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Health shocks are the most prominent idiosyncratic shocks and stresses that low-income households face, particularly when they affect primary income earners as health costs are compounded by loss of income.

While government and developmental assistance funding for health has increased over the past two decades and is expected to continue increasing into the future, out-of-pocket health expenses are projected to remain high for low-income countries.

Despite the availability of national health insurance schemes and free primary health care in some low-income countries, out-of-pocket health expenses are still often catastrophic for low-income households.

The demand for health financing support is often higher than any other financial risk management solution, and demand far exceeds the supply. Digital financial service providers therefore have an opportunity to round out a health financing portfolio.

10 Lessons for Designing Effective Health Financing Products

Through experience, supplemented with other research, Grameen Foundation USA offers the following top ten lessons for designing effective health financing products from our Developing Next Generation Health Financing Instruments for Households: Drawing on Lessons Learned research:

1. Understand the types and related amounts of out-of-pocket health expenses. Outpatient and indirect costs, such as for travel, accommodations, and on-going care can be more catastrophic for low-income households than in-patient, hospitalization costs due to frequency of health events.
2. Red tape has to be extremely minimal. While often well-intentioned, paper work and validation of health events can be significant barriers to prompt and effective use of financial tools meant to manage risk.
3. Designs have to compete with (and exceed benefits of) borrowing from friends and family and other informal lenders, such as moneylenders. While not always preferable, low-income households often resort to borrowing for health costs from friends, family, and moneylenders (when liquidity of family and friends is not sufficient), due to easy access to funds and flexible repayment options when borrowing.
4. Privacy matters. People value keeping their health matters private; products that build in privacy protections are needed.
5. Consider the decision-making power as well as the capacity of women to meet healthcare expenditures. While women are often noted for their preferences and roles for prioritizing health needs, this does not always translate to women actually deciding whether or how the household financially meets a health cost.
6. Design for a financial portfolio approach, but be careful with bundling. Households use and value multiple financial instruments to help manage their household finances. Existing health financing instruments do not (and perhaps cannot) meet all health costs effectively. Multiple instruments are needed. While bundling financing options, such as micro-insurance with microenterprise credit, seems like a win-win for clients and financial service providers, clients may prefer to lose their financial access altogether than to pay for an obligatory product. The portfolio of services needs to balance the high frequency, low impact health expenses (that savings, person- to-person payments can cover) with the low frequency, high impact health expenses (that insurance and loans can cover).
7. Timing matters. It is not always the cost, but the timing of a health event or health cost that matters. The timing of insurance premiums, for example, can be the biggest barrier to insurance enrollment due to irregularly of income streams.
8. Demand for and supply of quality health services have to intersect. The success of health financing options is highly related to the availability, quality, and satisfaction with health care. If local health services are not demanded, then neither will be health financing products. This requires intentional and long-term partnership approaches between the health and financial sectors.
9. Health financing products need to provide health care for the family. While income-earners should surely be covered due to the income loss experienced when ill, entire families should be covered as well, particularly since children are often the ones requiring the most health care.
10. Consider how health emergencies “compete” with other possible emergencies. Health shocks are one among many shocks low-income households can face and are a constant reality. Any unplanned expense can be experienced like a shock; products should be designed with that in mind.

Building a Digital Ecosystem for DFS

The market is littered with successes and failures of attempts to provide low-income households with financial tools they can use to plan for, respond to, and recover from health costs, whether they be small or catastrophic. With the growing emergence of digital technologies, digital financial services hold much promise for overcoming some of the long- standing challenges to effective use of financial services designed for health.

However, a digital ecosystem is needed to ensure health services and patient needs can intersect. For example, a digital ecosystem has to exist where health providers can accept digital payments from a digitally-enabled patient. Some of these efforts to ‘lay the digital rails’ require patience, time, and long-term commitments of many actors.

New innovative health financing products and research are needed. To this end, these experiences and the evidence raise key questions for the field:

1. Would clients—and financial service providers—be better off through the use of emergency financing products instead of products designed only for health?
2. How can health financing products be designed in a way to better capture the intra- household dynamics that influence how households decide to seek and pay for treatment?
3. Given the importance of the intersection between the supply and demand for health services, how can health financing tools be designed or calibrated to respond to rural areas that lack health services and that have a sound business case for the financial and health service providers?

Next Generation Household Health Financing

Regardless of the answers to these three questions or the mechanisms through which health financing products are delivered (traditional versus digital), it is critical that low-income populations have improved and expanded choice of health financing options.

Ensuring this choice will require patient and long-term investments from donors, investors, governments, the health and financial services sectors as well as thinking about health financing through an ecosystem lens, where demand generation for and supply of health services and health financing should be designed to intersect.

With these lessons, the financial and health services sectors are positioned to develop a new generation of health financing options that can ensure low-income households have financial options to anticipate, respond to, and recover from health events without resulting in increased vulnerability and poverty traps.

Puzzle graphic is from Morgan and Churchill, ILO