Financing Health Services: Models for Efficiency and Equity

Imagine you get a high fever. You visit a clinic, see a doctor, get a prescription, and buy the medicine. At each step, you pull out your wallet and pay. Now, imagine your neighbour has a similar fever but has to think twice, calculating if they can afford the doctor’s fee *and* the medicine, or if they’ll have to skip a meal to pay for it. This simple scenario cuts to the heart of one of the most critical questions in public policy: How do we pay for healthcare?

The answer is far from simple. Every country grapples with this, trying to balance three competing goals: keeping costs down (efficiency), making sure everyone can get care (equity), and ensuring the care is high-quality. The system a country chooses for “financing health services” determines who gets care, who provides it, and ultimately, who is left behind. Let’s explore the main models used around the world, from the simplest to the most complex, and see where India fits into this global puzzle.

The ‘pay-as-you-go’ dilemma: The User Fee Model 🔗

The most basic approach is the User Fee Model. It’s exactly what it sounds like: you use a service, you pay for it directly. This is also known as “out-of-pocket” payment. If you need a blood test, you pay the lab. If you need surgery, you pay the hospital. It’s the healthcare equivalent of a free market.

The case for user fees 🔗

Proponents of this model argue that it promotes efficiency and accountability. The logic is that when people have to pay for something, they are less likely to overuse it. This, in theory, reduces “moral hazard”-the idea that if something is free, people will consume it without thinking, leading to unnecessary tests and long wait times. It can also, in principle, make providers more accountable to their “customers” (the patients), who can vote with their feet and choose a different doctor if they aren’t satisfied.

The harsh reality of a high price 🔗

While the efficiency argument sounds plausible, the real-world consequences are often devastating. The primary and most glaring drawback is that this model is highly inequitable. It discriminates directly and powerfully against the poor. Healthcare is not a luxury good like a new phone; it’s a fundamental need. When faced with a 500-rupee doctor’s fee, a daily wage earner may choose to buy food for their family instead, letting an illness get worse.

This model doesn’t just block access to care; it actively creates poverty. A single serious illness, like a heart attack or a complicated childbirth, can force a family to sell their land, take their children out of school, or fall into a debt trap. This is known as “catastrophic health expenditure,” and it’s a major barrier to development. Because of these severe equity issues, virtually no wealthy country relies primarily on a user-fee model. Instead, they use different systems to pool risk and spread the cost across the population.

The Beveridge Model: Healthcare as a public right 🔗

Imagine if your local hospital was run just like your local police station or public library. You don’t pay a fee every time you visit, you just… use it. You’ve already paid for it through your annual taxes. This is the core idea behind the Beveridge Model.

Named after its architect, Sir William Beveridge, this model was famously adopted by the United Kingdom to create its National Health Service (NHS) after World War II. The philosophy is simple: healthcare is a public good and a right of citizenship, not a commodity to be bought and sold.

How it works 🔗

In a Beveridge system, healthcare is funded almost entirely through general taxation. The government is the primary owner of hospitals and the employer of doctors (or their main payer). This makes the government the “single-payer.”

• Funding: General taxes (like income tax, corporate tax, etc.).
• Ownership: Mostly public.
• Access: Universal. Every citizen is covered.
• Cost to patient: Free at the point of use (though some systems have small co-pays for things like prescriptions).

A major benefit of this model is that it tends to have very low per-capita costs. Because the government is the only buyer, it has immense power to negotiate prices for drugs and medical equipment, keeping costs down. It also excels at equity, as access is based on need, not ability to pay.

The common critiques 🔗

The main criticism of the Beveridge model is the risk of underfunding and inefficiency associated with government bureaucracy. Since funding comes from the national budget, healthcare must compete with defense, education, and infrastructure for money. This can lead to long wait times for non-emergency procedures, limits on available treatments, and concerns about the quality of facilities.

The Bismarck Model: Solidarity through social insurance 🔗

Now, let’s imagine a different approach. Instead of the government running everything, what if everyone who works, along with their employers, was legally required to contribute to a “sickness fund”? This fund, which is separate from the government’s general tax revenue, would then pay for everyone’s healthcare. This is the Bismarck Model.

Named after Prussian Chancellor Otto von Bismarck, who introduced it in Germany in the 1880s, this is the world’s oldest national health system. It’s built on a principle of social solidarity.

How it works 🔗

The Bismarck model is essentially an insurance system, but one that is mandatory, non-profit, and financed by employers and employees through payroll deductions. These contributions go to one of many “sickness funds,” which are non-profit insurers. The hospitals and clinics themselves are often private, not government-owned.

• Funding: Payroll contributions (social security) split between employer and employee.
• Ownership: Mostly private providers.
• Access: Universal. Everyone is covered, including the unemployed (whose contributions are paid by the government).
• Cost to patient: Very low, as the insurance funds cover almost everything.

This model, used in countries like Germany, Japan, and France, is marked by high levels of universal coverage and patient choice. You can typically see any specialist you want without a referral. The main criticism is that it can be expensive, and because it’s so focused on *treating* sickness, it has historically been weaker on *preventive* care, though this is changing.

The National Health Insurance (NHI) Model: A hybrid approach 🔗

What if you combined the best of both models? What if you took the universal, single-payer funding of the Beveridge model but used the private-sector providers of the Bismarck model? The result is the National Health Insurance (NHI) Model.

Canada is the classic example. The government acts as the single insurer for the entire population, paying all the bills. But the doctors and hospitals are (mostly) private entities. This system pools risk across the entire population, ensuring everyone is covered. The government, as the single-payer, has significant power to control costs by setting fixed prices for services.

This model avoids the employment-based nature of the Bismarck system (you’re covered whether you have a job or not) and the government-as-provider aspect of the Beveridge system. However, like the Beveridge model, it can also suffer from wait times for elective procedures as the government tries to manage its budget.

Filling the gaps: Community-Based Health Insurance (CBHI) 🔗

The models above work well in countries with large, formal economies where people pay taxes or have formal jobs. But what about in developing nations with large informal sectors? This is where Community-Based Health Insurance (CBHI) comes in.

CBHI schemes are non-profit prepayment plans, typically organized at the community level. Members pay a small, regular premium into a collective fund, which is then used to cover healthcare costs for the members. This model is common in parts of Africa and South Asia. While noble in its goal of providing access to the poor and informal workers, CBHI schemes often struggle. Their risk pools are very small, making them financially vulnerable to a few expensive cases. They often have limited administrative capacity and low enrollment, making their long-term financial sustainability a major challenge.

The complex case of healthcare financing in India 🔗

So, where does India fit in? The truth is, India’s system is a complex, fragmented mix of *all* these models, coexisting in a way that often fails to achieve the goals of either efficiency or equity.

The dominant player: Out-of-Pocket Expenditure (OOPE) 🔗

Despite all the schemes and public hospitals, India’s system is overwhelmingly a User Fee Model in practice. The single largest component of health financing comes from the pockets of citizens. According to the latest National Health Accounts (NHA) data, out-of-pocket expenditure (OOPE) accounts for 47.1% of all health spending in the country. While this is an improvement from previous years (where it was over 60%), it is still catastrophically high.

This high OOPE means that millions of Indians are pushed into poverty by medical bills every single year. It creates a two-tier system: those who can afford private care get it, and those who cannot must rely on the public system or get no care at all.

The public sector: A Beveridge model in theory 🔗

India *has* a public health system that is, in principle, a Beveridge-style model. Public hospitals and primary health centres (PHCs) are funded by state and central government taxes and are meant to provide free or heavily subsidized care to all. However, this system is chronically underfunded. India’s total public spending on health has hovered around a very low 1.35% of GDP.

This persistent underfunding means public facilities are often short-staffed, lack basic supplies, and are overburdened, forcing even the poor to seek care in the more expensive private sector.

The rise of social insurance: A Bismarck/NHI attempt 🔗

To address the high OOP spending, India has experimented with insurance models. The first major attempt was the Rashtriya Swasthya Bima Yojana (RSBY), which provided a basic health cover for families below the poverty line.

This has now evolved into the ambitious Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY). This is one of the world’s largest government-funded health insurance schemes, aiming to cover the bottom 50% of the population (over 500 million people) for secondary and tertiary care. PM-JAY is essentially an NHI model for a specific target group. The government pays the premiums, and beneficiaries can get cashless treatment at empanelled private and public hospitals.

The ‘missing middle’ and the mismatch with UHC 🔗

While PM-JAY is a significant step, it highlights a major gap. It covers the poorest, and the wealthy have private insurance. But what about the “missing middle”? This includes a huge swathe of the population in the informal sector, the self-employed, and lower-middle-class families who are not poor enough for PM-JAY but not rich enough to afford private insurance. They remain dangerously exposed to catastrophic health costs.

India’s goal, like that of the world, is Universal Health Coverage (UHC). But as reports from NITI Aayog and other bodies point out, our current financing model is a serious mismatch. A system dominated by out-of-pocket payments is the *opposite* of UHC. Achieving universal coverage will require a significant shift: a massive increase in public spending, strengthening primary healthcare, and finding a sustainable way to pool risk for the entire population, not just segments of it.

What do you think? Have you or your family ever faced a large, unexpected medical bill? Based on these models, what kind of system do you think would work best for India’s diverse population?

References

1. https://www.commonwealthfund.org/international-health-policy-center/countries/england
2. https://www.commonwealthfund.org/international-health-policy-center/countries/germany
3. https://www.who.int/health-topics/universal-health-coverage
4. https://prsindia.org/budgets/parliament/demand-for-grants-2023-24-analysis-health-and-family-welfare
5. https://www.niti.gov.in/sites/default/files/2021-10/HealthInsurance-forIndiasMissingMiddle_26-10-21.pdf