Understanding the Theory and Process of Strategy Development: Financial Management of Health Services

Key points:

• Financial balance is essential for all health organisations

Funding Health Services

There are five main ways to fund health services, each of which have advantages and disadvantages:

1. General Tax

2. Hypothecated Tax

3. User pays out-of-pocket

4. Private Medical Insurance

5. Social Insurance, sometimes, compulsory in law

Note that in most countries all five systems are used - the difference is which ones are dominant

1. General Taxation
   Definition: general taxation refers to both direct and indirect tax receipts collected by government to fund among other things healthcare.
   Advantages:

• General taxation is regarded as being highly efficient, delivering strong cost containment

• It forces prioritisation through what are typically overall cash-limited health care budgets set by the government and allows trade off of spend on health care with other public health priorities such as education or reducing poverty

• Ensures universal access to services irrespective of ability to pay.

• Low administrative costs

• Tax financing can help individuals in difficult times when they are less able to afford out-of-pocket payments or private insurance.

• Because it draws revenue from a wide base, it helps to minimize distortions in particular sectors of the economy.

Disadvantages:

• The government has both a strong incentive and the capacity to control costs which could result in poor services

• Because the service is free at the point of use it can encourage overuse and high expectations

• Reliance on general tax financing can leave a health system vulnerable in times of economic and fiscal difficulties.

• The degree of individual choice tends to be relatively limited, although this is being remedied under Choose and Book.

2. Hypothecated Tax
   Definition: hypothecated tax is a component of general taxation, usually based on income; it is normally levied to be used for a particular purpose. The current National Insurance scheme was started by Lloyd George in 1911 as a form of hypothecated taxation, but it doesn't work like that now The best example of a hypothecated tax is the use of tobacco tax for anti-tobacco work in California.
   Advantages:

• The electorate are generally willing to pay if they can see what they are getting for their money

• There is an identifiable link between the money paid and the service received

• The scheme is progressive so that those who earn more pay more

• Nobody is excluded from the service because they cannot pay - service is still free at the point of delivery

• Allows preventive services to be funded.

Disadvantages:

• Because the service is free it encourages over-use and it will not reduce demand

• Over-use may be exacerbated if people want to get back what they have paid in

• In time it may not increase funding if contribution from general taxation is withdrawn as hypothecated tax increases

• May require a separate and complicated administration

• Difficult to resist demands for further fragmentation of general taxation (e.g. for education, social security).

3. User 'pays out-of pocket'
   Definition: there are two forms of user charges
   a) those that top up funding from other sources (general taxation or various insurance schemes) e.g. prescription charges, or charges for dental treatment and eye examinations.
   b) those that cover the entire cost of treatment.
   Advantages:

• Can help to encourage a more responsible use of resources by limiting wasteful and unnecessary activity because people think before spending their own money on health care

• People do not spend money on food or heating while in hospital, so charges do not penalise people if they are used as top-up.

Disadvantages:

• People who most need service cannot afford to pay (inverse care law)

• Many people will cover themselves with private insurance leaving those who cannot afford charges doubly disadvantaged

• Where full user charges exist (e.g. US, although the US has Medicare, Medicaid and Veterans Administration) the proportion of GDP spent on health is high, but the public health benefits are questionable.

• There tend to be a large number of exemptions requiring funding from general taxation (e.g. children, elderly, chronic sick, certain conditions).

• People with stigmatising conditions, or those where insight into their health problems (such as HIV, GU infections, psychotic mental illness) may be deterred from seeking help.

• Preventive services may lose out in funding terms to acute/curative services.

4. Private Medical Insurance
   Definition: private insurance is run by companies, usually for profit, and contributions are paid by individuals.
   Advantages:

• Weighting of premiums according to use means that there is a deterrent effect on demand.

• Countries offering this system spend a high proportion of GDP on health care

• The costs of every aspect of care are made more explicit

• Insurance companies may manage care to ensure only effective forms of treatment are used

Disadvantages:

• Those who need insurance most often cannot afford it e.g. poor, chronic sick

• Employers often offer this as a benefit, leading to double disadvantage for unemployed

• May increase demand as people seek to get what they pay for

• Preventive services may lose out in funding terms to acute/curative services

• There still needs to be a system to cover those who cannot afford insurance

• There still needs to be a system to cover public health and preventive programmes

• Not all the money that is paid in goes on health care - profit motive.

• People have to seek prior approval for spending, even in emergency situations

• People will shop around until they get what they want - demand may increase among some sectors.

5. Social Insurance
   Definition: social insurance is a system where employers and employees make contributions which are compulsory, and premiums are underwritten by the state for high risk and non-employed groups.
   
   National Insurance is a form of social insurance, although in practice is part of general taxation. People generally have to pay for services then make a claim afterwards, and re-imbursement may not be complete.
   Advantages:

• Funding of health services tends to be removed from the political arena

• A system of payment and retrospective claim may limit demand

• Payment by employers may act as incentive to health and safety if they are penalised for ill health

• Non-profit making so all money paid in goes on either administration or health care.

• As with tax-financed systems, access to health services is typically universal or near universal and not based on ability to pay.

Disadvantages:

• May not limit demand as there is an element of getting value for the contribution paid

• There is generally little scope for expression of individual choice.

• May deter employers from taking on sick or disabled employees

• A high proportion of demand is not covered (elderly, unemployed, chronically sick, children) and therefore substantial amount of state underwriting remains

• Claims scheme may be complicated and deter genuinely sick from seeking help, particularly in conditions such as HIV, psychotic mental illness

• Social insurance contributions are raised from a narrower base than general taxation, with the costs falling mainly on employers and employees rather than the wider group of taxpayers. This may lead to economic distortions and disincentives as the revenue base is more concentrated on employment.

• Social insurance systems can also be vulnerable to periods of economic downturn which can result in reduced revenues into the sickness funds

• Social insurance is not as progressive as general taxation and may be regressive if the sickest groups have to pay highest premiums.

• Responsibility for funding preventive and public health services is unclear

• High earners may be allowed to opt out in favour of private schemes which depletes the social insurance scheme of funds

• Patients may shop around and see several doctors until they get what they want, increasing demand without increasing benefit.

Budget Statements

• NHS budget statements usually have three sections:

  • Pay (includes salaries + on costs of National Insurance at 11%, Superannuation at 14%)

  • Non-Pay (includes rent, rates, stationery, photocopying, telephone, refreshments etc)

  • Income (includes project money etc)

Purchasing health services and the role of the Public Health practitioner

The current financial management situation in England is as follows but it is currently under radical reform: 

• funds are allocated to PCTs by the Department of Health

• PCTs fund hospitals and other health care providers through Service Level Agreements which are negotiated yearly

• PCTs collaborate, and may or may not pool their budgets, for some specialist commissioning e.g. Renal, haemophilia

• the purse is finite and the PCT has to achieve financial balance

• Public Health practitioner can provide:

  • evidence

  • facilitator to accommodate opposing views

  • discussion of cost effectiveness and cost minimisation (i.e. where costs are different but outcomes identical) and potential cost savings (if any)

  • the role of the suggested investment in relation to Public Service Agreements (PSA) targets, NHS Plan targets, Local Area Agreements (LAA) and local PCT targets.

  All systems need to consider:

  • the consumers right to choose on the one hand, versus evidence where it is available on the other

  • lack of evidence does not necessarily mean lack of effectiveness

  'Not everything of value can be measured and not everything that is measured is of value'

Need to consider the following changes:
A. Payment by Results
B. Practice-based Commissioning

A. Payment by Results

The aim of the new financial system 'Payment by Results' is to provide a transparent, rules-based system for paying trusts. Strictly speaking the system will pay for activity not results e.g. for number of operations done not lives saved. The aim is to reward efficiency, support patient choice and diversity and encourage activity for sustainable waiting time reductions. Payment will be linked to activity and adjusted for casemix. The central idea is that the NHS will be a fixed price for a particular operation of treatment wherever the care is provided (i.e same price for all hospitals) This system aims to ensure a fair and consistent basis for hospital funding rather than being reliant principally on historic budgets and the negotiating skills of individual managers.

Primary Care Trusts (PCTs) will commission:

• the volume of activity required to deliver service priorities, adjusted for casemix (i.e. the mix of types of patients and/or treatment episodes)

• from a plurality of providers

• on the basis of a standard national price tariff, adjusted for regional variation in wages and other costs of service delivery

Potential disadvantages:

• Acute Trusts may be reluctant to go for evidence-based procedures

• Might not be able to commission on a population need basis

B. Practice-Based Commissioning

Practice-Based Commissioning is championed by the Department of Health who are encouraging consortia of practices to take over the commissioning role from the PCTs. The idea is that GPs know better than anyone else what their patients need and which hospitals can best provide it. In terms of market theory, GPs can overcome the information deficit in a market system of health care.

The DH believe that Practice Based Commissioning will produce the following positive outcomes:

• A greater variety of services, from a greater number of providers in settings that are closer to home and more convenient to patients.

• Increased support of clinician-to-clinician dialogue about improving and developing care processes.

• Early and continuing involvement of practitioners in service development

• An additional set of levers to aid demand management through more efficient use of resources.

Download practice based commissioning guidance (PDF, 222K)

Potential disadvantages:

• loss of population perspective

• reduced economies of scale

• maintenance of levels of activity in some Acute Trusts

• GPs may lack the time, the expertise and the motivation to do this work

• An unfair bias for those with a higher level of understanding, thus increasing health inequalities

• Concern by those who make a choice and them blame themselves if something goes wrong, particularly when made for a third part e.g. child

© K Enock 2006