Questions: Healthcare Financing Systems

Question 1

In the UK's Beveridge-model NHS, healthcare is funded through general taxation and provided by government-employed physicians. In Germany's Bismarck model, healthcare is funded through mandatory payroll-based social insurance contributions and provided by private physicians. Which system has a more progressive financing structure?

• A. Bismarck — payroll contributions are proportional to income
• B. Beveridge — general taxation (especially progressive income taxes) means higher-income individuals contribute more as a share of income than payroll-based systems where contributions are capped
• C. Both are equally progressive because both are mandatory
• D. Neither — progressivity depends only on who uses services, not who pays

Answer: (B)

General taxation, particularly when based on progressive income taxes, is more progressive than payroll contributions, which are typically proportional to income up to a ceiling and regressive above it (high earners pay a smaller share of income once contributions are capped). The Beveridge model, by financing through general revenue, draws more from higher-income groups. However, both models are far more progressive than systems relying heavily on out-of-pocket payments, which are regressive by nature (the poor pay the same dollar amount as the rich for the same service, representing a larger share of their income).

Question 2

Fee-for-service payment incentivizes high volume (more services = more revenue), while capitation incentivizes low volume (fewer services per patient = higher margin). Both create distortions.

• T. True
• F. False

Answer: True

Fee-for-service pays providers per service delivered, creating an incentive to increase the volume and intensity of care — potentially including unnecessary services (supplier-induced demand). Capitation pays a fixed amount per patient per period regardless of services used, creating an incentive to minimize care — potentially underserving complex patients or avoiding high-risk enrollees. Neither payment mechanism perfectly aligns provider incentives with patient welfare. Modern payment reform (bundled payments, pay-for-performance, accountable care organizations) attempts to balance these distortions by tying payment to outcomes rather than volume.

Question 3

The United States spends approximately twice as much per capita on healthcare as other high-income countries but does not achieve better health outcomes. What structural features of US healthcare financing contribute to this?

Model answer: The US has a fragmented financing system with multiple payers (employer insurance, Medicare, Medicaid, VA, individual market, uninsured), high administrative costs from billing and claims processing across these systems, limited bargaining power over provider and pharmaceutical prices (unlike single-payer systems that negotiate centrally), fee-for-service payment that incentivizes volume over value, and high out-of-pocket costs that deter preventive care among the uninsured and underinsured. No single feature explains the cost difference — it is the combination of fragmentation, limited price regulation, and volume-incentivizing payment structures.

International comparisons consistently show that the US has higher prices (not higher utilization) than peer countries for the same services — an MRI, a hip replacement, or a day in the hospital costs substantially more in the US. This is partly because fragmented payers cannot negotiate prices as effectively as a single payer, and partly because the US tolerates greater price variation and provider market power than other high-income countries.