Health Payments and Insurance

1. Sources of Healthcare Financing

Healthcare financing can be broadly grouped into three main streams: public (government) financing, private financing, and external or donor funding. Each stream plays a critical role in ensuring that health services are accessible, affordable, and of high quality.

Public (Government) Financing

• General Taxation
  Revenues raised through various taxes—such as income taxes, value-added taxes (VAT), or corporate taxes—are pooled into a national budget and allocated to health services. Examples include the United Kingdom’s National Health Service (NHS) and Canada’s Medicare, both of which provide universal coverage largely free at the point of delivery.

• Social Health Insurance
  Citizens and employers make mandatory payroll-based contributions into sickness funds or social insurance schemes. Germany’s Sozialgesetzbuch and Japan’s Kokumin Kenko Hoken exemplify systems where contributions are risk-rated and benefits are relatively comprehensive.

• Earmarked “Sin” Taxes
  Dedicated levies on harmful products—most commonly tobacco, alcohol, and sugary beverages—are ring-fenced to subsidize public health programs, tobacco-cessation initiatives, or broader health promotion campaigns.

Private Financing

• Private Health Insurance Premiums
  Individuals pay voluntary premiums to commercial insurers in exchange for coverage of a defined package of services. Benefit packages and cost-sharing requirements vary widely depending on plan design.

• Employer-Sponsored Insurance
  Common in countries like the United States, employers sponsor or subsidize group health plans for employees, often negotiating premiums and benefits on behalf of their workforce.

• Out-of-Pocket Payments
  Direct payments by patients at the point of service remain a significant source of financing, particularly in low- and middle-income countries. High out-of-pocket burdens can lead to catastrophic expenditures and reduced access to care.

• Community-Based / Micro-Insurance
  Small-scale, member-driven schemes operate in informal or rural economies. Members pool modest premiums to share risk and improve access to basic health services.

External & Donor Funding

Multilateral agencies (WHO, World Bank), bilateral donors, NGOs, and global health initiatives (e.g., Gavi, the Vaccine Alliance; The Global Fund) provide development assistance for health. These funds often target specific diseases, health system strengthening, or emergency response.

2. Types of Health Insurance Arrangements

Health insurance plans vary by how they structure benefits, manage care, and design cost-sharing. Three key dimensions differentiate plan types: plan structure, cost-sharing design, and risk-pooling/underwriting rules. Additionally, specialized schemes serve particular populations.

Plan Structure

• Fee-for-Service (FFS) Plans
  Providers are reimbursed for each individual service or procedure rendered. While transparent, FFS can incentivize overutilization.

• Managed Care Plans

  • Health Maintenance Organization (HMO)
    Enrollees must use an in-network provider network and designate a primary care physician (gatekeeper) for referrals.

  • Preferred Provider Organization (PPO)
    Offers in- and out-of-network coverage; no gatekeeper, but out-of-network care costs more.

  • Exclusive Provider Organization (EPO)
    In-network only, but without the gatekeeper requirement for referrals.

  • Point-of-Service (POS) Plans
    Hybrid of HMO/PPO: gatekeeper referrals are required for full coverage, yet some out-of-network services are covered at a higher cost.

Cost-Sharing Design

• High-Deductible Health Plans (HDHP)
  Feature lower premiums but higher annual deductibles; often paired with tax-advantaged Health Savings Accounts (HSAs).

• Copayments
  Fixed fees per service (e.g., $20 per doctor visit).

• Coinsurance
  A percentage of the billed amount after the deductible is met (e.g., 20% of the cost).

Risk Pooling & Underwriting

• Community Rating
  Premiums are set equally for all members, irrespective of individual health risk factors such as age or pre-existing conditions.

• Experience Rating
  Premiums reflect the claims history of an individual or group.

• Guaranteed Issue / Guaranteed Renewal
  Insurers are mandated to accept all applicants and renew coverage regardless of health status, minimizing gaps in coverage.

Specialized Schemes

• Medicare / Medicaid / CHIP (U.S.)
  Public programs targeting seniors, low-income families, and children.

• Veterans’ & Military Health Systems
  Dedicated coverage administered through agencies like the U.S. Department of Veterans Affairs or Ministry of Defence health services in other countries.

3. Provider Payment Mechanisms

How providers are paid affects their incentives, efficiency, and quality of care. Common mechanisms include:

• Fee-for-Service (FFS)
  Providers bill separately for each service, encouraging volume but risking unnecessary procedures.

• Capitation
  Providers receive a fixed payment per enrolled member per month (PMPM) covering agreed services. Shifts financial risk to providers and encourages cost containment.

• Global Budgets
  Hospitals or health systems receive lump-sum payments for all care over a defined period (typically annual). Provides predictability but may lead to under-provision without quality safeguards.

• Prospective Payment Systems (PPS)
  Bundled, pre-set rates for groups of services—e.g., Diagnosis-Related Groups (DRGs) for inpatient care, Ambulatory Payment Classifications (APCs) for outpatient services.

• Pay-for-Performance (P4P) / Value-Based Payments
  Incentive structures link payment adjustments to quality metrics such as readmission rates, patient satisfaction scores, or clinical outcomes.

• Shared Savings / Risk-Sharing Models
  Providers participate in accountable care organizations (ACOs) or similar entities, sharing in savings (or losses) relative to predefined spending benchmarks.

4. Patient-Facing Payment Methods

The mechanics of how patients pay for services directly impacts their financial protection and administrative burden:

• Direct Billing
  Providers bill the insurer directly; patients are responsible only for any applicable cost-share (copayment, coinsurance).

• Balance Billing
  When providers charge more than the insurer’s negotiated rate, the patient may be billed for the difference—though many jurisdictions regulate or prohibit this practice.

• Point-of-Service Payment
  Patients pay upfront and later seek reimbursement from their insurer, requiring claims submission and processing.

• Health Savings Accounts (HSA) / Flexible Spending Accounts (FSA)
  Tax-advantaged accounts through which individuals set aside pre-tax dollars to pay for eligible medical expenses. Paired with HDHPs, HSAs remain with the account holder year-to-year, whereas FSAs are typically “use-it-or-lose-it” within the plan year.

Conclusion

An effective health financing system leverages a balanced mix of public funds, private contributions, and strategic donor investments to ensure sustainable, equitable access to care. Insurance arrangements and provider payment models must be thoughtfully designed to align incentives for quality, cost-containment, and patient protection. As health systems evolve—facing demographic shifts, technological advances, and fiscal pressures—policy makers continually refine financing and insurance mechanisms to meet emerging challenges and improve population health outcomes.