Health System Financing

Health System Financing and How Spending Is Measured

Health system financing is analysed through three functions used by the World Health Organization (WHO), which are raising revenue, pooling prepaid funds and purchasing services from providers. The way a country combines general taxation, social health insurance contributions, voluntary insurance premiums and out-of-pocket payments across these functions largely decides whether people can use care without financial hardship. Pooling, provider payment and the monitoring of universal health coverage have their own linked pages.

The three financing functions

The World Health Report 2010 describes health financing as more than raising money, since it is also a question of who is asked to pay, when they pay and how the money is spent. Its technical box separates revenue collection, pooling and purchasing. Kutzin's earlier descriptive framework of 2001 also covers the provision of services and the policies on the benefit package and user fees, and his 2008 guide for WHO Europe treats benefit entitlements and patient cost-sharing obligations as a fourth area of financing policy.

In the WHO definition, pooling means that the financial risk of paying for care is borne by all members of the pool rather than by the individuals who fall ill, which requires funds to be prepaid before illness occurs. Purchasing can take three broad forms, namely a government budget paid to its own providers, an institutionally separate purchasing agency such as an insurance fund buying on behalf of a population, or individuals paying providers directly. Purchasing also includes deciding which services are financed.

The functions are analytically separate even when one organisation performs several. Kutzin's 2013 paper stresses that benefit design has to be coordinated with revenue collection, pooling and purchasing if the promised benefits are to be delivered in practice, and that the unit of analysis is the population and health system as a whole rather than any single scheme.

Sources of revenue and what each implies

Revenue comes from households, employers, government and external partners, and the mechanism matters as much as the amount. Mechanisms differ in whether payment precedes illness, whether participation is compulsory and how far contributions follow ability to pay.

The World Health Report 2010 argues that contributions need to be compulsory, otherwise the rich and healthy opt out and the pool cannot cover the needs of the poor and sick. It also reports that countries whose whole population has access to a set of services usually have pooled funds in the order of 5 to 6% of gross domestic product, and that countries below that level of government and compulsory insurance spending struggle to cover the poor.

Neither the source of money nor the name of a scheme fixes how it is pooled or spent. Kutzin's 2008 guide notes that the Republic of Moldova introduced a payroll tax and a compulsory health insurance fund in 2004, yet most of the fund's money came from transfers from general revenues. Separately, WHO's 2024 global spending report notes that several countries call their national schemes "health insurance" even though the System of Health Accounts 2011 classifies them as government schemes. The fairness of contributions across income groups is a separate question, analysed with progressivity measures such as the Kakwani index.

Out-of-pocket payments and financial protection

Direct payment at the point of use is the one revenue source that involves no prepayment and no pooling. The World Health Report 2010 states that when people must pay on the spot, the sick bear all of the financial risk, everyone pays the same price regardless of economic status, and costs cannot be spread over the life cycle. WHO's 2024 report describes financing that remains predominantly out of pocket as the most inequitable form of health financing, typically associated with high catastrophic spending and low universal health coverage scores.

The 2010 report gives a widely quoted rule of thumb, that only when direct payments fall to 15 to 20% of total health expenditure does the incidence of financial catastrophe and impoverishment fall to negligible levels. The benchmark is a cross-country regularity rather than a guarantee for any one country.

Financial protection itself is measured at household level, through catastrophic health expenditure and impoverishing health expenditure. The global financial hardship indicator is explained on the universal health coverage page. Kutzin's 2001 framework is built around this objective, which he calls the insurance function of a health system, meaning access to needed care without financial impoverishment.

Measuring health spending with two headline indicators

International spending data come mainly from the WHO Global Health Expenditure Database, which follows the System of Health Accounts 2011 (SHA 2011). SHA 2011 classifies spending by financing scheme, defined as the body of rules under which a person obtains care, and its key distinction is between schemes with compulsory or automatic participation and voluntary ones.

$$S_{GDP} = \frac{CHE}{GDP} \times 100$$

where $S_{GDP}$ is current health expenditure as a percentage of gross domestic product, $CHE$ is current health expenditure on health care goods and services in the year (capital expenditure is excluded) and $GDP$ is gross domestic product in the same year and currency.

$$S_{OOP} = \frac{OOP}{CHE} \times 100$$

where $S_{OOP}$ is the out-of-pocket share, $OOP$ is household out-of-pocket payments (SHA 2011 financing scheme HF.3) and $CHE$ is current health expenditure as above.

WHO's 2024 report puts aggregate global health spending in 2022 at USD 9.8 trillion, or 9.9% of global GDP, the first fall in real terms since 2000. The unweighted average across countries was lower, at 6.7% of GDP, because the global figure divides total world health spending by total world GDP, whereas the average gives each country equal weight. By income group the averages were 8.3% in high income, 6.5% in upper-middle income, 5.3% in lower-middle income and 6.6% in low income countries. In low income countries external aid accounted for 31% of total health spending against 22% from domestic public sources, and in 2022 out-of-pocket spending was still the main financing scheme in 30 low and lower-middle income countries, exceeding half of all health spending in 20 of them.

Illustrative example of the same spending with a different revenue mix

The figures below are hypothetical and show why the two indicators must be read together. Two countries each have GDP of USD 100,000 million, current health expenditure of USD 6,000 million and a population of 10 million, so both spend 6.0% of GDP on health. Country A then reforms by abolishing hospital user fees worth USD 1,200 million and funding them from general taxation, assuming that use of services does not change.

Before the reform the out-of-pocket share is 2,400 / 6,000 = 40% in Country A and 600 / 6,000 = 10% in Country B. After the reform Country A's out-of-pocket payments are 2,400 minus 1,200, or USD 1,200 million, giving a share of 1,200 / 6,000 = 20%, and compulsory prepaid funds rise from 2,400 + 900 = 3,300 to 3,600 + 900 = 4,500, or 75% of spending. Per person, out-of-pocket spending is 2,400 / 10 = USD 240 in Country A, 600 / 10 = USD 60 in Country B and 1,200 / 10 = USD 120 after the reform.

The share of GDP is identical in all three columns, yet households in Country A face four times the average direct payment of households in Country B. Country B sits below the 15 to 20% range that the World Health Report 2010 links with negligible catastrophe, and the reform moves Country A only to the top of that range. Averages per person also conceal concentration, because a household with a hospital admission pays far more than the mean, which is why household survey measures are needed to judge protection. If removing fees raised use, current health expenditure and the required tax revenue would both rise.

Beveridge, Bismarck and other historical labels

Financing systems have long been labelled Beveridge (tax-funded), Bismarck (social health insurance) or Semashko. Kutzin's 2008 guide accepts that such labels can convey political meaning or reflect a cultural context, and notes that the United Kingdom's National Health Service and Germany's social health insurance system are decades old and part of national cultural identity. For financing policy, however, it finds them unhelpful, because they are defined principally by the source of funds (general budget revenues against payroll tax revenues). It gives Spain as an example of a country that moved from employer and employee contributions to general tax funding without changing the relationship between the population and the health system.

The World Health Report 2010 reaches the same conclusion, stating that the division into tax-based and social health insurance systems, or Beveridge versus Bismarck, is no longer useful for policy-making, because two systems with the same label can pool and spend funds very differently. Kutzin's 2013 paper observes that Germany and Japan use insurance schemes to cover the entire population, while Sweden and the United Kingdom achieve financial access and protection for all without anything called an insurance scheme.

Financing in economic evaluation and health technology assessment

The financing system defines who the payer is in an economic evaluation. A cost-effectiveness analysis or budget impact analysis from a payer perspective counts only the costs met by that payer, so out-of-pocket payments fall outside it unless a broader perspective is chosen. Where direct payments are large, the payer's budget understates the cost of care, and with fragmented pools several payers may each bear part of an intervention's costs and savings.

Common misreadings

Most errors in quoting financing data come from treating one indicator or label as a description of the whole system. The commonest are listed below.

• A higher share of GDP means better protection. The illustrative example shows identical spending with a fourfold difference in direct payments per person.
• Financing reform means raising more money. The World Health Report 2010 gives equal weight to who pays, when they pay and how money is spent.
• A scheme's name shows how it is funded or classified. Under SHA 2011, some schemes called health insurance are government schemes, and Kutzin's 2008 guide found that most of Moldova's insurance fund money came from general revenues.
• A low out-of-pocket share rules out hardship. The share is an aggregate; household survey measures are needed to see who pays and how much.
• Recorded out-of-pocket spending captures informal payments in full. SHA 2011 counts informal payments as out-of-pocket spending, but Kutzin's 2008 guide notes that such payments are difficult to identify and measure.

Sources

• Kutzin J. A descriptive framework for country-level analysis of health care financing arrangements. Health Policy. 2001;56(3):171-204. https://doi.org/10.1016/S0168-8510(00)00149-4
• Kutzin J. Health financing policy: a guide for decision-makers. Health Financing Policy Paper 2008/1. Copenhagen: WHO Regional Office for Europe; 2008. https://iris.who.int/handle/10665/107899
• Kutzin J. Health financing for universal coverage and health system performance: concepts and implications for policy. Bulletin of the World Health Organization. 2013;91(8):602-611. https://doi.org/10.2471/BLT.12.113985
• World Health Organization. The world health report: health systems financing: the path to universal coverage. Geneva: WHO; 2010. https://iris.who.int/handle/10665/44371
• World Health Organization. Global spending on health: emerging from the pandemic. Geneva: WHO; 2024. ISBN 978-92-4-010449-5. https://iris.who.int/handle/10665/379750
• World Health Organization. Global Health Observatory indicator metadata: current health expenditure (CHE) as percentage of gross domestic product (GDP) (IMR 4950) and out-of-pocket expenditure as percentage of current health expenditure (IMR 4965). Geneva: WHO; accessed 3 October 2026. https://www.who.int/data/gho/data/indicators