Cash management and financing in health care systems
The task of staying ahead in the health care sector requires an astute knowledge of financial systems and cash management. In addition, it is important to actively understand health care financing in Nigeria and the world over.
Dr Chidi Ukandu, at the Pharmanews clinical leadership workshop held in December, 2014 quoted Dr Glo Harlem Brundtland, former WHO DG, as saying: “systems are not just concerned with improving people’s health but with protecting them against the financial costs of illness.” He also revealed that, according to the 2000 World Health Report, for health systems to perform optimally, they must undertake four key functions, namely:
- Provide services
- Generate the human and physical resources that make service delivery possible.
- Raise and pool the resources used to pay for health care.
- Set and enforce the rules of the game and provide the strategic direction for all the different participants involved.
Health financing may be defined as the way and manner funds are collected from various sources such as government, households, businesses and donors; pooled to share financial risks across large population groups, and used to pay for health services from health care providers. The objectives of health financing are:
- To make funding for healthcare services available
- To ensure appropriate choice and purchase of cost-effective interventions
- To give appropriate incentives to providers of healthcare services
- To ensure that all individuals have access to effective healthcare service
In 2002, former World Bank economist, Alexander Precker, asserted that: “more than 1.3 billion people worldwide do not have access to essential health interventions, due to weaknesses in health financing and delivery systems.”
Another renowned economist also concluded in 2007, that “as many as 44 million households worldwide, or more than 150 million individuals, face catastrophic health care expenditures every year and of these, about 25 million households or more than 100 million people are pushed into poverty by health care costs.”
Components of health care financing
There are three components of health care financing:
- 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
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 of paying providers are: fee-for-service, per diem or daily payment, case payment, budget and salaries. The type of method used has implications for cost, access, quality and consumer satisfaction.
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 enables health services to be received based on need rather than ability to pay and it removes the need to pay for health services at the point of care, thus, reducing the possibility of individuals failing to receive care because of financial constraints.
For pooling to occur, there has to be pre-payment. Pre-payment allows individuals to pay for health costs in advance, thus relieving them of uncertainty and ensuring compensation, should a loss occur. Pooling, coupled with pre-payment, enables the establishment of insurance and the re-distribution of health spending between high and low-risk individuals and between high and low-income individuals.
Methods of health care financing
There are five major methods for financing health care services. They are:
- General taxation
- Mandated social health insurance
- Voluntary private health insurance
- Community-based health insurance
- Out-of-pocket payments and;
- General taxation
This refers to both direct and indirect tax receipts collected by government to fund health care services, among other things. It is regarded as a highly efficient way for funding health care, as it ensures universal access to health care services, irrespective of the ability to pay. It is typically used where a large formal sector and relevant structures are available to collect tax efficiently and cost effectively. Many developed countries employ this method. An example is the NHS in the United Kingdom.
- Mandated 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. 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. A good example is Germany.
- Community-based health insurance (CBHI)
CBHI refers to any financing system that has these common objectives: to meet unmet health needs, increase financial access to health services; to encourage the predominant role of the community in mobilising, pooling, allocating, managing and supervising health care resources. The WHO argues 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 toward improved financial protection against the cost of illness and improved access to priority health services.
- Voluntary private health insurance
This refers to health insurance cover provided to individuals or groups based on an assessment of the risks they carry. It differs from social health insurance because it is usually voluntary and can be very expensive and usually not equitable.
- Out-of-pocket payments (OOP)
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. OOP in the form of user fees and direct payments represents a major method for financing health services in low-income countries. OOP payments imply the absence of pooling. They are not sustainable; hence, are regarded as the most ineffective method for financing health services.
This refers to financial assistance from other countries, bilateral and multilateral organisations, as well as NGOs. Literature indicates that financial assistance from donors is a major source of funding for health services in low-income countries. In 48 per cent of the 46 countries in Africa, donor funding accounted for more than 20 per cent of the total health expenditure. It is not a sustainable method for financing health services.
Attracting funding for business
Very importantly, while we look forward to improving health care financing in Nigeria, leaders in health care must be good managers of cash for effective set-up and delivery of goods and services. Initiating businesses and sustaining them is directly linked to expertise in fund raising and cash-flow management.
At the just-concluded Pharmanews Health Care Entrepreneurship Workshop held in March, Mr Emmanuel Tarfa, presented a paper on Business Financing and Cash Management. He discussed the need for business leaders to have a clear understanding of the financial workings of the health industry.
Business financing simply refers to how a business sources for capital to fund its start-up; its operations; and its expansion/investments – acquisition of a fixed asset, distribution line etc.
Whichever option you choose from the above, the underlying issue is purpose. This is the true motive behind business financing and is usually a critical determinant of whether or not a business will attract the right kind of funding. There are broadly two sources of business funding: debt and equity.
Debt is a short or long term obligation that is required to be paid over a period of time. Its approval is not tied to the ownership of the company, except if the debt is convertible to equity, based on some agreed terms. On the other hand, equity is a certain level of ownership and control relinquished in exchange for the funds. Investors expect a certain level of return on their investments. So, how best should a business leader position his business to attract funding?
First, he must determine whether or not he actually needs funding. This is obvious when he has identified a clear opportunity and has a business case to back it up (mostly for start-ups). Second, he must choose a source of funding – debt or equity. Also, he should determine if he has what it takes to handle and pay back the loan or give investors a certain level of return on investment. This is reflected in:
- The track record – in business or out of business;
- The potential of the idea or opportunity, based on the market numbers;
- The structure of the company – are you in a partnership? etc.
Packaging the business to look more attractive in order to access funding requires the following:
- Structure – Get a management board first: You cannot afford to appear to be alone. Build a team of people who believe in your vision and can lend their goodwill.
- Build capacity and acquire experience: You need knowledge and skills in the area of the business. Sometimes you need to begin from the basics.
- Get a good business plan: If you cannot write one, get a professional to prepare a business plan for you, or at least the financials. Sometimes, consultants could accept less cash than you think.
- Be patient: Raising money is a difficult and sometimes a very long process. You must be patient with your prospects and should display that calmness.
Furthermore, every business leader must be able to effectively pitch for funds to support his business. A good pitch must contain the business proposition – the idea, concept or actual business must have a clear value proposition, a target audience and a clear connection between the two. Also, the leader should do a market and industry analysis to show the difference between the market and industry and to determine intricacies of both.
In addition, a good pitch should state the risks and mitigation. The list of risks must be exhaustive; it should show a plan on how to deal with such threats and carefully thought-through. The financials should contain the capital requirement, the projection of financial statement (income, cash flow and balance sheet) and the financial ratios, with focus on return on investment capital.
Managing funds for business growth
Having successfully accessed funds, its management is very critical. Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments.
There are different motives for cash management, namely:
- Transaction motive: This refers to holding of cash to meet routine cash requirements and to finance the transactions which a firm carries out in the ordinary course of business. Cash is held to pay for goods or services. It is useful for conducting our everyday transactions or purchases.
- Precautionary motive: Cash balances are held in reserve for random and unforeseen fluctuations in cash flows. It is a cushion to meet unexpected contingencies such as: floods, strikes and failure of customers, unexpected slowdown in collection of accounts receivable, sharp increase in cost of raw materials, cancellation of some order of goods.
- Speculative motive: The motive for holding cash/near-cash is to quickly take advantage of opportunities typically outside the normal course of business. Positive and aggressive approach helps one to take advantage of:
- An opportunity to purchase raw materials at reduced price
- Make purchase at favorable prices
- Delay purchase on anticipation of decline in prices
- Buying securities when interest rate is expected to decline
- Compensating motive: The motive for holding cash/near-cash is to compensate banks for providing certain services or loans. Clients are supposed to maintain a minimum balance of cash at the bank which they cannot use themselves.
Today, the issue of financing and cash management remains at the front burner among leaders in the health care sector. Given the swings in the global economy, instability in price regimes, and existing government policies, there is need to maintain distinct leadership through innovative ideas and an understanding of health care financing and management.
Tarfa,E.(2015) “Business Financing and Cash Management.”Pharmanews Centre For Health Care Management Development, March 24, 2015.
Ukandu,C.(2014) “Health Care Financing” Pharmanews Centre For Health Care Management Development, December 3,2014
All is set for the International Workshop on Health Care Leadership, Financing and Innovation organized by Pharmanews Centre for Health Care Management Development in collaborations with Aster DM Health Care Dubai. The workshop, which is scheduled for May 17-22, 2015 is designed for pharmaceutical and health care industry leaders, doctors, nurses, pharmacists and other health care personnel. Registration is on-going, be assured you will benefit immensely from this workshop.