Challenges of Social Health Insurance in Low- and Lower-Middle Income Countries: Balancing Limited Budgets and Pressure to Provide Universal Health Coverage

For the vast majority of people living in low- and lower-middle income countries (LMICs) where governments are not providing universal health coverage (UHC) and without financial protection coverage, they must rely on out-of-pocket payments in cases of health emergencies or serious illness. When a health crisis arises, they may have to make impossible decisions: forego care and risk ill health or even death, or face catastrophic health expenditure, which may expose entire families to financial hardship and force them into poverty. Estimates suggest that around one-tenth of the global population spends more than 10 percent of their household consumption on health care. To protect individual and households against financial risks, the United Nations is urging countries to achieve UHC by 2030, and the World Health Organization, the World Bank, and others have encouraged LMICs to introduce health financing schemes that will expand health coverage across populations. But how feasible are these recommendations in practice, and do LMIC governments and ministries of health have the tools at hand to raise the funds needed without discounting the potentially large administrative burden of premium collection? Our team, a collaboration between the London School of Economics and independent researchers, is engaging in a project that aims to understand the cost of collecting health insurance contributions, particularly from the informal sector, and its determinants.

What options are available to LMIC governments?

With the importance of UHC now widely accepted in countries around the world, policymakers and health sector technocrats face the difficult task of implementation. One complex challenge is to determine the underlying financing mechanism for a country’s health system, with health and finance ministries negotiating funding for health at a time when donors are transitioning away from “traditional” aid. The impact of COVID-19 on economic performance is only likely to intensify the challenge; the pandemic has led to a reduction of GDP across developing countries by at least 3 percent compared with 2019, and significant income shocks to families, particularly those from lower income groups. Recent events are likely to carry spill-over effects on countries’ decision-making as they work to set up systems that will facilitate UHC, whether financed through general taxation, labour taxes, or mandatory insurance premiums. But are there lessons from developing countries that could guide the current adoption of health financing schemes?

Labour-tax based social health insurance schemes

A popular choice for LMICs is labour-tax based social health insurance, which is believed to raise additional revenues for health care services from contributions paid for in the formal sector in part by employees and employers. Social health insurance was originally adopted by the Prussian state in the late 19th century and spread to countries in Latin America and Africa. But it was quickly adjusted as it underperformed in securing enough financial resources to comprehensively finance health systems. Similarly, when Eastern European countries and the former Soviet Union first shifted to social health insurance in the early 1990s, expectations were not met because of the significant administrative burden posed by contribution collection.

National health insurance schemes

Based on the lessons learned from these experiences, today most countries opt for mixed national health insurance schemes, whereby contributions are not the primary source of health care financing. Instead, LMICs that have started contributory schemes often feature large tax-financed subsidies, which in turn creates a system that combines contribution payments and general government revenues called national health insurance. For example, the national health insurance scheme in Ghana is financed through 2.5 percent payroll deductions from formal sector employees, a 2.5 percent tax on certain goods and services, and premiums for informal sector workers ranging between $8 and $53.

National health insurance schemes are thought to improve equity and reduce barriers to access in LMICs through two features: pooling (whereby financial risk is spread across the population) and pre-payment (the collection of financial resources in anticipation of service use rather than out-of-pocket payments when health care is consumed). Accordingly, a growing number of LMICs are considering rolling out national health insurance schemes. For example Malawi, Madagascar, and Zambia are currently developing national health insurance legislation. However, national health insurance schemes also feature several key challenges that decision-makers should consider when weighing health financing choices.

Challenges with social or national health insurance schemes in LMICs

First, in their quest to move towards UHC, many countries have opted to collect contributions from the population, believing this to be an additional, untapped source of revenue. However, compared with high-income countries, many LMICs operate in a very constrained fiscal space. This may also be coupled with large sectors of society operating in the informal economy, where it can be challenging to rely on contributions as a reliable source of revenue. According to the ILO, informal employment without taxable income can account for up to three-quarters of all employment in parts of Africa and Asia, making the collection of revenues particularly challenging. Moreover, in the case of social health insurance, it is possible that contribution collection from formal employment in LMICs may hinder the formalisation of the labour market, questioning the economic sustainability of social health insurance schemes.

Second, the size of the contribution pool matters for redistributive health spending with an aim to provide UHC, specifically when countries are small such as those in central Asia or in the Pacific. It is possible that countries with a small workforce will be unable to raise sufficiently large revenues to pay for UHC.

Finally, if contribution collection is indeed justified in terms of providing additional resources to fund service delivery, for this to be worthwhile the amount collected from the population would need to exceed the cost of collection by a substantial margin so that most of it ultimately went to fund services. Unfortunately, the administrative costs of national health insurance schemes, and the costs of collecting contributions from the population are rarely considered. Ministries of health are not revenue-raising entities and may lack the infrastructure and capacity to effectively carry out contribution collection. This means that they must build revenue collection systems from scratch and will not benefit from the revenue generation (e.g., income tax, sales tax, etc.) mechanisms that already exist. This will require outreach across the country, with staff hired for the purpose, and the creation of accounting and fraud-management systems. Partnerships with mobile money operators, or banks, are other possible routes which may extend reach, but they may also incur high costs. It is possible that countries that have seen major digital identification initiatives over recent years could reduce operational costs and improve population targeting, as witnessed in the efforts made in Andhra Pradesh, India to adopt digital IDs, mobile communications and financial inclusion. Generally, successful contribution collection requires adequate systems of accountability and strong administrative, financial, and information and technology capabilities.

Ongoing research and policy engagement

Previous research assessing the severity of the challenges of contribution collection from the informal sector is limited. Preliminary work suggests variation in revenue spent on administrative costs that ranges from 4.8 percent of revenue in Indonesia to 11.2  percent of revenue in Ghana. This is an important area of work to inform future policy directions for LMICs aiming to progress towards UHC. Our team is engaging in a project to work collaboratively with ministries of health and national health insurers in LMICs, which have established contributory mechanisms to carry out analytical work.

Our contribution to this research

We seek to answer a series of questions: What are the costs of collecting social health insurance contributions in LMICs? How dependent is the cost of collection on the means of collection? How do costs compare with the size of the contributions being charged? And lastly, is there a level of economic development at which the amount to collect contributions becomes cost-effective, and if so, at what level of economic performance in terms of GDP per capita does global experience suggest that would that be the case?

Our aim is to carry out a cross-country analysis of the amount of revenue collected by national health insurance schemes in the form of contributions from clients, against the cost of collecting those contributions. This will be more than an academic exercise; it will be part of a learning agenda in collaboration with ministries of health and insurance agencies. This project will benefit from cross-country and cross-stakeholder contributions and we would be keen to connect with anyone working this area or with relevant contacts to stakeholders or access to data. As LMICs are at the crossroads between donor exit and pressure to provide UHC to its population, the question of health system financing is more important than ever. So, watch this space for future developments.

The team would like to thank Inke Mathauer (WHO), Kalipso Chalkidou (CGD), and Jonty Roland for their feedback on this and other documents.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.