General taxation and SHI

Public funding of health systems is crucial to promote financial protection and improve access to services. The two dominant styles of publicly financing health care are general taxation and SHI – collectively referred to as public revenue-raising modalities – which enable health systems to move away from reliance on private out-of-pocket (OOP) spending at the time and place of seeking care. Financing health systems from OOP spending is both inefficient and inequitable, exposing individuals and households to financial risk when seeking care, including the risk of deeper impoverishment, as well as contributing to foregone care. Under general taxation, revenue comes from the share of overall government resources apportioned to the provision of health care. Under SHI, on the other hand, revenues are raised in the form of contributions from mandatory earmarked payroll taxes. The nature of health services – the presence of externalities, information asymmetries between providers and patients, the need for protection from the financial burden of unanticipated health spending, common public good elements, lack of competition in the hospital sector, information failures, etc. – is such that overdependence on unregulated private financing inevitably leads to suboptimal outcomes, including from the perspective of equity (Arrow, Reference Arrow1963).

Compulsion and redistribution

Well-designed health financing systems ensure that there is some form of mandatory prepayment combined with redistribution for funding health. Compulsion and redistribution are key elements of public financing for countries to make progress towards UHC, i.e. where everyone can access the essential health services they need without facing undue financial hardship in the process of doing so (Fuchs, Reference Fuchs1996; WHO, 2010; Kutzin, Yip & Cashin, Reference Kutzin, Yip, Cashin and Scheffler2016; Tandon & Reddy, Reference Tandon and Reddy2021). Critically, this involves risk pooling from the healthy to the sick as well as from the well-off to the poor via progressivity in prepayments. Although some countries implement this by mandating the purchase of private health insurance with targeted subsidies for those who cannot afford premiums, most countries have made progress towards UHC using public financing, i.e. via general taxation and SHI (Kutzin, Reference Kutzin2012). Voluntary health insurance (VHI) plays a complementary or supplementary role but is not the primary mechanism for financing UHC globally, while funding from external sources including development assistance plays a role, particularly in lower-income settings (see chapters 1.3 and 1.4).

The health financing transition

In general, as countries grow and develop, overall levels of funding for health increase along with the share that comes from public sources, thus decreasing reliance on OOP and external financing. Across low- and middle-income countries (LMICs), this empirical trend – dubbed “the health financing transition” – brings with it the challenges of raising obligatory contributions for health care, whether as general taxes or mandatory SHI contributions (Fan & Savedoff, Reference Fan and Savedoff2014). These challenges include low levels of economic development, high levels of poverty and informal economic activity, difficulties in collection of taxes, institutional and governance-related weaknesses and a low priority ascribed to, and poor absorption of, allocations for health in government budgets (World Bank, 2016). In high-income countries (HICs), on the other hand, governments are contending with the problems of an ageing population: rates of participation in the labour force are declining, so necessitating general tax infusions for SHI systems as contribution bases shrink, while at the same time the demand for and costs of health care are rising, thus raising issues of the existing systems’ long-term sustainability (Stadhouders et al., Reference Stadhouders2019; OECD, 2015).

The rest of the chapter is laid out as follows. First, we elaborate on the definitions of public financing for health, general taxation and SHI in particular, and examine how each relates to principles of equity and efficiency and where their boundaries have blurred. Next, we summarize the global landscape and trends in public financing for health across countries. Then, we outline key challenges facing public financing for health across the different income groupings of countries and some of the solutions.

General taxation: definition

Under general taxation, revenues for health come from apportioning a share of overall government resources to the provision of health care, either for the entire population or for specific population subgroups such as the poor and vulnerable (Gottret & Schieber, Reference Gottret and Schieber2006). This type of general tax-financed public delivery system is often referred to as the Beveridge model, named after William Beveridge, the economist whose ideas underpinned the introduction of the United Kingdom’s NHS in 1948. Even earlier than this, in the 1920s, a similar, though more centralized and hospital-focused system of universal coverage had been introduced in the Soviet Union, known as the Semashko model, after health care commissar, Nikolai Semashko.

The term general taxation is often used interchangeably with general government revenue financing, although in fact the latter is more accurate since government funding typically comprises both tax and non-tax sources. For example, general taxation financing also includes both general and sector-specific borrowing by the government. Tax revenues are defined as “compulsory, unrequited” payments to the government; unrequited because the benefits received from government spending are usually not proportional to the amount paid in taxes (OECD, 2021). Tax revenues are further classified into two broad categories, direct and indirect. Direct taxes – for example, taxes on income, profit, wealth and property – can be adjusted based on the characteristics of the payer, but cannot be shifted to another taxpayer. Indirect taxes, in contrast, are paid on transactions that are independent of the characteristics of the payer – for example, taxes on consumption, including sales taxes, value-added tax (VAT), excise taxes and import tariffs; these can, at least in part, be shifted to other taxpayers. Non-tax revenues typically comprise sources of funds other than from taxation: for example, from external grants, rents or royalties from natural resources such as oil, gas and other commodities, as well as profits from state-owned enterprises.

SHI: definition

Under SHI, revenues for health are raised in the form of contributions from a mandatory earmarked payroll tax (Wagstaff, Reference Wagstaff2010; Yazbeck et al., Reference Yazbeck2020). Payment of this mandatory contribution secures entitlement to health care, and it is this quid pro quo payment-for-entitlement that is one of the key differences between SHI and general taxation modalities for raising revenues for health. SHI contributions are generally imposed on wages and are paid by both employers and employees of firms as well as by those who are self-employed. Hence, due to the way revenues are collected, there is typically a link between employment status and entitlement. Under SHI financing, funds are pooled, and service providers are paid prospectively or retroactively on behalf of contributors for utilization of health care services; in some countries; for example, in Costa Rica, the SHI agency that collects and pools contributions also owns and manages service delivery via its own network of providers (OECD, 2017a). Contribution rates are usually set based on actuarial analysis of estimated costs and projected utilization rates. An SHI system is also sometimes referred to as the Bismarck model, named after Otto von Bismarck, Chancellor of Germany, who introduced it there in 1883.

Overlapping approaches to public financing in health

General taxation and SHI contributions are often collectively referred to as public sources of health financing given that they both constitute mandatory prepayments for health care and the fact that management and administration of these funds is usually undertaken by government or quasi-public agencies. Some countries – including the Netherlands (Kingdom of the)Footnote ¹ and Switzerland – mandate that citizens purchase private health insurance; despite the presence of this mandate, revenues raised thus are managed and administered by private entities and, hence, are not considered to be public sources of financing. The latest System of Health Accounts (jointly produced by the Organisation for Economic Co-operation and Development (OECD), Eurostat and the World Health Organization (WHO)) eschews categorizing revenue-raising modalities for health in terms of public versus private; instead, the distinctions are based on whether revenues are: (i) compulsory or voluntary; (ii) domestic or external; and (iii) prepaid or OOP (Jowett & Kutzin, Reference Jowett and Kutzin2015; OECD, 2017b). For the remainder of this chapter, we follow others in the literature and take health’s share of general government expenditure – financed by domestic revenues, borrowing, external grants and mandatory SHI contributions, but excluding resources raised via compulsory private insurance prepayments – to represent the overall public financing envelope for health (WHO, 2020).

General taxation and SHI versus principles of equity and efficiency

A key issue is who contributes to and who benefits from a publicly financed health system. One policy objective for such a system is that it should be equitable, with those most able to pay shouldering the heaviest burden of the costs (so in effect redistributing resources from the well-off to the poor). However, obligatory contributions to public funds such as general taxes and SHI can be either progressive or regressive. While progressive payments are defined as those where the well-off pay a generally higher share of their income, a regressive payment is one where the poor pay a higher share of their income relative to the well-off. Generally, direct taxes – on income, property, wealth – are progressive. Indirect taxes – for example, taxes on consumption – are generally regressive. However, governments need to consider not just equity in payments linked to any instrument, but also the possible yield in terms of revenue generation, as well as the cost of collection. They also have the option to compensate for regressivity in any given instrument in two ways: making another instrument more progressive or compensating the poor using transfers in cash or kind from the revenue that is raised. In that sense, progressivity in terms of revenue generation of any particular instrument is not greatly relevant: the equity of the financing system needs to be assessed in terms of the distribution across individuals of net benefits, i.e. the payments into the system overall, including for health, net of what they receive as benefits in cash or kind (and not just health benefits) (Kaiser, Bredenkamp & Iglesias, Reference Kaiser, Bredenkamp and Iglesias2016; Jellema, Wai-Poi & Afkar, Reference Jellema, Wai-Poi and Afkar2017; World Bank, 2018).

Efficiency in how government revenues are raised is another key consideration in public finance, including for health. All taxes introduce distortions to economic activity by creating a gap between what a buyer pays and what a seller receives. Not only does this cause welfare losses, if not offset or balanced by externalities, but it can also adversely impact resource allocation decisions. In addition, some forms of tax collection themselves can be costlier to administer than others. Well-designed tax systems typically aim to reduce the economic inefficiencies that are inherent in any form of taxation, be progressive and broad-based in their incidence (ideally with minimal exemptions and loopholes) – and be relatively easy and cost-effective to administer.Footnote ²

Several countries, mostly high income, that originally financed their health provision by means of SHI systems subsequently abolished them – usually out of concerns for equity or as part of more general political reforms – and replaced them with tax-financed systems (Saltman & Dubois, Reference Saltman, Dubois, Saltman, Busse and Figueras2004). For instance, the United Kingdom absorbed its existing system of SHI when it transitioned to general tax financing in 1948. Norway abandoned its SHI system in 1967, followed by Denmark in 1973. Political transitions furthermore resulted in the removal of SHI and replacement by tax financing for health in Greece, Italy, Portugal and Spain. Conversely, many countries that started out with solely tax-financed health systems later introduced SHI, sometimes as a way to reduce financial pressure on existing tax-financed public delivery systems, but without dismantling them – in particular, in eastern and central Europe. In many countries – for example, in India (see Box 1.1.1), Nigeria, Myanmar and others – both general taxation and SHI financing systems coexist in parallel, but covering different population subgroups.

One advantage of general taxation over SHI is that the former is more broad-based and, hence, assumed to be more resilient and less volatile as a source of public financing. However, this is not always the case. This purported advantage of general taxation as a source of financing can be lost during economic downturns when public revenues decline significantly, especially in the absence of automatic stabilizers and countercyclical policy responses (Maresso et al., Reference Maresso2015). General taxation financing is also subject to political vicissitudes and competition for resources from other sectors, which can add to elements of unpredictability (Wagstaff, Reference Wagstaff2010). Although SHI revenues are also not immune to economic crises, in some countries – for example, Estonia during the 2008/2009 economic downturn – SHI reserves can help stabilize volatility and other challenges to short-term revenue-raising pressures. In general, a move towards a diversified revenue base appears to offer the best prospects for mitigating some of these challenges.

Over time, distinctions between the SHI versus the general taxation public financing models have blurred, so much so that they have lost several core characteristics that initially differentiated them (Yazbeck et al., Reference Yazbeck2020; Mathauer, Saksena & Kutzin, Reference Mathauer, Saksena and Kutzin2019). Included under the umbrella of general taxation financing modalities are situations in which governments impose additional taxes on income or consumption specifically for health, whether or not these are earmarked at source or for use (or both), although payment of these earmarked taxes is usually not a prerequisite for entitlement to health care. At the same time, SHI systems are increasingly dependent on cofinancing via general taxation, either due to prevalence of informal economic activity or the impact of an ageing population. Where governments subsidize contributions – for example, if SHI contributions are fully or partially subsidized for the unemployed, the poor and pensioners – these are classified and analysed as cofinancing via general taxation even if they are paid out by SHI schemes. Several general tax-financed health funding models now include elements that were previously considered to be hallmarks of SHI-financed systems, such as having a clear separation between purchasers and providers, explicit and well-defined benefits packages, use of non-traditional provider payment mechanisms, as well as the purchasing of services from both public and private providers.

It is important to note that the way revenues are raised in health systems can have significant implications for the pooling function of health financing; for example, if resources are raised and pooled separately by geographical areas or – as is sometimes the case under SHI – by industrial affiliation. This is addressed elsewhere in the book (see Chapter 2.1); for the remainder of the chapter, we focus primarily on issues and challenges related to revenue generation via public financing.

Challenge: Levels of economic growth and poverty

In most countries the overall size of the economy in per capita terms is a key constraint in terms of public financing, including for health. Economic activity is the basis of most forms of taxation, whether taxes are imposed with or without a quid pro quo intent. Countries that have experienced high levels of economic growth generally see levels of public financing for health also increasing at faster rates. India is a case in point: although levels of public financing for health remain far below those expected for its income level, relatively high economic growth rates have resulted in almost a tripling in real public financing for health in India in per capita terms since 2000 (Tandon et al., Reference Tandon2020). Conversely, countries on a lower growth trajectory – for example, Brazil, Mexico, Nigeria, and the Russian Federation – have faced a more constrained environment for public financing for health. Beyond the effects of economic growth, public spending for health is also a function of government revenues as well as the share of government budgets that flow to health (Tandon & Cashin, Reference Tandon and Cashin2010). Lower levels of economic development are also associated with high rates of absolute poverty; hence, even if institutional mechanisms for collecting taxes exist (which often they do not), the ability of the poor to pay such taxes remains a constraint. In addition, ageing not only causes an increase in demand for health but also lowers the tax base as people retire. (We discuss both ageing and the tax system in more detail in the Challenge: Governments’ conflicting budget priorities and the Challenge: Ageing populations sections).

Weak revenue generation

Weaknesses in revenue generation overall are a key challenge facing public financing of health, especially in LMICs. Lower-income countries tend to have lower levels of government revenue as a share of their economies. In 2019, whereas in HICs average general government revenues, both from taxes and non-tax sources, were 38% of GDP, in LICs this number was only 19%, even when external grants are included (Fig. 1.1.4).Footnote ⁵ Although countries can to some extent borrow to increase spending beyond the revenues received, repayment of debt can constrain future expenditure, especially if nominal economic growth rates are lower than the cost of borrowing (Blanchard, Reference Blanchard2019). Even within country income groups, there are some countries that lag behind in terms of government revenue collection: for example, in 2019, the general government revenue share of GDP was <10% of GDP in countries such as Bangladesh and Nigeria and only between 10 and 15% of GDP in Democratic Republic of the Congo, Ethiopia, Indonesia and Pakistan, therefore constraining the ability of their governments to publicly finance spending across all sectors, including health.

Fig. 1.1.4

General government revenues are a small proportion of GDP in lower-income countries

GDP: gross domestic product.

Figure 1.1.4 Long description

The y-axis notes the Share of G D P (percentage), from 0 to 50, while the x-axis notes the 4 income groups. Each bar has 3 stacks, representing Tax revenues, Non-tax and other revenues, and Deficit, with tax revenues being the largest share across each. The approximate net revenues across the categories are: Low income: 21 percent. Lower middle: 30 percent. Upper middle: 32 percent. High income: 40 percent.

Source: IMF (2022).

Challenge: Informal economic activity

In LICs and LMICs, large and persistent levels of informality in the labour market and in the economy more generally makes collection of taxes – especially direct taxes on income, wealth and property – particularly challenging (e.g. tax revenues as a share of GDP are only 8% in the Democratic Republic of the Congo and 10% in Ethiopia). Recent estimates indicate that whereas one third of GDP on average across LMICs is informal activity output – i.e. market based and legal but unobserved or hidden from public authorities for monetary, regulatory or institutional reasons – more than two thirds of all employment tends to be informal (Ohnsorge & Yu, Reference Ohnsorge and Yu2022; Schneider, Buehn & Montenegro, Reference Schneider, Buehn and Montenegro2010). Informality is often a consequence of poor government enforcement capacity as well as evasive strategies by firms and labourers to avoid (possibly burdensome) taxation and regulation.Footnote ⁶ There are wide variations underlying these averages: in some lower-income countries with large agricultural sectors and widespread subsistence farming, estimated informal employment exceeds 80%. In addition to its association with agriculture and farming, informal employment is also prevalent among the self-employed or those employed in small firms with relatively few employees. By definition, informal employment occurs without contracts and without formal payroll arrangements.

The challenge of pervasive informality also makes SHI an impractical and ineffective revenue-raising modality for LMICs aiming to make rapid progress towards UHC (Yazbeck et al., Reference Yazbeck2020). When workers lack formal contracts, labour income cannot be taxed directly. This helps explain the relatively tiny share of SHI contributions in financing health in LICs and LMICs (see Table 1.1.1).

Challenge: Resistance to SHI contributions

Many LICs and LMICs have SHI schemes but they tend to cover a small proportion of the labour force: usually civil servants and those employed in the formal private sector. Even for the latter, imposing the mandate for payment of SHI contributions has often been difficult. For example, Nigeria’s SHI programme for the formal sector covers approximately 1.5% of the population, the majority of whom are civil servants. The almost exclusive source of revenue is the employer contribution from the federal government for the civil servants (3.25% of the consolidated salary), while the collection of employee contributions has proven to be politically impossible (World Bank, 2019b). HICs have also faced challenges in maintaining their SHI systems when stakeholders are opposed to contributing because of concerns about rising labour costs and implications for competitiveness.

Challenge: Governments’ conflicting budget priorities

A key challenge – especially in LMICs – is that health is accorded a relatively low priority in government budgets, for a variety of reasons: other sectors’ demands for financing, perceptions that the health sector is inefficient or is unable to absorb allocated funds, or ideologically driven political narratives that favour private over public versus private financing for health. Globally, health’s share in overall public spending stands at about 9% (WHO, 2022). However, there are very large variations across countries: on the one end, health accounts for less than 3% of public expenditure in countries such as Cameroon and South Sudan; on the other hand, health exceeds 20% of public expenditures in other countries such as Costa Rica, Japan, Panama, Uruguay and the USA. Despite large country-specific variations, health’s share of government budgets is, on average, higher in HICs (Table 1.1.2). Health care costs tend to be higher in richer countries, driven by relative price differences as well as the availability of higher-technology care. Richer countries also tend to have more educated and ageing populations with preference structures that expect higher levels of public financing for health. Education tends to receive a higher share of government budgets across LICs, LMICs and UMICs; only in HICs does health’s share end up being higher than education’s, on average. Although both interest payments on debt and military spending represent the same or lower share than health on average, there are notable country-specific exceptions such as Armenia, Bangladesh, India, Morocco, Pakistan, Sri Lanka and Uganda where health receives a lower share vis-à-vis both interest payments and military spending.

Table 1.1.2Share of government expenditure for health, education, military and debt interest payments, 2019^a

Table 1.1.2 Long description

The table has 2 main columns (and further subcolumns): Classification and Share of government expenditure (Health, Education, Military, and Interest payments, all in percentage). It reads as follows. Low-income country: 9; 16; 7; 5. Lower-middle-income country: 6; 15; 8; 15. Upper-middle-income country: 10; 13; 5; 5. High-income country: 18; 13; 6; 4. All countries: 9; 14; 7; 9.

^a Share of government expenditure for education is for latest available year in 2014–2019.

Sources: WHO (2022); World Bank (2022).

Increased rates or new indirect taxes

The first class comprises cases of increased rates or the introduction of entirely new indirect taxes to finance the expansion of health care coverage beyond formal workers and their dependants. The most notable examples include Ghana (a 2.5% increase in VAT in 2004) and the Philippines (additional revenue generated from a comprehensive reform of tobacco and alcohol taxes in 2012). Other countries are emulating the approach. For example, Egypt, as part of a comprehensive overhaul of its SHI system, introduced earmarks on additional revenue from tobacco tax reforms and new levies on toll roads, drivers and car licenses to complement compulsory, individual contributions (Government of Egypt, 2018). Lessons from Ghana and the Philippines highlight the potential advantages of a soft revenue–expenditure link (Cashin, Sparkes & Bloom, Reference Cashin, Sparkes and Bloom2017). In both instances, tax reforms generated substantial amounts of funding for the extension of SHI: more than 0.5% of GDP. However, in the Philippines, even in the medium term, additional revenues exceeded the funds that the SHI agency managed to absorb (Ulep, Pargas & Alcantara, Reference Ulep, Pargas and Alcantara2021). In contrast, in Ghana, from year three onwards, additional revenues fell far short of operational expenditures (Kurowski & Iglesias, Reference Kurowski and Iglesiasin press).

Designated fixed shares for health in budget allocation

The second class of earmarked revenues comprises fixed shares for health in the allocation of general funds. Such fixed shares have been reported by more than a dozen countries. In decentralized systems, fixed shares for health have not only been established at the central level, but also in transfers from central to subnational governments, as well as for lower levels of government, to ensure the overall level of expenditure is adequate but also to reduce spending inequalities. Some countries use this type of earmark for specific expenditure categories – for example, Nigeria does so for its basic health care provision fund and South Africa for its HIV/AIDS programme. The fixed shares typically reflect only a minimum level of spending. As they fall short of actual spending needs, countries have combined them with other types of earmark.

But do these substantial earmarks affect spending levels in the targeted expenditure categories and ultimately in the health sector? In the absence of a counterfactual, this question is difficult to resolve. Country experiences suggest that there may be a short-term effect on government expenditures. For example, in Ghana, the size of the earmark correlated in the early years after its introduction with increases in the level of government spending on health (Kurowski & Iglesias, Reference Kurowski and Iglesiasin press). With time, however, the likelihood increases that allocations from general taxes are reduced. These cuts may lead to a shift in expenditure priorities with potential consequences for the efficiency of spending. In Ghana, for example, concerns have been raised that priority services outside SHI benefits – for example, immunization services – took a hit.

More generally, empirical work on prioritization has been sparse: the limited cross-country econometric analyses that exist suggest that factors such as democratization, lower levels of corruption, ethnolinguistic homogeneity and more women in public office are correlated with higher shares of public spending on health; however, these findings are not robust and are sensitive to model specification (Lebovic, Reference Lebovic2001; Meltzer & Richard, Reference Meltzer and Richard1981; Keefer & Khemani, Reference Keefer and Khemani2005; Tandon et al., Reference Tandon2014). A range of factors – political changes, disease outbreaks/pandemics, macroeconomic shocks – are common triggers that can sometimes lead to a sustained increase in health’s share of a government’s budget. The use of budgetary or numeric financing targets (e.g. the Abuja Declaration target that health’s share of the government budget be at least 15%) generally has not resulted in a higher priority for health. Evidence to date suggests that country-specific political economy considerations are key and that results-focused reform efforts – in particular efforts to explicitly expand the breadth and depth of health coverage as opposed to efforts focused only on government budgetary and numerical targets – are more likely to result in a sustained and politically feasible prioritization of health.

Challenge: Ageing populations

Another key policy challenge – particularly among UMICs and HICs – is that of an ageing population. With higher life expectancies and declining fertility has come a growing proportion of the population that is elderly with greater needs for health spending and long-term care. Some UMICs are seeing higher median ages resulting from declining fertility alone, even without registering significant improvements in life expectancy. United Nations estimates place the total number of people aged 65 years and above at 727 million in 2020, about 9% of the global population; this number is expected to more than double – to 1.5 billion, 16% of the global population – by 2050. In 2020, several countries such as Brazil, China and Mexico were already classified as “ageing”, i.e. with a population share of people aged more than 65 years over 7%; the Russian Federation and the USA counted among “aged” countries – with a population share of people aged more than 65 years exceeding 14% – and Japan was already “super-aged” with a share of the population aged more than 65 years of more than 21% of its total population (United Nations, 2020).

From a revenue generation perspective, the immediate risks from ageing are rising old-age dependency ratios – i.e. increasing numbers of those aged over 65 years relative to those in the working age population group aged 15–64 years – such that even if the size of the working age population is growing, it is having to provide a resource base for public financing for health and other services for a dependent population of people aged more than 65 years that is growing at an even faster rate. Elderly populations tend to have greater rates of multimorbidity from noncommunicable diseases (NCDs) than younger, working populations and need integrated care, which currently is provided in a fragmented manner across most countries. This rise in old-age dependency is already occurring in nearly all countries – albeit at different rates – and the trend is expected to accelerate in coming decades, especially in HIC. According to the United Nations’ projections, by 2050, the proportion of those people aged more than 65 years will be almost three quarters the proportion of those in the working age population group in Japan; this same old-age dependency ratio will exceed 35% in China, Brazil, the Russian Federation and the USA.

Although rising over time, the old-age dependency ratio in 2050 is expected to remain 10% or below in lower-income countries such as Ethiopia and Nigeria (Fig. 1.1.5). In some countries such as China, Japan and the Russian Federation, the rise in old-age dependency is occurring on top of an ongoing decline in the working age population of 15–64 years old. With ageing comes the potential for declining labour productivity and, when combined with a shrinking labour force, the possibility of reductions in investments and economic output. These trends can have adverse knock-on effects on public financing including for health, increasing the need for additional public spending while at the same time reducing the ability of governments to raise revenues as (generally lower) pension incomes replace (generally higher) labour incomes. Tax revenues tend to be highly correlated with the size of the employed population rather than with the size of the total population (Rouzet et al., Reference Rouzet2019). For lower-income countries, the challenge of ageing is that it is likely to occur at a rate that is faster than underlying rates of economic development, i.e. many of these countries will become old before they become rich.

Fig. 1.1.5

Old-age dependency ratios are projected to increase in many (middle- to higher-income) countries

USA: United States of America.

Figure 1.1.5 Long description

The y-axis shows the Old-age dependency rate in percentage from 0 to 80, while the x-axis lists the countries. Each country has 4 serially higher dots, representing current and projected ratios from 2020, 2030, 2040, and 2050. They increase as follows. Nigeria and Ethiopia: all projections stay below 10. Pakistan: 6 to 15. Egypt: 8 to 16. Philippines: 9 to 19. India: 9 to 20. Bangladesh: 9 to 22. Indonesia: 9 to 23. Mexico: 10 to 28. Brazil: 12 to 38. U S A: 18 to 28. Russia: 21 to 40. China: 25 to 44. Japan: 49 to 77.

Source: United Nations (2020).

Externally sponsored CBHI schemes

Since the 1990s, CBHI has been seen as the way to extend social health protection, with multiple experiences in LMICs. Interest in CBHI (re)intensified after 2015 when United Nations’ Member States adopted UHC, including financial risk protection, as part of Sustainable Development Goal 3.8.

Most CBHI schemes in Africa and Asia were introduced and supported by external actors; for example, Belgians and the French for CBHIs in west and central Africa. Many started as research projects or pilots, such as in Guinea (Sylla et al., Reference Sylla, Criel and Barry2002), Lao People’s Democratic Republic (Bodhisane & Pongpanich, Reference Bodhisane and Pongpanich2017), government trials, such as in China (Hsiao, Reference Hsiao2001; Wang et al., Reference Wang2005; Yip & Hsiao, Reference Yip and Hsiao2008), the Philippines (ILO, 2004) and Ghana (McIntyre et al., Reference McIntyre2008).

Some were initiated by NGOs, both locally and internationally; for example, the ORT Health Plus scheme in the Philippines (Aviva & Kupferman, Reference Aviva and Kupferman1996) and faith-based institutions, such as the Presbyterian Church of East Africa’s CBHI scheme at Chogoria mission hospital in Kenya (Musau, Reference Musau1999). In Mali, early CBHI schemes targeted specific members of the population; for example, pregnant women (Ndiaye et al., Reference Ndiaye, Richard, Witter and Brouwere2008) while the Bwamanda district hospital scheme in the Democratic Republic of the Congo started in 1986 with funding from the Belgian government which was targeted to health providers (Moens, Reference Moens1990).

In Africa, CBHIs started in, and were more common in, West Africa than the rest of the continent. In Senegal, the first CBHI schemes were trialled during the colonial period from 1910 onwards, but they did not remain in place for long and covered very few people (mostly colonists) (Ridde, Diaw & Béland (2025). The Mutuelle Pharmaceutique de la Sainte Famille Tounouma in Burkina Faso was one of the first, initiated in 1986 (Soors et al., Reference Soors2010). Senegal and Benin followed closely, with other countries in the continent establishing similar schemes albeit with variations in the designs (Atim et al., Reference Atim1998; Criel et al., Reference Criel, Heggenhougen and Quah2008; Musau, Reference Musau1999).

In Asia, CBHIs were piloted primarily in Afghanistan, Bangladesh, India and Nepal (Bhageerathy, Nair & Bhaskaran, Reference Bhageerathy, Nair and Bhaskaran2017; Criel et al., Reference Criel, Heggenhougen and Quah2008; Devadasan et al., Reference Devadasan2010; Soors et al., Reference Soors2010). While CBHIs were mainly designed for and available in rural populations, schemes were also established in Tanzania and Ivory Coast targeting urban populations (Soors et al., Reference Soors2010).

Subsequently, such schemes have been considerably expanded, in particular by government initiatives to subsidize contributions for people who wish to join CBHIs voluntarily, and thus to increase coverage. For example, in Mali and Senegal, the state subsidizes 50% of the annual premiums for the general population. In Senegal, the state subsidizes 100% of premiums for indigent people with varied provisions for other population groups while in Burkina Faso the poorest pay 50% of the premiums (Ridde et al., Reference Ridde2018; Parmar et al., Reference Parmar2014). In 2019, the Senegalese government provided CFA franc 19 billion to cover 50% of the premium costs for 2.84 million general population CBHI members and 100% of coverage for 1.27 million indigent people (Ridde et al., Reference Ridde2018; Daff et al., 2020).

CBHI’s impact: mixed evidence

Evidence on the impact of CBHI is mixed. Some is positive: for example, evidence from the first CBHI scheme in Mali suggested increased coverage across all dimensions, higher hospital utilization rates and a reduction in OOP payments for members compared to non-members (Soors et al., Reference Soors2010). We present here some of the evidence of CBHI’s impact on the level of utilization of health services, equity in using them (i.e. do the poor use them as much as the non-poor?), financial protection and population coverage.

Challenge 1: Low uptake

The uptake of CBHI schemes remains limited in many settings. A core barrier to increasing uptake of CBHI is the limited ability of people in the informal sector to pay for premiums (Adebayo et al., Reference Adebayo2015). High poverty levels, lower education and the resultant limited purchasing power among households preclude the sustainability of CBHIs (Fadlallah et al., Reference Fadlallah2018; Shewamene et al., Reference Shewamene2021; Umeh & Feeley, Reference Umeh and Feeley2017; Adebayo et al., Reference Adebayo2015). Evidence also points to a lack of awareness or limited understanding about health insurance generally, and CBHI specifically, which leads to poor uptake among communities (Alkenbrack, Jacobs & Lindlelow, Reference Alkenbrack, Jacobs and Lindelow2013; Cofie et al., Reference Cofie2013; Kigume & Maluka, Reference Kigume and Maluka2021; Noubiap et al., Reference Noubiap2013; Shewamene et al., Reference Shewamene2021). The limited uptake of CBHI schemes is also considered to be a function of the lack of supportive regulatory frameworks, and interpersonal, community- and system-level conflicts in horizontal and vertical relationships (Atim et al., Reference Atim1998; Alkenbrack, Jacobs & Lindlelow, Reference Alkenbrack, Jacobs and Lindelow2013; Bennett, Reference Bennett2004; Carrin, Waelkens & Criel, Reference Carrin, Waelkens and Criel2005; Purohit, Reference Purohit2014) (see the Challenge 3: Issues with governance section).

Challenge 2: Inadequate benefits poor delivery

The benefits expected with CBHI membership are not always delivered. For example, in one scheme in the Democratic Republic of the Congo, while all costs were covered in theory, hospitals did not recognize CBHI cards (Soors et al., Reference Soors2010). As a result, patients incurred significant OOP costs while accessing care, defeating the purpose of their CBHI membership. Similarly, in Bangladesh, the level of financial protection offered by the CBHI schemes often did not sufficiently protect households from incurring catastrophic health expenditures (Werner, Reference Werner2009). Perceived poor quality of health services and frequent medication stockouts have also been documented (Criel et al., Reference Criel2020; Kigume & Maluka, Reference Kigume and Maluka2021). In part, CBHI’s failure to deliver is a function of its low uptake: small-scale CBHI pools with very limited risk sharing present a serious organizational challenge (see Chapter 2.1), and the poor delivery of services then further discourages uptake.

Challenge 3: Issues with governance

CBHI issues with governance are both internal, related to the schemes’ community base, and external, related to the quality and level of support they receive from outside agencies, including other parts of the health system, local and national government and NGOs (i.e. both horizontal and vertical linkages).

Internally, the weak managerial capacity in many CBHI schemes is attributed to the community ownership and management of the structures (Atim et al., Reference Atim2001; Basaza, Criel & van der Stuyft, Reference Basaza, Criel and Van der2007; Kigume & Maluka, Reference Kigume and Maluka2021; Mladovsky, Reference Mladovsky2014). By excluding non-members from their management and decision-making, CBHI schemes can lack necessary input from management experts, as well as health professionals (Soors et al., Reference Soors2010). Lack of trust in CBHI leadership and among fellow members has also been associated with low enrolments and dropouts of previously enrolled members (Alkenbrack, Jacobs & Lindelow, Reference Alkenbrack, Jacobs and Lindelow2013; Fadlallah et al., Reference Fadlallah2018; Muchabaiwa et al., Reference Muchabaiwa2017; Ozawa & Walker, Reference Ozawa and Walker2009; Rao et al., Reference Rao2009; Shewamene et al., Reference Shewamene2021). The communal membership, which would otherwise be a strength, instead becomes a risk.

Externally, researchers have pointed out that some CBHI schemes are disconnected from the local health systems (Alkenbrack, Jacobs & Lindelow, Reference Alkenbrack, Jacobs and Lindelow2013; Bousmah et al., Reference Bousmah2021; Mladovsky, Reference Mladovsky2020). The non-recognition by hospitals of CBHI cards in the Democratic Republic of the Congo, as described above, constitutes a prime example (Soors et al., Reference Soors2010).

Government support for CBHI schemes includes establishing a regulatory framework within which CBHIs can operate, monitor, coordinate and manage the schemes (but stopping short of mandating enrolment and transforming CBHI schemes into SHI). However, overall, the lack of, or often-limited, political buy-in has been highlighted as a major challenge facing CBHIs (Basaza, Criel & van der Stuyft, Reference Basaza, Criel and Van der2010; Purohit, Reference Purohit2014; Uzochukwu et al., Reference Uzochukwu2009). There have been attempts to create and adopt legislative frameworks within which CBHIs can operate in countries such as Mali, Senegal and Togo (Barry, Reference Barry, Waelkens and Criel2007; Diop & Ba, Reference Diop and Ba2010; Letourmy & Ouattara, Reference Letourmy, Ouattara, Dussault, Fournier and Letourmy2006). In India, a policy supporting the development of health insurance programmes encourages the involvement of community-based organizations in pro-poor risk pooling arrangements (National Rural Health Mission, 2005; 2007). Similarly, the SHI master plan in Cambodia, while offering a fragmented approach towards achieving UHC, recognizes the use of CBHI as one of the strategies and has established relevant implementation guidelines (Annear, Reference Annear2009; ILO, 2008). The community health funds and TIKA schemes in Tanzania, and CBHI in Lao People’s Democratic Republic, are backed by legislation (Alkenbrack, Lindelow & Jacobs, Reference Alkenbrack, Lindelow and Jacobs2010; Jutting, Msuya & Afsaw, Reference Jutting, Msuya and Asfaw2004) while in the Democratic Republic of the Congo, development of CBHIs was included in the country’s 2009–2011 specific action plan (Programme National de Promotion des Mutuelles de Santé, 2009). However, the evidence on the impact of such policies aimed at enabling CBHI is limited.

It remains the case that most countries do not have regulatory frameworks supporting the operationalization of CBHI schemes and, where they do exist, for example offering financial support to cushion vulnerable population groups, or re-insurance of schemes and guarantees, they are perceived as weak (Atim et al., Reference Atim1998; Diop & Ba, Reference Diop and Ba2010). Nonetheless, there have been several initiatives to subsidize contributions for people who wish to join CBHIs voluntarily – again including in Mali and Senegal. In both countries, the state subsidizes 50% of the annual premiums for the general population (Ridde et al., Reference Ridde2018). In Senegal and Burkina Faso, the state subsidizes 100% of premiums for indigent people, with varied provisions for other population groups, while in Burkina Faso the poorest pay 50% of the premiums (Ridde et al., Reference Ridde2018; Parmar et al., Reference Parmar2014). However, there is limited evidence on the effectiveness of such subsidies on the utilization of services and financial protection for indigent people.

Challenge 4: Broader health and insurance system issues

Broader health and insurance system issues have also been highlighted as key barriers to enrolment in, and the sustainability of, CBHI schemes.

Evidence in practice: Senegal

In 2014, in Senegal, the communal mutuals of two departments were merged to create a single health insurance department (UDAM – Les Unités Départementales d’Assurance Maladie) managed by professionals (Ridde et al., Reference Ridde2022). Membership remains voluntary, so risk sharing on a large scale is still limited. However, through professional management and the recruitment of specialists, innovative strategies for recruiting members have been implemented. These include a state contribution for entire villages or schools which enables CBHI membership fee reductions for all those living, studying or working in these places and creates collective conduits to channel the state subsidy to the recipients. These UDAMs have a headquarters, general management and qualified support staff for all administrative tasks (Mbow et al., 2020). The scheme’s management by professionals is the main way in which it deviates from the Donfouet & Mahieu (Reference Donfouet and Mahieu2012) definition of CBHI we introduced at the beginning of this chapter. The two UDAMs have been effective and able to cope with overdue subsidies from the state. In addition, all the health facilities in the region have transitioned from unit pricing for each service to a global flat rate, making the price predictable for patients (Mbow et al., 2020). UDAMs also influence the supply of care during the regional health team coordination meetings. In 2021, more than 50% of the population in the two districts were members of the UDAMs, which is an impressive achievement. In addition, between 30% and 60% of the region’s hospital revenue comes from the UDAMs, which gives them undeniable power. The Senegal national UHC agency (ANCMU – Agence Nationale de Couverture Maladie Universelle) is scaling up this reform to other districts. This has been noted by neighbouring countries which have visited for benchmarking. However, the scalability of these reforms has been opposed by the community mutualist movement, which is challenging the management of mutuals by professionals rather than volunteers (Ridde, Kane & Faye, 2025). With the support of the Belgian and French mutualist movements, the Senegal body has engaged in advocacy through the Lomé Platform so as to scale up these reforms.

What preconditions are needed for CBHI to work?

Available evidence suggests that success of a CBHI scheme is heavily dependent on its design and structure, including the affordability of the scheme, managerial capacity, benefits package, level of trust, distance to facilities and the perceived quality of health care covered by these schemes; as well as personal factors, such as individual knowledge and understanding of the scheme, among others (Dror et al., Reference Dror2016). It is argued that barriers to the successful implementation of CBHI schemes are largely operational in nature (De Allegri et al., 2009) and these have been documented widely (Ekman, Reference Ekman2004; De Allegri et al., 2009; Ridde et al., Reference Ridde2010; Fadlallah et al., Reference Fadlallah2018).

Here we outline the underlying preconditions for the successful implementation of CBHIs, as follows: a supportive political and economic environment (from which several of the other preconditions flow); the availability of and ability to mobilize social capital; awareness of CBHI and issues of equity; the formalization/institutionalization of CBHI schemes within the overall health sector; and enhanced vertical and horizontal linkages.

Supplementary coverage

Perceived problems with the quality and timeliness of publicly financed health care can motivate people to buy supplementary VHI. Supplementary VHI plays a role in the majority of countries, but its role is usually small both in terms of contribution to spending on health and share of the population covered. Ireland, Israel and South Africa are key exceptions: in these countries supplementary VHI either covers a large share of the population (Ireland, Israel) or only covers a small share of the population but accounts for an unduly large share of current spending on health (South Africa) (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020).

Complementary coverage

Gaps in the scope of the publicly financed benefits package or the existence of user charges for publicly financed health care can drive demand for complementary VHI coverage. Complementary VHI covering services excluded or not well covered by publicly financed health care usually plays a small role. It often focuses on dental care and is sold alongside supplementary VHI. The two main outliers are Canada, where outpatient medicines are not routinely publicly financed and many employers offer VHI to their employees, and the Netherlands, where over 80% of the population has VHI covering dental care and physiotherapy (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020). Complementary VHI covering user charges also usually plays a small role. Globally, Croatia and France are the main countries in which this type of VHI plays a significant role (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020). Slovenia was another notable case until 2024, when complementary VHI covering co-payments was abolished and replaced with a fixed compulsory contribution within the public health insurance scheme, and co-payments were removed.

Substitutive

People can buy substitutive VHI if they are excluded from publicly financed coverage or allowed to choose between publicly and privately financed coverage. Usually, only a small share of the population – often those with higher incomes – benefits from this type of coverage, but it can represent a more significant share of current spending on health. Substitutive VHI plays a significant role in a few countries only: Bahamas, Botswana, Brazil, Chile and Germany (Mathauer, Saksena & Kutzin, Reference Mathauer, Saksena and Kutzin2019; Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020). It was abolished in the Netherlands in 2006 (Sagan & Thomson, Reference Sagan and Thomson2016b). Over time policy-makers in Chile and Germany have tried to limit the role of substitutive VHI because of its disruptive effect on the wider health system (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020).

Table 1.3.1VHI plays a supplementary role in most countries

VHI: voluntary health insurance.

Source: Authors, adapted from Foubister et al. (2006).

How much is VHI currently used and in which countries?

VHI makes a negligible contribution to spending on health in most countries.

In 2021, the VHI share of current spending on health exceeded 10% in only 22 countries globally (Fig. 1.3.1). VHI accounted for between 5% and 10% of current spending on health in a further 39 countries and was negligible everywhere else (WHO, 2023).

Fig. 1.3.1

In 2021, the number of countries in which VHI accounted for at least 10% of current spending on health was very small

Note: SHA: System of Health Accounts; VHI: voluntary health insurance, USA: United States of America. VHI here is defined as health insurance schemes that are based upon the purchase of a health insurance policy, which is not made compulsory by government using the SHA code HF2.1. The figure excludes previously voluntary forms of private health insurance in France and the USA, which have been reclassified as compulsory health insurance in health accounts.

Figure 1.3.1 Long description

The y-axis notes the voluntary health insurance schemes as a percentage of current health expenditure, while the x-axis notes the countries. The values are as follows. Liberia: 47.0. South Africa: 43.0. Venezuela: 37.9. Namibia: 36.4. Bahamas: 31.6. Brazil: 27.6. Lebanon: 26.0. Thailand: 16.5. Jamaica: 14.3. Andorra: 14.3. Botswana: 13.8. Jordan: 13.6. Antigua and Barbuda: 13.6. Slovenia: 12.4. Canada: 11.4. Argentina: 11.4. Bahrain: 11.1 Uruguay: 10.9. Eswatini: 10.7. Ireland: 10.4. Gabon: 10.4. Israel: 10.1.

Source: WHO (2023).

Across all countries for which data are available, on average VHI accounts for only 5.3% of current spending on health, ranging from 3.6% in lower-middle-income countries to 7.4% in upper-middle-income countries (UMICs) (Fig. 1.3.2).

Fig. 1.3.2

In 2021, the VHI share of current spending on health was highest in UMICs

Note: SHA: System of Health Accounts; VHI: voluntary health insurance. Only includes countries for which VHI data were available. VHI here is defined as SHA code HF2.1.

Figure 1.3.2 Long description

The y-axis notes the Voluntary health insurance schemes as a percentage of current health expenditure from 0 to 50, while the x-axis represents the income groups, each with three values: Range, Average, and Median, respectively. The values are as follows. Low (21 countries): 46.0; 4.2, 2.0. Lowe-middle (46 countries): 25.5; 3.6; 2.5. Upper middle (51 countries): 44.0; 7.4; 5.0. High (55 countries): 31.5; 5.1; 4.9. All (173 countries): 46.0; 5.3; 4.0.

Source: Adapted from Thomson, Sagan & Mossialos (2020) using the WHO Global Health Expenditure Database (WHO, 2023).

In terms of World Health Organization regions, on average the VHI share of current spending on health was highest in the Americas (8.1%) and the lowest in Europe (3.2%) (Fig. 1.3.3).

Fig. 1.3.3

In 2021 the VHI share of current spending on health was higher in the Americas than in other parts of the world

AFR: WHO African Region; AMR: WHO Region of the Americas; EMR: WHO Eastern Mediterranean Region; EUR: WHO European Region; SEAR; WHO South-East Asian Region; SHA: System of Health Accounts; VHI: voluntary health insurance; WHO: World Health Organization; WPR: WHO Western Pacific Region.

Notes: Only includes countries for which VHI data were available. VHI here is defined as SHA code HF2.1.

Figure 1.3.3 Long description

The y-axis notes the Voluntary health insurance schemes as a percentage of current health expenditure from 0 to 50, while the x-axis represents the regional groups, each with three values: Range, Average, and Median, respectively. The values are as follows. A F R (43 countries): 47.0; 6.1; 3.0. A M R (35 countries): 27.5; 8.1; 5.5. E M R (16 countries): 25.0; 5.5; 3.0. S E A R (9 countries): 15.5; 3.6; 1.5. E U R: 15.0; 3.3; 3.0. W P R (20 countries): 10.0; 4.3; 4.0.

Source: WHO (2023).

Changes in levels of use of VHI

Only a handful of countries have seen large changes in VHI’s contribution to current spending on health over time, with decreases usually recorded in high-income countries (HICs) and increases in middle-income countries.

VHI’s share of current spending on health did not change much between 2000 and 2021 in most countries. Looking at changes between two points in time can conceal fluctuations, but during this period the VHI share fell by five or more percentage points in only eight countries globally (mostly HICs) and grew by five or more percentage points in 21 mostly lower-middle or UMICs (Fig. 1.3.4).

Fig. 1.3.4

Not many countries saw substantial changes in the VHI share of current spending on health between 2000 and 2021

Note: CHE: current health expenditure; SHA: System of Health Accounts; VHI: voluntary health insurance, USA: United States of America. VHI here is defined as SHA code HF2.1. In France, Germany and the USA the changes are due to changes in health accounting that resulted in VHI being reclassified as compulsory health insurance.

Figure 1.3.4 Long description

The y-axis lists the percentages from minus 40 to 60, while the x-axis lists the countries. The countries with negative age point change are: United States of America, Uruguay, Morocco, Netherlands, Monaco, France, Germany, and Antigua and Barbuda. Those with positive age point changes are: Croatia, Benin, Kenya, Côte d’Ivoire, Suriname, Poland, Iran, Israel, Haiti, Republic of Korea, Brazil, Zimbabwe, India, China, Bahrain, Ireland, Jordan, Thailand, Lebanon, Venezuela, and Liberia.

Source: WHO (2023).

The large drop in the VHI share of current spending on health in France, Germany and the USA was due to changes in health accounting. VHI was reclassified as compulsory health insurance in National Health Accounts in response to reforms making private health insurance compulsory for some groups of people (OECD, Eurostat & WHO, 2017). In France, the VHI share fell from 13% in 2012 to 7% in 2016 following the government’s introduction in January 2013 (with effect from 2016) of a mandate on all employers to offer complementary private health insurance covering user charges to their employees (Couffinhal & Franc, 2020; Bricard, Reference Bricard2024). The introduction of a universal mandate in Germany in 2009, making it compulsory for people who choose to opt out of publicly financed coverage to take up substitutive private health insurance (as opposed to remaining without any coverage), resulted in the VHI share falling from 9% in 2008 to 1% in 2009 (Ettelt & Roman-Urrestarazu, Reference Ettelt, Roman-Urrestarazu, Thomson, Sagan and Mossialos2020). In the USA, the implementation of the Affordable Care Act in 2014 made health insurance mandatory for people under the age of 65 years for the first time, leading the VHI share to fall from 33% in 2013 to 1% 2014 (Brown & Glied, Reference Brown, Glied, Thomson, Sagan and Mossialos2020).

In Morocco, the Netherlands and Uruguay, the decline in the VHI share of current spending on health followed reforms to expand access to publicly financed coverage. A sudden fall in the VHI share in Morocco (from 12% in 2005 to 1% in 2006) followed the creation of a mandatory social health insurance (SHI) scheme, which extended publicly financed coverage from 16% to 30% of the population (Mulvihill, Reference Mulvihill2022). In the Netherlands, a national health insurance scheme introduced in 2006 abolished substitutive VHI for richer people, who had previously been excluded from publicly financed coverage, leading to a fall in the VHI share from 20% in 2005 to 6% in 2006 (Maarse, Jeurissen & North, Reference Maarse, Jeurissen, North, Thomson, Sagan and Mossialos2020). In Uruguay the VHI share fell progressively from 32% in 2000 to 12% in 2020, following the establishment and gradual expansion of publicly financed coverage (Arbulo et al., 2015). The speed of decline in the VHI share was slower than expected, however, partly due to employers continuing to be allowed to provide VHI to their employees (Pettigrew & Mathauer, Reference Pettigrew and Mathauer2016).

The decline in VHI’s share of current spending on health in South Africa is linked to a decline in VHI population coverage due to rising premiums (Pettigrew & Mathauer, Reference Pettigrew and Mathauer2016). Despite this, the VHI share in South Africa remains the highest in the world (43% in 2021), despite the fact that VHI only covers around 16% of the population (see Fig. 1.3.1) (McIntyre & McLeod, Reference Mcintyre, Mcleod, Thomson, Sagan and Mossialos2020).

In countries such as Jordan, Thailand and Venezuela, large increases in the VHI share of current spending on health reflect a combination of factors, including the poor performance of publicly financed coverage, growing purchasing power in the middle class and wider economic trends, including trade liberalization and privatization (Pettigrew & Mathauer, Reference Pettigrew and Mathauer2016).

Growth in public spending on health slowed significantly following the global financial crisis of 2007–2008, leading to an increase in the private share of current spending on health in many countries, but this often occurred due to increased reliance on OOP payments rather than growth in VHI (Thomson et al., 2015). In response to COVID-19, many countries sought to increase public spending on health and some expanded publicly financed coverage, at least for services related to COVID-19 (Thomson et al., 2022; WHO Regional Office for Europe, 2021). Access problems, including large backlogs in health services and higher waiting times, have fuelled interest in purchasing VHI in countries like the United Kingdom (Campbell, Reference Campbell2022). Indeed, per capita spending on VHI in the United Kingdom rose from US$ 123 to 140 between 2019 and 2021 (WHO, 2023). Over this period, 26 countries experienced an increase in per capita VHI spending by more than US$ 10, with the most substantial increases observed in Canada, Australia, Ireland and Liberia (exceeding US$ 50 per capita). Conversely, eight countries noted declines in VHI per capita spending of US$ 10 or more, with the largest falls observed in Cyprus, Lebanon, Monaco and United Arab Emirates (WHO, 2023). However, on the whole, per capita VHI spending changed little in most (80%) countries (WHO, 2023).

Policy challenge 1: VHI is unlikely to be helpful in making progress towards UHC in countries that rely heavily on OOP payments

Both economic theory and empirical evidence indicate that VHI is unlikely to provide comprehensive coverage for the whole population.

Empirical evidence

The empirical evidence supports economic theory. Historically, as the precursor to publicly financed coverage, VHI never succeeded in covering the whole or even most of the population. The goal of universality was only achieved through the introduction of mandates for publicly financed health care.

We can briefly recap VHI’s history, based on the account of Thomson, Sagan & Mossialos (Reference Thomson, Sagan and Mossialos2020). VHI is the earliest form of prepaid health financing. It first emerged in Europe in the Middle Ages, before the rise of modern medicine, and aimed to compensate people for loss of earnings due to illness, which is why it was linked to employment. VHI offered by mutual-aid associations serving industrial workers had become the norm in Europe by the mid-19th century and spread via colonialism to countries outside Europe (e.g. South Africa, where it initially covered white mine workers).

Medical advances led to an increase in the cost of health care, motivating health care providers in the early 20th century to develop VHI, often in league with hospitals run by the charitable sector, so that people could continue to pay for their services. Provider-driven VHI proliferated in Europe and beyond, including Australia, Canada and the USA. Over time, these largely non-profit schemes were joined by commercial schemes.

Few of these early forms of VHI grew to cover more than a small share of the population, not only because health insurance was voluntary and also usually linked to employment, but also because it was unaffordable for many people. Starting with Germany in 1883, national governments began to introduce compulsory publicly financed schemes to extend coverage to more people, filling gaps that VHI could not cover.

Further empirical evidence is provided by data on health spending, which suggest that public spending on health is more likely to reduce OOP payments than VHI. Across countries there is very little association between spending through VHI and spending through OOP payments (Fig. 1.3.5a). Liberia, Namibia and South Africa are the only countries where the VHI share of current spending on health substantially exceeds the OOP payment share. In South Africa, for example, the decline in the OOP payment share (from 14% in 2000 to 5% in 2020) was accompanied by a small decline in the VHI share (from 47% to 42%) and a large increase in the public share (from 37% to 51%) (WHO, 2023). This means that it is unlikely that it was VHI that drove down OOP payments in South Africa. Across countries there is a much stronger correlation between public spending on health and OOP payments (Fig. 1.3.5b).

Fig. 1.3.5a

Public spending on health is more likely to reduce OOPs than VHI

Figure 1.3.5a Long description

The x-axis represents V H I as percentage of current health spending from 0 to 50, while the y-axis represents O O P spending as percentage of current health spending from 0 to 90. Most of the plots are concentrated between x equals 0 and x equals 15, along the full length of the y-axis. The best-fit line moves straight from (0, 30) to (47, 12), where R-squared equals 3 percent.

Fig. 1.3.5b

Domestic general government spending on health as a percentage of GDP versus OOP payments as percentage of current spending on health, 2021

Note: GDP: gross domestic product; OOP: out-of-pocket; SHA: System of Health Accounts; VHI: voluntary health insurance. VHI here is defined as SHA code HF2.1. Domestic general government spending on health here is defined as health expenditure funded from general government domestic sources (government domestic revenues and SHI contributions). In SHA it is calculated as FS.1 (transfers from government domestic revenue allocated to health purposes) plus FS.3 (social insurance contributions).

Figure 1.3.5b Long description

The x-axis represents Domestic general government expenditure on health as percentage of G D P from 0 to 14, while the y-axis represents O O P spending as percentage of current health spending from 0 to 90. Most of the plots are concentrated between x equals 0 and x equals 4, along the full length of the y-axis. The plots move down the y-axis as the x-axis increase. The best-fit line moves straight from (0.5, 42) to (11.5, 0), where R-squared equals 33 percent.

Source: WHO (2023).

Policy challenge 2: It is difficult to ensure affordable access to VHI for those who need it most

Empirical evidence shows that VHI is more likely to be taken up by richer people, which exacerbates inequality in financial protection (affordable access to health care) (Sagan & Thomson, Reference Sagan and Thomson2016a; Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020). This is sometimes the result of policy design – for example, in countries such as Germany where only richer people are allowed to opt out of publicly financed coverage. More often, it is due to insurer behaviour, perhaps in response to concerns about adverse selection (as described above), which makes VHI less accessible to people with a higher risk of ill health and less affordable for people with lower incomes. As a result, it is generally difficult for VHI to improve financial protection in the health system as a whole – but the degree to which affordability is a problem varies according to whether VHI is playing a supplementary, complementary or substitutive role in the overall health coverage mix.

Policy challenge 3: VHI undermines equity and efficiency in the use of resources

Erosion of equity and efficiency in the use of health system resources is a particular challenge when VHI plays a supplementary or substitutive role.

VHI can undermine equity and efficiency in the use of health system resources in various ways (Box 1.3.3). This is most likely to occur in contexts where, rather than complementing publicly financed coverage, VHI plays a significant supplementary or substitutive role, covering the same services as publicly financed coverage and drawing on the same pool of health care providers. Negative spillover effects are common when the services offered by VHI are more expensive than those offered by publicly financed coverage, creating incentives for providers to prioritize the treatment of people with VHI or to work in the private sector. Spillover effects may be present even where VHI plays a minor role, but they become more visible and more detrimental where VHI plays a more significant role.

Other concerns related to VHI include the inefficiencies that arise from duplication of administrative and other responsibilities for managing different risk pools (Smith & Witter, Reference Smith and Witter2004). Risk-rating requires information and auditing capacity to assess individual health risks, write appropriate contracts and monitor health care use (Smith & Witter, Reference Smith and Witter2004). Available data suggest that administrative costs are almost always higher in VHI than publicly financed coverage (Sagan & Thomson, Reference Sagan and Thomson2016a).

Policy challenge 4: History and politics are a challenge to effective public policy towards VHI

Once established, VHI markets can be difficult to shape, especially where VHI plays a larger role.

Aligning VHI with the goals of UHC requires effective public policy. A government’s ability to ensure this may be more difficult where VHI plays a large or significant role, which in turn may be the outcome of historical developments (path dependency), political ideology and the relative power and interests of different stakeholders (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020).

Health care providers and insurers have frequently opposed efforts to expand access to publicly financed coverage or tighten regulation of VHI, sometimes with the support of employers, civil servants and richer people – those most likely to benefit from preserving the status quo. Private interests have blocked or delayed the implementation of universal schemes in a wide range of countries, including Canada, Chile, Germany, Ireland, Kenya, the Netherlands, South Africa, Switzerland and the USA (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020). In some LMICs, the promotion of VHI by donors and other actors has given it disproportionate political power (Pettigrew & Mathauer, Reference Pettigrew and Mathauer2016).

In many countries, VHI does not fall under the purview of the health ministry but is regulated as a financial service by the finance ministry or other ministries concerned more with economic or industrial policy than social policy (Sagan & Thomson, Reference Sagan and Thomson2016a). This is another obstacle to effective public policy and may explain why oversight of VHI is often weak in countries at all income levels (Thomson, Sagan & Mossialos, Reference Thomson, Sagan and Mossialos2020).

If VHI does not yet play a role or only plays a small role in the health system

• Decision-makers should anticipate the policy challenges that VHI brings and consider whether there is enough capacity to monitor and regulate VHI and manage interests. Alongside this, they must remember that, once established, VHI may be more difficult to shape.

• If thinking about introducing VHI, careful consideration should be given to policy design so that it does not undermine publicly financed coverage. Further, clear boundaries between publicly and privately financed health care should be drawn.

• Supplementary VHI (offering people faster access to treatment) is best when it is limited to a small share of the population. Keep it that way. Do encourage growth through tax subsidies or material regulation to make VHI more accessible and affordable.

• Complementary VHI can protect against OOP payments where there are significant gaps in the publicly financed benefits package or heavy user charges. Globally, only a handful of countries have managed to achieve the high rates of population coverage needed if this type of VHI is to help meet UHC goals. Achieving high rates of population coverage comes at a cost: to ensure VHI is accessible and affordable for those who need it most requires heavy government intervention, including tax subsidies exclusively for people with low incomes.

• Do not allow people to opt out of publicly financed coverage. Substitutive VHI does not enhance health system performance. Some countries have abolished substitutive VHI (Netherlands) and others are trying to limit its role (Chile and Germany).

• VHI is not a panacea for high OOP payments. Increases in public spending on health are more likely to reduce OOP payments than VHI, so rather than trying to encourage VHI through tax subsidies or other means, policy should focus on improving affordable access to publicly financed health care. Tax subsidies for VHI are generally inequitable and inefficient and waste public resources.

If VHI already plays a significant role in the health system

• Ensure there is sufficient capacity and political will to monitor and regulate VHI, enforce boundaries between publicly and privately financed health care and manage stakeholder interests.

• Enforce boundaries between publicly and privately financed health care so that VHI does not undermine equity and efficiency in the use of public resources. In practice this can be difficult to achieve due to entrenched stakeholder interests.

• Where VHI plays a significant complementary or substitutive role, careful intervention is needed to ensure affordable access to VHI for those who need it. This can be achieved through material regulation involving a wide range of rules, including open enrolment (guaranteed issue); lifetime cover (guaranteed renewal); community rating (delinking premiums from individual risk of ill health); premium review, approval or caps; mandated (usually minimum) benefits; prohibition of exclusion of pre-existing conditions; caps on user charges for VHI-covered services; and prohibition of benefit ceilings (Sagan & Thomson, Reference Sagan and Thomson2016a).

• Country experience shows that it is not easy to ensure affordable access to complementary or substitutive VHI for people with low incomes or chronic conditions. Some countries have resorted to making VHI compulsory, but this has not been unproblematic, in part because it is a regressive way of financing health care, placing a disproportionate financial burden on those with lower incomes. A better solution would be to make sure that people with low incomes or chronic conditions do not need VHI.

What is ODA?

ODA is defined as government aid that promotes and targets the economic development of developing countries. ODA constitutes over 70% of total external finance of the poorest countries in the world, and the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) provides a unique platform for coordination among aid givers. Formed in 1961, the Committee’s mandate is to promote development cooperation in order to help implement ODA and sustainable development. The Committee comprises an international group of some of the largest providers of aid, including 30 bilateral members (who give aid government to government), six observers (those who channel and pool aid, commonly known as international financial institutions) formed of four MDBs, the International Monetary Fund (IMF) and the United Nations Development Programme (UNDP), and other participants, which are countries who are not members of OECD but want to contribute to discussions of the DAC. The current seven participating countries include Bulgaria and United Arab Emirates.Footnote ³ The DAC list of countries eligible to receive ODA, based on per capita income, is updated every three years. The Committee recognizes ODA as the gold standard of foreign aid, having provided billions of dollars in aid and technical support over the years (OECD, 2023).

How much ODA is there?

Loans versus grants

Notably, most of the support is increasingly provided through loans as grant resources dwindle, which may have long-term consequences: 22% of gross bilateral ODA in 2020 comprised loans and equity investments, up from 17% in previous years. International financial institutions also increased the volume of commitments significantly between 2019 and 2020 from US$ 21.6 billion to US$ 62.5 billion (Dodd, Knox & Breed, Reference Dodd, Knox and Breed2021). Even though, compared to 2019, US$ 40 billion more in concessional loans have been provided in 2020, overall, grants represent just 1.4% of ODA commitments from the international financial institutions. Even if concessional (i.e. on favourable lending terms), these loans carry significant implications because clients (particularly governments) must eventually pay them back. So while this aid may benefit countries in the short term, it can also result in a heavy debt burden which countries may not be able to manage, especially where unforeseen events occur. There have been many calls for eradicating all debt held by the poorest countries. Even prior to the fallout from COVID-19, the IMF found that 36 of 70 low-income countries (LICs) were at high risk of debt distress, or already in debt distress. Many countries have since turned towards debt restructuring, and the pandemic has forced countries to make the difficult trade-off between investments in health and social welfare, versus addressing debt (IMF, 2021).

Which sectors benefit?

Support continues to vary significantly by sector. With the onset of COVID-19, the social sector (including health, education, social infrastructure and services) took centre stage. Social infrastructure commitments by the international financial institutions comprised only a small portion of resources compared to physical infrastructure investments prior to COVID-19. This picture changed dramatically in 2020, when the largest increase in commitments was for the social sector, as measured by percentage change in share of total ODA, especially from international financial institutions. These increases have largely come at the expense of investments in transport, storage, energy and industry. Moreover, worryingly, investments in water and sanitation – critical for the COVID-19 response – fell (Dodd, Breed & Coppard, Reference Dodd, Breed and Coppard2020).

Which countries benefit, by income level?

Historically, ODA commitments from international financial institutions tend to be delivered to lower-middle and middle-income countries rather than lower-income countries; and this trend is likely to continue. The reasons behind this are linked to a number of factors: precedence; project continuity (hence once a client, always a client); the ability of larger and typically more developed countries to borrow and attract higher volumes; and extenuating circumstances (for example, natural hazards or political strife) which can delay or defer support to smaller and/or poorer, less developed countries. In 2019, as a proportion of the international financial institutions’ commitment, middle-income countries received 83% while lower-income countries received 11% (Dodd, Breed & Coppard, Reference Dodd, Breed and Coppard2020). Commitments to high-income countries (HICs) and upper-middle-income countries (UMICs) rose between March 2018 and February 2019 before stabilizing or falling only marginally between March 2020 and February 2021, while commitments consistently fell across 2018 to 2021 for LICs (Knox & Jalles d’Orey, Reference Knox and Jalles d’Orey2021). While it is important to carefully consider the product type (for example whether ODA comes through grants or loans), it is clear there are significant differences in commitment volume across-country income groups.

Why ODA remains critical to health financing

In the medium- to longer-term, ODA for sustainable development financing, particularly for health, will remain critical for a few reasons: the magnitude and nature of support required; the need for consistent, reliable funding; and the weakness/failure of other funding mechanisms.

Type of support offered

The Asian Development Bank’s range of products is separated into regular ordinary capital resources (comprising loans, equity investment and other debt securities), concessional resources (loans and grants) and other special funds (grants only). Contrary to the general landscape of ODA which saw declines in grant resources, the volume of grants disbursed by the bank increased significantly from US$ 514 million in 2019 to US$ 877 million in 2020. Partly due to this, the net resources transfer (the net amount of disbursements in excess of payments of principal, interest and other charges) to Developing Member Countries more than doubled between 2019 and 2020. The bank also provided a record US$ 41.6 million in technical assistance resources in 2020 for medical equipment, personal protective equipment and advisory services.

Which sectors benefited?

The portfolio of approved projects changed significantly owing to COVID-19. Pre-COVID-19, heavily committed sectors were classed as transport, finance and public sector management, with health ranked as the second smallest standalone sector (with commitments totalling just US$ 644 million in 2019). With COVID-19, health operations increased more than fivefold, becoming the fourth largest by volume of 11 sectors behind public sector management, finance and energy. As a share of the total Asian Development Bank portfolio, the health sector accounted for over 11% of the bank’s commitments in 2020, significantly exceeding its target of 3–5% set in the Midterm Review of Strategy 2020. Such trends follow those found in the general ODA landscape introduced earlier.

Which countries benefited, by income level?

The increase in commitments resulting from the COVID-19 response, especially between 2019 and 2020, is reflected in increases in support to all countries, but lower-middle-income countries have benefited the most. In 2020, 67% of the Asian Development Bank’s portfolio was found to have supported lower-middle-income countries (versus 0.2% to HICs, 28% to UMICs, 4% to LICs and 1.2% to the regional portfolio), reflecting their larger economies and higher absorptive capacities. Such trends are consistent with general ODA trends which showed commitments consistently fell across 2018 to 2021 for LICs, with larger volumes supporting middle and HICs.

Factors to consider when assessing ODA as a financing instrument

The concept of ODA – providing government aid to promote and target economic development in countries which need it – is fairly straightforward; however, measuring how successful ODA is executed in practice, and to the extent to which they contribute to sustainable development, is not simple. Some tools are offered here by way of example only.

Assessing ODA quality

The QuODA index summarizes four dimensions comprising: prioritization; ownership; transparency; and evaluation to consider when analysing aid effectiveness (Mitchell, Calleja & Hughes, Reference Mitchell, Calleja and Hughes2021). Prioritization measures how well allocations are targeted to respond to long-term development challenges. Ownership demonstrates how well providers work with countries to ensure ownership and use of national systems. Transparency considers how timely and comprehensive reporting on ODA activities are; and evaluation assesses quality of learning and evaluation systems.

In its most recent assessment referring to aid distributed in 2019, QuODA placed multilateral organizations at the top of overall rankings, scoring highly on all four dimensions. Nearly all resources provided by multilateral organizations reach their intended recipients, with a focus on the poorest and “under-aided” countries (Mitchell, Calleja & Hughes, Reference Mitchell, Calleja and Hughes2021). Recipient countries promote domestic ownership and use of national systems, while untying their procurement practices from domestic contractors. Authors also find that donors that provide the most, also produce the highest quality of aid (Mitchell, Calleja & Hughes, Reference Mitchell, Calleja and Hughes2021). Such trends are largely driven by Scandinavian and northern European providers, who are known for their strong commitment to development finance and impact (Mitchell, Calleja & Hughes, Reference Mitchell, Calleja and Hughes2021).

Such indices provide a partial response to critics of ODA systems, who argue that to improve efficiency, accountability, performance and equity impacts of ODA, more detailed descriptions of financing are needed (McCoy et al., Reference McCoy2009). Critics argue that the landscape is so complex and involves so many stakeholders who are currently not accounted for (for example, non-OECD donors and funds, private sector, philanthropists, etc.) that the current system does not do a good job of tracking and monitoring aid activities. Indeed, the COVID-19 pandemic has shown that multiple stakeholders, not just public sector actors, are critical to overcome global challenges and their financial contributions should be reflected accordingly.

Impact at the organizational level

For donors, the professed priority is to ensure that their resources positively change the lives of those who need aid the most. Organizations, including MDBs, carry out regular evaluations by both internal project officers and independent, external others. Commonly, a systematic tool is deployed to monitor impact, for example, logframes. The extent to which projects are successful can generally be summed up across four aspects: relevance, sustainability, efficiency and effectiveness.Footnote ⁵ Relevance measures whether projects align with country and organizational strategic priorities. Sustainability evaluates if outcomes and outputs may last beyond project completion. Efficiency looks at the use of resources to achieve intended outcomes. Effectiveness refers to the extent to which outcomes and outputs were achieved. Achieving balance between these aspects and applying lessons in the pursuit of the SDGs is an ongoing challenge, in the light of financial considerations such as ensuring high disbursement rates.

Effect of COVID-19 on MDB operations and their health sectors

COVID-19 and its after-effects has given rise to new challenges – especially for MDBs working in the health sector – and will have long-lasting effects on how MDBs operate, and their place in the ODA sphere. Since 2020, not only has ODA been required to support developing countries in their urgent COVID-19 response, but it has also been needed to support medium- to longer-term health goals. For some MDBs, this required a recasting of corporate strategies to give a higher priority to health and social sectors since COVID-19 has taken centre stage in many developing countries in the last few years, even as investments have moved from emergency response towards more longer-term, sustainable outcomes.

In the health sector, increased investment to boost capacity to prevent, detect, and treat COVID-19 (including contact tracing, testing, vaccines and vaccinations, and therapeutics) has been critical. Now the focus has turned to mainstreaming COVID-19 as part of communicable disease control with an emphasis on primary care, basic infection prevention control and strengthening laboratory networks. Restoration of health services which were severely curtailed during the height of the pandemic, and clearing the backlog of missed appointments and surgeries is the first priority. At the same time, as the science evolves and longer-term effects of COVID-19 become better known, the health system will need to cope with the virus’s detrimental consequences on physical and mental health.

In addition to disease control, addressing COVID-19 fully requires countries to focus on various newer areas, including medium- to longer-term vaccine supply for boosters and further R&D to provide these; genome sequencing; vaccination logistics; health data management; and digital or e-health including telehealth, among others. Investments in pandemic preparedness (still an underinvested area) are also required to help avert and mitigate future catastrophes. This, in turn, will require reforms to public financial management including the allocation of funding to health, but which go beyond the health sector alone.

COVID-19 has both highlighted and intensified health-related inequities across ethnicities, sexes, ages and within and across countries; addressing these divides will pose one of the most difficult challenges for the health sector, which must work harder to address the causes of health inequities that lie within its control, and the impacts of those root causes which lie beyond its control. Resources are required to increase access to health care for all – which calls for more outreach, better financial protection and increase in quantity and quality of health care in typically underserved areas. Critically, countries will need to increase cooperation to redistribute resources, recognizing that global public bads can only be controlled when everyone gains access to vaccines and treatments.

The development community will need to take a multisectoral and whole-of-government approach to cross-sectoral concerns. Provision of the following, and more, is needed: basic water supply and sanitation; safe and nutritious food; and clean air and safe environments. Investments to improve the quality of health infrastructure, especially green facilities, will require close coordination with environmental experts; a pivot towards patient-centred care and improved quality of health human resources will require more emphasis on health education and training; and addressing zoonoses will require increased research and cooperation with the agricultural sector. Accordingly, ODA must shift from a sector-by-sector approach towards addressing challenges along salient trends and themes.

Conclusions

This chapter has analysed what ODA is, why it is important and its major trends, highlighting health ODA trends. It has focused on MDBs as critical ODA players, using a case study of the Asian Development Bank and its experience in financing COVID-19 response and recovery. ODA remains the main source of international development financing for many developing countries, and has proved its worth by stepping up during the COVID-19 pandemic. The DAC mechanism enables a consensus-led, concerted effort to deliver aid to those who need it the most, while supporting the monitoring of the quality of public spending and investments. However, the true test of ODA is whether resources have had a meaningful impact on development outcomes: while this chapter has touched on ODA volumes, effectiveness and its measurement with regards the health sector, focused research is required to fully comprehend medium- to long-term results and support evidence-based policy-making across multiple sectors and themes. This will become more salient as the world tackles other challenges such as the climate crisis and food insecurity. The Asian Development Bank and other such agencies must continue to build on the successes from the COVID-19 response, and stand ready with increasingly plentiful, innovative and agile financing mechanisms.Footnote ⁶