How health care is funded

What is it?

Tax revenues are collected to fund health care.

How does it work in principle?

Tax-funded models typically seek to pool risk across large populations and make health services available on a universal basis.

Taxes vary according to:

• how they are levied: direct taxes are levied on individuals, households and companies by the government (eg, Income Tax, Corporation Tax), whereas indirect taxes are applied on the manufacture or sale of goods and services (eg, Value Added Tax, import/export taxes)
• who is raising them: taxes raised by central government may be used to finance national spending on health care; taxes raised by local government may be used for spending on health care in a specific region or local area
• whether they are raised for general purposes or earmarked for a specific use – the latter is known as a hypothecated or earmarked tax (see box).

How is this model applied in practice?

Australia, Canada, New Zealand and the Nordic countries are some of the other countries that rely mainly on general taxation to fund health care. However, no country relies on general taxation alone; they may also have user charges or elements of private insurance. For example, in Canada, about 70 per cent of health spending is publicly funded though taxation, with the remaining 30 per cent largely accounted for by out-of-pocket spending (costs borne directly by patients) (14.6 per cent) and private health insurance (12.2 per cent) (Canadian Institute for Health Information 2016).1

Methods of levying tax vary considerably between different countries, particularly whether they are raised by central or local government. In Sweden, for example, public funding for health care comes from both central and local taxation. In 2013, local taxes accounted for 68 per cent of county councils’ total revenues, 18 per cent came from subsidies and national government grants financed by national income taxes and indirect taxes (Mossialos et al 2016).

• 1Canada’s out-of-pocket and private health insurance spending is high in comparison to other OECD countries (Canadian Institute for Health Information 2011). This is because universal Medicare coverage is limited to medically necessary hospital and physician services. So, for example, there is almost no public coverage for dental care.

What is it?

Individuals (or employers on their behalf) take out health care insurance policies from private organisations.

How does it work in principle?

Policy-holders contribute on a regular basis. The level of contribution is based on their risk of requiring health care, which can be assessed in several ways:

• individual risk, which may take into account age, family history and the existence of pre-existing medical conditions
• community risk, for example, where contributions are estimated as an average across a geographically defined area and all members of the community pay the same premium
• group risk, typically estimated across employees of a single firm or occasionally a single industry; again, all members of the group pay the same premium (Mossialos et al 2002).

Contributions are collected by private insurers. The benefits package may vary between insurers, enabling people to choose according to their means, needs and preferences.

How is this model applied in practice?

The use of private insurance varies greatly. Broadly speaking, there are five different ways in which private insurance can be used: as the dominant form of cover; as duplicate cover; as complementary cover; as supplementary cover; and as substitutive cover.

Dominant or primary cover

In the United States, PHI is the dominant form of health cover for most of the population. In some countries (eg, Switzerland) PHI is mandatory. However, as with tax-funded models and social health insurance, countries that use PHI as a dominant form also rely on other sources of funding (for example, see box on US).

Duplicate – or ‘double’ cover

In other countries (eg, in the UK, Portugal, Spain), PHI is largely taken out by individuals in higher income groups, to allow quicker access to services or increased choice of provider. This form of PHI does not exempt people from paying into the publicly funded health system. Arguments that the privately insured are ‘paying twice’ and are making less use of public services can lead to advocacy for tax relief for PHI (see box).

Complementary – or ‘additional’ cover

In some countries, PHI is used to complement government/social insurance schemes by covering the costs of publicly funded services that incur user charges. For example, in France complementary insurance is held by approximately 85 per cent of the population to cover the cost of statutory user charges.

Supplementary cover

This form of PHI provides coverage for health services that are excluded from government/social insurance schemes. In Canada, for example, private supplementary health insurance provides coverage for the cost of prescription drugs (only medication administered in hospital is covered by public funding), dental care, optical care and other goods and services not covered by the public system.

Substitutive – or ‘alternative’ cover

Finally, in some countries, people are permitted to opt out of government health coverage or statutory social insurance schemes and purchase PHI as an alternative. In Germany, for instance, people who earn over a certain amount can choose to purchase private health insurance instead of social health insurance. However, this type of opt-out needs to be carefully managed to ensure the statutory scheme remains equitable and financially viable.

What is it?

Typically, employees and employers pay contributions to cover a defined package of services (Wagstaff 2010). This system was introduced under Chancellor Bismarck in 19th century Germany.

How does it work in principle?

In classic social insurance models, members (normally employees) contribute a proportion of their salary, with the level of contribution related to income rather than risk of illness. Employee contributions are typically matched by employers. For example, in Germany, the basic flat social health insurance contribution rate in 2016 amounts to 14.6 per cent of an employee’s gross income (with an annual upper limit of €52,200), shared equally between employer and employee. Those earning above €57,600 per year can opt out of the social health insurance system and purchase private insurance instead (Federal Ministry of Labour and Social Affairs 2016).

Contributions are often collected by independent bodies, usually known as insurers or ‘sickness funds’, which are responsible for paying providers of health and care services.

There may be a single fund or several funds covering different sectors of the population and these are usually publicly run. In some countries, privately run insurers can compete; where this happens, mechanisms may exist to pool risks and costs between funds. Members may or may not have a choice of which fund they join. The defined package of health benefits may also vary between funds, but there is usually a standard regulated basic package.

How is this model applied in practice?

The way that social health insurance schemes operate varies widely from one country to another.

In most countries, the statutory scheme does not raise sufficient funds and is subsidised by other means (see below). In France, for example, additional funds are raised via general taxation (income tax) and ‘sin taxes’ on alcohol and tobacco. France also requires co-payments at the point of access that are capped. Co-payments also apply in Germany – eg, for each day of an inpatient stay – and are capped at 2 per cent of household income, or less for certain groups that meet the criteria (Robertson et al 2014).

As social health insurance is often based on employment, countries operating this model have to find ways (including general taxation and other sources such as statutory pension funds) to provide cover for those not in employment. For example, the Japanese health insurance scheme has several options to ensure universal cover is provided: employees of large firms are required to sign up to SHI; employees at smaller firms are given cover through the Japan Health Insurance Association; those who are not covered by either of these are covered by a government scheme.

What is it?

User charging involves individuals paying for some or all of their medical care out of their own pocket.

How do user charges work in principle?

In their purest form, user charges rely on patients paying the cost of care. In most European and OECD countries, these charges make up only a small proportion of expenditure. However, user charges often form a large part of the way health care is financed in developing countries (Gottret et al 2006). In India, for example, more than 70 per cent of total health expenditure is accounted for by user fees (Mossialos et al 2016).

How are user charges applied in practice?

Health care costs can be catastrophically expensive for people with severe or long-term illness, so very few countries rely solely on user charges to cover health care costs, instead developing alternative financing models that allow risks and costs to be pooled across large groups of people.

However, most countries rely on user charges to some extent. An OECD survey of 29 member states in 2010 found that all had some form of co-payment or charge for pharmaceuticals and 20 had some form of payment for a GP visit and half had some form of charge for hospital treatment (Paris et al 2010). Some countries allow charges for non-clinical services that do not affect health outcomes. For example, the NHS in England allows hospitals to charge inpatients for use of bedside entertainment systems.

User charges also apply where individuals seek private care for services or treatments not covered by a national scheme or insurer, or where access may be limited (eg, paying privately for an operation to avoid having to wait).

In practice, many European countries use exemptions to ensure that individuals less able to pay are not discouraged (or prevented) from seeking care when they need it. Often these exemptions apply to people on lower incomes, children or older people, or people with long-term conditions or a disability. Introducing these exemptions makes the administration of schemes more complex, and will limit the money such charges can raise.

In Italy, out-of-pocket spending accounted for 18 per cent of total health spending in 2013 – comprising spending on services not covered by the public system and co-payments for some services, including pharmaceuticals, specialist visits and some diagnostic testing (Mossialos et al 2016). Various exemptions are in place: for pregnant women (for treatment related to pregnancy), prisoners, people with severe disability or long-term conditions, and those over the age of 65 and under the age of 6 who live in households with a gross income below a nationally defined threshold (Mossialos et al 2016).

In Norway – where co-payments are used for GP and specialist visits, physiotherapy visits, prescription drugs and some diagnostics – annual caps for out-of-pocket expenditure are set nationally. Above this, fees are waived, and exemptions are also in place. In New Zealand, co-payments are required for most GP services and some nursing services provided in GP clinics. The average co-payment for a GP consultation ranges from NZD15-45 (around £8-25), although this is capped at NZD17.50 (around £10) per visit for people living in low-income areas (Mossialos et al 2016).

A variant of having users pay for their own healthcare is Medical Savings Accounts. Usually mandatory, individuals (and in some cases, their employers) make regular savings into funds which they then use to pay for care when they or their family members need it. The most widely known example is Singapore, although even here it is only one of a number of payment systems. Other funding streams used to supplement it in Singapore include direct subsidies to hospitals, voluntary back-up insurance to cover high health care costs and a government-funded safety net for low-income people (McKee 2013).

No country (the UK included) relies on a single source of funding for health care. Countries typically use one of the three main funding models as the principal way of paying for health care alongside elements of the others. All countries make use of user charges to pay for a proportion of overall costs.

The precise combination of funding sources in use develops over time based on a country’s context, history and social values. Whatever model is used, debates about its effectiveness and efficiency are inevitable.

However, there is no evidence that one funding model or particular mix of funding mechanisms is inherently superior to others. As the OECD concluded, ‘There is no health care system that performs systematically better in delivering cost-effective health care’ (OECD 2010). This, plus the high costs associated with any transition, means that developed countries rarely make major changes to their established primary way of paying for health care.

Regardless of how health care is funded, all countries face similar challenges – namely, how to meet rising demand for services and transform care in response to an ageing population and changing patterns of disease. This is leading to increased pressures on services and funding challenges in countries around the world.

For the sake of simplicity, we have limited this analysis to health care; however, it is important to note that most countries face similar challenges in funding social care. As we have argued elsewhere, any debate about how to fund the NHS in future must go hand in hand with discussion about how to pay for social care, with the aim of creating a single ringfenced budget for health and social care (Commission on the Future of Health and Social Care in England 2014a).

Our thanks to Loraine Hawkins (Health Systems, Finance and Governance Consultant​, and Visiting Fellow at The King's Fund) for her contribution to this report alongside the authors.