Economic Rationales for the Design of Health Care Financing Schemes

In this chapter we investigate the economic rationales for the design of health care financing schemes. We make an explicit distinction between the arguments for governments to implement a system of mandatory cross-subsidies to achieve affordability in the financial access to basic services for high-risk or low-income individuals, and the arguments to mandate the coverage for predefined health care services. We argue that the most important economic arguments to enforce a system of cross-subsidies are related to: the presence of externalities in health care services consumption; the individuals’ risk of becoming bad risks; and the moral hazard effects induced by cross-subsidisation. The rationale for mandatory coverage is based on considerations of free riding behaviour, individuals’ lack of foresight and too high transaction costs of alternative ways to organise cross-subsidies. Finally, we discuss the implications of our analysis for the design of health care financing arrangements. We argue that imposing a universal mandate to obtain uniform coverage for predefined services is not a necessary and proportionate measure to increase the affordability of health care for vulnerable groups. To achieve affordability it is sufficient if governments impose mandatory cross-subsidies. By allowing variations over income groups in the composition of the mandatory benefits packages and/or on the level of deductibles moral hazard can be reduced as compared to a universal mandate for a uniform coverage.