Pan American Health Organization

Health financing in the Americas

  • Introduction
  • Financing and its characteristics in the Americas
  • Financing challenges for the countries
  • Summary
  • References
  • Full Article
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Introduction

Despite the economic growth and progress in health of the past decade, poverty and inequity within and among countries remain a challenge for the Region of the Americas. Some 29% of the Region’s population is still below the poverty line, and 40% receives less than 15% of total income, with marked differences among the countries (). The wealthiest 10% of the population receives 14 times the average income of the poorest 40% in Latin America and the Caribbean (LAC) (). Furthermore, an estimated 30% of the population has no access to health care for financial reasons, and 21% is kept from seeking by geographic barriers ().

At the same time, exclusion and lack of access to quality services persist for large sectors of the population. The prevailing models of care, based more on hospital care for episodes of acute illness than on disease prevention and health promotion, often with excessive use of technologies and poor distribution of medical specialists, do not necessarily meet the health needs of individuals and communities. Investments to reform and improve health systems have not always been designed to deal with new challenges related largely to the demographic and epidemiological transition or the expectations of the population.

The result is a lack of universality and equity in access to quality services and appropriate coverage, which entails a substantial social cost and impoverishes the more vulnerable population groups. The evidence shows that when there are access barriers to services (whether economic, geographic, cultural, demographic, or other), a deterioration in health implies not only greater expenditure but a loss of income as well. The absence of mechanisms to protect against the financial risk of ill health creates and perpetuates a vicious cycle of disease and poverty.

Inadequate financing and inefficient allocation and use of the available health care resources are major obstacles to progress toward equity and financial protection. Indeed, average public health expenditure in the Region of the Americas is around 4% of gross domestic product (GDP)–a very low level compared to the 8% allocated to this budget line by the countries of the Organisation for Economic Co- operation and Development (OECD) (). Direct payment (or out-of-pocket expenditure) at the point of service, the most inefficient and regressive form of financing, yields an unstable flow of financial resources and constitutes an access barrier that impedes or delays care and makes it more expensive for both patients and the system. Furthermore, it has a relatively greater impact on the poor, as even the smallest payment can represent a substantial portion of their budget. Only six countries in the Region of the Americas have direct expenditure levels of under 20% of total health expenditure, the figure that, according to the World Health Organization (WHO) (), protects their populations against the risk of impoverishing or catastrophic health expenditures.

Efficient allocation of public expenditure is a prerequisite for reducing inequities. Implementing the people- and community-centered model of care requires greater efficiency through the priority allocation of new resources to the first level of care and networks to increase the availability of quality services and speedily address unmet health needs. A series of mechanisms must be implemented simultaneously to transform the model of care and the health services structure. Particularly important are payment systems that foster integrated care and the continuity of care ().

The segmentation and fragmentation that characterize the majority of the Region’s health systems give rise to inequities and inefficiencies that compromise universal access, quality, and financing. Weak health system regulatory capacity, excessive verticality in some public health programs, lack of integrated service delivery, and, occasionally, union pressure to protect privileges and lack of political will to make the necessary changes exacerbate and perpetuate this problem.

The strategy for universal access to health and universal health coverage of the Pan American Health Organization (PAHO) redefined the concept of coverage and access to health and stressed the values of solidarity, equity, and the right to health; it also recognized financing as a necessary, though insufficient, factor in reducing inequities and increasing financial protection for the population. The core value in the strategy’s definition of “access,” embraced as a priority for society as a whole, is “the right to health,” which requires adequate, allocated, and efficiently managed financing. This vision stands in sharp contrast to the traditional view, in which access depended on an individual’s and household’s ability to pay and went hand in hand with the proposals to adopt direct payments and the promotion of policies that had led to the fragmentation of health systems in previous decades. At the same time, the strategy acknowledges the need to foster the necessary changes through political and social action that puts health squarely at the center of the policy agenda.

Strategic Line 3 of the PAHO strategy proposes “Increasing and improving financing, with equity and efficiency, and advancing toward the elimination of direct payment that constitutes barrier to access at the point of service.” Three interrelated lines of action flow from this:

  • Increase financial protection by eliminating direct payment, which constitutes an access barrier, thus preventing exposure to catastrophic expenditures or those that lead to or exacerbate poverty. The replacement of direct payment as a financial mechanism should be planned and progressively achieved through prepaid pooling mechanisms, using sources of funding that guarantee their stability and sustainability.
  • Increase public health expenditure to the benchmark of 6% of GDP, which implies a commitment by society as a whole to increase the fiscal space reserved for health in terms of new public sources of financing, with the search for equity as the main objective.
  • Boost efficiency in the health system by adopting a series of measures that specifically impact its financing and organization, such as aligning payment mechanisms with health system objectives and rationalizing the introduction of new medicines and other technologies that contribute significantly to rising health expenditures.

This chapter is a response to the need for an extensive overview of the health system financing situation in the countries of the Region and the challenges they face. Following this introduction, which outlines the theoretical framework in relation to PAHO’s current regional strategy and its financial scope, health financing in the Region will be examined in a conceptual and descriptive section, with special attention to financial protection. The third and final section completes the analysis and describes the immediate challenges facing the countries in terms of the need to equitably and efficiently increase financing.

Financing and its characteristics in the Americas

Any characterization of health financing in the Region would do well to start with the definition of the structures in which health financing functions are performed, the type of health system constructed, and its processes of development and change.

Health financing structure in the Americas

Institutional arrangements in financing decisions are critical. In securing resources and identifying and structuring funding sources, they involve decisions in the realm of tax policy that have developed over time, and in the absence of a major change or reform, are neither directly nor exclusively related to the health sector, but rather, the State and government. In the majority of the countries, operational financing decisions are made year-to-year by the ministries of finance and health as part of a planning process in which the democratic political system is involved, since in most cases, the main source of funding (or a significant part of it) – the budget – is approved by the parliament or congress. Other sources of financing are determined by the market through private expenditure.

Pooled resource arrangements, in turn, are usually long-term and have also taken shape during the historical development of the systems. The Region is largely characterized by segmented systems in which different entities exercise this function hermetically and hence with little or no solidarity (with the notable exceptions of Brazil, Canada, Costa Rica, Cuba, and Uruguay). On the other hand, the purchase of services as a resource allocation mechanism takes many forms, with payments from the historical budget in the public sector and the fee-for-service mechanism in the private sector predominating. However, some countries have made significant progress in planning or implementing payment systems designed to efficiently reaffirm health objectives by operating in networks, as seen in Brazil, Chile, Costa Rica, Ecuador, Peru, and Suriname.

In the same way that financing can be characterized by its functions, the development factor and transformation of systems can be added. In fact, the universal health strategy characterizes health system segmentation and fragmentation as a serious problem. Countries continually launch processes of transformation, reform, or change, and these efforts also determine financing strategies.

For example, when Chile began reforming its explicit health guarantees in 2005, this appeared to be a remedy for the health system’s access and fragmentation problems; however, it failed to address the segmentation of the existing funds for mitigating risk (). In Mexico, the design of the People’s Insurance created a new health care system in the attempt to cover a population group that had been excluded from access to health care; this implied greater equity () but not less segmentation. Something similar happened in Peru with the creation and gradual roll out of its Comprehensive Health Insurance, although in this case, it appears that broader coverage has led to greater equity (). The Uruguayan reform, with a single revenue collector and payer (FONASA), vigorously addresses segmentation, pools resources, and promotes solidarity in financing. However, there is still the challenge of reducing fragmentation, which could perhaps be addressed by using ways of financing the purchase of services that facilitate movement toward a comprehensive integrated system based on primary care.

Between 2010 and 2016, the United States implemented the Affordable Care Act (ACA), a substantive reform for that country’s context that has brought insurance and coverage to major population groups through a three-pronged approach: 1) compulsory universal insurance, so that all citizens are covered; 2) the regulation of group premiums and open enrollment to prevent discrimination against seniors and the rejection of beneficiaries by insurance companies; and 3) subsidies for people who meet the criteria (low income) so that they can receive coverage, along with a significant expansion of the national Medicare and Medicaid programs. Thus, whether or not segmentation predominates is reflected in the composition of health financing in the countries, as seen in Figure 1.

Figure 1. Segmentation reflected in financing

Source: WHO, Global Health Expenditure Database (accessed June 2016).

Countries with national public health systems and broad-based coverage, such as Brazil, Costa Rica, Cuba, and Ecuador, must still confront the need to boost efficiency through payment mechanisms and the creation of fiscal space (sustainable resources to finance increases in public expenditure), which will help them achieve health objectives and the sustainability of the system. In contrast, several Caribbean countries, such as Belize, the Bahamas, and Jamaica, promote the policy of establishing single-payer systems, creating a new source of funding in the form of compulsory social security contributions. In addition to the considerable effort that shifting to this new institutional arrangement implies, they will have to deal with its potential consequences in terms of equity levels.

By instituting reforms, changes, or transformations grounded in the principles of equity, solidarity, and health as a right, PAHO’s Member States have committed to moving toward the elimination of direct or out-of-pocket expenditure, the creation of the largest possible pooled funds, and more efficient public financing as the way of promoting greater individual and community access to comprehensive quality services in integrated health systems, with strengthening of the first level of care. This effort is determining the types of health systems that are being developed in the Region.

Health financing and expenditure in the Americas

This section contains a descriptive comparative analysis of health accounts in the Americas, emphasizing public health expenditure and out-of-pocket, or direct, payment. It also provides other relevant data, such as private and per capita expenditure, together with the weight of the tax burden and the fiscal priority of health in the countries. The first two variables are emphasized, since public health expenditure is the variable that is positively correlated with health outcomes and out of-pocket expenditure is one of the main obstacles to access to health.

a) Public health expenditure and its weight in total expenditure

Considering the universal health strategy’s public health expenditure benchmark of at least 6% of GDP, Figure 2 shows that only 5 of the 34 countries that provided information are above that threshold: Canada, Costa Rica, Cuba, the United States, and Uruguay. The countries below the threshold include three with public health expenditure above 5% of GDP: Colombia (5.4%), Nicaragua (5.1%), and Panama (5.9%).

Observing what happens with total health expenditure and its public-private mix, we discover that in countries that exceed the 6% benchmark, public health expenditure accounts for more than 70% of total health expenditure, except in the United States. Furthermore, in the case of Bolivia, Canada, Colombia, Costa Rica, Panama, and Uruguay, this balance is similar to the average for the OECD member countries (73%). At 17%, total health expenditure in relation to GDP in the United States is known to be the highest in the world, without proportionally better health outcomes (). This indicates the need not only for more resources but greater efficiency in their use.

At the opposite extreme, countries with lower public health expenditure are also those in which the composition of total health expenditure is more skewed toward the private component: Guatemala (private expenditure of 62%), Haiti (79%), Saint Kitts and Nevis (58%), and Venezuela (71%). However, Peru and the Dominican Republic are examples of the opposite, with low public health expenditure (3.3% and 2.9% of GDP, respectively) and a high share of public health expenditure in total health expenditure (61% and 67%, respectively). Added to this is the case of the United States, with high public health expenditure (8.3%), but health expenditure that is predominantly private (52%).

Figure 2. Health expenditure (as a percentage of GDP) and composition (public-private, as a percentage of total expenditure), 2014

Source: WHO, Global Health Expenditure Database and OECD Data (accessed June 2016).

b) Per capita expenditure and equity in expenditure

Total per capita health expenditure in the Region averages 1,320 international dollars (Intl$) per year (adjusted by purchasing power parity) and ranges from Intl$ 160 in Haiti to Intl$ 9,145 in the United States (Figure 3). This absolute level of expenditure can be compared with the average for the OECD countries, which is triple that of the Region and far less scattered. Furthermore, in each country the different segments have different amounts of per capita expenditure, which is one of the most unmistakable signs of inequity. Some countries move toward the convergence of these figures, but slowly, as seen in Colombia, Chile, and El Salvador. With the reform of 2008, Uruguay’s transition was faster in closing this gap, leading to a drop in the difference between the per capita expenditure of social security providers and the public provider from 2.3 times greater in 2007 to just 25% greater in 2012.

Figure 3. Per capita health expenditure in the Americas

Source: WHO, Global Health Expenditure Database and OECD Data (accessed June 2016).

c) Out-of-pocket health expenditure

When examining the impact of health expenditure on household well-being and access and use of the health services, out-of-pocket health expenditure (or direct payment) merits special attention. These terms refer to the payment required at the time of service and at the point of access to the health services and health products, after discounting any subsequent reimbursement. In practice, this can take different forms, such as direct payments for medicines, copayments, coinsurance rates, and deductibles. It can also involve formal or official payments, informal or “under-the-table” payments, or both at the same time ().

The fact that this type of payment may be required to receive care or access the necessary health services makes them a health care access barrier. Even among people who can cover these expenses, incurring them may adversely affect their household’s well being and the consumption of other goods and services or may even be harmful to health if the alternative is self-treatment. It also has implications for the efficiency of the health system, since by discouraging the use of the health services, it causes many users to seek care from the system at more advanced stages of an illness, requiring more complex and expensive services. Thus, out-of-pocket expenditure can result in higher costs in the medium and long term, with worse health outcomes, poorer health system response capacity, and less efficiency and effectiveness.

The indicator most commonly used to measure the burden of out-of-pocket health expenditure in a country is the proportion of total health expenditure that it represents: the higher the proportion, the greater the number of households likely to face financial difficulties as a result of using health services. Figure 4 shows the value of the indicator for the countries of the Region and, as a reference, the average value for the countries of the European Union (EU). First, it shows that while out-of-pocket health expenditure in the EU countries averages 21% of total health expenditure, 29 countries in the Region (83%) exceed that value. Furthermore, the countries with a lower proportion of out-of-pocket health expenditure are also those with higher public health expenditure (as a percentage of GDP) (Figure 1): Canada, Colombia, Cuba, the United States, and Uruguay. Some exceptions are conspicuous: Suriname has low public health expenditure (2.9% of GDP) and also a low proportion of out-of-pocket expenditure (11% of total health expenditure); and Costa Rica, with very high public health expenditure for the Region (6.8% of GDP), has a moderate proportion of out-of-pocket expenditure (25% of total health expenditure).

Low out-of-pocket expenditure is not always an indication of equitable access, since it may also be due to lack of access to the services. Also, it can sometimes increase with the desired increase in access, although the ratio with coinsurance rates or unit values of copayment remains constant.

Figure 4. Proportion of out-of-pocket health expenditure in the Region of the Americas, 2014

Source: WHO, Global Health Expenditure Database (accessed June 2016).

The weight of direct payment (out-of-pocket expenditure) by households in total health expenditure is trending downward in certain countries in the Region, among them Chile, Colombia, El Salvador, and Mexico.

Here, the case of El Salvador is worth examining. In 1995, more than 60% of its health expenditure was financed through direct payments; today, the figure is less than 30% and though still high, represents a significant decline. In Colombia, the indicator fell from 38% to 15% in that same period, and the country currently has one of the lowest percentages of out-of-pocket expenditure in the Region. Other countries show a certain stability in the indicator and remain at very high levels, as in Guatemala (above 52% throughout the period), or low levels, as in Costa Rica, although with a certain upward trend (from 21% to 25% during the period). In Ecuador, a marked increase in the indicator was observed between 1995 and 2000 (moving from 32% to 62%), subsequently shifting downward, but nevertheless remaining at very high levels (48% in 2014).

Figure 5. Trends in out-of-pocket health expenditure in the Americas, 1995–2014 (selected countries)

Source: WHO, Global Health Expenditure Database (accessed June 2016).

While out-of-pocket expenditure is generally more of a direct barrier to care for households with less purchasing power, it also is for the middle class (). Thus, having access to health services does not prevent out-of-pocket payments from undermining health equity, since “overcoming” the barrier can significantly jeopardize a household’s well-being, driving it into poverty (impoverishing expenditure) or representing a painfully high proportion of its total expenditure or ability to pay (catastrophic expenditure). Expenditure is considered impoverishing for a household when it represents the difference between being above or below the poverty line (). Expenditure is considered catastrophic when out-of-pocket health expenditure represents a substantial percentage of household expenditure–usually 30% or 40% of its ability to pay (), or 25% of total expenditure (), with “ability to pay” understood as total household income minus the expenditure necessary for meeting basic subsistence needs (). The values of catastrophic and impoverishing expenditure indicators vary with the methodology used. However, a recent PAHO study of 11 countries in the Region shows that in 7 of them, 2.5% of households have catastrophic expenditures according to any of the known methodologies. These methodologies generally vary in whether the catastrophe threshold is 30% or 40% of a household’s ability to pay or use the more recent threshold established by WHO and the World Bank for the Millennium Development Goals, which is 25% of total household expenditure.

d) Trends in public health and out-of-pocket expenditure

Observing the averages of these two key indicators in the Region in a 20-year series, we see a slight increase in public expenditure, together with a slight decrease in out-of-pocket expenditure. The point of intersection in Figure 6, which was 3.6% of GDP and 34% of total health expenditure in 2007, did not augur well. In 2012, the figures were 4.1% of GDP for public health expenditure and 32.6% for out of-pocket expenditure. In fact, since 2008, this trend has continued its moderate path without reaching sufficiency, especially in the LAC countries. However, in the non-Latin Caribbean countries, the general trend exhibited in the Region did not materialize; instead, the two indicators have remained stable. North America, which had already reached 6% of GDP at the beginning of the series (1995), was almost at 7% and 13.8% of out-of-pocket health expenditure in 2007, and in 2012 had increased the share of public expenditure in GDP to 8% and decreased out-of-pocket expenditure to 12% of total health expenditure.

Figure 6. Trends in public health expenditure and out-of-pocket health expenditure

Source: WHO, Global Health Expenditure Database (accessed June 2016).

e) Decomposing public health expenditure

The following is an intuitive way of decomposing the indicator for public health expenditure as a proportion of GDP to facilitate analysis of its determinants ():

Public health expenditure

=

Total public expenditure

×

Public health expenditure

GDP GDP Total public expenditure

Thus stated, the indicator in the formula is expressed as the product of two factors. The first of them, total public expenditure as a proportion of GDP, refers to a country’s fiscal capacity. The second, public health expenditure as a proportion of total public expenditure, represents the fiscal priority of health.

Figure 7 presents data on fiscal capacity in the Americas, as well as the simple average for EU countries. The median for the Region, around 30% of GDP (with considerable variability between countries), stands in marked contrast to the average of 48% of GDP for total public expenditure in the EU countries. Fiscal capacity (understood as total public-sector resource mobilization) should be a potential source of fiscal space for health in the Region. Furthermore, the combination of a low tax burden and weaknesses in tax collection—manifested, for example, in tax evasion and tax fraud—create a scenario not uncommon in the Region that must be considered in the specific analyses.

Figure 7. Fiscal capacity in the Region of the Americas, 2014

Source:International Monetary Fund, World Economic Outlook Database (accessed June 2016).

When analyzing the fiscal priority of health in the Region (Figure 8), the variability of the indicator is even greater. While public health expenditure in the EU member countries averages 14% of total public expenditure, almost half the countries in the Region of the Americas give higher priority to the health sector. In the case of Costa Rica and Nicaragua, for example, public health expenditure accounts for almost one quarter of total public expenditure (23% and 24%, respectively). At the opposite extreme, however, nine countries allocate less than 10% of their total budget to the health sector: Haiti (5%), Venezuela (5.8%), Brazil (6.8%), Saint Kitts and Nevis (6.9%), Argentina (6.9%), Trinidad and Tobago (7.6%), Jamaica (8.1%), Grenada (9.2%), and Guyana (9.4%). Painting a more complete picture of the countries’ health financing efforts requires at least this dual perspective in order to see how countries that prioritize health in their budget may be spending little due to their excessively low level of total public expenditure, while countries with a high level of total public expenditure may not be prioritizing the health sector, even though health expenditure figures are relatively high in absolute terms.

Figure 8. Fiscal priority of health in the Region of the Americas, 2014

Source:International Monetary Fund, World Economic Outlook Database (accessed June 2016).

Combining the data on fiscal capacity and fiscal priority reveals very unequal country performance. For example, despite its relatively low fiscal capacity (25% of GDP), public health expenditure in Nicaragua is relatively high for the Region (5.1% of GDP), thanks to the high priority of health in the national budget (24% of total public expenditure). However, in Guatemala, where the fiscal priority of health is relatively high for the Region (17.8% of total public expenditure), public health expenditure is low (2.3% of GDP), due to the country’s excessively low fiscal capacity (13.4% of GDP, the lowest in the Region). In Brazil, public health expenditure stands at 3.8% of GDP, despite a high fiscal capacity (almost 40% of GDP), since health has a low fiscal priority (6.8%). In general, the data show that in the eight countries where public health expenditure exceeds 5% of GDP (Canada, Colombia, Costa Rica, Cuba, Nicaragua, Panama, the United States, and Uruguay) the fiscal priority of health is more than 14% of public expenditure.

f) Health outcomes and expenditure

It should be pointed out that these indicators provide no information about the quality of the expenditure, which can be obtained only by comparing them with health outcomes in the population. One way to do so would be to compare health expenditure with life expectancy and mortality from diabetes, as shown in Figure 9 and Table 1.

Here, we can see a correlation between higher public health expenditure and better health outcomes. The figure shows the association between life expectancy at birth and public health expenditure as a percentage of GDP in the countries of the Americas. In Table 1, moreover, the results of a preliminary study of 34 countries, using data from 2000, 2010, and 2014, show that increased public health expenditure is highly correlated with longer life expectancy and lower mortality from diabetes mellitus, as well as lower out-of-pocket health expenditure. Thus, public health expenditure is essential for improving health outcomes and financial protection in the Americas, and increased investment in public health is expected to result in a further reduction in mortality and longer life expectancy, bringing significant economic benefits to the Region. This association has been confirmed in other regions and countries in the world (), serving as additional support for the argument to convince governments to increase resources for the health sector.

Figure 9. Relationship between public health expenditure and life expectancy

Source: WHO, Global Health Expenditure Database (accessed June 2016).

Table 1. Summary of regression analysis

Outcome variable Year Coefficient SE 95 % CI Lower 95 % CI Upper
Mortality from diabetes mellitus 2000 -32.26188 5.19368 -42.86878 -21.65498*
2010 -34.82691 7.34039 -49.81798 -19.83584*
2014 -20.66315 5.89383 -32.66849 -8.6578*
Life expectancy at birth 2000 4.58267 1.02212 2.49522 6.67013*
2010 6.88649 1.56629 3.69607 10.07691*
2014 3.10145 0.73388 1.60659 4.59631*
Out-of-pocket health expenditure 2014 -20.83396403 4.29818 -4.84715 -29.62474*

Note: * p<0.001; SE = standard error of the coefficient; CI = confidence interval. Source: PAHO/WHO from WHO Database (accessed June 2016).

g) Pharmaceutical expenditure

Total pharmaceutical expenditure accounts for a growing proportion of total health expenditure in LAC, increasing from 17% in 2010 to a projected 33% in 2017. Per capita pharmaceutical expenditure in 2015 was calculated at nominal US$176 (US$ 264, adjusted by purchasing power parity), where 25% of the expenditure is covered by the public sector and the remaining 75% by private insurance and households (the latter, through direct payments). In 2010, total expenditure on pharmaceutical products came to US$ 9.4 billion, or 1.2% of GDP, and in 2015, US$ 16.7 billion, or 1.8% of GDP. This upward trend is expected to continue and reach 2.2% in 2017. The LAC countries are net importers of pharmaceutical products. Between 2010 and 2015, the share of pharmaceutical products in the global value of trade rose by 15%, from 1.2% to 1.38% of GDP.

Financing challenges for the countries

Increasing public investment: a priority need

Health financing in the Region is far from meeting the objectives set by the countries in 2014 when they adopted the strategy for universal health. In fact, as stated earlier, only a small group of countries has achieved public health expenditure of 6% of GDP (Figure 10), and direct expenditure in the Region accounts for 33% of total health expenditure.

Figure 10. Public health expenditure and out-of-pocket health expenditure in the Americas

Source: WHO, Global Health Expenditure Database and OECD Data (accessed June 2016).

Recent calculations show that the targets are unlikely to be met unless specific planned action is taken to increase fiscal space for health. In fact, if the rate of increase in public health expenditure of the past 20 years continues, it will take an average of 80 years to meet them (Table 2).

Table 2. Estimated year for reaching the benchmark of 6% of GDP, considering only economic growth

Country Initial public health expenditure Elasticity Gap Year
Cuba 8 · 19
United States 7 · 58
Canada 7 · 40
Costa Rica 8 · 05
Uruguay 6 · 14
Ecuador 3 · 94 2 · 90 2 · 06 2024
Nicaragua 4 · 49 1 · 56 1 · 51 2026
Brazil 4 · 66 1 · 68 1 · 34 2030
Colombia 5 · 18 1 · 22 0 · 82 2032
Barbados 4 · 14 2 · 68 1 · 86 2034
El Salvador 4 · 63 1 · 49 1 · 37 2039
Honduras 4 · 28 1 · 35 1 · 72 2040
Bolivia 4 · 75 1 · 22 1 · 25 2042
Saint Kitts and Nevis 2 · 30 1 · 94 3 · 70 2050
Suriname 3 · 24 1 · 42 2 · 76 2053
Chile 3 · 66 1 · 26 2 · 34 2068
Grenada 3 · 00 1 · 41 3 · 00 2083
Paraguay 3 · 46 1 · 16 2 · 54 After 2099
Guyana 4 · 30 1 · 08 1 · 70 After 2099
Antigua and Barbuda 3 · 14 1 · 14 2 · 86 After 2099
Belize 3 · 39 1 · 01 2 · 61 After 2099
Jamaica 3 · 38 <1 2 · 62 Never
Dominican Republic 2 · 82 <1 3 · 18 Never
Panama 4 · 93 <1 1 · 07 Never
Haiti 0 · 70 <1 5 · 30 Never
Argentina 4 · 92 <1 1 · 08 Never
Trinidad and Tobago 2 · 62 <1 3 · 38 Never
Peru 3 · 12 <1 2 · 88 Never
Venezuela 0 · 98 <1 5 · 02 Never
Guatemala 2 · 42 <1 3 · 58 Never
Bahamas 3 · 20 <1 2 · 80 Never
Saint Lucia 4 · 70 <1 1 · 30 Never
Dominica 4 · 20 <1 1 · 80 Never
Mexico 3 · 23 <1 2 · 77 Never
Saint Vincent and the Grenadines 4 · 30 <1 1 · 70 Never

Source: IMF/WHO and World Bank data.

This is because the increase in per capita public expenditure has historically been moderate, with relatively low elasticities in health expenditure with respect to economic growth (below 1 in many countries). Even the peak public health expenditure of 2009 was due to the impact of the economic crisis on the GDP of the countries of the Region and not to an absolute increase in that expenditure. However, although the average GDP growth rate would recover by 2010 and continue until 2014 (), the particular situations in the Region in response to the global crisis caused the decline in public health expenditure as a percentage of GDP to continue in several countries, as seen in Figure 11.

Figure 11. Trends in public health expenditure in the Americas, 1995-2014 (selected countries)

Source: The World Bank Data (accessed June 2016).

The calculations also show that reasonable modifications in some sources of fiscal space (such as taxes and efficiency levels) would accelerate progress (). In fact, a simulation in which the fiscal priority of health was at least 15%, like the figure established in the Abuja Declaration for the African countries, and some tax rates were equalized to the LAC average finds that 8 more countries would reach the target and raise expectations about another important group of nations.

Table 3. Changes in health investment simulating changes in the tax burden (exercise with 13 Latin American and Caribbean countries)

Countries Public expenditure in
health as a percentage
of GDP (2013)
Increase scenario (1) Increase scenario (2)
Bolivia 4.8 5.6 7.6
Honduras 4.3 4.30* 5.9
Nicaragua 4.5 6.2 5.8
Paraguay 3.5 S/D 5.1
Colombia 5.2 6.4 6.7
Ecuador 3.9 4.4 5.2
Peru 3.1 3.8 4.5
Argentina 4.9 5.3 5.3
Brazil 4.5 6.0 6.0
Chile 3.7 4.1 4.0
Barbados 4.1 S/D 4.7
Guyana 4.3 S/D 4.6
Jamaica 3.4 3.7 4.3
Countries reach 6%
or nearly (5,8%)
0 3 5
Percentage 0% 23.1% 38.5%

Source: PAHO from Collecting Taxes Database 2010/2011, BID-CIAT and CEPAL.
Scenario (1): current priority fiscal levels.
Scenario (2): fiscal priority of 15% of total public expenditure.

The economic context today is complex and makes the challenge more difficult. The majority of the LAC countries are experiencing zero growth (-0.5%, on average, in 2015, with projections of -0.8% in 2016) and fiscal contraction. Especially in South America, some countries, such as Argentina, Brazil, Ecuador, and Venezuela, will experience a significant drop in GDP (2.1% on average), and in the Caribbean, GDP in Suriname and Trinidad and Tobago will fall. Despite this somber picture, however, Central America and Mexico will grow at an average of nearly 2.6% ().

Notwithstanding, according to economic theory, fiscal policy should be countercyclical. Countercyclical policies generally cool the economy down when it is growing (covering the fiscal deficit) and stimulate it when there is a downturn (increasing government expenditure to attenuate economic and financial fluctuations). One component of these programs is countercyclical social policy, which includes health and education, as well as unemployment benefits and other social transfers. Several studies hold that countercyclical government spending has been essential for meeting long term economic and human development targets () and will surely be today to meet the United Nations Sustainable Development Goals adopted in 2015 with a 2030 horizon.

In spite of this consensus, there is evidence that in the low and lower-middle income countries, protecting public health investment and maintaining expenditure during crises has not been the norm. Indeed, the contraction of public expenditure, beginning with the social sectors, has unfortunately been routine. While this procyclical practice can attenuate economic fluctuations, it adversely affects State revenues, poverty levels, long-term growth, and human capital formation. As the facts show, the more advanced countries have historically favored countercyclical policy. In fact, Europe and Central Asia exhibited countercyclical behavior during the Asian crisis of 1997-1998 and up to 2007. After that, however, their behavior was procyclical. In LAC, procyclical behavior was generally seen in both periods ().

Due to cyclical nature of the economy, the health sector must be sustainable and resilient to the economic cycle, as it must in disasters and emergencies. Countercyclical policy is key to protecting the health of the population and mitigating the risks posed to households by illness and the impoverishment that may accompany it. Thus, reacting to the global crisis of 2008, WHO proposed several lines of work to the countries to mitigate the effects of these changes in the economic cycle (): (a) raise awareness about the ways in which the drop in GDP can affect health expenditure, health services, healthy behaviors, and medium- and long-term health outcomes; (b) protect investments in health; and (c) identify action, including the monitoring of troubling signs, to mitigate the adverse impact of the economic cycle.

Fiscal space for universal health

Since the 1950s, health has gone from being a residual explanatory factor in economic growth theories to having a place of its own among the main factors that spur productivity, growth, and poverty reduction. The WHO report of 2001 () was definitive. Its recommendations leave no room for doubt about the link between health and growth and promote the economic development of the world’s poorest countries through investment in health (). The arguments of the international agencies that backed the formulation of the Millennium Development Goals in 2000 and the Sustainable Development Goals today have also been supported in these recommendations. In 2013, the Lancet Commission report, Global Health 2035, once again emphasized this link (). Finally, the 2016 UN report on investing in the health workforce, co-sponsored by the Director of WHO together with the Presidents of France and South Africa, bases its findings on the association between health and economic growth ().

There are several historical examples of countries whose development was rapidly stimulated largely by the good health of their populations. Some authors maintain that this is what happened in the United Kingdom, the United States, and Japan (). Certainly, the countries with longer life expectancy in the 1960s grew faster in the next four decades (). Furthermore, in a study of 138 countries, Barro () showed that a 5-year increase in life expectancy was responsible for annual growth of 0.3 to 0.5 points from 1965 to 1990. The Sachs Commission’s estimates also showed that each 10-percentage-point increase in life expectancy is associated with an annual growth increase of no less than 0.3-0.4 percentage points. Several studies also demonstrate the inverse: that countries with high disease rates do not develop or they grow less.

PAHO has identified the following sources of fiscal space ():

  1. Creating conducive macroeconomic conditions.
  2. Greater prioritization for health.
  3. Creating new tax revenues through a greater tax burden.
  4. Increasing the efficiency of tax collection.
  5. External aid with loans and specific donations for the health sector.
  6. Increased efficiency in existing health expenditures.

Economic growth, the most direct and generic source of all, which is based on the assumption of economic stability, consists of creating fiscal space through GDP growth and a consequent increase in State revenues. Greater prioritization of health, in turn, implies an increase in public health expenditure at the expense of other sectors, such as defense or foreign affairs. On this point, PAHO’s analytical framework presents two ways of accomplishing this: first, by increasing the proportion of health expenditure in public social expenditure or total public expenditure; and the second, by increasing public social expenditure as a whole to prevent competition between health expenditure and other complementary budget lines for an “intersectoral approach” to universal health ().

In addition to providing resources, creating new revenues through a higher tax burden and taxation is positively correlated with better health indicators, as seen in the scientific literature (). In addition to the level of taxation, the tax structure is key to meeting the objective of increasing equity: systems based on indirect taxes (as in the majority of countries in the Region) tend to be more regressive (that is, they impose a greater burden on poorer households) than those in which direct taxes (on income or inheritance) have greater weight. Related to this, “increasing the efficiency of tax collection” means preventing tax evasion and avoidance and promoting formal economies. Here, it is worth calling attention to matters such as the granting of tax reductions or special exemptions from the general tax regulations (), which occurs when the regulations are waived for an agent, sector, or type of income, resulting in lower taxes than are levied on similar activities or income. Many such exemptions were created at specific times for specific purposes, but the need for them has not been reexamined. Finally, “external aid with loans and specific donations for the health sector” refers to two mechanisms: debt and donations. Based on the scientific literature, it is important to point out the macroeconomic implications of the former and the volatility and fragmentation of the latter.

Promoting greater fiscal space requires a broader social dialogue among all stakeholders. These decisions, which involve States, tend to be political and are based primarily on technical arguments. There are several ways of fostering this type of dialogue, for which technical studies are also essential. The PAHO studies of fiscal space — a regional study covering 14 countries () and three individual studies for Peru (), Honduras (), and Bolivia () — show the following:

  • The countries generally have fiscal space for health, and economic growth is not enough to fill that space and meet financing needs.
  • Additional fiscal revenue must be collected, using better methods.
  • Tax expenditures should be reviewed to identify exemptions that are unfair or not beneficial to the countries.
  • There are arguments and space for increasing specific health taxes (primarily on alcohol and tobacco). Although revenues are low in these cases, the projected savings to the system can be substantial.
  • From a policy standpoint, loans and donations are not a viable source of revenue for governments in the medium and long term.
  • Measures to boost efficiency should accompany these efforts, promoting the principles established in the strategy for universal access to health and universal health coverage.

Boosting efficiency: necessary, but not enough

From the financing standpoint, efficiency should be an objective in itself. However, it is also important to consider that it can be an additional source of fiscal space (since making better use of existing resources or combatting waste has the same effect as injecting new resources). Efficiency in the organization of services implies, among other things, the adoption of people- and community-centered models of care and the delivery of quality services by strengthening the first level of care and building integrated networks.

a) What is “efficiency in the health sector”?

Resource allocation in a health system is efficient when it achieves an optimal combination of morbidity and mortality reduction and greater financial protection for households that permits equitable access to the health services with given resources. In this case, the efforts are designed to yield what society needs and expects in terms of health and well-being—a task that involves both the State and society. The degree of productive and technical efficiency achieved will depend on how the health services are managed—or to put it another way, on obtaining the best response capacity through better coordination and linkage between levels of care and care networks. It is necessary for resource allocation to achieve a balance among the inputs used in the health sector (technical efficiency); and for technical efficiency to be transformed into productive efficiency, it is also necessary to meet the aforementioned objectives as fully as possible, given the existing resources. Dynamic efficiency, in turn, implies guaranteeing conditions and efficiency levels over time through innovation in the health systems in the broadest sense of the word ().

b) Payment systems to boost efficiency

Payment mechanisms must be aligned with system objectives. Thus, it is important to note that territorial and population-based payment systems—keeping in mind morbidity levels and combined with mixed-level payment mechanisms—are potentially effective regulatory mechanisms for meeting these objectives (). Aligning incentives with health system objectives to promote integrated care and comprehensive services, and putting emphasis on the first level of care are initiatives that can boost the efficiency of the system as a whole. Studies coincide in recommending the adoption of payment mechanisms with circumstantial margins of flexibility and empirically contrasted macro- and micro-allocation instruments. Territorial capitation and episode-based payment (also called bundled payment or case rates, as in diagnosis-related groups) are two examples of tools that can boost the efficiency of expenditure. Thus, capitation adjusted by territorial and population risk is a powerful regulatory tool already in use in several initiatives that makes it possible to align incentives with health-system and health objectives ().

There are known mechanisms for boosting efficiency in resource utilization, among them protocols for reducing clinical variability, centralized drug procurement systems, economic evaluation, and the evaluation of other aspects, such as safety and quality in the introduction of new technologies, programs to boost workforce efficiency and productivity, and the strengthening of disease prevention and health promotion. In this context, the measures with the greatest short-term impact are related to resource allocation mechanisms, including those involving drug procurement. For example, as a result of the financial crisis of 2008, the United Kingdom recently took steps to improve productivity and cost control, with various results. For example, from 2011 to 2013 the greatest savings in resources were obtained with measures involving changes in payment mechanisms and organized drug procurement ().

From 2010 to 2015, several countries in the Region, among them Brazil, El Salvador, and Ecuador, made progress in this regard, channeling most of the growth in expenditure to the first level of care to broaden access to these services and improve their quality. For cases like those of Chile, Mexico, Peru, and Uruguay, results based payment systems were also established (). The 2008 reform in 2008 in the latter country involved the expansion of coverage and pooling of social security and State funds to finance services to the beneficiaries of FONASA, the national health insurance program that currently covers more than 70% of the population. The risk-adjusted capitation payment system used in this fund also considers four targeted areas associated with preventive measures for pregnant women and older persons and the allocation of human resources. During this period, Peru launched a results-based payment system through a project implemented at the more general level of results—based budgets. Chile, in turn, introduced targets in the per capita transfer system in primary health care and is developing a hospital payment system based on diagnosis-related groups, aspiring to be the first country in LAC to employ this tool. Suriname currently uses a capitation system for first-level providers and payment per day and bed in the hospital setting.

c) Prioritization to equitably boost efficiency

Finally, it should be noted that the countries of the Region are increasingly adopting prioritization as a way of meeting health objectives through efficient and equitable resource allocation. This process takes different forms and involves different approaches; thus, we find processes related to the definition of the services offered and the use of positive lists of standardized services, lists of generic medicines, and the preparation of clinical treatment guidelines and protocols, in addition to health promotion, disease prevention, and the prioritization of first-level services to build strong systems based on primary care. The use of economic analysis in the health sector to evaluate cost-effectiveness and cost-utility in prioritization processes is also growing in the countries. In this context, efficiently increasing expenditure implies identifying specific action to prevent losses in health (as measured by indicators such as quality-adjusted life years [QALY]) to ensure that services reach the neediest beneficiaries based on their health deficits.

Improving financial protection through pooled funding

Increasing financial protection requires greater public expenditure, adopting efficient interventions primarily at the first level of care to boost response capacity and increase linkage among service networks. Increasing financial protection will reduce inequity in access. However, the replacement of direct payments should be done gradually through collective prepayment mechanisms involving different sources of financing, such as contributions to social security, taxes, and fiscal revenues. Thus, the main components of a financing system designed to offer financial protection to the population are the elimination or minimization of direct payments by households and the pooling of funds.

Pooled funds, in which the risk of disease and the need for health services are shared by a group of people through collectively financed prepayment mechanisms, is therefore key to financial protection. Sharing risk under any institutional arrangement implies the transfer of resources or a subsidy from healthy people to patients, as well as from young people to older people — basically, from people who are not using the health services at a particular moment to those who are. Moreover, for this financing to be solidarity-based, there should also be a subsidy, grounded in redistributive policies, from households with greater contributory capacity (the wealthiest) to those with fewer resources (the poorest), whose contributions are limited but whose health care needs tend to be greater.

There is no ideal number of people who should share risks, but the larger the fund, the greater the probability that all of these population groups will be covered. The existence of numerous small and fragmented funds hinders the cross-subsidies mentioned above, since it provides an incentive for risk selection: each fund will attempt to include people who are better off economically and in better health and exclude those with limited resources and more health problems. Smaller funds are more vulnerable to specific risks, such as illnesses that require more expensive treatment. This is why funds that cover a small number of people tend not to be economically viable in the long term ().

In the extreme case of an individual fund, such as health savings accounts (), in which the risk of disease is carried almost exclusively by one person, a costly episode of illness could lead to financial ruin. Furthermore, when the members of a fund share similar characteristics in terms of the social and environmental determinants of health to which they are exposed, the risk of health problems tends to be inefficiently diluted, implying a higher cost per person to treat episodes of illness than in funds that cover people with different characteristics. This is a powerful reason for advising against segmented funds for communities with limited resources.

The existence of numerous funds with their respective mechanisms for collecting and pooling resources and contracting services compromises the efficiency of the entire health system due to the administrative costs that it entails, as well as the cumulative superimposed transaction costs. Single large funds tend to be a more efficient type of organization than competing funds, as long as organizational and institutional incentives are adequate (). Economies of scale in the operation of these funds can generally be expected—not only in the collection and pooling of resources, but in the contracting of services for large numbers of people.

Pooled funds will contribute little to meeting the objective of equity if poor individuals and households must make a greater economic effort to finance them than the non poor. Flat contributions or fixed amounts that are equal for all are a highly regressive mechanism, since they represent a higher proportion of the income of poor households than non-poor households. In order to prevent this, contributions should be tied to the contributory capacity of households and individuals and should be progressive only when poor households must contribute a small percentage of their income. Moreover, solidarity-based risk sharing among a group of people means that the contribution to the fund must not be greater for those at higher risk of disease. Financially protecting households with young children, older persons, people with chronic diseases, and other groups likely to make greater use of the health services means not penalizing them with higher contributions.

Finally, in addition to increasing access to quality health services, financial protection is an important tool for fighting inequity and poverty, as it converges with policies for development and the social and economic protection of societies. In other words, it represents a specific contribution from the health sector to human development strategies.

Summary

The health financing situation in the Region is well defined. Public expenditure rose between 2010 and 2015 but did so very slowly, and out-of-pocket expenditure fell, but not fast enough. In this context, substantial progress was made in some cases, with sharp increases in public health expenditure in Uruguay, and sustainability of the goal in Canada, Costa Rica, Cuba, and the United States, all of which had met it earlier. Considering past levels of public expenditure, substantial increases are being observed in Bolivia, Ecuador, Nicaragua, and Peru, along with a clear trend toward the reduction of direct payments, as seen in Bolivia, Brazil, Colombia, El Salvador, and Peru. Tax policies could play an important role in enabling Bolivia, Brazil, Ecuador, and Nicaragua to reach the benchmark of 6% of GDP in the near future. However, health expenditure has not been accorded sufficient priority in many countries, even in the context of economic growth. Considering only the more populous countries in each subregion, this can be seen in Argentina, the Bahamas, Guatemala, Jamaica, Mexico, Panama, and Venezuela—countries with negative health expenditure elasticities with respect to GDP growth. Still, the countries report progress in terms of efficiency in the integration of care and the strengthening of primary care through different types of initiatives—in some cases with a high degree of success in their health indicators.

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Reference/Note:

1. According to WHO (), health financing functions consist of raising revenue, pooling it, and allocating economic resources (that is, spending). Revenue can be raised through taxation, contributions to the social security system, voluntary premiums, and direct payments. Pooling, in turn, involves collecting and managing resources to guarantee that the financial risk of losses stemming from an episode of illness is borne by all members of the common fund. Resource allocation, or spending, is the payment to health service providers, which includes the transfer of historic budgets to mixed payment mechanisms.

2. While this indicator is very important because it is a significant measurement of country efforts in health and because of its acceptance as a prerequisite and useful benchmark in the regional strategy for universal health, it cannot be interpreted in isolation, since individual variations can reflect movements within a country’s economic cycle (variations in GDP), for example, regardless of the resources allocated to the health sector.

3. By definition, insurance premiums (or any other form of prepayment) are not considered out-of-pocket expenditure; by convention, neither are the indirect costs associated with the use of services (transportation, meals, etc.).

4. European Union parameters are used as representative of the more advanced countries, even though development levels in some EU countries are considered similar to those of several countries in the Americas.

5. There is no absolute consensus regarding this threshold. For example, Wagstaff and van Dorslaer () examine threshold differences in the case of Vietnam. Knaul et al. () define a threshold of 30% of the non-subsistence expenditure or the total expenditure of a household once the international poverty line of US$ 1 per day is discounted.

6. PAHO. Estudio de gasto catastrófico y empobrecedor en salud en la Región de las Américas (forthcoming).

7. Cuba does not appear in the figure because it is not in the World Economic Outlook Database of the International Monetary Fund (IMF).

8. Simple average of the countries.

9. PAHO. Public and private expenditures on pharmaceutical products in Latin America and the Caribbean (unpublished).

10. Cid C, Matus M, Báscolo E. Fiscal space for health. Is economic growth enough for the Americas? Washington, D.C.: PAHO; September 2016 (unpublished).

11. Grossman’s human capital model () and Shultz’s human development model () laid the foundation for including health in neoclassical economic growth theories based on Solow (). In post-Keynesian theories, moreover, institutional distributive stimuli are critical for growth, in which equity is an important factor. Many economists, among them Nobel Prize winners such as Gary Becker and Amartya Sen, have also made important contributions-the former noting the importance of health in workforce productivity and the latter giving health a value in itself as a human capability.

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