The health financing transition: A conceptual framework and empirical evidence

Highlights

• Time-series data shows countries are going through a health financing transition.

• Income growth and other factors account for rising health spending.

• Public policies contribute to reducing out-of-pocket shares of health spending.

• The health financing transition provides a framework to guide public policy.

Abstract

Almost every country exhibits two important health financing trends: health spending per person rises and the share of out-of-pocket spending on health services declines. We describe these trends as a “health financing transition” to provide a conceptual framework for understanding health markets and public policy. Using data over 1995–2009 from 126 countries, we examine the various explanations for changes in health spending and its composition with regressions in levels and first differences. We estimate that the income elasticity of health spending is about 0.7, consistent with recent comparable studies. Our analysis also shows a significant trend in health spending – rising about 1 per cent annually – which is associated with a combination of changing technology and medical practices, cost pressures and institutions that finance and manage healthcare. The out-of-pocket share of total health spending is not related to income, but is influenced by a country's capacity to raise general revenues. These results support the existence of a health financing transition and characterize how public policy influences these trends.

Introduction

Most countries seem to manifest two basic health spending trends over time: health spending per person increases and the share of health spending that is paid out-of-pocket declines. An extensive literature examines the determinants of the first trend – growing health expenditures – and finds that the major factors are rising income; changes in medical technology and practices; population aging; higher prices; and changes in the financing and management of healthcare. In contrast, very little attention has been paid to macro-level explanations for the second trend – the declining share of out-of-pocket health expenditures – though political scientists and historians have written extensively on the factors behind public policies that contribute to this pattern.

This paper proposes that these trends should be considered together as a “health financing transition” (de Ferranti, 2007, Savedoff et al., 2012), analogous to the demographic and epidemiologic transitions (see Chesnais, 1993, Omran, 1971, and Savedoff et al. (2012)). As with the demographic and epidemiologic transitions, the health financing transition is neither inevitable nor universal but it is widespread. Like the other two transitions, countries begin the health financing transition at different times, move through it at different paces, and sometimes may even undergo reversals. Economic, political and technological factors move countries through this transition, with public policies that expand pooled funding (through subsidised provision or mandatory insurance) playing a particularly important role.

The health financing transition has significant implications for public health, equity, and growth. Increasing real resources and buying more health care for more people have contributed to better population health including in developing countries (Bokhari et al., 2007, Moreno-Serra and Smith, 2012). But it is the composition of spending and how it is spent that affects its efficiency and equity. Institutions which pool funding from large groups of people and manage health care spending on their behalf are not necessarily efficient, but they do appear to be a necessary condition for both improving the efficiency and equity of health care coverage. At a minimum, people living in countries with institutions for pooling health spending and limiting out-of-pocket health expenditures are less likely to be impoverished by health care costs particularly in certain Latin American countries and countries in transition (Xu et al., 2007).

This paper begins by describing the health financing transition and identifying some common patterns. Second, it reviews the literature on the determinants of total health spending and out-of-pocket health spending. Third, using data for 126 countries from 1995 to 2009, the paper analyses the determinants of health spending and its composition, testing whether the health financing transition is observed on average in this relatively short time period.