about Equity
Addressing the health care service with in the concept of
equity principle of PHC affect the health care financing
5. Disease Pattern Change
Disease pattern change may result due to change in
average income level or change in social development
6. Efficiency
In order to use the limited resource in efficiently also
affect the health care financing
 Health Care Financing...
• Health Care Financing involves the Three basic functions:-
– To generate sufficient and sustainable resources for a
health care system (REVENUE COLLECTION)

– To use these resources optimally (OPTIMAL

PURCHASING )

– To insure that everyone has financial access to health

services (POOLING)
1. Revenue collection
 Is the way the health system raises money
from households, businesses and external
sources.
 It is concerned with the Sources , Structures
and Means by which funds are collected.
2.Pooling of funds and sharing of risks
 Is the collection and management of financial
resources
 Large unpredictable individual financial risks
become predictable and are distributed among
members of the pool.
 Prepayment allows pooling of funds.
3. Purchasing
 Purchasing is the transfer of pooled resources to
service providers on behalf of the population for
which the resources are pooled.
 What is health insurance?
• Insurance relies on the fact that what is unpredictable for an
individual is highly predictable for a large number of individuals.

• The purpose of insurance is to reduce the variability in one’s income

by pooling risks with a large number of people.

• Insurance reduces a person’s uncertainty concerning the timing and

amount of possible future expenses that may be incurred.

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 Example: Consider a group of 100 individuals

On average, each member gets sick every year which costs
20,000. It is random who gets sick.
Since it is a lot of money for one person to pay, they insure
each other, and each pay 200 a year.
They pay this to avoid the risk of uncertainty that they
will have to pay 20,000.
It’s money put in bank to get interest and pay out when
someone gets sick.

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 Why health insurance?
• Healthcare costs continue to increase.
• Risk of illness or injury is a part of life.
• Health insurance is developed as a way to “share the risk.”

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 Values in health insurance
• Solidarity: the awareness of unity and a willingness to bear
its consequences.
• Equity: risk sharing between the high risk and low risk
populations or between healthy and sick, between rich and
poor and economically active and in-active.
• Empowerment

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 The health insurance process

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 Types of health insurance
In the formal sector:
a) Social Health Insurance (SHI)
b) Private Health Insurance (PHI)

In the informal sector:

a) Community-based Health Insurance (CBHI)

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 Problems in demand for health insurance
Moral hazard
 Additional quantity of health care demanded, resulting from a decrease in
the net price of health care attributable to insurance.
Copayment can decrease moral hazard
Adverse selection
• Results from asymmetric information where those who anticipate needing
health care choose to buy insurance more often than others.
• Occurs when high-risk consumers, who know more about their own health
status than insurers do, subscribe to an insured group composed of lower-
risk individuals to secure low premiums.
Risk rated premium can decrease adverse selection
• 4/1/2025 24
 Principles(Forms ) of health care financing
• Cost recovery: The cost incurred in the provision of health
care should be recovered
• Patients cover a substantial(larger) proportion of the cost
of provision
• It can be sustainable but does not consider ethical and
social values of health
• Cost sharing: Cost sharing is the financial contribution that
patients are required to make when they use health care
services, amounts that are not reimbursed by their health plan
 Types of cost sharing include
• Copayments : Copayments are fixed-dollar fees that a health
plan enrollee is required to pay for a covered service (e.g., $10
per office visit $3 per prescription drug).
• Coinsurance : A percentage of the charge that the consumer
must pay. It refers to the freed percentage of covered expenses
shared by a health plan and an enrollee after the deductible
requirement has been met
• Deductibles : An amount the consumer must pay out-of-pocket
before coverage begins, usually applied for a specific time period,
such as yearly.
 Models of implementing health financing functions
1. National health service system (state-funded)
2. Social health insurance (SHI)
3. Private voluntary health insurance
4. Community-based health insurance (CBHI)
5. Direct purchase by consumers (Out of pocket )
6. Others:
• Payroll taxes (earmarked tax)
• Saving-based schemes
• External assistance
 Criteria for choosing the financing system
1. Viability and ease of using the system

2. Revenue generating ability

3. Effect on service provision

4. Effect on equity

5. Participation in decision making

 1. State-funded system (tax based health financing )
• Key features
– Risk pooling
– Contribution not based on income, wealth or
expenditure
– Funds not earmarked for health
Traditionally main source of finance in developing countries
including Ethiopia
 State-funded system (tax based health financing )

• Strengths • Weaknesses
– Comprehensive coverage of  Unstable Funding
the population
– Large scope of raising  Disproportionate benefits for the
resources rich
– A simple mode of  Potential inefficiency in health
governance
– potential for administrative care delivery
efficiency and cost control.  Sensitivity to political pressure
 2. Social Health Insurance (SHI)
The is quasi independent insurance fund unlike the general revenue
funded system
It is compulsory membership and payroll-based contribution
Both the employee and employer pay some sort of salary
The premiums are related to average cost of treatment for group
as whole.
The fund is independent of the government but with in the frame
work of regulation
 Strength and weakness
• Strengths • Weaknesses
More resources for health care – Possible exclusion of the poor
system – Negative economic impact of
Less dependence on budget payroll contributions.
negotiation than state-funded – Complex and expensive to
systems manage
High redistribution system – Escalating costs
– Poor coverage for chronic
Strong support by the diseases and preventive care
population
 3.Community-based health insurance(CBHI)
Premium are set according to the risk face by the average number of
the community

Enrolment is voluntary

Usually targets a different set of people

Funds are held by private non profit entity

There is no distinction b/n high and low risk

Complementary to social insurance (for people left out from SHI)

Strengths Weaknesses
Better access to health – Limited protection of members

care for low-income people – Sustainability is questionable

Useful as a component of – Limited benefit to the poorer

a health financing system part of the population

involving other instruments – Limited effect on delivery of care

• Some are advocating community based health
insurance as one and best alternative to out of
pocket payments

• Currently community based pre-payment scheme

gained favor and is rapidly expanding in different
parts of Africa
 What FMOH doing regarding

• Social Health insurance Implementation manual

developed.

• Community Based Health insurance starting

piloting in 2010 by piloting 12 woreda (District) in
2024 it covered almost all district in Ethiopia (more
than 800 woreda ).
 4. Private/ voluntary health insurance
– Usually operate individual risk rating
– Can also operate on revealed preference and self-assessment
offering policies with different level of coverage
– Is a supplementary source of finance
– Excludes pre-existing and self- inflicted illnesses +HIV/AIDS &
STD
– Can be for-profit or not-for-profit
 Private voluntary…
• Strengths
– Affords financial protection (compared with out-of-pocket
expenditure)

– Enhances access to health services

– Increases service capacity and promote innovation

– Helps finance health care services not covered publicly in

case of supplementary private health insurance
 Private voluntary…
• Weaknesses
– Have not reduced certain financial barriers to access
– Increased differential access to health care in some countries
– Removed very little cost pressure from public health financing
system
– Increased total health expenditure in many developed countries
– Have not been able to achieve value-based competition
– Incurred high administrative cost
 5.Direct purchase by consumers (user charges/fees)

• Key features:
– Are direct out-of-pocket

– Paid for use of public and private health facilities

– Takes different fee structures

 6.Fee waivers and exemptions
• Fee waiver is the right conferred to an individual that
entitles him or her to obtain health services in certain
health facilities at no direct charge or reduced price due
to lack of ability to pay.
• Exemption refers to a service that is provided at no
charge to all patients on the account of addressing public
health goals where the market often fails to deliver due
to existence of externalities
In practice fee waivers and exemptions mostly ineffective
due to the following reasons.
• Which groups ought to qualify
• How they are identified
• The capacity to identify and reach these groups
• staff reluctance to grant exemptions
• leakages or subsidies to those able to pay
• users’ reluctance to claim subsidies despite being eligible
 7.Other source of health financing
7.1. External Development Assistance For Health
• External development assistance for health remains a critical
component of healthcare financing.
• In 2019/20, external assistance accounted for 33.9% of the total
health expenditure.
• Significant contributions from global initiatives like the Global
Fund (GFTAM), Gavi , foundations such as the Bill and Melinda
Gates Foundation.
Key Donor Contributions in Health In Ethiopia :

USAID: a major contributor.

 Including HIV/AIDS (through PEPFAR), TB, malaria, and MCH.
 PEPFAR nearly $3 billion has been invested in HIV/AIDS treatment
in Ethiopia
 In 2024, USAID allocated $451 million to improve WASH
World Bank:
 As of September 30, 2024, the WB in Ethiopia consists of 44 active
projects, with a total commitment of $16.33 billion,
 complemented by $1.14 billion in trust fund financing.
Global Fund:
 The Global Fund plays a vital role in combating HIV/AIDS,
tuberculosis, and malaria in Ethiopia.
 External Development Assistance For Health
Advantages: Disadvantages:

• Improved Health Outcomes • Dependence on External Aid:

• Access to Essential Services: • Volatility and Uncertainty

• Capacity Building • Aid Fragmentation

• Financial Support • Risk of Displacement of

Domestic Financing
Thank you