Assessing financing mechanisms for their ability to deliver an insurance function

Ministry of Health and Family Welfare

Government of the People's Republic of Bangladesh

Assessing financing mechanisms for their

ability to deliver an insurance function
Research Note 23
June 2007
Author: Tim Ensor

Health Economics Unit (HEU)

gtz
1

Assessing financing mechanisms for their ability to deliver an insurance function

Assessing financing mechanisms for their ability to deliver an insurance function

HEU Research Note 23

June 2007

Dr. Tim Ensor

Dr. Md. Anwar Hossain Munshi, Joint Chief (Joint Secretary)

Health Economics Unit
Ministry of Health and Family Welfare
Government of the Peoples Republic of Bangladesh

Ansary Bhaban (3rd Floor)

14/2 Topkhana Road
Dhaka 1000, Bangladesh

Tel: +88 02 7169832, 7169835

Fax + 88 02 7169831
Email: info@heubangladesh.org
Website: www.heubangladesh.org

Assessing financing mechanisms for their ability to deliver an insurance function

Past papers prepared by the HEU

Research papers
Working papers report on recent research carried out by, or in collaboration with, the
Health Economics Unit. The research may be based upon new primary data or upon the
fresh analysis of secondary data.
1.

A public expenditure review of the health and population sectors, September 1995

2.

An analysis of recurrent costs in GOB health and population facilities, July 1995

3.

Balancing future resources and expenditures in the GOB health and population sectors,
January 1996

4.

Mobilising resources through hospital user fees in Bangladesh: a report on quality and
ability to pay, August 1996

5.

An assessment of the flow of funds in the health and population sector in Bangladesh,
January 1997
Myemensingh Medical College Hospital: financial analysis (FY1994 -5), July 1997

6.
7.
8.
9.
10.
11a
11b.
12.
13.
14.

Cost analysis of caesarean section deliveries in public, private and NGO facilities in
Bangladesh, March 1998
Cost-effectiveness analysis of caesarean section deliveries in public, private and NGO
facilities, April 1998
Resource envelope for the 5th health and population project: preliminary estimates, May
1997
Unofficial fees at health care facilities in Bangladesh: price, equity and institutional
issues, September 1997
Cost benefit analysis of reducing lead emissions from vehicles in Bangladesh, January
1998.
Health and technical cost benefit analysis of options for reducing lead emissions from
motor vehicles in Bangladesh, January 1998
Economic aspects of human resource development in Health and Family Planning: flow
of funds, September 1998
Economic aspects of human resource development in Health and Family Planning: dual
job holding practitioners, September 1998

15.

Economic aspects of human resource development in Health and Family Planning: Costs
of Education and Training, September 1998.
A survey of private medical clinics in Bangladesh, September 1998.

16.

Bangladesh Facility Efficiency Survey, November 1999

17.

Public Expenditure Review of the Health and Population Sector, 1998/9

18.

Resource allocation in the health sector of Bangladesh:

a case study of Medical and Surgical Requisites, February 2000
Public Expenditure Review of the Health and Population Sector, 1999/2000

19.
20.
21.

Calculation of total unit cost for diarrhoeal management at district hospital and thana
Geographic resource allocation in Bangladesh, March 2001.

Assessing financing mechanisms for their ability to deliver an insurance function

22.

Who benefits from public health expenditure?, March 2001

23.

Financing the health and population sector resource projections, May 2001.

24.
25

Funding health care in Bangladesh assessing the impact of new and existing financing,
May 2001
The current costs of essential health services - a study of government facilities, June 2001.

26.

Projecting the cost of the Essential Service Package, June 2001.

27.

Study on Tuberculosis and the poor, June 2001

28.

30.

Study on Public and Private Hospital Provision of the ESP and Non-ESP Services
Efficiency, June 2002
Public Expenditure Review (2000/01) of the Health and Population Sector Programme,
October 2001.
Public Health Services Utilisation Study, November 2003

31.

National Health Accounts 1996 -2001, June 2004

32.

Public Expenditure Review (PER) 2003-04 Health Nutrition and Population Sector
Program, June 2006.

29

Research Notes
Research notes are prepared by staff of the Health Economics Unit or other collaborating units. The
objective is to raise important research questions that might later be researched in more depth. The series
includes research concept notes, structured literature reviews and surveys of current research in a particular
area.
3.
4.
5.
6.
7.
8.

Draft terms of reference and background briefing document: a pilot programme for
resource mobilization through user fees in the MOFHW, Bangladesh, September 1995
Key issues in costing an essential package of health services for Bangladesh, May
1996
User fees, self-selection and the poor in Bangladesh, August 1996
An agenda for health economics research concerning antibiotics usage standards in
developing countries: the case of Bangladesh, July 1996
Experiences with resource mobilisation in Bangladesh: issues and options, June 1997

10.

A pre-feasibility analysis of social health insurance in rural Bangladesh: the NGO

model, June 1997
Resource envelope for the 5th health and population project: preliminary estimates,
May 1997
Resource envelope estimation for HAPP5, November 1997.

11.

Health insurance for civil servants of Bangladesh, January 1998.

12.

Private medical clinics in Bangladesh, February 1998

13.

Development of a Health Economics Database Archive for Bangladesh, September

1998.

14.

Pricing health services: where to now?, November 1999.

9.

Assessing financing mechanisms for their ability to deliver an insurance function

15.
16.
17.
18.
19.
20.
21.
22.

Costing the ESP: overview of previous studies and current research needs, December
1999.
Economic indicators for monitoring the HPSP, February 2000
The public-private mix in health care in Bangladesh, May 2000
Covering the population: extending health insurance in Bangladesh
Health insurance in South-East Asia and lessons for Bangladesh, July 2000
Strategies for developing health insurance in Bangladesh, October 2000
Towards a poverty strategy for the health sector, February 2001
Proposal to Ministry of Finance for local utilisation of user fee revenue on a pilot
basis within HPSP, November 2000

Occasional Papers and other publications

Occasional papers (OPs) are prepared by members of the HEU principally for internal use. OPs
may also be prepared for special purposes such as the HPSP/HNPSP Annual Programme
Review. Some OPs are later edited and issued as research notes or papers.
Also available:
Public-private mix for health sector development: proceedings of the fourth annual conference,
25-26th July 1999
Bangladesh National Health Accounts 1996/97, Final report, Data International/ Health
Economics Unit.
Operational Mechanism for Social Health Insurance in Poverty Prone Sub-district of
Bangladesh: Development of Tools & Guidelines, March 2005.
The Development of Proposed Alternative Models for Social Health Insurance (SHI) Schemes in
Bangladesh for Different Populations, October 2005.

Assessing financing mechanisms for their ability to deliver an insurance function

Contents
Contents .......................................................................................................................... 1
Abstract ........................................................................................................................... 8
Introduction..................................................................................................................... 9
The insurance function.................................................................................................... 9
International priorities in low income countries ........................................................... 10
Assessing the potential of financing systems to provide risk-protection...................... 12
Discussion: a way forward............................................................................................ 19
References..................................................................................................................... 20

Assessing financing mechanisms for their ability to deliver an insurance function

Abbreviations
APIR
APR
ESD
ESP
GOBI-FFF
HNPSP
HPSP
HEU
IMCI
MOHFW
NGO
OECD
PER
STI

Annual Programme Implementation Report

Annual Programme Review
Essential Services Delivery
Essential Services Package
Growth monitoring, ORS, breast feeding, immunization - food production,
female literacy, family planning
Health, Nutrition and Population Sector Programme
Health & Population Sector Programme
Health Economics Unit
Integrated Management of Childhood Illness
Ministry of Health and Family Welfare
Non Government Organisation
Organisation for Economic Cooperation and Development
Public Expenditure Review
Sexually Transmitted Illness

Assessing financing mechanisms for their ability to deliver an insurance function

Abstract
Although mentioned as an objective of HNPSP, funding for catastrophic health care risks
remains extremely low in Bangladesh. Public funding focuses predominantly on primary
care led essential services delivery. At the same time there remains considerable interest
in alternative financing mechanisms such as vouchers and other demand side mechanisms
although these are largely not suited to the financing of uncertain, catastrophic services.
The extent of social and micro/community insurance remains small. Although there are
an increasing number of micro-insurance schemes, the proportion of the population
covered remains low. Social insurance has largely not developed although more rapid
growth and an increased industrial sector means that there may be some potential for
exploring ways of extending more risk protection to the formal sector using such
mechanisms. In considering ways of increasing the level of financial pooling it is
worthwhile also examining how the existing public sector might be enhanced to provide a
greater level of protection from catastrophic costs. The hospital sector in Bangladesh
remains small and largely unrelated to population need. The policy agenda for financing
of the sector should explore how resource allocation, management and investment in this
sector could be enhanced to provide for a greater proportion of catastrophic needs.
Keywords: health insurance, catastrophic risk, financing, risk pooling

Assessing financing mechanisms for their ability to deliver an insurance function

Introduction
The aim of this note is to stimulate the debate about what type of risk pooling could and
should be used to reduce the consequences of catastrophic spending due to ill health in
Bangladesh. The note is written in full knowledge that this question has been asked many
times over the last 10 or more years including by the HEU; see (Ensor & Dave Sen, 2000;
HEU, 1997, , 1998, , 2000; Hoque, 2005; K.M. Mortuza Ali, 2005). Debating whether
current health financing mechanisms are adequate is a natural part of the long term policy
cycle. Bangladeshi economic growth rates are quite high, there are projections of
considerable urbanisation of over the next 20 years and the formal sector is expanding. In
addition it may be helpful to view the issue not solely from the perspective of
mechanisms how can the country encourage the extension of insurance systems? - and
more from the side of the risk-reducing function. Taking this perspective forces us to
consider how this risk-reducing function might be enhanced within the existing publicly
financed system as well as by developing new mechanisms for risk reduction.

The insurance function

Discussions of health financing methods frequently proceed by focusing on tools to
provide insurance. Yet a point made forcefully by Kutzin is the importance of first
focusing on the main functions or objectives of health care financing and only after this
to assess the extent to which different financing tools deliver on these objectives (Kutzin,
2001). Four functions of financing systems are described:

resource generation providing adequate funding for individual and population

needs at minimal administrative cost,
pooling of funds funds provided by contributors and placed into a pool and used
by individuals when they have need of health care,
purchasing selecting services that are of most benefit to individuals for the
funds expended
paying providers using mechanisms for reimbursing the providers of care that
encourage efficient and high quality services

Insurance of any time is principally required in order to mitigate the negative financial
consequences of uncertainty. Ultimately these financial consequences may affect a
households ability to secure good education, health and lifestyle for its members or
require it to take action to secure additional resources such as selling productive assets
or taking out loans that in themselves can increase the likelihood of future
impoverishment. It follows from this that adequate insurance is associated with several
financing functions. A fundamental principle of risk mitigation is that contributions
collected from members are pooled so that when individuals require benefits that exceed
their individual means they can draw from this pool to finance their own care. Adequate
resource generation obtained at low administrative cost is also important community
insurance systems are often criticised for taking too large a slice of income for

Assessing financing mechanisms for their ability to deliver an insurance function

administration. Provider payment mechanisms have been shown to be important in
inducing behaviour that delivers good quality services.
A further implication of the insurance requirement, however, is that services being
obtained will have a substantial negative impact on household income. In turn this
suggests that services being purchased are those that would represent a substantial burden
if brought directly by individuals and households. The important costs to households do
vary considerably with context. The direct service costs (supply side) of providing
services at facilities and by medical practitioners will usually be important. Yet there is
also much evidence that costs that affect the consumers willingness and ability to reach
treatment, costs such as transport, attendants costs and lost production can also
represent a substantial burden to households (Ensor & Cooper, 2004). These are not
usually covered by traditional insurance systems although they are increasingly being
recognised in the design of new financing mechanisms.

International priorities in low income countries

In recent years much of the emphasis of governments and development partners in
financing health care has been to ensure the purchase of cost-effective services and to
target these services primarily at the poor. This approach began with prioritisation
initiatives such as GOBI-FFF1 continued with the high profile essential service package
described in the 1993 World Development Report and has now been replicated in many
countries that have planned, costed and implemented essential, minimum or basic
packages of services (Pearson, 2000; Walt & Rifkin, 1988; World Bank, 1993).
Bangladesh began implementing its own Essential Service Package (ESP) during HPSP
and has continued the approach with Essential Services Delivery (ESD) under HPNSP
(GOB, 1998; Ministry of Health and Family Welfare, 2005).
Emphasis on the poor begins from much quoted research that suggests that despite its
ambitions, public health services (and indeed other public services such as education)
often do not reach the poorest segment of the population but are captured by the middle
and upper (although the very rich often abandon the public sector entirely opting for
private services financed from private contributions) income groups (Castro-Leal,
Dayton, Demery, & Mehra, 1999; Demery, 2000). The reasons for this are not difficult to
uncover and include the near universal fact that the best facilities are usually
predominantly situated in areas which are relatively wealthy and the payments both
official and unofficial - that must be made once at a facility together with more subtle
barriers such as lack of information on where to seek care and informal prioritisation of
influential and wealthy patients once in a facility. The findings have led to a much greater
emphasis being placed on targeting services to poorer populations.
In Bangladesh during HPSP this emphasis was based on a policy of targeting more
resources towards facilities at Upazila and below on the basis of evidence that these
facilities were and are used predominantly by lower income groups. Under HNPSP this
1

Growth monitoring, ORS, breast feeding, immunization (GOBI) food production, female literacy, family
planning (FFF) package Introduced by UNICEF.

10

Assessing financing mechanisms for their ability to deliver an insurance function

policy has been adjusted with greater emphasis given to targeting not only facilities and
services that are used by the poor but also to providing more resources to poorer
households. In resource and implementation terms the programme remains largely
focused on a targeted delivery strategy that predominantly emphasises essential services.
An essential services delivery strategy targeted at the poor is undoubtedly a vital tool for
raising the level of health and reducing disease in the population. Essential packages help
to emphasise the resourcing of services that should be provided at zero or very low cost
to the entire population. A targeting strategy helps to ensure that monitoring indicators do
not just look at population averages but focus also on the sometimes enormous disparities
between the poorest and richest. Analysis of Demographic and Health Surveys (DHS),
for example, have shown that across the countries where the survey is done the difference
in infant mortality between the richest and poorest wealth quintile is more than two fold2.
For some measures of utilisation the gap is even greater: the difference between rich and
poor in the use of skilled attendance, for example, at delivery differs by a factor more
than 5 across low and middle income countries. In Bangladesh studies continue to show a
disparity between utilisation and resulting benefits incidence of the rich compared to the
poor (Al-Sabir, Sultana, Bhadra, & Rahman, 2006; HEU/Research Training and
Management International, 2006).
At the same time targeted ESPs are not necessarily a good way of ensuring that an
insurance function develops within the sector. There are two issues. Firstly, the type of
services included in an typical ESP - treatment for malaria, tuberculosis, IMCI etc
although extremely important from a health point of view are not necessarily the most
important in terms of financial risk to the household. The diseases themselves, if not
alleviated, have the potential to push a household into poverty but on their own they are
not that expensive to treat. There are of course exceptions: complications of pregnancy
can certainly prove both unpredictable and costly to treat and often far exceed a
households financial capacity (Jo Borghi, Ensor, Somanathan, Lissner, & Mills, 2006).
Yet in the majority of cases costs will not cripple a family. The case for financing
treatment as part of a package rests far more on the importance of dealing with
externalities, overcoming information barriers and ensuring that quality, cost-effective
services are provided through recognised outlets as a way of preventing more serious and
costly conditions and complications.
A second issue is the specific targeting of the poor, particularly targeting of individual
households. There is plenty of evidence to suggest that individual targeting in health is
usually not effective (Bitran & Giedion, 2003; Weiss, 2006). Methods used can be crude
and administratively costly while the effect is often to miss many of those in need while
the influential non-poor are often able to capture benefits. Yet even if these problems are
avoided, concentrating only on those already in poverty, may not be sufficient in ensuring
an insurance function. One of the key objectives of insurance is that it is meant to protect
2

http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTHEALTHNUTRITIONANDPOPULATIO
N/EXTPAH/0,,contentMDK:20216946~menuPK:400482~pagePK:148956~piPK:216618~theSitePK:4004
76,00.html

11

Assessing financing mechanisms for their ability to deliver an insurance function

households from being pushed into poverty. Although poverty indices sometimes suggest
otherwise, poverty is a dynamic phenomena with households slipping in and out of
poverty as a result of seasonal harvests, changes in household dependency and unexpectantly large expenditures (Scoones, 1998). Some health expenditures are themselves
enough to push households into poverty. A study in Indonesia, for example, found that
without financial assistance for a scheme aimed at the poor around 13 percent of a sample
of women requiring emergency obstetric care would have been pushed into poverty (see
figure) . This is in contrast an estimated 6 percent of the sample that already had a
household monthly income less than the official poverty line. The lesson from this is
clear; if a system is to help protect the population from the financial consequences of illhealth it must target a much larger group than those in lowest income or wealth groups.
Figure 1: Pens parade of EOC pre and post household income in Indonesia (Banten Province)

Expenditure/year
Post expenditure
Poverty level

4.0

Higher
income

3.0

2.0

Poverty level

1.0

92
10
5
11
8
13
1
14
4
15
7
17
0
18
3
19
6
20
9
22
2
23
5

79

66

53

40

27

0.0
1
14

Annual household income (Rp. million)

5.0

-1.0
Cases (poorest to richest)

Assessing the potential of financing systems to provide riskprotection

i) Social insurance
One common response to a lack of risk-pooling in the health systems of low and middle
income countries has been to encourage the development of parallel health insurance
schemes. Many OECD countries have systems of universal or near universal coverage
provided through social insurance. Social insurance is usually financed largely from an
earmarked payroll tax based on both employee and employer contributions calculated as
a percentage of earnings. This feature means that such systems are largely proportional
although a lower limit or lower contribution for low-earning employees may make the

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Assessing financing mechanisms for their ability to deliver an insurance function

system progressive while an upper limit on contributions can render the system
regressive. Evidence in Europe suggests that on average social insurance systems are
mildly regressive (Wagstaff & Doorslaer, 2000). An upper limit is often imposed to
demonstrate that the contribution is for a defined service rather than just another tax. A
functioning social insurance mechanism depends on the ability to collect a mandated
(compulsory) contribution for health care from the payroll that entitles those contributing
to a defined package of services. As such it is mainly suited to the formal sector. Some
countries also encourage voluntary contributions from the self-employed and other
workers but this is often not successful.
A recent review argued that while social insurance can be successful covering the poor
(through subsidies) and the formal sector, it is generally not a good mechanism for
covering those in the informal sector (Wagstaff, 2007). Vietnam is a good example of
this. Social insurance was developed to cover the formal sector while a system was also
introduced for the poor. These systems worked fairly well to cover much of the target
population. Voluntary insurance was used to cover the (majority) informal sector, largely
farmers and other agricultural or fishery worker. This scheme has failed to develop and
numbers in the scheme have only been boosted relatively recently with the extension of
the scheme to children through schools (Carrin, Hollmeyer, Jones, Everard, Ron, Savioli
et al., 1999).
ii) Community or micro insurance
Micro or community insurance has been proposed as an alternative in societies where the
formal sector is not well established. Community insurance is usually based on the
voluntary purchase of an insurance package. Because it is voluntary there is usually
limited scope for subsidising the premiums of the poor since substantial cross-subsidy
will deter wealthier members from contributing (a type of adverse risk selection the
scheme ends up covering only the high risk, low contributing members). It is argued that
basing schemes around small communities may increase the likelihood that social
relationships will increase the willingness of richer members to contribute voluntarily on
behalf of other members of the community.
Although the coverage in terms of membership and benefits paid of most community
schemes tend to be limited the development of such schemes should not be dismissed
lightly. Universal systems in Europe largely developed as a result of the merger of small
scale schemes based around workplaces, guilds and farming communities. There is also
recent experience of the development of universal coverage through the merger of
schemes that include rural community insurance (health card) in Thailand and earlier in
South Korea. Recently Ghana has begun a process of extending universal coverage by
linking both district NGO based schemes with formal social insurance; Kenya has similar
plans. In Bangladesh community insurance has been launched by a number of major
NGOs including BRAC and Proshika, Grameen and Gonoshastaya Kendra (GK)
(Desmet, Chowdhury, & Islam, 1999). One recent report found that there were around 13
microinsurance schemes operating in the country (Ahmed, Islam, Quashem, & Ahmed,
2006).These schemes have had some success in extending coverage although it is
noticeable that coverage has not increased substantially in the last five years. The same

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Assessing financing mechanisms for their ability to deliver an insurance function

report found that three of the biggest Grameen, BRAC and Society for Social Services
had around 150,000 members while GK enrols perhaps 75,000 households. These are
substantial schemes but clearly a very small proportion of the Bangladesh non-formal
sector.
Several issues arise if community insurance is to provide adequate insurance particularly
for poorer groups. In order to ensure affordability it is necessary to obtain funding to
subsidise premiums. Some level of government intervention to ensure this subsidy and
begin to link schemes may be essential if community insurance is really to attain a
substantial level of population coverage. Such government intervention should be
approached with care. While the success story of Thailand is often quoted, other less
successful, at least in the early stages, examples of government intervention also exist. In
relatively successful local pilot schemes were taken over probably too early by national
government that then struggled to enrol voluntary contributors at least partly because
local features were lost (Ensor, 1995).
A system for providing subsidy to the poor implies some mechanism for identifying those
that will receive the subsidy. In addition, although community insurance systems may
develop to include catastrophic services, they often begin largely as pre-payment cards
that permit individuals to spread the cost, particularly of medicines, throughout the year.
Extending this to permit proper risk pooling requires that premiums are actuarially
calculated to cover larger catastrophic expenses and methods are in place to ensure that
the usage of services by members is restricted to prevent bankruptcy. This requires a
management capability that may be viable in community schemes run by larger,
established NGOs but not immediately practical within micro insurance schemes based
around small communities widely encouraged during the 1990s (ILO, 2000).
Table 1: Features of health system funding systems
Resource generation

Pooling

Targeting

Type of services

Social insurance
(payroll taxes)

Funding can be collected

at relatively low cost.
Usually restricted to the
formal sector.

Pooling restricted
to those
contributing usually the formal
sector.

Entitlement is based
on contribution but
since these are income
related poorer
employees can benefit
disproportionately.

Usually social insurance is

focused largely on curative
services including
hospitalisation.

Community or
Micro insurance

Funding is voluntary and

often collected at
relatively high cost (a
cost that may be masked
by hidden in-kind
contributions from
donors and NGOs). Total
funding available is
usually quite small.

Extent of pooling
is restricted by
the need to
ensure that
members remain
in the scheme.

Voluntary and usually

flat-rate premiums may
restrict the
opportunities for
targeting groups
unless a third party
source can be found
for their contributions

Both small/regular primary

services and
secondary/catastrophic
services may be covered. In
most cases the former makes
up the majority

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Assessing financing mechanisms for their ability to deliver an insurance function

Resource generation

Pooling

Targeting

Type of services

Private insurance

Limted to those
volunatarily buying
insurance.

None - unless there is

public purchase of
private insurance
products.

Usually largely focused ion

curative services, mostly
inpatient and specialist
outpatient/diagnostics.

Medical savings
accounts

Tends to be quite limited

even in countries where
they are well established.

Pooling is
restricted to those
choosing to
contribute mostly the
relatively wealthy.
Inter-temporal but
not interpersonal
pooling.

Usually restricted to
those in formal
employment.

Limited to the amount in the

account - can be linked to
catastrophic insurance
schemes.

Vouchers

A mechanism not a
financing source.

Limited since a
voucher is usually
for a pre-defined
service. May
allow pooling
within treatment
groups (e.g.
delivery care).

Can be targeted at a
group or area as
required.

Usually focused on small

predictable services to extend
choice and encourage
purchase. May include some
catastrophic services but then
will be better provided through
a proper insurance scheme.

Conditional cash
transfers

An allocation mechanism
not a financing source.

Not a pooling
system

Can be targeted at a
group or area as
required.

Cash provided to boost

regular household income but
unlikely to protect against
large risks. Conditional
services usually important but
not catastrophic.

Consolidated tax
funding

Multiple funding sources

at relatively low
administrative cost.
General tax evasion
main threat.

Pooled funding
from taxation.

Entitlement based on
citizenship or
residency.

Depends on public priorities

for funding.

User fees

Although private
payments are ubiquitous,
official collection in
private facilities can be
administratively
expensive.

Not a pooling
system

Exemptions may
reduce impact on the
poor

Depends on purchasing power

of user.

iii) Private insurance

Private (commercial) insurance usually assesses individual risk usually determined
strongly by past or likely future use of services - as a basis for setting premiums. This
mechanism ensures that premiums are not affordable for most people in low income
countries. Risk pooling is achieved across those buying insurance. People buying private
insurance usually do so to cover secondary, specialist care although insurers may impose
limits on the amount that can be claimed in order to reduce their potential losses.
In recent years several low & middle income countries have examined how to use private
insurance companies as carriers for public financed insurance products. Countries such as
Colombia have systems that permit people to opt for private insurance packages rather
than the public package. In Georgia, the government is developing a system that will
allocate public money to private insurers for hose below the state-determined poverty line

15

Assessing financing mechanisms for their ability to deliver an insurance function

. The latter represents an extremely bold experiment and there are fears that the state
structures will not be adequate to regulate the resulting system.
iv) Medical Savings Accounts
Medical savings accounts have been developed as a way of encouraging savings for
health care. The principal idea is that regular contributions are placed into an individual
account that can be used only for the medical care of the individual contributor. They are,
therefore, attractive in countries where it is difficult to develop systems of social
solidarity. It is no accident that, outside Singapore where savings accounts were
pioneered, the main countries to develop widespread systems are China, where
individuals are disillusioned with forced solidarity systems such as the commune, and in
the USA. It should be noted, however, that savings accounts work best where
contributors can easily be transferred from the payroll and where there is a well
established technology to make use of the card (electronic cards for adding contributions
and deducting expenses have become universal in technology-rich China). Contributions
tend only to represent a small fraction of total expenditure even in wealthy Singapore.
Savings accounts are really sophisticated pre-payment cards permitting smoothing of
expenditures across the lifecycle rather than the year. They are not really suited to
financing the larger catastrophic payments and, for example, Singapore has an add-on
system of insurance to financed such services in the event that the savings account is
insufficient (Pauly, 2001).
v) Vouchers
In addition to the main traditional forms of financing, are various other financing
mechanisms that have increasingly become popular as ways of targeting services. These
include both voucher schemes and conditional cash transfers. Vouchers can be exchanged
directly for specified services. Much of the experience of vouchers is in education where
they have been used to boost school choice (in North and South America) and encourage
female participation (in South Asia). The most successful examples are those that have
been distributed to easily identifiable groups who have a clear need for service. These
include STI treatment for sex-workers (Nicaragua), bed-net distribution to pregnant
women (Tanzania) and ANC and delivery care for poor pregnant women (Yunan, China)
(summarised in (Ensor, 2004)). They could be distributed to purchase small, regular
medical services in which case they would be indistinguishable from the pre-payment
cards used in many micro-insurance schemes. If vouchers are distributed for general
medical services where their use is less certain then they become a type of insurance in
which case calculations of actuarial risk are required. The area where a catastrophic
dimension to a conventional voucher can easily be added is providing care for
complications for pregnancy which can be added to a conventional maternal health card
covering antenatal and care for normal delivery.
vii) Conditional cash transfers
Conditional transfers are the provision of cash on condition that use is made of specified
high priority services. The best known programme is the Progresa scheme in Mexico
which provides conditional cash transfers to poor families on condition that they enrol
and keep their children in primary school and utilise basic health services aimed at

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Assessing financing mechanisms for their ability to deliver an insurance function

children and pregnant women (Gertler, 2000; T.P.Schultz, 2001). Schemes have also
been introduced in other Central and South American countries. The Nepal safe
motherhood scheme that provides a fixed cash sum to women, designed to mitigate the
costs of travel, that arrive for delivery at a health facility is another such example. Neither
the transfers nor the services that are provided can really be an insurance mechanism.
Transfers help to raise a households income but are of a fixed amount. They are used to
encourage consumption of a service which should be provided to all in a particular group
education for school children, growth monitoring for infants, antenatal care for
pregnant women. It may, however, be possible to piggy back insurance onto such
transfers in the same way that insurance is sometimes included as an extra benefit of
micro-credit so that, for example, part of the cash transfer might be in the form of
insurance for services.
viii) Tax financing
Tax funding is used as the basis of the insurance mechanism predominant in many
countries of the OECD including Scandinavian, New Zealand and the United Kingdom.
The main difference from the social insurance of countries such as Germany, Austria and
Hungary is that residency or citizenship qualifies entitlement rather than contribution.
Historically tax financed systems have tended to be associated with government owned
providers although this need not be the case and increasingly contract relationships exist
between the public purchasers and providers both government and non-government.
Benefits may be less well defined than in social insurance systems and lack of coverage
may only become apparent when a member attempts to obtain a service that the public
purchaser considers not to be on the list. Increasingly both social insurance and tax
financed systems are making use of effectiveness and cost-effectiveness decision criteria
to decide whether medical technologies are included in the benefits package.
Tax financing provides a reasonably low cost way of pooling funding for a large
population. It has a broader base than social insurance and so revenue may be less prone
to fluctuations in the macro-economy. Whether tax funding provides an insurance
function crucially depends on what types of services are financed. While services in the
essential package mostly provide relatively little catastrophic insurance, providing
funding for hospital, particularly inpatient, services do provide such coverage.
There are two major criticisms of such funding in low income countries. Firstly, benefits
incidence results invariably show that the benefits of secondary and tertiary level services
are predominantly captured by middle and upper income groups (however measured).
Thus funding hospitals is not seen as pro-poor strategy. This objection to financing
secondary care services goes back to the barriers to use discussed briefly in an earlier
section. Geography is clearly an important barrier and the near immutable fact that much
of the poor usually live far from hospitals. The solution to this issue may sometimes to
bring mobile clinic services nearer rural, poor communities. This works in case of some
basic services including primary care and some mass surgical services such as cataract
surgery and sterilisation. In most cases it is neither effective (in terms of quality
outcomes) nor cost-effective to duplicate services in every area. In other circumstances it

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Assessing financing mechanisms for their ability to deliver an insurance function

may be preferable to develop ways of bringing patients to health facilities. This is
particularly important for very scattered populations and in the case of specialist services.
The second criticism is that the services provided frequently provide less health gain per
dollar or Taka spent. The latter argument clearly depends on the type of services but in
general it is true that many hospital level services come out rather poorly in dollar per
DALY reduction or QALY gained (World Bank, 1993). It is certainly important to
prioritise treatments that deliver high value and the essential package approach has
helped to increase the resources going to a range of priority diseases. Yet at the same
time insurance against catastrophic risks has benefit to the population that goes beyond
immediate health gain, usually the basis for DALY calculations, in impacting the ability
of a household to maintain household living standards and livelihoods.
In a tax funded system there are typically two ways of ensuring that catastrophic (or any
other) services are financed. The first is to purchase services through contracts either
from non-government (for profit or not for profit) providers or from autonomous state
owned but independently managed providers. Such a modality has become increasingly
popular in OECD countries where the benefits of choice and competition are regarded as
having a beneficial impact on quality. A central issue with such an approach is that it
presupposes an ability to design and monitor contracts that is lacking in many public
sectors and can be expensive to develop and operate.
A second approach is to deliver services directly through government run hospitals. In
effect Government hospitals become a type of insurance organisation (McGreevey,
Rannan-Eliya, Akin, Musgrove, Gaag, & Jeffrey Hammer, 1998). They are given a fixed
budget to provide for the catastrophic health care needs of the catchment population. The
problem of benefit capture by the rich remains pertinent but hospitals around the world
can, if adequately resourced, develop systems that automatically filter patients so that
those in most need receive free care. While overt systems of filtering according to need
often fail, methods of self-selection, where richer patients opt for more comfortable
accommodation and at the same time also pay for part of their medical care, are arguably
more effective and certainly cheaper to administer. Hospitals in Bangladesh already filter
patients in this way although the lack of resources in many public facilities mean that
medical care often remains inadequate.
This discussion raises a key issue for policy makers. Consolidated funding (taxation plus
other contributions) is usually the cheapest form of pooled funding to administer. The
main issue at stake is whether the resources can be directed in a way that properly
finances catastrophic care (the purchasing/payment function). Currently this is not the
case. Allocations of beds and resulting financial allocations are based on norms per
district and upazila not population size and other measures of health need (Ensor,
Hossain, Sen, Ali, Begum, & Moral, 2004). A recent study demonstrates that, for districts
of the same size, Bangladesh has much less hospital capacity than other countries in
South Asia (Somananthan, Rannan-Eliya, Hossain, Pande, Sharma, & Sikurajapathy,
2006).3.
3

For example Sri Lanka has 3.08 per 1000 population while Bangladesh has 0.24.

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Assessing financing mechanisms for their ability to deliver an insurance function

Discussion: a way forward

Although there are many ways of financing care, the choice of mechanisms to finance
catastrophic is more limited. The level of pooling in the Bangladesh health system is
currently extremely low. According the 1999/01 National Health Accounts only around
36% finance for health care is pooled (Data International, 2003). There is a general
consensus that measures are required to increase pooling. Although HNPSP states an
intention to extend catastrophic risk coverage to a larger proportion of the population
evidence suggests that these costs are mostly not well covered by pooling arrangements
(Barkat & Sabina, 2006), page 37. Much of the debate to boost pooling focuses on
insurance mechanisms but it is also important to consider whether the public system
could be better enabled to provide for catastrophic risk.
The aim of this paper is to raise the issue of providing greater risk protection to the
Bangladesh population. A variety of mechanisms are available most of which have been
tried out to some degree in the country. The HEU is well placed to lead a debate on ways
to improve risk protection. As a start it might begin to raise the a key questions relating to
risk coverage including:
1. To what extent to do existing financing mechanisms provide protection from
catastrophic risk?
2. Which groups currently have access to adequate protection from catastrophic risk
in Bangladesh?
3. What are the main options for extending catastrophic risk protection? What are
their advantages and disadvantages?
4. How might the state encourage greater risk protection amongst the informal
sector?
5. To what extent do public hospitals provide risk protection for different groups?
6. What could be done to improve the risk protection provided by public hospitals?

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Assessing financing mechanisms for their ability to deliver an insurance function

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