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Health care funding: is the grass greener on the other side?

The financial difficulties facing the NHS have given rise to the suggestion from some quarters that the UK would be better off with a different model for funding health care.

Why, it is argued, aren’t we more like the Germans who use social insurance as the main way of paying for care, or the French who take out private insurance to cover part of the costs of their care. Or why don’t we adopt the system used in Australia where almost half the population receives tax breaks to help pay for private insurance, as well as paying taxes to fund the Medicare system that covers the entire population. The assumption behind these questions is that other methods of paying for care would be preferable to our tax-funded model.

Our briefing describes the three principal methods used to fund health care, drawing on international experience. These are general taxation (as in Australia, Canada and the UK), compulsory social insurance (as in Germany and many other western European countries), and private insurance (as in the United States). All these countries also raise funds by asking patients to contribute some of the costs of care out of their own pockets. It is common for different funding sources to be used in combination. France is an example, with compulsory social insurance being supplemented by funds raised through taxation, private insurance and co-payments by patients.

The chosen method and mix of health care funding reflects the history, culture and values of different countries. The United States has traditionally seen health care funding as a matter of personal responsibility and has looked to individuals and families to take out private insurance to cover the costs of care. Tax funding in the United States is used mainly to pay for Medicare for older people/retirees, and Medicaid, which is a safety net programme for people on very low incomes, in recognition of the difficulties facing these groups in buying affordable insurance cover. These two programmes have grown to the point where they account for around half of total health expenditure. The United States has one of the most expensive systems in the world, with health care expenditure accounting for around 17 per cent of GDP.

Contrast this with western Europe and Australasia, where health care funding is seen primarily as a public responsibility. Germany led the way when Bismarck introduced social insurance in the 19th century, at the beginning of what we now think of as the welfare state. Tax-funded systems evolved during the 20th century, with New Zealand leading the way in 1938 and the UK in 1948. The Nordic countries also pay for health care through taxation, but differ from the UK in that there is a greater reliance on taxes raised at the regional and local levels. In all these countries, private funding makes up a much smaller proportion of total health expenditure than in the United States where around half of all resources are raised privately.

International surveys show that one of the strengths of the UK’s funding model – which relies predominantly on general taxation, with around 10 per cent of the population taking out private insurance, and limited co-payments – is that people are not deterred from seeking access to care because of concerns about the costs. One of the weaknesses of this model is that funding goes through cycles of feast and famine, and is shaped by the state of the economy and the decisions of government on how much should be spent on the NHS. Seven years of austerity have reignited debate about alternative ways of paying for health care, but is the grass really greener on the other side?

The short answer is no. Compulsory social insurance has the advantage of demonstrating a closer link between what people pay and what they receive, but resources are raised through payroll taxes paid by employees and employers – and this is a much narrower tax base than that used for general taxation. These taxes add to employers’ costs and it is argued that this puts them at a competitive disadvantage in a global market. The narrower tax base also means that tax revenues are used to supplement the funds raised from social insurance.

The disadvantages of private insurance as the main way of funding health care include the costs incurred in marketing insurance and handling claims, and the inequities that arise when insurance premiums are based on people’s pre-existing medical conditions. These well-known market failures have led almost all high-income countries to rely on public funding raised through social insurance or taxation as the principal funding source. Pooling risks and sharing the costs of care are seen as important values in these countries, not least because the treatment of serious medical conditions may entail catastrophic costs that could cause personal bankruptcy, as is often the case in the United States.

All funding permutations have strengths and weaknesses and no health care system performs systematically better in delivering cost-effective care. In countries committed to values like equity, the main choice is between taxation and social insurance as the main way of raising resources. The enormous costs and complexity of shifting from one to the other explains why this route has never been taken in western Europe. Despite its faults, taxation has served the UK well since 1948 – notwithstanding the pressures that services are under.

The focus should now be on improving how the current funding system works, rather than changing it fundamentally. A good start would be to revisit the work of the Barker Commission and its proposals for a new health and social care settlement, paid for by changes in how public spending is used along with increases in taxes and National Insurance Contributions.