Private Financing of Health Care in Times of Economic Crisis: a Review of the Evidence
| Author | Olivier J. Wouters,Martin McKee |
| Date | 01 March 2017 |
| DOI | http://doi.org/10.1111/1758-5899.12211 |
| Published date | 01 March 2017 |
Private Financing of Health Care in Times of
Economic Crisis: a Review of the Evidence
Olivier J. Wouters
London School of Economics and Political Science
Martin McKee
London School of Hygiene and Tropical Medicine
Abstract
Many high-income countries have cut public health care spending since the global economic downturn in 2008. In some cases
these cuts have been accompanied by calls to expand private financing to improve the efficiency of health systems. In low
and middle-income countries seeking to increase access to health care, it is sometimes suggested that private financing is
more effective than public financing because of weak state institutions and bureaucratic shortcomings.
In this paper, we review the theoretical and empirical evidence on private financing in terms of cost, efficiency, equity and
financial protection. We consider private health insurance, medical savings accounts and user charges in high, middle and
low-income countries.
The theoretical and empirical evidence reveals major market failures in the health sector. It is unlikely that private financing
generates better results than public financing. Still, as private financing options are heterogeneous, it is possible that a particu-
lar form might play a beneficial role in a specific setting. Given the current state of knowledge, however, any calls to increase
private financing must be accompanied by robust evidence, such as real world pilot studies.
Background
Many high-income countries have cut public health care
spending since the global economic downturn in 2008 (Cylus
et al., 2012; Reeves et al., 2014). In some cases these cuts have
been accompanied by calls to expand private financing to
improve the efficiency of health systems (Reynolds and
McKee, 2012). In low and middle-income countries seeking to
increase access to health care, it is sometimes suggested that
private financing is more effective than public financing
because of weak state institutions and bureaucratic shortcom-
ings (Pauly et al., 2006). These trends have fuelled debates
about how to fund health systems sustainably. Although
these debates are sometimes ideological, reflecting different
views about the relationship between the individual and the
state, they need to be evidence-based.
In this paper, we review the theoretical and empirical evi-
dence on private financing in terms of cost, efficiency, equity
and financial protection. We consider private health insur-
ance, medical savings accounts and user charges in high, mid-
dle and low-income countries. There are similar debates
about the role of the state in other parts of health systems,
such as service delivery by physicians and institutions, pro-
curement of health system inputs and professional education
(Hsiao, 1995), but these are beyond the scope of this paper.
Private health insurance: theoretical evidence
The theoretical deficiencies of unregulated private health
insurance (PHI) markets are well-documented (Arrow, 1963;
Hsiao, 1995; Barr, 2004). Most commentators agree that PHI
systems must be regulated to some extent, although the
scale and nature of such regulation are rarely specified. One
important concern is information asymmetry between
patients and insurers. Individuals know more than insurance
companies about their health and the aspects of their life-
styles that increase the risk of disease or injury. Conse-
quently, patients may buy insurance plans that are
underpriced (i.e. adverse selection). Individuals may also
engage in riskier behaviour or seek more treatment than
they would if they were uninsured (i.e. moral hazard) (Pauly,
1974).
1
Both adverse selection and moral hazard prevent
insurers from accurately estimating whether enrolees are at
high or low risk of needing health care –a necessity for set-
ting actuarially fair premiums.
This leaves insurance companies with two main options.
They can charge average premiums to groups consisting of
both low and high-risk individuals to pool risks. Low-risk
patients will face disproportionately high premiums and may
leave the schemes; the remaining high-risk patients will then
face increasing prices and may eventually forgo insurance.
This is known as a premium spiral. Alternatively, insurers can
try to separate low and high-risk individuals into different
plans. Insurers can then offer lower premiums to healthier
individuals to retain these clients. For example, insurers can
raise the premiums of patients with chronic illnesses. Insurers
may even choose not to cover these patients or the care
related to their known conditions. The lack of cross-subsidisa-
tion from the rich and healthy (usually low-risk) to the poor
and sick (usually high-risk) is highly regressive (Barr, 2004).
Global Policy (2017) 8:Suppl.2 doi: 10.1111/1758-5899.12211 ©2016 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 8 . Supplement 2 . March 2017 23
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