How is Health Insurance Funded?

Throughout the world, if you ever want to buy a product or service, you have to pay up for it. The same is the case for most insurance products. If you want to buy insurance for your house or for your car, it is likely that you will have to pay the premium. However, the same cannot be said about healthcare.

Up until a few years back, health insurance was like any other product. This meant that an individual had to buy the product before they could expect to obtain any benefits from the same. However, this changed as governments all over the world started realizing that healthcare is a fundamental right. This led to the creation of two camps. One camp believes that it is the government’s duty to ensure proper healthcare facilities to all their citizens. On the other hand, the other camp believes that it is the duty of the citizens to ensure that they have made provisions for their own well-being.

There are people who wholeheartedly believe in both sides of the debate. This is the reason why we have many different ways of financing healthcare across the world. In this article, we will have a closer look at the three most common methods used for funding healthcare.

Method #1: Self-Funded Healthcare

In most developing countries of the world, the health insurance ecosystem is not well developed. This means that if people fall sick, they are supposed to pay for their own treatment without any external help. This method is mostly followed in developing countries like Bangladesh, Thailand, etc. The biggest advantage of using this method is that there is no wastage as such. If people are paying for their healthcare, they only use services which they absolutely need.

On the other hand, the disadvantages are also quite severe. For instance, when people pay for their own healthcare, they usually don’t pay unless it is too late. This means that they do not pay for preventive healthcare services. Also, the problem is that more often than not, people who do fall sick do not have a source of income that will enable them to pay for their own healthcare. Also, people with embarrassing health problems such as mental health issues, etc. tend to avoid treatment if they have to pay for it.

This system is followed only in third world countries where the insurance system is still grossly underdeveloped.

Method #2: Private Insurance Funded Healthcare

In most developed countries throughout the world, i.e. the United States and Western Europe, healthcare is largely funded by private insurance companies. Private insurance companies are for-profit organizations which function by receiving contributions from the people. They operate for profit and hence it is assumed that they are naturally inclined towards reducing costs. Hence, it is believed that these companies make the market more efficient by ensuring only the best forms of treatment are funded.

Once again there are many disadvantages associated with this model. For instance, since private companies have a for-profit motive, they are interested in insuring people that are not likely to fall sick. Hence, they do not usually provide insurance to people with any sort of pre-existing medical conditions.

For instance, in America, there have been protests against health insurance companies for their failure to provide health care at affordable costs. Also, health insurance benefits are generally provided by employers. This means that if a person gets unemployed, they are often without insurance. Hence, losing a job does not only mean losing a source of income but also losing a source of security.

Method #3: Government Backed Healthcare

People in many countries of the world believe that healthcare is a fundamental right. Hence, they have voted for governments who support this logic and therefore provide free healthcare to all their citizens. Canada and the United Kingdom are two countries which famously provide government-backed healthcare. This means that every citizen of the country is entitled to free healthcare regardless of whether they purchased insurance or not.

Hence, in effect, this means that the government is the insurer. The government obtains contributions which are akin to premiums. These contributions are either obtained indirectly, i.e. by using money from income taxes to pay for healthcare. Or the government could levy a new tax, the sole purpose of which is to pay for healthcare costs. The second method is more preferable since governments cannot reduce healthcare budgets from year to year in order to cover other costs.

This system is socially just in the sense that no one is ever denied healthcare due to lack of money. However, this system is also prone to abuse. For instance, since the system is free, people tend to misuse the system. Hence, people who don’t need to use healthcare facilities also end up using them. This clogs up the system and makes it slow. As a result, people who need emergency healthcare have to wait for longer durations in order to get treatment. Also, since the government is the only service provider, there is no real competition. Hence, the government does not have any incentive to maintain service quality.

To sum it up, there are many alternative ways of funding health insurance. The advantages of one system are the disadvantages of the other. Hence, there is no right or wrong way. The path chosen depends upon the underlying philosophy which is believed by people of a particular nation.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.