Research brief: Key questions relating to healthcare financing

 In Healthcare, Healthcare Financing
Key questions Pertinent considerations
A.    System design policy question 1: Who pays?
A.1 Healthcare financing is fundamentally about the question of “who pays for one’s healthcare?” There are in essence two alternatives for paying for one’s healthcare: 1) everyone pays for his/her own healthcare; 2) all collectively pay for everyone’s healthcare. Thus, the first-order question of healthcare financing is which alternative should be adopted, alternative 1) or 2). And why?

–           If alternative 1) is adopted, everyone is on his/her own. Possible financing arrangements include out-of-pocket payments and personal medical savings accounts.

–           Given the potentially high level of expenditures of modern healthcare, however, no one, except the very wealthy, would be able to shoulder one’s healthcare costs alone. Adopting some forms of collective financing arrangement such as tax financing, social insurance and private insurance would appear more rational and for the greater benefit of all. That is, alternative 2) looks more rational.


A.2 If alternative 2) is adopted, the next policy question is: How should healthcare costs be apportioned among all? Who is required to pay more: the wealthy, the medium wealthy, or the less wealthy? And why?

–           These questions are in essence questions of income redistribution: Do we support or not support redistributing income from the wealthy to the less wealthy (or vice versa) in healthcare financing? Why?

–           It should be noted that these questions cannot be avoided.

–           Our choice of financing arrangements entails our decision regarding who should pay more.

–           In other words: our value judgment regarding income redistribution decides our choice of financing arrangements.

–           If we support income redistribution from the wealthy and the relatively well-to-do, tax-financing or social insurance must be the choice. If we do not support such redistribution, we can either choose private insurance or even go for the “you are on your own” option. The decision is as simple as that.


B.    System design policy question 2: How to contain costs?

B.1 After the apportionment of healthcare costs, the question that follows is how to contain healthcare costs. In this relation, how a healthcare system is financed determines its capability to contain costs. Pertinent policy questions on this front include: Which arrangements induce over-treatment or encourage patients to seek unnecessary care? Which arrangements are administratively more costly? Which arrangements can better contain costs at the macro-level?


–           One research finding on the cost-containing capability of a tax-based system vis-à-vis a mixed-financing system is worth recapitulating here: “There is a consensus among most health economists, although the evidence base is incomplete, that single pipeline funding enables effective cost control. Thus, those countries which are single-pipeline financed by taxation can, by control of public expenditure limit cost inflation better than countries where funding is fragmented (for example, the USA). Once funding is fragmented, direct control of one pipeline tends to be compensated by inflation in funding via another.”[1]

–           The worry about patients seeking unnecessary care should also be subject to particular scrutiny as such worry appears to have been overstated. Except for patients’ initial visit to a primary-care doctor, all other healthcare is doctor-initiated. The real cost-containing issue is to prevent doctors from over-treatment/-diagnosis. As for patients’ initial visit to a doctor, it is unclear how such a visit can meaningfully be classified as necessary or unnecessary. The major reason why we visit a doctor in the first place is to find out whether we need healthcare and if so, what type. From this angle, all first visits are necessary.


C.    Problems of common perceptions – Another level of policy questions concern common beliefs/perceptions about the problems of healthcare financing and possible solutions. Examining such beliefs is important for designing rational policy solutions.
C.1 One common belief in Hong Kong is that the tax-based system is unsustainable and therefore, financing reform is unavoidable. But how far is this belief correct?

–           A system is unsustainable when we are unable to control spending or increase revenue.

–           Thus, the policy question here is whether we can control spending or increase revenue.

–           On the spending-control side, are the oft-cited cost drivers for making a case for financing reform, such as ageing, technological advancement, rising expectations, and early occurrence of chronic illness really unmanageable?

–           On the revenue side, it has always been argued that tax increase is not a viable option. The question is: If taxpayers, in particular the wealthier, cannot afford and cannot be made to contribute more, how much more can non-taxpayers and the less wealthy taxpayers afford to contribute more so that the system can be made sustainable in the long-run?


C.2 A second common belief is that if the relatively well-off can be encouraged to purchase private insurance and to seek care in the private market, this will not only reduce public spending but also allow focusing public money mainly on the needy. On this belief, related policy questions include: Is such a “win-win” situation really attainable? Would expanding the private market eventually hurt the public system? –           Two research findings are noteworthy here:

    •  “… the evidence to date suggests that increasing the private share of total health care expenditures does not offer a solution to the challenges facing publicly-financed system. Indeed, a resort to private finance is, on balance, more likely to harm than to help publicly financed systems, though the effects will vary depending on the form of private finance.”[2]
    • “The ability of PHI [private health insurance] to reduce demand pressures on the public system has nonetheless proved to be constrained. Increases in the population covered by PHI in Australia and Ireland have not resulted in unambiguous signs of decline in the level of waiting. …PHI has not only shifted demand across public and private hospitals but has also increased overall demand, thereby limiting the impact on waiting times.”[3]





Winston Ng (吳君韻)
Healthcare Policy Forum (醫療政策論壇)
17 June 2009




[1] A. Maynard. 2001. Ethics and health care “underfunding”. Journal of Medical Ethics 27: p. 225.

[2] Carolyn H. Tuohy, Colleen M. Flood, and Mark Stabile. 2004. How does private finance affect public health care systems? Marshaling the evidence from OECD nations. Journal of Health Politics, Policy, and Law 29(3): p. 393.

[3] F. Colombo and N. Tapay. 2004. Private Health Insurance in OECD Countries: The Benefits and Costs for Individuals and Health Systems. OECD Health Working Paper N0. 15. Paris: OECD, p. 22.





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