NOTE: This article is the sixth in a series of 10 articles and is part of our Health Economics 101 course. You can find a course overview and links to all 10 course modules here:
- Health Economics 101: Course Overview
- Module 1: Introduction to Health Economics
- Module 2: Demand and Supply of Health Care
- Module 3: Health as an Economic Good
- Module 4: Health Insurance and Risk Management
- Module 5: Economic Evaluation in Health Care
- Module 6: Health Systems and Health Care Financing
- Module 7: Market Competition and Provider Payment Mechanisms
- Module 8: Equity and Efficiency in Health Care
- Module 9: Health Policy and Regulation
- Module 10: Current Issues and Future Directions in Health Economics
Health Systems and Health Care Financing
A well-functioning health system is essential for ensuring the delivery of effective, equitable, and efficient health care. Health care financing—the mechanisms by which funds are generated, pooled, and allocated—is a core component of any health system. Different countries have developed distinct health system models based on their historical, political, and economic contexts. Understanding these models and the financing mechanisms that support them is crucial for policymakers, researchers, and practitioners alike.
Overview of Health Care Systems (Beveridge, Bismarck, Private, Mixed)
Health care systems can be broadly classified into four main models, each reflecting different philosophies regarding the role of the state, the market, and individual responsibility.
1. Beveridge Model
Named after British economist William Beveridge, this model features:
- Public financing through general taxation
- Public provision of services
- Universal coverage
The United Kingdom’s National Health Service (NHS) is the archetype, providing free-at-point-of-use care to all residents. The state owns hospitals, employs health workers, and centrally controls costs. This model prioritizes equity and cost containment but can face challenges with efficiency and waiting times.
Other countries using this model (with variations) include Sweden, Norway, and New Zealand.
2. Bismarck Model
Originating in 19th-century Germany under Chancellor Otto von Bismarck, this model relies on:
- Social health insurance funded by employer and employee payroll contributions
- Multiple insurance funds (“sickness funds”)
- Regulated competition among insurers
Providers are mostly private, but access is universal, and government regulation ensures equity and quality. Germany, France, Belgium, Japan, and Switzerland follow variants of the Bismarck system.
3. Private Market Model
This system relies predominantly on private health insurance and market-based delivery, with limited government involvement.
The United States is the clearest example, where most individuals obtain coverage through employer-sponsored plans or private markets. Public programs (e.g., Medicare, Medicaid) serve specific groups, but the system is characterized by fragmentation, high costs, and disparities in access.
4. Mixed Systems
Most countries have hybrid systems, combining elements of the Beveridge, Bismarck, and private models. For instance:
- Australia has a publicly funded universal insurance scheme (Medicare) alongside private insurance options.
- Canada offers publicly financed hospital and physician care (Beveridge-like) but allows private spending on non-covered services.
Health Financing Mechanisms
Health financing involves three core functions: revenue collection, risk pooling, and purchasing of services. Countries differ in how they structure these functions.
1. Tax-Based Financing
Funded through general taxation, this model is common in Beveridge-style systems. It allows for:
- Progressive financing, where the wealthy contribute more
- Universal risk pooling, enhancing equity
Challenges include reliance on government budget priorities and potential underfunding.
2. Social Health Insurance (SHI)
Under SHI, contributions are typically mandatory and income-related, collected via payroll taxes. Funds are pooled in statutory insurance schemes.
Advantages include stable funding and broad coverage, while drawbacks may include inflexibility and difficulty in covering informal workers.
3. Private Health Insurance (PHI)
PHI can be:
- Primary (main source of coverage)
- Supplementary (covering services not included in public systems)
- Duplicative (offering faster or higher-quality care)
While PHI increases consumer choice and innovation, it often contributes to inequities in access and cost escalation.
4. Out-of-Pocket Payments (OOP)
Direct payments made at the point of service. While easy to administer, high OOP spending is:
- Regressive
- A major cause of financial hardship and catastrophic health expenditure
Health systems aim to minimize OOP to enhance access and reduce inequality.
Comparing Health Systems Across Countries
Comparative analysis of health systems offers valuable insights into trade-offs between cost, access, and quality. International organizations such as the OECD, WHO, and World Bank collect standardized data on health system performance.
United Kingdom (Beveridge Model)
- Universal access
- Low administrative costs
- Cost-effective but sometimes criticized for long wait times
Germany (Bismarck Model)
- High-quality care with extensive coverage
- Choice among multiple insurers
- Strong financial protection, but high health expenditures
United States (Private Market)
- World leader in innovation and specialized care
- Highest per capita health expenditure globally
- Significant inequities in access and outcomes
Canada (Mixed Public System)
- Universal hospital and physician coverage
- Lower costs compared to the U.S.
- Gaps in coverage for pharmaceuticals and dental care
Low- and Middle-Income Countries (LMICs)
Many LMICs rely heavily on OOP spending, contributing to inequities and poor health outcomes. Global efforts, including Universal Health Coverage (UHC) initiatives, aim to expand public financing and reduce reliance on private payments.
Conclusion
Health care financing is a defining feature of any health system, shaping access, equity, and efficiency. From tax-based systems to social insurance and private markets, each model reflects different societal values and institutional arrangements. No system is perfect, and countries often reform financing structures in response to economic pressures, demographic shifts, and technological change. As global health challenges grow in complexity, comparative analysis and evidence-informed policymaking will be vital in designing resilient and equitable health systems.
References
- World Health Organization (2010). Health Systems Financing: The Path to Universal Coverage. World Health Report 2010.
- Kutzin, J. (2001). A descriptive framework for country-level analysis of health care financing arrangements. Health Policy, 56(3), 171–204.
- Mossialos, E., Wenzl, M., Osborn, R., & Sarnak, D. (2016). International Profiles of Health Care Systems. The Commonwealth Fund.
- Thomson, S., Foubister, T., & Mossialos, E. (2009). Financing Health Care in the European Union: Challenges and Policy Responses. European Observatory on Health Systems and Policies.
- Wagstaff, A., & van Doorslaer, E. (2003). Catastrophe and Impoverishment in Paying for Health Care: With Applications to Vietnam 1993–1998. Health Economics, 12(11), 921–933.
