1 Study Table 15.1 and identify those terms of contract that are controlling for moral hazard and adverse selection.
2 Assess differences between the schemes with regard to redistributional policies.
3 What differences can you identify between services included in the social insurance benefit package and those offered by private insurance?
Feedback
1 Numbers 1–4 relate to terms controlling for adverse selection. Unlike private insur- ance, social insurance cannot refuse to take on bad risks. With private insurance, waiting times apply before a subscriber is entitled to benefits. Co-payments are used under both schemes to reduce moral hazard.
2 Social insurance subsidizes services for low earners, families and elderly people.
3 Social insurance also covers non-medical benefits like home care, rehabilitation and sick payment whereas private insurance includes private consultations and additional hotel services in hospitals.
Normand and Weber (1994) focuses on the advantages and disadvantages of social insurance and the reasons why it might not be feasible. Answer the following questions when you have finished reading:
1 What benefits might social insurance have as regards provider performance?
2 Introduction of social insurance needs careful consideration. What conditions need to be met to support its successful implementation with regard to:
a) the labour market?
b) health services infrastructure?
c) administration and management?
3 What are the main disadvantages of social insurance?
4 What are potential effects on equity if social insurance is introduced for only part of the population?
The desirability and feasibility of social insurance
It is necessary to identify the administrative needs of an insurance system and decide whether they can be met. Insurance arrangements tend to be more complex (and often more expensive to administer) than tax funding, and certainly require considerable administrative skills . . .
Payroll deductions
Social health insurance is normally provided through a system of payroll contributions to a health fund. It is typical (although not essential) for the total contribution to be calculated as a percentage of income. This amount is normally split between employer and employee:
for example, if the total social health insurance contribution for a worker is 12% of the wage, this may be made up by contributions of 8% from the employer and 4% from the employee.
The distinction between employee and employer contributions may not be important. For the employer, the decision to employ a worker depends on the overall cost of wages and other payroll costs. For the employee, the main areas of interest are take-home pay and other benefits. If contributions to the insurance fund are tax-free, there is little analytical difference between employer and employee contributions, although there may be import- ant psychological differences. One reason for having employer contributions is that they encourage employers to seek cost containment, since the employer benefits from any savings in resources.
One important question is whether payroll contributions are the best source of funds for health care. In most countries, the payroll is already a major source of taxation – income tax, pension contributions, unemployment insurance and sometimes insurance against loss of earnings due to ill-health. If the deduction rate is already high (i.e. the proportion of total payroll costs taken out in compulsory deductions is high) then it is not advisable to use this source for additional deductions. The effect of further payroll charges is likely to be to discourage employers from retaining or taking on staff, with the consequence of higher unemployment . . .
Labour market structure
Social insurance for health is funded by a percentage deduction from incomes (or salaries), and this depends on there being an agreed measure of income. Social health insurance therefore works best in the context of a relatively large formal sector, with a large propor- tion of the population working as employees, so that there is little scope for doubt about their incomes.
Although it is difficult to assess contributions for any self-employed person, there are particular problems with people working in agriculture. Farmers have the additional prob- lem that incomes are very uneven over the year. A large proportion of their income may be realized in a few weeks (e.g. at harvest time) and so they will have real difficulty in paying regular weekly or monthly contributions.
Of course it is possible to operate social health insurance for self-employed people, and there are many examples of ingenious ways of assessing the level of contributions.
If incomes are consistently understated, it is possible to charge a higher rate for self-employed people, or to insist on a higher level of copayments.
Social health insurance and national infrastructure
Social health insurance requires some additional administrative arrangements for collect- ing contributions and providing access to care, and it can only be effectively developed if these arrangements can be put in place. The overall level of education within the country can be important in this respect. Adequate standards of literacy and numeracy in the general population may be important to the extent that self-assessment is an element in the determination of insurance contributions. Thus education in general, as well as the educational level of the administrative staff, can be significant.
Some countries have an established system for collecting income tax through payroll deductions. Under these conditions, it may be possible to introduce social health insurance contributions using the same basic procedures, but paying the money into different funds.
This can simplify the operation of social health insurance and reduce costs . . . Social health insurance and health care infrastructure
Health insurance gives the insured population an entitlement to health services. It is therefore important to ensure that the health infrastructure exists to provide those ser- vices and that there is some incentive to comply with the insurance. It is important that an individual should have better access to care if he/she pays the contributions due and obtains insurance. This is true even if the insurance is compulsory, since it helps to ensure that contributions are paid.
In principle, insurance does not require a system of hospital-based secondary and tertiary health services, although such provision is typically popular with the population, and thus with the insured population. The important thing is to ensure that the health services to which insured people are entitled can be delivered.
When social health insurance is introduced, it is often difficult to offer advantages to members in the form of better access to care. Most countries have a system of access to some emergency care, regardless of ability to pay or insurance status. There is consider- able disquiet when people in serious medical need are refused treatment because of their inability to pay or lack of insurance. There is therefore a potential conflict between the desire to protect the population, regardless of people’s insurance status, and the need for
insurance to offer significant advantages to the insured population. This problem is particu- larly severe when insurance is proposed in a country with an existing system of state- funded, free or heavily subsidized health services (however poor these services may be).
People will question the advantages and resist the introduction of additional and highly visible insurance contributions unless they bring demonstrable additional benefits.
Several mechanisms can be used to resolve these difficulties. It is sometimes possible to give immediate access to emergency care for everyone who needs it, and to recover the money later from those who can afford to pay. Alternatively, the incentive to be a member may be better access to non-emergency care.
Feedback
1 a) Improved productivity. In government-run services, a provider unit – such as a hospital – is financed through a budget allocation, whereas under social insurance the provider is paid for specified services rendered to specific patients. This means that ‘money follows the patient’.
b) Improved quality of care. Paying contributions creates a specific entitlement to services, which is considered to give patients more explicit rights to demand high quality services.
2 a) Social insurance is easier to implement where the formal sector is large in rela- tion to the informal sector. Provisions need to be in place to collect contributions.
b) The health services need to be prepared to offer the services to which the subscribers are entitled. This means that facilities, staff and equipment need to be available to meet the increased demand. An unprepared infrastructure may turn entitlements into ‘paper rights’. New schemes need to offer advantages to sub- scribers, such as better access to care, otherwise there would be no incentive to join.
c) Administration of social insurance is more complex than government funding and involves higher costs. Administrative structures for collecting contributions, claims handling and paying providers, management staff and a legal framework are essential.
3 Disadvantages include high administrative costs, problems of cost containment and problems of ensuring coverage for workers in agriculture and the informal sector. Cost escalation is salient where insurers fail to control providers, as experiences in the 1990s in China, South Korea and Brazil demonstrate (Kutzin and Barnum 1992).
4 Moving part of the population from government to insurance finance may free government resources for priority services. But increased demand from the insured could worsen access for the uninsured. Partial coverage can exacerbate equity problems, as the insured tend to have higher incomes and better access to care. If government extends insurance, it needs to ensure services for the uninsured.
A variety of rural risk-sharing schemes, which are based on the idea of mutual support, operate successfully in low income countries (Shaw and Griffin 1995). The schemes are organized by local communities, government or non-govern- mental organizations. The premium takes the form of a flat amount per adult or per
household and covers the most essential services for the subscribers and their dependants. Premiums also need to cover commissions for enrolment agents, administration and incentives for people to join the scheme. The following extract by Per Eklund and Knut Stavem (1995) describes their main conclusions from evaluating a community insurance scheme in 18 villages in Guinea-Bissau in west Africa.
Activity 15.4
As you read the extract, consider the following questions:
1 How do the schemes of the 18 villages vary in relation to the degree of cross- subsidization between adults and dependants?
2 How do rural pre-payment schemes control for moral hazard and adverse selection?
3 What has been the reported effect on drug availability and quality of care?
Community health insurance through pre-payment schemes in Guinea-Bissau
The village health post (USB) system is based on community participation and involves a significant amount of local resource mobilization. A contract between the village leaders and the Ministry of Public Health (MINSAP) defines responsibilities as the following.
i. The village decides on the fee levels for the prepayment scheme, whether payment is based per capita, per adult or per household, and the timing of payments.
ii. The village must collect funds under the prepayment system to ensure that initial drug supplies are continually replenished. Drugs are sold to USBs with substantial subsidies, set at the central level and equal across regions.
iii. Some villages create special health sub-committees to oversee USB operations, but in the smaller villages, the responsibilities are performed by the political committee.
iv. The village provides the labor and most construction materials for building the health post. MINSAP provides materials for windows, doors, and hinges.
iv. The government supplies simple equipment, including a metal cupboard for storing drugs, a bed, stretcher, four chairs, one obstetrical stethoscope, one lantern, a kit of posters and other teaching aids, and an initial stock of drugs estimated to last for six months (for the population of each village).
v. The village selects one or more of its residents to be trained as VHWs (village health workers) and midwives.
Funds are collected at USBs by the village committee treasurer or one of the health staff and a record of the contribution is kept in each village. The funds are then transferred through the regional health directorate to Bissau, where they are deposited into a special account earmarked for the purchase of drugs at the central drug depository.
The prepayment scheme in Guinea-Bissau is an example of a simple scheme that pools risks for basic primary health care services (particularly drugs), while simplifying manage- ment demands. Once prepayment levels have been determined by the village, the
prepayments are collected all at once and forwarded up through the health system. This system is easier for illiterate villagers to manage than one of user fees for consultations and drugs. The latter would require an accounting of fee revenues for each use of the various services by different categories of clients and finding a way to safeguard the funds. The USB prepayment scheme is also much easier to manage than most insurance schemes. Since there is no billing necessary, providers are not being reimbursed for services used and it is not necessary to assess prepayment rates based on risk. The services provided by USBs are limited to prenatal care and treatment of a few basic ailments with essential drugs.
. . . Adverse selection is prevented by almost universal membership within each village participating. Moral hazard is avoided through the vigilance of village health workers and midwives, who dispense drugs only as needed, based on diagnosis, and by the pressure of the local community.
Although the level of cost recovery . . . is low, this understates the total amount of resource mobilization. Villagers provide construction materials for the USB and the labor of village health workers and midwives for implementation and management of the scheme – none of which is reflected in cost recovery figures. Further, respondents indicated their willingness to prepay greater amounts, provided that drugs could be made available on a timely basis. Drugs are heavily subsidized to the USBs, however, and their price is not regularly increased, to reflect inflation and devaluation. The degree of subsidization of USB drug supplies is thus increasing over time.
The survey found that the level of satisfaction with the village health posts was high, despite evidence that drug stocks are rapidly depleted. Respondents’ willingness to prepay was often linked to improvements in the quality of service, including greater availability of drugs and better training for village midwives. Yet, the quality of service that can be provided at village health posts depends critically on the extent of support from the rest of the health care system. Even when villagers prepay, drugs are not available immediately because of more general problems of finance and procurement in the health system. The health posts also rely on supervision, training and referral services from health centers.
Feedback
1 Most schemes are based on fixed rates per adult or per household, which also cover children. Contributions are flat rates regardless of income, but the poor are exempt from payments.
2 Moral hazard is easier to control in small communities where villagers know each other and health workers know the needs of their patients. Adverse selection is prevented through nearly universal membership.
3 Although the availability of drugs continues to be uneven, the quality of care overall was perceived to be higher after the introduction of insurance.
Activity 15.5
By way of revision, given what you have learned about social insurance, what do you think are its advantages and its disadvantages compared with the alternative of tax-based funding?