PHA-Exchange> Sustainable Community Health Financing-The Social Reinsurance Approach

Fri Jun 6 00:17:02 PDT 2003

The following is one of the articles on Health Care Financing published in Asia Pacific Consumer, No. 30, the quarterly magasine of Consumers International Office for Asia Pacific based in Kuala Lumpur. For more information, visit our website, www.consumersinternational.org/roap

Sustainable Community Health Financing-The Social Reinsurance Approach 
AP Consumer, Health Care for All
No. 30 4/2002

By Dr. David M. Dror
Senior Health Insurance Specialist, 
Social Protection Sector, International Labour Organization. 

Where private insurance and public health financing have failed, communities have got together to underwrite their health care costs. This article examines the new concept of social reinsurance, which underpins the community health care financing scheme.

What is more important in development than improving access to Health Care for the poor? Prof Nicholas Barr, a leading authority on public financing and Professor at the London School of Economics thinks there is little that is more important than tangible results on this count.

In order to improve access of the poor to Health Care, one immediately thinks of private and public systems.  So why do poor people in poor countries turn to their communities for support in paying for health costs?  To answer this question one must understand the private, public and market failures.  The next step is understanding how to overcome these failures by utilising community finance schemes, which leads to the related need for Social Reinsurance.  This idea is not only very new, but also an important one, according to Prof Barr. 

Several factors contribute to failure of private health insurance as a viable option for health financing for the poor.  The main reason why the poor do not buy health insurance is their inability to pay on a regular basis, simply due to irregular income flows or prevalence of barter transactions.  Admittedly, low revenue-raising capacity of the poor is a barrier to providing self-financed health protection, unless subsidies could be made available. But these are rare, often ill targeted, and mostly provided through the supply side.  However, no less important a reason is that private insurers think that health insurance for the poor is not a profitable market.  Compounded with the horrendous information problems to adequately estimate the insured risk, private insurers prefer to cover only certain medical risks, and to apply the more expensive risk rating.  Consequently, the poor find low or no affordable offer of health insurance in the first place, and the little that is available strengthens the notion that private insurers are not willing to offer a reliable and worthwhile deal. It is not uncommon for the poor to have low trust in insurers.  With nobody out there to enforce different rules on private insurers, the private health financing option is ruled out.  

What about public health financing? Governments have attempted to provide Health Care for the poor through public clinics and hospitals.  These services are funded through tax revenues, contributions from formal-economy employees and user fees. But these formal financing instruments do not work as well in developing countries because income is not readily identifiable, and taxes and premiums cannot be collected easily at source.  The result leaves many of the poor without needed health care or financial protection against the cost of illness.  Also, public budgets can only afford minimal health care, and most subsidies are channelled to health centres that are accessed more by the middle class.  The high incidence of tax evasion by middle-to-upper class causes serious dysfunction of risk spreading through a revenue pool that is not sufficiently large or diversified.  There are more problems in developing countries due to limited regulatory capacity of government. Thus, with low revenue base and poor capacity to implement regulatory compliance, many low-income governments rule out the option of universal health financing from public funds.  

This is why so many poor people have to rely on spot payments to pay for health care.  If they cannot afford it they suffer illness and the resulting lower earning capacity, and if they do pay for it they are exposed to a severe risk of impoverishment, or both.  This is a major problem.  The poverty-illness nexus arises, and its vicious impact is particularly pronounced among the rural poor and people working in the informal economy. 

Then there is market failure.  Market failure is partly the lack of an effective exchange between supply and demand, inability to create an effective link between needs, demand, ability to pay and supply.  The compounding private, public and market failures pushed many rural populations and informal sector workers to turn to local community arrangements to help meet their health care needs.

Community health financing schemes have shown advantages in mobilising and managing health care resources under difficult conditions.  Three factors contribute to the strength of community health financing: social capital, pre-existence of community institutions, and interconnectivity with other players.  Social capital is the term used to describe the strength of relationships, financial support and safety net that low-income groups have with their family, community and friends.  Community-financing institutions serve members through credit, savings or insurance (microinsurance). In many cases these local institutions are more attractive to low-income groups than broad based national health insurance.  Interconnectivity between community health financing institutions and external institutions providing social health and welfare is a link of much potential, often underexploited.

Despite these strengths, community schemes also have shortfalls.  For instance, in their role as risk managers, community schemes are themselves exposed to risks of insolvency (that is when expenses exceed income, leading to bankruptcy) due to small group size, underfunding, low technical and managerial skills and lack of access to risk management infrastructure.  What are some ways to guarantee solvency?  One way is to enable community schemes to transfer risks to reinsurance.  Unfortunately, just as the poor have no access to insurance, communities have no access to reinsurance.  It basically comes down to the vision of commercial reinsurers who see no profit in covering community-based microinsurers.  So far, no government or international development agency has ever put together a plan to reinsure community health schemes.  Enter Social Re.

What is Social Re?  Social Re (Re is short for reinsurance) is a concept to provide the financial and technical backstop, which will enable community, health financing schemes to succeed.  It offers hope for a solution to an enduring problem of developing countries: providing health insurance to poor people.  Social Re offers an institutional structure that can pool decentralised community insurance schemes, and thereby lessen their financial exposure due to fluctuations in caseload, through a contract that enables communities to limit their exposure to the average risk for the entire pool. A reinsurer covers the outliers, or above average costs.  This allows all schemes to enjoy essentially the same financial structure that every insurer must have: limit the risk, identify it, and enjoy the best technical support to manage, mitigate, reduce and compensate for health risk. 

What is reinsurance?  Reinsurance is insurance of one insurer by another insurer. Reinsurance allows smaller first-line insurance schemes to enjoy the more stable risk exposure that is typical of much larger groups. Single communities transferring risks to reinsurance increase the risk pool, and if the larger pool is randomly constituted, it will homogenize risks, and thus also reduce both costs and the incidence of insolvency.  Reinsurance can be designed to also redistribute risks and resources equitably across members of the pool.

Where does the Social Re project currently stand?  The book: Social Reinsurance: A New Approach to Sustainable Community Health Financing has been published recently, and contains background information including: Development Challenges in Health Care Financing; Insurance, Microinsurance, and Reinsurance (including the reinsurance model); Implementation Issues; and Toward a Reinsurance Pilot in the Philippines.  The business plan estimates the Social Re project can break-even after 5-6 years.  

In addition to the conceptual work, a method has been elaborated to monitor and evaluate the impact of implementing reinsurance. This includes a survey of the situation before and after interventions, among both members and non-members of small insurance plans. The baseline situation analysis in six regions of the Philippines has been conducted.  What are the survey results?  As summarized by Dan Altman of the New York Times, "Hospital visits were 40 percent higher. among members than among comparable non-members in the last two years. Compliance with drug regimens for the chronically ill was higher in all five regions reported. In four of the five regions, mortality rates for . members were substantially lower in the last five years than mortality rates compiled from regional statistics."

The full data analysis will be completed shortly, and published early in 2003. But we can already state that community schemes make a real difference in terms of reducing risk exposure of members, improving access to Health Care, and including the poor in the system. This is a very encouraging set of findings. The next step will be to pilot Social Re, and one country that seems a good candidate for this is the Philippines.  

Piloting will include five main activities: capitalization of the reinsurance facility; technical support to community-financed schemes; benefit package design and enhancement; contracting with suppliers so that members are sure to get the benefits they need; and Formalizing the links between communities, Social Re and other players, including national schemes.

Essentially, Social Re will complement other large schemes, if these exist, to enlarge the benefit package and improve the role of community-based schemes. In countries that do not have the capacity either to finance or to organise large-scale social insurance schemes, Social Re can improve the capacity of community schemes to open poor people's access to Health Care. There aren't many things more important than that, and there aren't many plans that have provided good solutions to this thorny issue in low-income countries hitherto.

References:

- Barr, N. (2002). Social Re Insurance: A New Approach to Sustainable Community Health Financing, Seminar sponsored by the World Bank and the ILO, 
  Closing Remarks by Nicholas Barr, Professor of Public Economics, European Institute, London School of Economics and Political Science, November 
  2002
- Dror, D. & Preker, A. (2002). Social Reinsurance: A New Approach to Sustainable Community Health Financing, (Washington) The World Bank and the 
  International Labour Organisation..
- http://www.ilo.org/socialre
- http://www.worldbank.org/hnp/hsd/SocialRe.asp
- DANIEL ALTMAN A Program Intended to Offer Health Insurance to the Poor (The New York Times, December 4, 2002)
   http://www.nytimes.com/2002/12/04/business/worldbusiness/04INSU.html?ex=1039582800&en=22facaffd316036c&ei=5062&partner=GOOGLE 
- Dror, D.M (2002). Social Reinsurance: A New way to sustain community health insurance schemes. ICMIF World,  No. 43, October 
  2002,  https://www.icmif.org/public/services/publications/icmifworld.asp, pp. 4-5.
- Dror D: Reinsurance of Health Insurance for the Informal Sector, Bulletin of the World Health Organisation, Geneva, WHO, Vol. 79 No. 7, pp. 672-678, 
  July 2001 http://www.who.int/bulletin/pdf/2001/issue7/bu0980.pdf  
- Social reinsurance: An innovative way to sustain community health insurance schemes. The World of Work - The Magazine of the ILO, No. 44, Sept-Oct 
  2002, pp. 19-21. http://www.ilo.org/public/english/bureau/inf/download/magazine/pdf/mag44.pdf

________________________
Carmelita C.Canila, M.D

Programme Officer 
Health & Pharmaceutical

Consumers International 
Asia Pacific Office
Lot 5-1 Wisma WIM,
7 Jalan Abang Haji Openg,TTDI,
60000 Kuala Lumpur, Malaysia.
Tel: (603) 77261599
Fax: (603) 77268599
E-mail:   carmelita at ciroap.org
Websites: www.consumersinternational.org/roap , www.ciroap.org/apcl , www.ciroap.org/food

Consumers International is a federation of consumer organisations dedicated to the protection and promotion of consumers' rights worldwide through empowering national consumer groups and campaigning at the international level. It currently represents over 250 organisations in 115 countries. For more information, see: www.consumersinternational.org

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