Published On: Wed, Mar 27th, 2013

An Overview of Health Financing by Dr. ChidiUkandu

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The World Health Organization (WHO) defines health financing as the way in which money is raised to fund health activities, as well as how it is used.It is important to note that the way a health system is financed is a key determinant of population health and well being. More than 1.3 billion people worldwide do not have access to essential health interventions, due to weaknesses in health financing and delivery systems. As many as 44 million households worldwide, or more than 150 million individuals, face catastrophic health care expenditures every year; of these, about 25 million households or more than 100 million people are pushed into poverty by health care costs. Health financing thus aims to achieve three goals: generate sufficient and sustainable financial resources; ensure optimal use of such resources; and protect individuals from financial embarrassment, in the process of seeking health care. The attainment of these objectives depends on how effectively the health financing functions of revenue collection, pooling and purchasing are performed.

Revenue collection

Revenue collection is the process by which the health system receives money from households and organisations or companies, as well as from donors. Common methods for revenue collection include general taxation, mandated social health insurance contributions, voluntary private health insurance contributions, community-based health insurance contributions, out-of-pocket payments and donations.


Fig 2.1: Health financing functions

An Overview of Health Financing by Dr. ChidiUkandu

Source: {Schieber,G. 2005}


The mix of collection methods adopted by a country will influence how much money can be mobilised and the patterns of equity, efficiency and the cost of health care services.  Countries often use more than one of these methods to raise funds for the health system but the best mix depends on a country’s income level and its technical and administrative capacity. Literature indicates that many high income countries rely on general taxation or mandated social health insurance contributions, in contrast to low-income countries that depend far more on out-of-pocket payments or donor funding.


Pooling refers to the accumulation and management of revenues in such a way as to ensure that the risk of having to pay for health is borne by all members of the pool rather than each contributor individually. Pooling performs the ‘’insurance function’ by sharing the financial risk that is associated with health interventions for which the need is uncertain. Pooling can be explicit, as with social health insurance, community-based health insurance and private health insurance, where people knowingly subscribe to the scheme, or it is implicit, as with tax based health systems. In either case, pooling enables health services to be received, based on need, rather than ability to pay and removes the need to pay for health services at the point of care, and thus reduces the possibility of individuals failing to receive care because of financial constraints. For pooling to occur, there has to be prepayment. Prepayment allows individuals to pay for health costs in advance, thus relieving them of uncertainty and ensuring compensation should a loss occur. Pooling coupled with prepayment enables the establishment of insurance and the redistribution of health spending between high and low-risk individuals and between high and low-income individuals.


Purchasing is the process by which pooled funds are paid to providers, in order to deliver a specified set of health interventions. The principal methods for paying providers are fee-for-service, per diem or daily payment, case payment, capitation, budget and salaries. The type of method used has implications for cost, access, quality and consumer satisfaction. Purchasing is therefore very important for achieving the health financing goals of universal access, optimum use of resources and financial protection for all.

 Social health insurance (SHI)

SHI is a method of health financing where contributions for health services are collected from workers, self-employed people, enterprises and the government.  Collections through SHI are often mandatory and backed by a legal act. It is sometimes referred to as national health insurance, when it covers the entire population within a country. In this case, SHI may be combined with voluntary schemes, such as community-based health insurance schemes, to cover the self-employed or informal populations.


Literature indicates that about 60 countries all over the world are using SHI as the predominant method for raising money for health services.27 countries have achieved universal coverage for their populations through this method.

In recent times, multilateral and bilateral organisations, such as the WHO, World Bank, German Agency for Technical Cooperation, have been promoting social health insurance as an alternative way to mobilise additional funds for the health system, especially in developing countries. They suggest that social health insurance is a suitable alternative when low-income countries do not have adequate tax revenues to fund health care of reasonable quality for everybody. In fact in 2005, the World Health Assembly adopted a resolution recommending social health insurance as an effective strategy for financing health systems.

Community-Based Health Insurance (CBHI)

CBHI has, in recent times, been advocated as complementary method for mobilising funds for the health system especially, in low-income countries. However, evaluations by the World Bank, the International Labour Organization and others conclude that in low-income settings CBHI schemes make only modest contributions to overall coverage and only as a complement to other formal schemes. Literature indicates that coverage with CBHI rarely exceeds 10 per cent of the population because voluntary contributions of poor people are usually insufficient to make it viable. Other researchers and scholars however argue that, in situations where government taxation is weak, formal mechanisms for social protection for vulnerable populations absent, and government oversight of the informal sector lacking, community health financing provides the first step towards improved financial protection against the cost of illness and improved access to priority health services.

Donor funding

This refers to international financial assistance from other countries, bilateral and multilateral organisations and NGOs. Literature indicates that financial assistance from donors is a major source of funding for health services in low-income countries. In 48per cent of the 46 countries in Africa, donor funding accounted for more than 20per cent of the total health expenditure. In 2004, external sources accounted for 6.25per cent or US$2.23 billion of the US$35.53 billion expended on health in Africa.It is recognised that current health expenditure in Africa are unlikely to meet the required funding to achieve universal access and, as such, increased donor assistance is being canvassed for many African countries.

Out-of-pocket payments       

Out-of-pocket payments refer to payments that are made at the point of accessing health services and could be in the form of direct payments to health providers, user fees or co-payments. Out-of-pocket payments in the form of user fees and direct payments represent a major method for financing health services in low-income countries. Out-of-pocket payments imply the absence of pooling, are not sustainable and are therefore regarded as the most ineffective method for financing health services. Indeed, there is a distinct correlation between the amount of out-of-pocket-payments and the share of people exposed to catastrophic expenditure.


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An Overview of Health Financing by Dr. ChidiUkandu