Funding the Irish health system
Brian Turner outlines the various health insurance models used across the globe and considers which is most suitable for Ireland.
Health systems around the world struggle to balance equity and efficiency. The basic principle that systems try to achieve is funding based on ability to pay and access based on need. The Irish health system does not currently achieve this, but then no health system around the world is without its shortcomings in this regard. So what are the options for funding the Irish health system and would any of them be superior to the existing funding mechanism?
There are a number of established funding mechanisms for health systems around the world. The most common ones are taxation, social health insurance, private health insurance, medical savings accounts and user charges. Each of these has advantages and disadvantages.
However, the first three mechanisms all involve pooling of funds and risks, thereby providing social solidarity, whereas the last two do not to any great extent. With these three mechanisms, citizens provide funding, in the form of taxes or premiums. These funds are pooled together by one or more third-party purchasers (the government or insurers), which then allocate money to providers, who then provide healthcare to the citizens who need it. Everyone pays into the system but only some use it – hence the pooling of risk, since in many cases the need for healthcare cannot be predicted with any degree of accuracy.
Taxation is widely regarded as the most progressive funding mechanism, as those on higher incomes pay a higher proportion of their income in tax than those on lower incomes. The balance between direct and indirect taxation will affect the degree of progressivity, but most tax systems have significant levels of direct taxation. However, if the health system is funded from general taxation, as is the case in Ireland, then there is less transparency than if it is funded from ring- fenced taxes.
Insurance
Social health insurance, which is a popular mechanism elsewhere in Europe, usually involves employers and employees paying income-related contributions into sickness funds, which then purchase care on behalf of their members. Social health insurance has the advantage of greater transparency, as the contributions are ring-fenced for healthcare. However, wealth is often not taken into account in setting contributions. Furthermore, the government often pays the contributions on behalf of those who are not in employment (such as those who are unemployed, retired or unable to work), so there is usually an element of tax financing even in predominantly social health insurance funded systems.
Private health insurance comes in many forms. Substitutive health insurance substitutes for the statutory system (for example, in the Netherlands prior to their reforms in 2006, those in high incomes were excluded from the social health insurance system and had to opt for substitutive private health insurance if they wanted to cover themselves). Complementary health insurance covers treatments that are not covered by the statutory system or covers co-payments that are required in the statutory system (for example, a majority of people in France have complementary private health insurance to cover the co- payments involved in visiting the GP). Supplementary health insurance provides benefits over and above those provided in the statutory system, such as greater choice of provider, better accommodation or faster access (as is the case in Ireland).
Furthermore, private health insurance can be risk rated, whereby the risk that an individual represents to an insurer is reflected in their premium (meaning that older and sicker individuals would pay more than younger and healthier ones); community rated, whereby everyone pays the same for the same plan (this is the system in operation in Ireland); or group rated, whereby everyone in a group pays the same as everyone else in that group but different groups pay different rates (this is a popular rating system in the US, where choice and affordability can be more limited for members of small groups compared with their large-group counterparts). The rating system chosen can have significant implications for equity and for take-up in different age groups – for example, the take-up among older age groups of community rated health insurance in Ireland is proportionately far higher than the take- up among older age groups of risk rated health insurance in the UK.
Other options
Medical savings accounts are not as widespread a funding mechanism as the previous three, although Singapore is a good example of where these have been used. In this system, people are mandated to save a proportion of their income in an account that is ring-fenced for their healthcare bills. Such a system requires a catastrophic insurance plan which covers exceptionally high medical bills that could not be covered by an individual’s medical savings account, for example if someone needed a particularly expensive treatment but had insufficient funds in their medical savings accounts due to a previous illness or because they hadn’t been working very long. The government also provides a basic level of cover for those who do not have a regular income. Although giving individuals greater responsibility for their healthcare bills means that they are more cost- conscious, individuals have far less bargaining power than a third-party purchaser acting on behalf of a large group and therefore price competition may not be strong, leading to inflation.
User charges are direct payments made by individuals for their healthcare expenses. Examples in Ireland include payments made to GPs, payments for prescription medications (under the drug payment scheme threshold), and the daily bed charges for public beds in public hospitals for those without medical cards (or GP visit cards in the first instance). Although such payments reduce the risk of moral hazard – whereby those with free access could overuse services – evidence suggests that the level of payment for GP services in Ireland leads to significant numbers of people putting off seeking care, in some cases until the illness has progressed to the stage where it requires hospitalisation. In this context, the new Government’s proposals to make access to GPs free at the point of use would be a positive step.
Ireland’s healthcare system is predominantly tax financed, with taxation accounting for around 78 per cent of healthcare funding. User charges account for approximately 14 per cent of funding, with around 8 per cent coming from private health insurance. This last figure is somewhat surprising given the additional benefits that private health insurance confers on those who hold it. Furthermore, the difference in allocation mechanisms between the public and private systems (salary and capitation and fixed budgets for the former and fee- for-service for the latter) leads to incentives to treat private patients, which causes problems of two-tier access.
Caution
The new Government’s plans to reform the Irish health system would see an end to the user charges that are currently paid by around two-thirds of the population, although it is envisaged that around three-quarters of funding for the system would still come from taxation. This would imply that the remaining one- quarter would come from private health insurance. Fine Gael’s proposals were for mandatory community rated private health insurance which, while equitable in that older and sicker consumers do not pay more, is not progressive in that som
eone earning €50,000 a year would pay the same as someone earning €500,000 a year.
Therefore, in funding terms, the new proposals are unlikely to be any more progressive than the current system, although the elimination of the two-tier system would be welcome. One potential issue with the new proposals is that the ‘money-follows-the-patient’ mechanism that is proposed could potentially lead to supplier-induced demand, which would be inflationary. This is one problem that the Dutch are grappling with under their reformed system.
Indeed, the Dutch system of mandatory universal private health insurance is unusual in international terms. The Dutch reforms – which they themselves admit are a work-in-progress – are an experiment in managed competition, something that no other country has implemented to the same degree, and it remains to be seen whether they work. The implementation of similar reforms here should be given very careful consideration before proceeding.
Brian Turner is a lecturer in University College Cork’s economics department, specialising in health insurance.
