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Health financing system

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A good health financing system raises adequate funds for health, in ways that ensure people can use needed services and are protected from financial catastrophe or impoverishment associated with having to pay for them.[1] Health financing systems that achieve universal coverage in this way also encourage the provision and use of an effective and efficient mix of personal and non-personal services.

Three interrelated functions are involved in order to achieve this:

  • the collection of revenues from households, companies or external agencies;
  • the pooling of prepaid revenues in ways that allow risks to be shared – including decisions on benefit coverage and entitlement; and purchasing;
  • the process by which interventions are selected and services are paid for or providers are paid.

The interaction between all three functions determines the effectiveness, efficiency and equity of health financing systems.

Health system inputs: from financial resources to health interventions

Like all aspects of health system strengthening, changes in health financing must be tailored to the history, institutions and traditions of each country. Most systems involve a mix of public and private financing and public and private provision, and there is no one template for action. However, important principles to guide any country’s approach to financing include:

  • raising additional funds where health needs are high, revenues insufficient and where accountability mechanisms can ensure transparent and effective use of resources;
  • reducing reliance on out-of-pocket payments where they are high, by moving towards prepayment systems involving pooling of financial risks across population groups (taxation and the various forms of health insurance are all forms of prepayment);
  • taking additional steps, where needed, to improve social protection by ensuring the poor and other vulnerable groups have access to needed services, and that paying for care does not result in financial catastrophe;
  • improving efficiency of resource use by focusing on the appropriate mix of activities and interventions to fund and inputs to purchase;
  • aligning provider payment methods with organizational arrangements for service providers and other incentives for efficient service provision and use, including contracting;
  • strengthening financial and other relationships with the private sector and addressing fragmentation of financing arrangements for different types of services;
  • promoting transparency and accountability in health financing systems;
  • improving generation of information on the health financing system and its policy use.

This section of the health system profile is structured as follows:

Contents

Analytical summary

Health care financing in the WHO African Region is inadequate to the needs. This is indicated by the fact that the Region has access to only 1% of the world’s financial resources for health, despite accounting for more than 24% of the global burden of disease.

Per capita health spending has doubled to US$ 472 since the year 2000 at regional aggregate level. However, in more than half of the low-income countries, per capita expenditure on health is below the US$ 34 recommended by the WHO Commission on Macroeconomics and Health to provide an essential package of health services in low-income countries.

Government expenditure on health across the Region was less than 10% of all government expenditure in 2007 – far below the target recommended in the Abuja Declaration of allocating at least 15% of the national budget to health. Only three countries met the Abuja Declaration target of 15% in 2007. Six met it in 2006, so examination of the factors responsible for this fluctuation is needed.

General government expenditure on health as percentage of total government expenditure in the WHO African Region, 2000 and 2008

By far the largest share of African health care financing comes from private expenditure – at 32.5% significantly larger than government expenditure of 8.3%. The poor are therefore paying disproportionately for health care. Studies in some countries have found that most of the benefits of government spending on health go to the richest quintiles.

The high out-of-pocket expenditure by those on low incomes can result in catastrophic expenditure for poorer segments of the population. With few, if any, health social security mechanisms in place, informal organization takes its place, increasing the burden on the rural poor in particular. However, effective use of available funding is essential. Some countries achieve better results than others for less funding invested, indicating that questions of efficiency of use need examination.

Many African countries rely heavily on external resources. In 21 countries, external resources account for more than 20% of total health expenditure. Although external resources for health have increased steadily over the last 20 years, there is urgent need to protect these resources during the present economic downturn to prevent worsening of fragile health conditions in a number of countries.

Lack of government spending on health, coupled with high expenditure by individuals, increases impoverishment and impedes economic as well as health development. A clear summary of required actions is drawn up at the end of this section, based on the recommendations of major conferences and high-level statements and declarations. The way forward has been clearly defined; however, the question remains whether countries can act on these provisions with sufficient speed and effectiveness.


Organization of health financing

The lack of financial resources in African countries to meet health care needs remains a critical problem,[2] especially with the emergence and re-emergence of various infectious diseases and the dual burden of disease characterized by a surge in the prevalence of noncommunicable diseases. The dearth of health care resources is indicated by the fact that the WHO African Region has access to only 1% of the world’s financial resources for health, despite accounting for more than 24% of the global burden of disease.[3]

Health financing entails three subfunctions, including:

  • revenue generation
  • pooling and risk sharing
  • purchasing (resource allocation).

The organization of health financing in Africa refers to how these three functions are managed.

Health expenditures patterns, trends and funding flows

Trends in health expenditures

Per capita government expenditure on health (purchasing power parity international dollars) in WHO Regions, 2000 and 2008
In 2007, the per capita total health expenditure in the WHO African Region amounted to US$ 76 at an average exchange rate of US$ 9 to US$ 564. This contrasts unfavourably with the corresponding figure for the WHO Region of the Americas, which was US$ 2911. However, it is worth noting that the per capita health spending in the WHO African Region doubled in 2007 from its level of US$ 35 in 2000. The per capita total expenditure on health for the Region is shown in the figure.
Per capita total expenditure on health at average exchange rate (US$), the WHO African Region

In more than half of the low-income countries, per capita expenditure on health is below US$ 34 (the blue vertical line in the figure) – the amount recommended by the WHO Commission on Macroeconomics and Health to provide an essential package of health services in low-income countries.[4]

Health expenditure as percentage of gross domestic product

On average, the total expenditure on health in African countries was about 6.2% of gross domestic product (GDP). This is far below the global average of 9.7% in 2007. The figure shows the distribution of total expenditure on health as a percentage of GDP for countries of the Region.

Total expenditure on health as percentage of GDP, 2007, WHO African Region[5]

In 50% of the countries, total health expenditure ranged from 4% to 6%. The few countries labelled have atypical values and are regarded as outliers. All these outliers are low-income countries except Sao Tome and Principe, which is a lower middle-income country. This signifies that even if they spend a higher proportion of their GDP on health, in absolute terms this may not be substantial.


  1. Everybody’s business. Strengthening health systems to improve health outcomes. WHO’s framework for action (pdf 843.33kb). Geneva, World Health Organization, 2007
  2. McIntyre D, Gilson L, Mutyambizi V. Promoting equitable health care financing in the African context: current challenges and future prospects. EQUINET Discussion Paper No. 27, 2005
  3. World health statistics 2006 (5.52 Mb). Geneva, World Health Organization, 2006 http://www.who.int/whosis/whostat2006.pdf
  4. Macroeconomics and health: investing in health for economic development. Report of the Commission on Macroeconomics and Health (pdf 545.57kb). Geneva, World Health Organization, 2001 http://whqlibdoc.who.int/publications/2001/924154550x.pdf
  5. World health statistics 2010 (pdf 4.62Mb). Geneva, World Health Organization, 2010 http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf

Funding sources

Examination of patterns of total expenditure on health reveals important information on the role of different sources of health finance in the WHO African Region. The figure depicts the main health financing sources in the Region.

Sources of health financing in the WHO African Region, 2007[1]

Some important observations can be drawn from the figure:

  • private sources play a significant role in the financing of health systems in the Region;
  • prepayment schemes, both public and private, are at a low level of development and out-of-pocket payments are very significant;
  • at the aggregate level, African health systems are mainly financed from domestic sources.

Private prepaid plans accounted for 32.5% of total health expenditure. However, only about 8.3% of general government expenditure on health comprised social security schemes.

Out-of-pocket payments

In 2007, private expenditure on health in the WHO African Region accounted for 54.7% of total health expenditure. Out-of-pocket expenditure accounted for approximately 60% of private expenditure, or about 32.9% of the total health spending. This indicates heavy reliance on out-of-pocket payments, with corresponding high potential for catastrophic spending.[2]

Catastrophic spending occurs when households spend more than 40% of their disposable income (after deduction of subsistence expenses) on health – a pattern demonstrating that domestic sources by far exceed external sources for health care. Out-of-pocket payment is higher in low-income countries of the Region than in those countries classified as middle-income.

Health financing for the most vulnerable

In designing health financing systems, it is critical to examine sources of finance closely to ensure that they are equitable, efficient and sustainable.

A high proportion of out-of-pocket payment as a percentage of total expenditure on health affects equity adversely, as it can result in catastrophic expenditure and hence impoverishment. A study conducted in a sample of African countries has shown that on average about 30% of the total expenditure on health benefits the richest quintile, whereas only 12% goes to the poorest.[3]

Per capita total expenditure on health versus under-five mortality rate[1]

Countries’ efficiency in converting financial inputs into health outcomes is varied. Some African countries have managed to achieve a significant reduction in under-five mortality rate despite meagre financial resources. On the other hand, many countries have high under-five mortality rates disproportionate to the level of resources committed, indicating possible inefficiencies.

Government funding

General government expenditure on health

Government expenditure on health in the WHO African Region was about 9.6% of all government expenditure in 2007. This aggregate figure is far below the target recommended in the Abuja Declaration of allocating at least 15% of the national budget to health.[4] In 2007, the shares of government and external resources contribution to health were 45.3% and 6.9%, respectively.[1]

Government expenditure on health as percentage of total government expenditure, WHO African Region, 2007[1]

In 2007, only three of the 46 countries in the Region – Liberia, Rwanda and the United Republic of Tanzania – surpassed the 15% mark of the Abuja target. In contrast, six countries met the Abuja target in 2006, namely Botswana, Burkina Faso, Malawi, Niger, Rwanda and Zambia. With the exception of Rwanda, these countries have not sustainably met the target. This indicates that meeting it one year does not necessarily imply an ability to meet it in subsequent years.

External sources of funds

In sub-Saharan Africa, development assistance for health has increased significantly, rising from US$ 541 million in 1990 to US$ 4957 million in 2007. External resources for health accounted for about 6.9% of the total expenditure on health in 2007, an increase of 1.5 percentage points from levels in 2000. The table groups countries in the WHO African Region according to the share of external resources in their total health spending.

Reliance on aggregate regional averages can mask important variations. Some countries rely more heavily on external resources than others. For example, while 75% of the total health spending in Niger is attributed to external resources, the corresponding figures for Algeria and South Africa are 0.1% and 0.8%, respectively. In 21 of the 46 countries in the Region, external resources account for more than 20% of total health expenditure.

External resources as percentage of total expenditure on health, 2007

As the table shows, many African countries rely heavily on external resources. There is therefore a need for sustained support to those countries in the short to medium term. Protection of development assistance for health during the current economic downturn is therefore crucial if a health crisis is to be avoided.[5]

Pooling of funds

Institutional arrangements and purchaser provider relations

Purchasing refers to the process by which pooled funds are paid to providers in return for delivering services.[6] Strategic purchasing enables countries to promote efficient delivery of good quality services.

The two key issues to consider' in the purchasing function of health financing systems are:

  • the choice of the benefit package to which beneficiaries are entitled
  • the choice of the provider payment mechanism.[7]

Many African countries have embarked on defining or revising an essential package of health care interventions, based on epidemiological analysis of their beneficiary populations. Services are mainly provided by government facilities and some nongovernmental organizations, particularly faith-based institutions. In most African health financing systems, allocation of funds, from pooling to purchasing, occurs in ministries of health through the budgetary process.

Payment mechanisms

Lack of effective pooling and risk sharing is evidenced by the fact that prepayment schemes do not play a significant role in financing African health systems. In 2007, private prepaid plans accounted for 39.1% of all private expenditure on health, which implies about 21% of the total health expenditure.[8] In most low-income African countries, due to the relatively large size of the population in rural areas and a strong informal sector, there are no effective collective arrangements to pay for health care and protection from the costs of ill health. In response, communities themselves increasingly mobilize through various informal financing schemes, placing the burden on relatively poor rural communities and those operating in the informal sector of the economy.[9] [10]

Priorities and ways forward

In recent years a number of declarations and resolutions have been passed, and strategies formulated, to improve health financing in the WHO African Region. These are detailed in the box below. The way forward depends, to a great extent, on their effective implementation.

Key policy decisions and recommendations on health financing, 2001–2008
  • Organization of African Unity (2001): Abuja Declaration on HIV/AIDS, tuberculosis and other related infectious diseases, recommending that countries should spend at least 15% of the national budget on health.
  • World Health Assembly (2005): Resolution WHA58.33 on sustainable health financing, universal coverage and social health insurance. This urges countries, inter alia, to ensure that health financing systems include a method for prepayment of financial contributions for health care.
  • WHO Regional Committee for Africa Resolution AFR/RC56/10 (2006): Health financing – a strategy for the WHO African Region. The strategy aims to foster development of equitable, efficient and sustainable health financing mechanisms to help achieve the health Millennium Development Goals and other national health goals.
  • The Ouagadougou Declaration on Primary Health Care and Health Systems (2008) urges Member States to develop health financing policies and strategies; ensure equitable and sustainable allocation of resources by level of care; develop and implement health insurance schemes; and implement the Abuja Declaration of committing at least 15% of the national budget to health.

In the light of the challenges identified and the strategic direction provided, countries of the Region and their partners should focus on the following:

  • reduce the current levels of high out-of-pocket payment by promoting prepayment mechanisms;
  • increase funding of health services from tax revenue and meet the Abuja Declaration target of allocating at least 15% of the national budget to health;
  • increase total expenditure on health to at least the levels recommended by the Commission on Macroeconomics and Health as that required to provide a basic package of health services in low-income countries;
  • improve the benefit and cost incidence of publicly provided services in order to improve the equity of health financing systems;
  • coordinate external resources through mechanisms such as sector-wide approaches and in line with the principles of the 2005 Paris Declaration on Aid Effectiveness. This is critical as donor support plays a prominent role in financing the health systems of many African countries;
  • improve the predictability of external resource flows in order to improve budget implementation and avoid adverse consequences such as shortages of health inputs;
  • promote strategic purchasing of health services in order to maximize performance of health systems and decision-making on purchasing;
  • develop comprehensive health financing strategies to pave the way towards universal coverage;
  • enhance health system efficiency, as many African countries produce health outcomes that are incommensurate with their levels of health spending.

Others

Endnotes: sources, methods, abbreviations, etc.

References

  1. 1.0 1.1 1.2 1.3 World health statistics 2010 (pdf 4.62Mb). Geneva, World Health Organization, 2010 | http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf
  2. Designing health financing systems to reduce catastrophic health expenditure (pdf 258.16kb). Technical Briefs for Policy-Makers, No. 2, 2005. Geneva, World Health Organization, 2005 http://www.who.int/health_financing/documents/pb_e_05_2-cata_sys.pdf
  3. Marek T, Eichler R, Schnabl P. Resource allocation and purchasing in Africa: what is effective in improving the health of the poor? (pdf 559.16kb). Washington, DC, World Bank, 2004 http://siteresources.worldbank.org/AFRICAEXT/Resources/No_74.pdf
  4. Abuja Declaration on HIV/AIDS, tuberculosis and other related infectious diseases (pdf 26.3kb). Addis Ababa, Organization of African Unity, 2001 http://www.un.org/ga/aids/pdf/abuja_declaration.pdf
  5. Protecting health during the economic crisis. Editorial. The Lancet, 2008, 372:1
  6. Gottret P, Schieber GJ, Waters HR, eds. Good practices in health financing: lessons from reforms in low and middle-income countries (pdf 4.85Mb). Washington, DC, World Bank, 2008 http://siteresources.worldbank.org/INTHSD/Resources/376278-1202320704235/GoodPracticesHealthFinancing.pdf
  7. McIntyre D. Learning from experience: health care financing in low- and middle-income countries (pdf 7.14Mb). Geneva: Global Forum for Health Systems research, 2007 http://whqlibdoc.who.int/publications/2007/2940286531_eng.pdf
  8. World health statistics 2006 (5.52 Mb). Geneva, World Health Organization, 2006 http://www.who.int/whosis/whostat2006.pdf
  9. Preker AS et al. Effectiveness of community health financing in meeting the cost of illness. Bulletin of the World Health Organization, 2002, 80:142–150
  10. McIntyre et al. Key issues in health care financing in East and Southern Africa (pdf 525.65kb). EQUINET Discussion Paper 66, 2008 http://uct-heu.s3.amazonaws.com/wp-content/uploads/2010/07/DIS66FINresmob.pdf