The most basic question to be asked about a health care system relates to how it is to be financed. Financing in this case refers to the mechanisms a country employs to raise the funds necessary to support its health care system, whether public or private (Bureau of Labor Statistics:2004). In Kuwait, for example, we have developed multiple ways of raising funds. This involves both public schemes which use, for example, payroll taxes for Medicare, or general tax revenues for Medicaid or the Veterans Administration health care system; and private mechanisms, principally financed through insurance premiums. Financing a health care system should not be confused with the reimbursement of providers. The latter concept, which deals with the methodology used by either governments or private insurers to pay hospitals, physicians, nursing homes, etc., might include salaries, capitation, or fee for-service.
It is necessary to distinguish between financing and reimbursement because they represent different components of the same system (Institute for Healthcare Improvement:2005). In other words, having a public financing mechanism does not dictate a specific approach to reimbursement. People wrongly assume, for example, that a public system of financing means that physicians will work for the government and be paid on a salaried basis. Just because Kuwait has a public, single-payer financing system does not mean that all physicians must therefore be salaried or heavily regulated. In fact, most are paid on a fee-for-service basis just as they are in Kuwait. As the multiplicity of financing schemes used in other countries, we will see that pubic financing does not necessarily require some accompanying reimbursement methodology.
In fact, attitudes and rules regarding financing and reimbursement are totally independent of each other. A public financing system can pay physicians in a comparatively unregulated manner (National Institute for Health Care Management:2003). Or, one might employ a private financing mechanism, as is the case in Kuwait with the premiums paid to HMOs or other managed care plans, where the physicians can be paid in a highly regulated manner, using salaries or capitation rather than fee-for‐ service.
Although there are many different ways in which health care can be financed, some general approaches can be recognized. For example, the most fundamental way of characterizing financing approaches is whether the system derives the funds from public sources such as income, payroll, or sin taxes; or whether money is raised through the collection of private premiums (Piotro and Meyer:19990. Unfortunately, the world is not always so clearly defined, and many countries use a combination of the two. In addition to the mixed financing approach used in the Kuwait, we have already mentioned the Netherlands as an example of a country with both public and private mechanisms that provide the revenues necessary to support their system. Within these public or private categories, further distinctions can be made with respect to the sources of financing. Public financing can be achieved by generating revenues in a variety of ways including the use of income, payroll, or value-added taxes, or some separate levy such as a sin tax (including items such as cigarettes or liquor) or sales taxes.
When general taxes are used as the source of revenue, health care must compete with other government programs for these funds, and each year the amount of funding for health must be reassessed in light of other public priorities. On the other hand, the use of “dedicated” taxes means that the money raised through this revenue source, whether it be a payroll, property, or sin tax, is specifically earmarked, in this case, for health care (National Institute for Health Care Management:2003). In this way, the funds are supposed to be protected against competing priorities or overall budget cuts. In this country, education is funded in part through local property taxes specifically earmarked for this purpose, and the Hospital Insurance component of Medicare is financed by a dedicated payroll tax. However, even given the supposed protected nature of the payroll tax, the size of Medicare in 1993, Medicare spent about billion on hospital care has made it vulnerable to budget cuts as a means of dealing with the broader federal deficit.
For private insurance, financing is derived from premium payments. Or, in the case of businesses that self insure, revenues from the business itself are the source of financing, although employees may still be charged a premium to support a self-insurance fund (National Institute for Health Care Management:2003). While insurance premiums are the main source of financing for private coverage, calculation of the actual premium amount can be done in different ways. For instance, as already discussed, the level of premium can be based on the principle of spreading the risk throughout an entire community defined as a geographic area, large corporation, or industry group. Or, the insurance premium can be more closely related to the health claims experience of an individual business or person.
In the first case, that of community-rating, the health experience of an individual or small employer is not as critical, since premiums will reflect the experience of a much larger group (Piotrow and Meyer:1999). However, in the latter approach, that of experience-rating, a small business or an individual may, in a given year, find itself with very high insurance premiums because of a single major illness. In this case, it does not take very much to adversely affect the experience of a small group. One serious illness can either greatly increase the cost of insurance or even make the entire group uninsurable. Differences in how we define experience-rating and community-rating can be somewhat artificial and may simply be a function of the size of the pool of people involved rather than the nature of the rating mechanism. In other words, a small employer who pays premiums based on the experience of his organization is experience-rated. On the other hand, a large employer who is paying premiums based on the experience of a much bigger group is really community rated since one catastrophic event has little impact on the experience of the entire group (National Institute for Health Care Management:2003). Moreover, the line separating the two rating systems can be further clouded by the fact that, even under community-rating, subgroups within the pool can be rated differently. Usually taking the form of demographic rating, premiums can vary, for example, based on age or gender.
Ideally, community-rating should be done on the basis of grouping employees across multiple employers, or it should not even be employer-based, creating insurance pools instead based on geographic area, trade, or even religious groups. In other countries like Germany many different grouping methodologies are used (National Institute for Health Care Management:2003). There, the sickness funds may involve a large employer, a geographic community, or a trade or industry group.
Health maintenance organizations (HMOs) are also financed through private health insurance premiums. The difference, however, between this financing mechanism and the more traditional indemnity lies in the fact that the HMO is also responsible for actually providing the care to the insured through providers who are either HMO employees or under contract to them. On the other hand, indemnity coverage simply pays for the care with no responsibility for providing it (Simmons:2005). In this way, the HMO has control not only over the amount it pays a provider but also, theoretically, over the actions of the providers themselves.
In recent years, a hybrid between the pure HMO and indemnity models has emerged as the most typical option. Called managed care, it attempts to control payment and to manage utilization and practice as well. Different from the more traditional HMO, these managed care plans have much less of a formal relationship with the physicians with whom they work (Simmons:2005). Physicians may participate in multiple managed care plans and the essential basis for their relationship with each of these plans is that they agree to accept discounted payment rates (or other specific payment arrangements) from the payer, and subject themselves to the plan’s utilization review mechanisms. At times, managed care plans will also incorporate other incentives into their payment arrangements with physicians, based on how well the physicians control utilization of services by their patients.
In the more typical HMOs , where the physicians are more likely to work exclusively for those plans, they have greater allegiance to a single plan and see their role more in terms of managing the care of the patient, i.e., using their discretion to determine what services the patient needs and coordinating those services (National Institute for Health Care Management:2003). On the other hand, managed care plans can best be characterized by the control they exercise over the provider by second-guessing clinical decision-making through requiring the physician to seek pre-approval for hospital admissions, expensive procedures, and extended lengths of stay for patients. While primary care physicians in managed care plans also make decisions about the use of other services (i.e., specialist and hospitalcare), the motivation may be more focused on reducing utilization than on helping the patient navigate the system. The question is whether the emphasis on cost containment in these plans leads to any compromise in the quality of care or simply a more rational use of services. The answer is unknown.
In both the managed care plan and the HMO, the primary care physician is seen as a gatekeeper, in charge of controlling the access of the patient to other services (National Institute for Health Care Management:2003). However, under managed care, this is used principally as a cost containment mechanism intended to limit the amount of care used, rather than as a means to coordinate the care of the patient as it has been in the more traditional HMO. Although these two roles for the gatekeeper may overlap, the distinction lies again in what is the primary focus: containing utilization or patient care management?
Clearly, good physicians will make clinical decisions benefiting the patient with or without managed care. Thus, this is not meant as a condemnation of physicians who work under managed care systems; rather, it simply describes the underlying philosophy and motivation behind the two models (Piotrow and Meyer:1999). Since managed care in its current form is a comparatively new concept, it is too early to know if the greater focus on cost containment that characterizes these plans will impact adversely on the patients or simply be a cost-effective mode of delivering care .
Another form of private financing that has undergone significant growth in recent years and has meaningful implications for health care reform is that of self-insurance by large corporations or by union groups (National Institute for Health Care Management:2003). In this way, rather than purchasing coverage on a risk basis from an insurance company, the self-insured corporation or union will assume the risk itself for its employees’ or members’ health costs. While insurance companies might still be involved, they function as third-party administrators, processing claims and performing some managed care functions like utilization review—but they are not at risk for the actual costs of the care (unless they provide some reinsurance to the company that is self-insured).
Public financing of Medicare, Medicaid, the Veterans Administration and Defense Department health systems, and private financing including both community- and experience rated plans for most employer-based programs make up the larger system of health care financing in this country (National Institute for Health Care Management:2003). The question as we move toward health care reform is whether they want to continue this pluralistic, multilayered approach or change to one system of financing for all. In doing this, it is important that we not fall prey to two myths that have influenced our thinking in the past. First, decisions concerning financing do not automatically determine how we will reimburse providers, nor do they necessarily impinge on the provider community with respect to either earnings power or clinical decision-making. Second, even if we decide on a single system, whether public or private, this does not mean that pluralism and choice for consumers will also disappear. Different countries have permitted the development of either parallel or supplemental plans that can provide for considerable consumer choice in terms of the extent, access, and amenities of care.
References
Badrick T. & Preston A. (2001). Influences on the Implementation of TQM in health care organizations: professional bureaucracies, ownership and complexity. Australian Health Review. Vol. 24 (1), p. 166-175.
Bureau of Labor Statistics (2004) Medical and Health Services Managers. U.S. Department of Labor (Occupational Outlook Handbook, 2004-05 Editions) Retrieved 07 Jan 05 at http://www.bls.gov/oco/ocos014.htm
Crichton et al. (1997).Health Care: A Community Concern? Calgary, Alta: University of Calgary Press.
Institute for Healthcare Improvement. Success Story: Improving Access to Computed Tomography Services at ThedaCare. Retrieved 08 Jan 05 at http://www.ihi.org/IHI/Topics/OfficePractices/Access/ImprovementStories/SuccessStoryImprovingAccesstoComputedTomograophyServicesatThedaCare.htm
National Institute for Health Care Management (NIHCM) Foundation (2003). Retrieved 08 Jan 05 at www.nihcom.com
Piotrow, P. T. & Meyer, R. C. (1999). Strategic Communication: The Six Directions of Leadership. Retrieved 08 Jan 05 at http://www.jhuccp.org/training/ContinuingEd/ReferenceLibrary/Lectures/SixDirections.htm
Simmons, D. A. (n.d.) Examining ISO 9000 in Health Care. Retrieved 08 Jan 05 at http://www.qualitydigest.com/mar98/html/cover.html
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